In a recent report, CIPD expressed its views as follows:
Outsourcing can be defined as ‘the delegation of one or more business processes to an external provider, who then owns, manages and administers the selected processes based on defined and measurable performance metrics.

Within the context of HR outsourcing, the specific processes that are included within any outsourcing arrangement will vary from organisation to organisation. Some, for example, may outsource virtually all of their HR processes where others select specific components such as payroll or resourcing.

It is most common to have outsourced the operational elements of delivering all HR activities whilst retaining control over HR strategy and decision-making.

There are a number of well-publicised examples of large, mainly global organisations that have outsourced large parts of their HR operational activities, for example BT, BP, Cable & Wireless, Procter & Gamble and BAe Systems. Interestingly, small organisations often do the reverse, effectively outsourcing their strategy (to HR consultants and other professional advisers) and keeping the delivery of HR processes internal.

To outsource or not?

When considering HR outsourcing, an organisation needs to ask at the outset why it needs to change the way the HR function operates at present. In other words, what aspects of the existing HR provision are not satisfactory or would benefit from improvements? By probing these responses HR can then focus on the scale and type of changes that maybe required and these will help decide whether HR outsourcing might be an appropriate response (as opposed to some of the alternatives detailed above).


Potential benefits

When organisations put forward a business case for HR outsourcing there are a number of potential benefits that many cite. In practice, these benefits are not necessarily mutually exclusive and a number of them could be achieved through some alternative solution rather than via outsourcing. Commonly mentioned benefits include:

reduced cost
increased efficiency
access to improved HR IT systems
improving management information (including human capital metrics)
access to HR expertise not available internally
increased flexibility and speed of response
philosophical reasons (for example the organisation is outsourcing a number of its support functions, of which HR is just one part)
reduced risk
to free HR resources to operate more strategically.

Potential pitfalls

From a practical point of view, there are also a number of potential pitfalls that it is useful to bear in mind when considering outsourcing. Some of the main ones are:

Don’t outsource what you don’t understand. The outsource provider will only have to subsequently solve the problem (at a cost) and the provider’s solution might not be most suitable from your organisation’s perspective.
Outsourcing does not absolve the organisation of good people management practices nor of overall responsibility for the provision of HR services.
Increasingly, outsourcing arrangements are often long term (five to ten year contracts are not unusual). An understanding of the organisation’s current and future business strategy and potential changing business (and hence risk) profile is important before entering into any contractual arrangement. This helps to avoid being tied into unfavourable contractual arrangements.
Loss of local knowledge and processes which instead reside with the outsource provider.
Standardisation of processes in line with outsource provider not organisational preferences.
Selecting a provider and managing the transition

A number of actions and decisions must be made when selecting a suitable outsource provider – many of these will be similar to those made when entering into any contractual arrangement with a third party. For example:

Understanding the existing HR service provision, for example the cost base, responsibilities, level of service. These will all provide useful baseline information when comparing provider offerings and costs.
Understanding of your own future requirements, for example in terms of level and type of service.
Establishing a shortlist of preferred suppliers.
Speaking with other organisations that the outsource providers currently have contracts with to understand how satisfied they are with the provider.
Consideration of ‘fit’ with provider organisation which might include cultural as well as geographical factors.
Identification of the ‘actual’ person who will be the key relationship manager.
Determining preferred contract length.
Building in contractual flexibility where possible.
Staying involved in the contracting process. Particularly in some larger organisations there might be a procurement (or other) function which normally takes care of all contracts. It is important not to abdicate everything to such a function as it is unlikely to have the necessary expertise in HR matters.
Identification of metrics (including benchmarks of what unacceptable and acceptable ranges are) to be included as part of any service level agreement.
With regards to managing the transition from in-house to third-party service, a lot of the considerations will be similar to those required when managing any large-scale change.

Finally it is possible that there will need to be a number of changes made to the roles and skills required of the remaining internal HR staff as well as other employees and managers. This may well involve re-deploying certain staff as well as providing additional training to many others. It is important to recognise that these might take time to introduce and that this needs to be factored into any change programme.

Outsourcing is one manifestation of the transforming shape of HR and, in particular, the increasing demands being placed upon HR functions to deliver greater levels of transactional efficiency at the same time as raising the level of other HR activity to focus on ‘strategic’, ‘value adding’ service. The CIPD believes that HR functions need continually to improve the efficiency of the administrative services they deliver, as part of their shift to a more strategic and influential future. Outsourcing is one potential route to achieving this.