David Stroud has been engaged by Red Wind to produce this white paper. This paper is the intellectual property of Red Wind exclusively. 7/18/2014 HR outsourcing – the why, what and how of making your HR outsourcing program a success As a small to medium size business it can be difficult to find the time to stay on top of the market trends that impact your business. At ‘Red Wind’ we remove the hassle and keep you in touch with what matters. In this paper, we look at the why, what and how of SME HR outsourcing. Red Wind - David Stroud
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David Stroud has been engaged by Red Wind to produce this white paper. This paper is the
intellectual property of Red Wind exclusively.
7/18/2014
HR outsourcing – the why, what and how of making your HR outsourcing program a success As a small to medium size business it can be difficult to find the time to stay on top of the market trends that impact your business. At ‘Red Wind’ we remove the hassle and keep you in touch with what matters. In this paper, we look at the why, what and how of SME HR outsourcing.
Red Wind - David Stroud
Red Wind - David Stroud
1
HR outsourcing – the why, what and
how of making your HR outsourcing
program a success
As a small to medium size business it can be difficult to find the time to stay on top of the
market trends that impact your business. At ‘Red Wind’ we remove the hassle and keep you in
touch with what matters. In this paper, we look at the why, what and how of SME HR
outsourcing.
Introduction
There are over 2 million small enterprises trading in Australia. Enterprises employing fewer than 19 staff accounted for 96% of all businesses and employed 46% of all private sector Australian workers. By contrast enterprises with more than 200 employees account for 0.3% of businesses and employ 30% of workers. As our previous White Papers have shown, the small to medium size enterprise sector is a crucial growth engine of the Australian economy, yet has struggled to implement effective HR functions that reduce cost, lower risk and make a genuine difference to the performance of their workforce.1 Leading edge research by the UK Chartered Institute of Personnel and Development (CIPD) on the role of HR in creating value for small to medium enterprises indicates that this issue reaches boiling point for organisations at approximately the 80 FTE mark. It is at this critical junction that a dedicated function for HR becomes a necessity due to complexity, risk and performance. (UK Chartered Instiute of Personnel and Development, 2013)
At the same time economic growth analysis by the Australian Bureau of Statistics confirms that the economy has slowed sharply in the June quarter after its regular capital expenditure data showed a drop in equipment spending. On a positive note, the same report showed that firms in the services sector – accounting for 70% of jobs in Australia, increased expenditure forecasts for 2014-15 by 10% to $55.7 billion.2 In previous White Papers, ‘Red Wind’ has discussed the rebalancing of the Australia economy. These reports confirm that it is taking place, albeit very slowly.
1 AHRI Blog - SMEs and HR 2 Australian Financial Review - 28 August 2014 Figure 1: Change picture to something more
HR outsourcing is also being influenced by the unprecedented change in the nature of work, with significant implications for how your HR team creates value for your organisation. The workplace of the future in Australia will be increasingly diverse, multi-generational, with a higher concentration of contingent labor. Organisations are becoming more specialised, decentralised and networked in their operations. In response structures are becoming more flexible and organic and we are seeing more organisations entering into strategic partnering arrangements ( (UK Chartered Institute of Personnel and Development, 2013)). The complexity of future work will be influenced by the Australian economy rebalancing, longer working lives, social connectivity and work virtualization or task outsourcing (such as through an online staffing platform like Freelancer).
This means that a number of business relationships must now be managed beyond the organisation. Importantly, research has revealed that these external business relationships staggeringly high failure rate. A 2007 Harvard Business Review article ( (UK Chartered Institute of Personnel and Development, 2013)) reports that, ‘studies show that the number of corporate alliances increases by some 25% a year, and those alliances account for nearly a third of many companies’ revenue and value – yet the failure rate for alliances hovers between 60% and 70%’.
The Red Wind Managed HR Services platform was developed to address these specific issues for the Australian SME. This White Paper is about supporting the SME sector to make the right decisions to get the most out of their HR outsourcing program.
What is HR outsourcing?
Most organisations conduct some form of outsourcing, whether that is outsourcing back-office
processes such as tax preparation or the conduct of marketing operations. The practice of outsourcing
involves the purchasing from an external provider of one or more business services, which could include
HR and/or other functions such as IT. We define outsourcing here as the purchasing of HR services
from a third party supplier. The specific processes that are included within any HR outsourcing
arrangement will vary from organisation to organisation – some may outsource virtually all of their HR
processes while others select specific components such as payroll or recruitment. Outsourcing has
created value in audit, accounting, IT, services, business process, functional consulting and training to
name a few yet benefits have eluded small to medium size enterprises in Australia in HR.
According to Tony Barnes, a leading HRO executive based here in Australia, over the past 30 years there have been three phases of outsourcing, from cutting cost above all else, to learning from mistakes and being more precise in what gets outsourced, and now finally to a third phase of outsourcing where the customer and the client embark on a partnership.3 This is confirmed by a 2012 survey by Deloitte of the global outsourcing and insourcing sector. A Deloitte Survey of the global outsourcing and insourcing sector confirmed that outsourcing has now become mainstream.
Other notable findings of the 2012 survey include:
• The outsourcing market continues to confuse outsourcing with offshoring. Many respondents still see the two processes as inseparable – even though many times outsourced work never leaves the originating country.
• Vendor management organisations, while highly competent at day-to-day activities, find themselves underutilized when it comes to driving strategic value.
• Most recent outsourcing experience: Respondents list “underestimating scope by the vendor” as the largest contributor to deal dissatisfaction
• Cloud sourcing: Though often discussed and promoted, there continues to be a substantial amount of uncertainty about cloud-based outsourcing and its future adoption.4
Figure 1 | Deloitte 2012 Outsourcing Survey
Global business services (GBS)
Large organisations will increasingly plan to develop global business services, placing more pressure on
small to medium size enterprises to be more efficient if they wish to supply or compete.
• Global enterprises plan to spend $40 billion dollars per year on improvements in GBS. • Back-office centralization is well developed, with the majority of companies (51 percent) already
centralized. • Analytics will provide the value-differentiator for GBS organisations, providing strategic
operational analytics to improve services, contain costs, and enhance decision making.
• GBS organisational models fundamentally change the structure of companies by replacing traditional siloes with matrixes processes. Limited executive experience in key areas slows progress.5
Jill Goldstein, HR Business Process Outsourcing offering lead at Accenture is one: “HRO started off as a cost
reduction move for some companies. It has expanded well beyond that to become a driving force for creating
business value. We expect 2012 to bring even greater emphasis on business outcomes, as companies explore HR
BPO as a way to meet business needs and improve business performance.”
Virtualisation
Global outsourcing company oDesk says Australian enterprises are increasingly outsourcing tasks online
as the company passes $US1 billion worth of projects. The figures released by oDesk show Australians
have been outsourcing both technical and non-technical tasks over the last two years.
Game development outsourcing has grown by 437%, engineering and technical design by 276% and
mobile app development by 258%. Other fast growing areas that Australians are outsourcing include
human resources/payroll and recruiting, which both grew by 227%, and legal which grew by 267%. This
virtualisation of the workforce will be an ongoing trend and a real challenge for SMEs to capture the
efficiencies presented by this.6
HR Outsourcing in Australia
In 2011, Talent2 conducted a survey of the state of HR outsourcing in the Asia Pacific. 576 senior HR and
C-suite executives from Australia, China, Singapore and Hong Kong participated in an online survey to
share their views of the challenges in the HR industry and their current business practices. The Study
found that across Australia, Hong Kong, China and Singapore the majority of HR executives (80-90%) are
now considering HR outsourcing as a solution to key challenges cited, including search and recruitment
(64%) and employee retention (50%).
Challenges for SMEs
In late 2010, ADP Employer Services (ES) International conducted a survey into the challenges HR
executives in small- and medium-sized enterprises (SMEs 50-2000 FTE) entitled ‘HR Challenges and
Solutions: Winning the war for talent through automation and outsourcing’. It covered 2,642 HR
professionals from 8 European countries, China and Australia. (ADP, 2011) For Australia, recruitment,
retention and HR capability were highest concerns for HR executives in SMEs. Very interesting, for HR
5 KPMG Study shows investment in the next generation of business services 6 Odesk reports Australian organisations increasing outsourcing
As with any major change process, there are risks associated with outsourcing your HR function. As long
as you are aware of the pitfalls and more common risks, you will be able to address and combat these
issues from the start of your relationship:
1. Your company forgets its HR responsibilities - it is very important to remember that despite moving a key business process to an outside provider, you retain overall responsibility for the success of this strategy. Your managers are not absolved from their people management responsibilities.
2. You don't clearly understand your chosen outsourced service provider - make sure that you really know your outsourced provider's culture and values. If you are switching your HR function to an outsourced agency, they must share the same goals and values as your own company.
3. You lose local knowledge - once again, outsourcing does not absolve your company and managers from all responsibility. This knowledge can be continuously updated if you carry on training your own staff members.
4. Operations become separate from strategy - your outsourced HR provider should align their service delivery with your company's overriding business objectives and strategy. In an outsourcing relationship, however, day-to-day operations can become separated from strategy.
5. You don't review the success (or failures) of the outsourcing arrangement - once a relationship is in place, you must continually review the success of your outsourcing strategy. Regular contact with your provider is essential, particularly face-to-face meetings to discuss where things are going well and what could be improved.
Managing the engagement
Signing an HR outsourcing contract is the beginning, not the end, of the relationship between company
and supplier. The history of the outsourcing movement is littered with failed relationships: Gartner
Group, the market analyst, estimates that up to 50 per cent fail to meet expectations. However, this is
not because the suppliers are breaching their contractual obligations.
The high failure rate has two main causes. First, there is the tendency to view outsourcing as a
way of getting rid of a problem – be it the high fixed cost of a business process, or the distracting
burden of legacy computing. From this first cause derives the second – the view that once something is
outsourced it no longer needs managing.
A recent survey by Aberdeen Group of 292 HR organisations supports the notion that HRO is providing
more of a strategic support for clients, while still providing line leaders with tools to improve day-to-day
talent management. This stands in contrast to the older notion of HRO as simply a way to reduce the
tactical burden on HR. The survey indicates that increasingly companies are being selective about what
service they outsource, the ‘a la carte’ approach.
1 Sign the contract but don’t hand off responsibility
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Responsibility changes from managing the people and the process to managing the supplier. The HR
professionals you retain must understand their new role.
They need to build a collaborative relationship with the supplier, but must stay in control – tracking the speed and direction of change and measuring the benefits of the relationship. A new Accenture-sponsored report from HfS Research of 282 major enterprises confirms that outsourcing initiatives deliver sustainable value only when enterprises and their outsourcing providers invest in developing the talent that actually fuels the performance of their outsourced functions and processes. This can move the outsourcing relationship beyond cost and efficiency into strategy value creation.
2 Develop core competence in contract management
Non-core activities have come to be synonymous with "irrelevant" or "unimportant" – and ripe for
outsourcing. Paradoxically, any company embarking on an outsourcing contract needs contract
management as a core competence. The wisdom of this is evident considering the impact in IT
outsourcing, which has sometimes led to the deskilling of internal IT staff.
The retained HR staff will require training because the management skills needed to run a contract
efficiently differ from the operational skills required to do the work in-house. As well as being able to
develop an appropriate relationship with the supplier and to understand the HR function, these staff
need the commercial skills to understand how the HR function feeds into changing business
requirements.
3 Ensure owner or board-level support
Why would anyone with a serious interest in their career want to be involved in managing an activity
that is deemed non-core and hence outsourced?
The status of the project management team needs to be elevated, and it should have clear endorsement
from, and access to, the board.
This process may require a change in attitude from boards of directors or owner who view outsourcing
purely as a cost-cutting tool. The board needs to understand and support the contract management
role. It must not underestimate the time and effort needed to manage the contract.
4 Establish a collaborative relationship
In general, outsourcing relationships don't fail because the supplier does not deliver on the agreed
service levels, but because the business requirements change and the contract no longer fits.
The outsourcer is likely to be able to demonstrate that they are doing everything to contract. The
problem is that the world has moved on.
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Put communication at the heart of the contract management process. Insist on regular face-to-face
meetings to review progress and analyse what is, and is not, working. Don't treat the relationship as a
traditional customer-supplier one.
5 Understand what you currently get out of HR
Few companies have any accurate measures of what they are getting out of the in-house HR provision.
At best, they probably know the cost per employee, and may have an idea of cycle times. But they have
no objective measures of the quality of the service, or benchmarks to compare it with peers and
competitors.
It is important to be honest about the capabilities and shortcomings of the HR department at present,
and to have a vision of how its contribution to the organisation could be enhanced.
Your outsourcing partner should work with you on the strict definition of performance criteria and
service levels.
6 Retain ownership of the HR policy and strategy
Free from having to worry about "bread and butter" administration, your HR group will have the time to
become more involved in strategy. They will be able to take a proactive role in planning skills needs,
addressing how to deploy resources to their best effect, and attracting, retaining and developing skilled
employees. In short, outsourcing HR will enhance the professional lives and status of your retained HR
staff.
Contracting out HR administration is not a case of losing control over the HR function, but of freeing it
up to deal with key competitive issues, such as developing the company culture, managing change,
monitoring performance or conducting strategic workforce planning.
In conclusion
The ‘Red Wind’ viewpoint
Here are the 5 top reasons why we see many companies turning to a SME HRO specialist:
1) It frees them to concentrate on core competencies. HR does not produce a product, yet it can eat up
a lot of an organisation’s time and energy. A great HR department demands resources and continual
oversight and innovation. Many organisations would rather focus on their core strengths and/or
moneymakers by outsourcing HR.
2) It saves money. Running an effective HR department requires major focus, financing and talent.
Outsourcing can allow organisations to hire top-class specialists they could never afford to bring on-
board permanently. This kind of virtual workforce will continue to find momentum.
Red Wind - David Stroud
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3) It improves compliance. There are a whole lot of regulations out there these days. There is the
constant threat of lawsuits for sexual harassment, wrongful termination, safety violations, etc. When
you hire a compliance specialist, these headaches become theirs.
4) It improves recruitment. Recruiting top talent is an art (and a science) and a lot of HR departments
are the equivalent of weekend DIY. Many organisations would rather turn this critical function over a
company that does nothing but recruit talent.
5) It provides access to the latest tools and technology. The most innovative HR-services supplier will be
up on the very latest technology, including big-data mining, analytics, virtual workforce leadership, cloud
technology and social media, and will know how to exploit them to meet an organisation’s specific
needs.
Call to action – Red Wind Managed HR Platform
Picture / contact
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David Stroud is the Director of Workforce Insight, a strategy and workforce solutions practice specialising in planning and analytics, based in Perth. Workforce Insight consults across WA and Australia with entrepreneurs, senior HR professionals and business owners in order to unlock the value of their human capital. David provides a unique blend of public and private sector experience across systems analysis, consulting, stakeholder management and business model innovation. His deep experience in developing compelling workforce strategies has seen him work with
enterprises in the mining, natural resources, construction, and healthcare and government sectors; first for the Commonwealth Government and more recently for the Chandler Macleod Group.
Prior to founding Workforce Insight, David made the move to the private sector in 2011 and established the strategic workforce planning practice at Chandler Macleod Group, a $1.4 billion HR services organisation in the Asia Pacific region.
David’s background is informed by ten years in the Commonwealth Government, researching, developing and implementing solutions to issues within the Australian labour market in fields such as community development, workforce analysis, economic development and national training system operations. He has worked to improve the funding and operations of organisations such as RTOs, TAFEs, State Government and Industry Skills Councils.
David’s academic background includes public policy analysis, research economics, statistics, strategy and leadership, all now being used to develop new business models for SMEs based in WA. David holds a Bachelor of Arts in Economics and Political Science from UNSW and a Masters of Public Policy from the University of Sydney.
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Selected Bibliography
Aberdeen Group. (2011). PEO: Taking Outsourcing a Step Beyond Pays Off for Small and Mid-Sized Companies.
Boston: Aberdeen Group - A Harte-Hanks Company.
AAG. (2011). Australia Innovation System Report. Canberra: Australian Government.
Boston Consulting Group. (2013). Ahead of the Curve: Lessons on Technology and Growth from Small Business
Leaders. 2013: Microsoft.
Cutler, D. T. (2008). Venturous Australia: building strength in innovation. Canberra: Australian Government.
Department of Industry. (2012). Australian Small Business: Key Statistics and Analysis. Canberra: Australian
Government .
Girotra, K., & Netessine, S. (2013, February 12). Good Old Focused Strategy. Retrieved Jul 11, 2014, from Harvard
Business Review Blog: http://blogs.hbr.org/2013/02/good-old-focused-strategy/
Macquarie University: Centre for Workforce Futures. (2014). Australian Recruitment Practices: A literature review
of current Australian recruitment practices. Sydney: Australian Workforce and Productivity Agency.
Minifie, J. (2014). The silver lining: cloud computing and small to medium enterprises. Sydney, Australia.
RSM Bird Cameron. (2013, December). Home - Publications - Special Reports. Retrieved July 5, 2014, from RSM Bird