Outsourcing HR: Keep Core Competencies, Offload Administration

By Bruce R. Ellig Jun 20, 2008
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Human resource professionals have three major roles in an organization: business partner, employee champ​ion and administrator. Administrative work is the top candidate for outsourcing; it takes up a very large portion of the HR professional’s time and has little value added. But HR should be sure to hang on to its functions that support the organization’s core competencies.

“value added” is the net dollar value, found by subtracting the cost of production of an item from the dollar value of the item. For example, if the HR function does a pay survey and it is estimated that the total cost is $5,000, but an outside provider would have charged $15,000 for the same result, the value added would be $10,000 (i.e., $15,000 minus $5,000). And if the company considered the pay survey worth $25,000, the value added by the HR function would be $20,000. Not all attempts to calculate value- added are as easy as the concept, but it is important that HR make such calculations if it wants to be a business partner and show that it is contributing to the success of the business.

Some HR departments, and even more likely some senior management, are likely to outsource things they should not. This varies by company, but any tasks that are tied to the core competencies and major strategies of the organization should be reviewed very carefully to ensure one is not giving up something which could be a competitive advantage.

A “core competency” is the combination of knowledge and ability that is critical to the organization’s success and is the basis for a competitive advantage to the company. Therefore, it is neither purchased nor shared with other organizations.

The core competency of a company is typically one of the following: research and development; production; sales and marketing; finance; legal; or human resources. The latter three typically apply only to companies selling such services. As a fictional example of a company, we’ll use the Brucell Company. Sales and marketing is the core competency of the Brucell Company. Research and production is secondary because the company can license in products from other companies to sell. And a number of companies are available to produce the product, either onshore or offshore. This suggests that sales/marketing needs to identify the type, knowledge, process and behavior skills needed to be successful. These will be converted into recruitment brochures and interview screens.

Within HR, the business partner and employee champion core competencies are the knowledge and process skills that enable it to work the four levers of HR change:

  1. Work structure design and outsourcing.
  2. Recruitment and selection of needed staffing.
  3. Training and development of the workforce.
  4. Rewarding success and penalizing failure.

What HR Functions To Outsource

Administrative work that is not tied to enhancing the core competencies is a prime candidate for outsourcing. Thus, if sales and marketing is a core competency, then the recruit/select; train/develop and reward/penalize of such positions would not be outsourced. However, all other work could be a candidate for outsourcing.

Organizations that specialize in various types of administrative work should be sought out and checked out as candidates for outsourcing providers. Start with other HR contacts in other companies. Who have they used? Were they any good? Having established a list of possibles, contact them and ask if they are interested in being considered. If so, send them a RFP (a request for proposal) clearly describing the work to be done and asking for a timetable (with key event dates) and costs. If HR has not done such a RFP before, it should look to other parts of the organization that have experience in this matter. The purchasing function is an excellent place to start because of its experience in this area.

Having received the RFPs, they need to be evaluated. Again someone in purchasing may be of assistance. Ambiguous points need to be clarified and the timetable and costs acceptable to both HR and management. The project can not move ahead until this has been accomplished. It is also key to have an exit strategy if HR is not satisfied with the progress during the project.

Checking references is important but you should start with the belief that any volunteered references will be supportive in their comments. Ask for company names (and contacts) of previous engagements. Why are they no longer clients? Ensure you have a list of all prior clients, not simply those who were satisfied. Cross reference this information with your other service providers.

It is important to review carefully the various steps in outsourcing a service. If the provider does not do a good job, it will be HR that management and employees will likely hold accountable, not just the provider. After all, it was HR that made the vendor decision.

What HR Functions To Keep

This leads us to the other two roles of HR, which should be the dominant roles so they can lead to adding value to the company: business partner and employee champion.

HR professionals will not get to the management table unless they can demonstrate they can be an effective business partner. They should be able to show how they can play a major role in the optimization of the workforce’s efficiency and effectiveness in striving to achieve identified company strategies and objectives. To do this, HR professionals must clearly know the company’s business. What are its major products/services? Who are its customers? Why do the customers value our products/services? Who are our competitors? What are their strengths and weaknesses? What are ours? The sales organization is the best source for such information. What are the threats and opportunities facing our organization? The company president, as well as the chief financial officer, chief legal officer and chief sales executive have this information. If HR does not have this type of knowledge, how can it expect to be a business partner?

Effective HR business partners also have cutting-edge HR knowledge skills which they can bring to bear on the business issues—the four levers of HR change discussed earlier. Most HR people underestimate the power of these HR levers of change. Closely tied to the core competencies of the company and its major strategies, these are tasks that should not be outsourced. However, for portions of the organization that are not closely tied to the core competencies, they are candidates for outsourcing.

Work Structure. In reviewing the structure of work, HR should play a major part in structuring work relationships. At the core should be regular employees (those whose knowledge and work is critical to the success of the company). Next should be part-time employees—also critical but not needed on a full-time basis. Then temporary employees, who help fill in gaps of workload imbalance. Then one has independent contractors (individual and group) whose assignments may range from completion of a one-month project to a long-term responsibility for an outsourced task (such as 401(k) administration). With this type of alignment of work responsibilities it should be possible for the organization to expand and contract as needed without laying off full-time workers.

It is important for HR to attempt to determine the manning levels for each of these categories. Initially, it is based on the input of the line executives, but after in place it may need to be updated. There are probably too many regular employees if the company has to terminate some for lack of work. There are probably too few if they ask part-time employees to work overtime beyond the regularly scheduled work week. The same type of analysis applies to temporary employees and contractors. Although it is expected to have ebbs and flows in manning levels, regular employees typically form the largest group, followed in sequence by the others. If there are more part-timers than regulars, more temporaries than part-timers, more contract workers than temporaries, it suggests the manning levels be revisited. As part of the analysis, all employment costs for each category (pay and employee benefits) need to be calculated. The same type of analysis that is done on relative manning levels also should be done on costs by category. If the regular employee category is not the highest cost and the contract worker the lowest, the manning levels need to be reviewed. Such reviews should be done by HR at least every three months and reviewed with line management, as well as getting line management’s indication of upcoming manning levels by category. It is important to avoid sudden and dramatic changes, such as adding 100 regular employees and two months later terminating them. This suggests the possibility of poor planning by management. When this happens, HR should point out the increased costs for employment and severance.

That is not to say one does not need to be mindful of possible future events that could affect staffing requirements and build them into the respective size of the components. Clearly this is a part of being a business partner. However, whenever possible one should be able to avoid last-minute, sudden, significant adjustments to its core employment (i.e., regular and part-time workers).

It is possible that the workload may change dramatically due to outside factors, such as a competitor introducing a far superior product or going out of business. Such actions would require quick adjustments and for that reason HR working with line management should identify those who might have to be terminated because of marginal performance, as well as possible sources for adding employees. Typically, this would start with looking to part-time to become full-time and temporary to become either regular full-time or part-time workers.

Recruit/Select. The recruit/select lever is a buy-not-make solution and needs to be done very carefully. A new hire who fits the culture is being viewed by many as more important than one whose skills fit. One can train a person easier than adjusting their sense of values. Therefore, it is important for HR to define its company culture and recalculate those values in the employment interviews.

As stated earlier, the core competency of our sample company, the Brucell Company, is sales and marketing. Recruiting and selecting of candidates for employment should be under the control of sales and marketing with a HR professional providing assistance in developing recruitment plans and interview questions to identify and select the best candidates for the sales and marketing organizations.

HR and sales/marketing need to identify the best way to get their message to potential candidates (e.g., advertising, college visits or trade shows). Applicants need a preliminary screening to eliminate the obviously not qualified. Those who remain should be personally seen. The interviews will use the earlier prepared screens to conduct targeted selection. This means at least two interviewers will ask the same questions (perhaps in a different context).

Because sales/marketing is the company’s key competency these screens should not only be carefully developed, they should be carefully protected for they are linked to the competitive advantage of the company, namely getting the best people to drive its sales/marketing function. Other functions (e.g., research/development and production) are good potentials for outsourcing since they are not core competencies.

Similarly, if finance is not a core competency for the organization, much of the recruiting and selecting can be outsourced after HR and the finance function have indicated the type of persons they are seeking. Recognize that finance could be a core competency for a company selling financial services, such as auditing. If that were the case, recruiting and selecting would be closely handled by the finance function and HR. The key point is that the company does not want to give away a competitive advantage by revealing their recruiting and selection criteria for core competency positions.

HR should review the information provided by management about core competency and determine if the recruiting and selecting plans are consistent with such data. If it is not, HR should develop a plan on how to bring them into alignment, insourcing core competencies and outsourcing non-core competencies. It is important to recognize that core competencies for divisions are likely to be different than for the company. Therefore, it is important to determine the core competency by organizational level.

Train/Develop. Having selected and hired individuals, it is necessary to look to the next major lever of change: training and development. Training is focused on providing ways in which individuals can acquire the needed skills to do the assigned work. Development focuses on ways in which the person can acquire the skills needed to take on more responsibility within the organization. There are many ways to do both. On-the-job training may be computer-driven programs in addition to an assigned trainer. Development may include rotating through various departments within the division. Again, training and development within the core competency—in our example, marketing—should be done internally. Others can be done externally (e.g., professional associations, conferences, and college or university courses).

The train/develop lever is a make-not-buy decision. Training focuses both on job skills and appropriate behavior (e.g., what constitutes harassment). Development focuses on possible future assignments. More and more companies take the position that they should provide the appropriate developmental opportunities, leaving individuals responsible for their career planning. The focus should be on further enhancing the strengths of a person rather than shoring up their weaknesses, and reorganizing the work structure to capitalize on these strengths.

In most cases, weaknesses are because of either a lack of interest or a lack of ability. The latter can be addressed, but it is of little value if the person has little or no interest in the weak area. Therefore, rather than spend a lot of time and money trying to help a person with terrible people skills improve, remove the individual from work that requires people interaction. This is a win-win: the company saves money and the individual no longer has to do work he/she does not like. A dollar spent on additional training in an area the person likes is far better than spending it on something the person does not like. Furthermore, the company is less likely to have a person quit if he or she likes the work and has the opportunity to learn about preferred skills.

Training related to core competencies is integral to the company and should not be outsourced because it enhances the competitive advantage of that core competency. Conversely, other training should be a candidate for outsourcing. This analysis applies to both skills and behavior training. Each position has a portion of both but it will vary by function. For example, one would expect a sales position to have a high level of required behavior skills in dealing with customers, perhaps even higher than required job skills. Conversely, those in technology positions would be expected to have higher job skills than behavior skills.

Reward/Penalize. The reward/penalize lever is very powerful in reinforcing desired behavior and outcomes. However, that means expectations must be described at the beginning, not the end, of the performance period. It is important to quickly address performance problems. Mediocre performance should not be tolerated. It sends a bad message to other workers. People not meeting standards should be counseled. Is additional training needed? Is a different job or boss the answer? After reasonable alternatives have been tried without success, the individual should be exited graciously and generously from the company and thereby given an opportunity to succeed elsewhere. The alternative is to condone the mediocre performance until a later date when the person will be terminated because of a new “rightsizing” initiative. Until then, the company lost the opportunity to have a better performer in place sooner and the individual has lost time in getting work that is a better fit. Furthermore, it is difficult to communicate the importance of outstanding performance if other members of the workforce see you are tolerating mediocre performance with others.

HR professionals know that managers often write a performance review that will justify their proposed pay action. In other words, they start with the increase they want to give and work backwards to develop a performance review to support the action. That may be difficult for HR to challenge. It’s easier to look for consistency. If the manager wants to terminate an employee, determine if the action is consistent with progressive discipline: coaching, counseling and warning the individual of possible termination unless mending one’s ways. An even easier discrepancy to spot is proposed termination, preceded by a very positive performance review. This discrepancy needs to be discussed with the manager, indicating termination could open the company to legal actions because of the inconsistencies.

Conversely, for the top performers, managers should be encouraged to provide appropriate intrinsic and extrinsic compensations. Extrinsic is pay action with the best being a bonus or lump sum merit increase shortly after the performance review. The larger and more frequent the better. Intrinsic compensation consists of praise for work well done. Ideally, it is given face to face and then put in writing for the service file. The same applies to poor performance.

Employee Champion

Employee champion means ensuring managers treat workers fairly. How can we expect individuals to be the best they can be if they believe they are not being given fair treatment? Employees should know they can speak up about inappropriate treatment without jeopardizing their future.

Being an employee champion means ensuring all have equal opportunities. This means training and development programs on company time and at company expense. Developing appropriate training and development programs is part of being a business partner; ensuring all have equal access is being an employee champion.

Many HR people may think they are employee champions, but unless they are receiving unsolicited feedback from the employees supporting that position, the view may be premature and not justified. Focus groups and broad-based employee surveys are appropriate feedback vehicles.

A simple, quick test to determine if an HR person is really an employee champion: How often does the HR person ensure the employee’s right to fair and equitable treatment with dignity? Is the HR person consistently siding with management on cutbacks and downsizing? If so, it is difficult to believe the individual is really an employee champion.

Some ask, “Is there a business advantage in being an employee champion?” The answer is a resounding, “Yes”! The literature is filled with studies that show employees are more productive if they are treated fairly, rather than if they are simply viewed as costs that need to be trimmed. It’s hard for employees to “rally around the flag” when they or their fellow employees are terminated or experience pay and benefit cutbacks because of revenue losses, while executives receive new bonuses and stock options for implementing these cutbacks. Where is the voice of HR asking management if such actions will help produce a more effective workforce? Cutbacks should apply at all levels. Ideally, they are even more severe at the top than the bottom. After all, top leaders are more responsible for the problem. They are paid more to lead the company.

Technology can be quickly copied or exceeded and financing is available 24/7 around the world. Where is the lasting competitive advantage for the company? The answer: its workforce! Treat them right and they will treat the company right. HR should continually lead management in helping employees: being the best they can be, helping others do their best and having fun. This is best achieved in a collegial work environment. Is your company culture one that is consistent with these objectives? Does management talk in terms of “we” and “they” or do they talk about “us”? A collegial culture is not one that is bifurcated!

Success as an employee champion is often measured one person at a time. It is micro in nature, whereas success as a business partner is macro in nature—the workforce as a whole.

Conclusion

HR professionals who step up to being both a business partner and an employee champion, using opportunities to eliminate and/or outsource administrative responsibilities, will be major players in shaping a workforce that provides its organization with the only sustainable competitive advantage.

Mr. Ellig is a noted authority, author and lecturer on human resources. He has been quoted in major publications throughout the world, as well as being interviewed on national television shows. He has received numerous awards including SHRM’s Lifetime Achievement Award. He also served as Board Chair for SHRM in 1996. His most recent books are The Evolution of Employee Pay and Benefits in the United States (2005) and The Complete Guide to Executive Compensation (2007). Before retiring after 35 years with Pfizer, he served as worldwide head of HR for over 12 years.

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