Roundtable: The Value of HR Outsourcing
Last month, to launch our series ‘OutsourceXplores Getting out of the HR Jungle’, Outsource and Logica – now part of CGI – convened a roundtable looking at some of the key trends, developments, challenges and opportunities at play within the HRO space. During a wide-ranging, free-flowing discussion, a team of thought leaders representing the buyer, vendor, advisory and analyst communities tackled some of the very biggest issues facing HRO today. Here we present an edited transcript of the debate.
Taking part were:
Andrew Fox, Head of Human Resources, HSBC
Nick Harvey, HRO Proposition Director, Logica, now part of CGI
Linda Merritt, Research Director HRO, NelsonHall
Sola Osinoiki, Manager Human Resource Services, PWC
The debate was chaired by Outsource editor Jamie Liddell.
Outsource: Sola, let’s start with you: how is HR outsourcing, specifically, driving business transformation within the HR function and in organisations globally at the moment?
Sola Osinoiki: Over the past couple of years we are seeing more and more of the HR function aligning with the overall business outcomes – so this drives around “What is the business outcome that we are trying to drive to and deliver to?” Because you understand the business outcome, you begin to align HR to that – and (with the concept of cost reduction in mind) you are looking at the best way of delivering those solutions. If you are looking broader than just “I want to outsource”, more in what we term selective sourcing – what do you outsource, what do you in-source, what do you share, what do you use fast models for – everybody is trying to get away from high-technology implementations within organisations, because implementing, let’s say, a recruitment tool, internally, involves you setting up servers, setting up firewalls, setting up interfaces, whereas if you go for a fully outsourced model where you actually outsource the process itself, you begin to walk away from those sort of high-end costs in terms of the ability to deliver solutions.
O: And how important is cost still, as a factor in what organisations are looking to do currently?
SO: For the organisations we are working with across the board, cost is still one of the key drivers, so every single implementation that I’ve been involved with has got a big monetary return investment at the end of it.
O: Andrew, from a practitioner’s perspective how far does that align with what you’re seeing at the moment?
Andrew Fox: I agree. When we look to outsource, cost is a major driver – and you can dress it up any way you want to: say efficiency, say core capability, say variable costs, you could say lower unit costs…
Nick Harvey: I think we’re seeing very much the same: the cost is a significant element, but in many cases – especially where people have outsourced once already – they’ve often achieved some of that cost reduction, maybe by moving things to a lower-wage environment that’s helped drive costs down. Increasingly organisations are looking to go up the value chain to understand how they can drive greater business performance and achieve value that way as well as maintaining a tight cost environment.
O: You mention moving to a lower-cost environment: how important is labour arbitrage at the moment in terms of location selection particularly in HR?
NH: I think you get a very mixed picture. I think that where people can use wage arbitrage to manage back-office aspects of the service in terms of non-customer-facing work, you still get a lot of that. Once you get to the point of actually putting customer contact work out into those environments, you do get a much more mixed picture.
I think it also depends on what other experiences organisations have had with moving work offshore in any other environment; that is a key factor in conversations we have. Those typically that have had a good experience moving a function or parts of a function offshore are much more receptive. Those that don’t have any of-shore capability (however it’s provided) are much more reluctant. There’s a maturity piece there that comes into it.
O: Andrew, do you see the labour arbitrage question fading right now, or is it a more cyclical thing?
AF: Well I think over time (this is just an opinion) it will fade away and you’ll start to compete on other elements. Beforehand (again my view) true outsourcing was always, at its core, cost. If that starts to diminish then you have to look for other benefits. I think there are other, benefits like core capability. My personal view is that the wage differential may never go away but I think it will get less and less and less and therefore that won’t be the sole or predominant driver of outsourcing like it was in the past.
HSBC, historically, actually didn’t do a lot of outsourcing – in fact it had a stated policy where we insourced and what we did was offshored. We’ve got massive operations located all around the globe, at the moment predominantly in India and now in Poland, but they are still owned and run by us. We’ve not outsourced: we’ve offshored. I think we’re entering a new era now where there might be an understanding that actually we’ll be better off outsourcing things which are not our core capabilities, but the challenge there will be that the provider will have to match our level of globalisation. That’s where we’ve started, certainly in the HR space, to run into some challenges.
Linda Merritt: Cost is always a top concern and expected benefit of HRO, but it does vary by the maturity of the client. Clients new to HRO tend to look for the lower HRO admin costs. Then second-generation clients start to look at the overall cost of the programme and want to manage the large costs beyond the vendor fees. Finally, the most progressive clients are looking at creating improved business performance at the optimum cost.
O: Nick, moving away from labour arbitrage specifically, what do you feel have been the key transformations within HR that have been driven by outsourcing?
NH: I think you’ve got to go back and look at the reasons for HR transformation – because outsourcing effectively is just an enabler: why are organisations looking to transform HR, how they are going to go about it, are they clear in terms of the outcome they expect from it and how they are going to achieve those outcomes? Then obviously there’s a piece around how they bring all of that together. If you think about a typical HR transformation journey there’s a foundational element and then you look to build on that, and then you look hopefully to optimise. I think what we are seeing is that HR outsourcing can play a part in each of those steps on the transformation journey. It’s quite interesting to take some views on if we’re thinking about HR transformation – not just the outsourcing element of it – is that being truly business driven? Ultimately it’s all about aligning HR with the broader business strategy.
LM: It’s important to think about business strategy early on, even if you’re first-generation outsourcing. Where is it you want to end up? If you want to end up with HR transformation, then picking a vendor who can help you through your early stages when you are more focussed on operations – getting the services up and running, almost catching up with others so far as technology and processes are concerned – and you’re also very concerned about cost, you may pick a partner who isn’t the best partner for you as you move forward as you mature. Sometimes you see when contract renewals come up, even happy customers on a day-to-day level may decide the initial vendor is not the one they keep – or they’re going to consolidate, they’re not the one they’re going to choose for a broader range of services. So I think it behoves everybody to think about what they want from day one, but also what they want over a period of time as they mature and grow into the complexity that HR transformation really is, so they have the right partner.
AF: I would agree with that. Certainly in my experience, outsourcing doesn’t drive the transformation. Sometimes transformation drives the function to look at, amongst other things, outsourcing – so outsourcing may enable HR transformation, and I think that’s right. You don’t start with one pot and end with that same pot on a journey. As you mature your pot matures with you – or then you renew with a different provider. I also have had this pet theory that says “whatever you outsource today, you’ll in-source tomorrow” – and then what you in-source tomorrow, you’ll outsource again the day after. I think there is not always, but often, a cycle of nature and I think that’s driven by nothing other than the way we report financially, and the way financials work. A lot of the behaviour is driven by financial statements and the way we report, not by what might or might not be best for all concerned when it comes to in- out-, in- outsourcing. I certainly agree with the fact that outsourcing can enable transformation as you mature into your transformational journey. You may seek to change and/or upgrade and/or swap out your outsource providers, if they have failed to keep pace with what you are seeking to do internally.
O: Andrew, have you at HSBC performed an HR transformation during, or as a result of, the process of offshoring?
AF: In 2007 we started a global HR transformation journey. We realised globally we were spending about $1bn on HR (I can give that figure now because it’s old and we’ve moved on since then). I think when we looked at what had happened to the HR function as an organisation, we realised we had moved away from best-in-class on any number of fronts including efficiency and effectiveness. Actually the transformation journey that we started in 2007 (and will finish at the end of this year) certainly was driven by offshoring, but offshoring was one of the enablers to reduce our unit cost production. Now my transformation journey is looking at the next wave or generation of change (if you will) that are lead on. We are considering a combination of offshoring and outsourcing as part of our next generation of transformation.
O: Did you set out with a kind of deeper transformation agenda in mind or was it focussed on the costs first and foremost?
AF: It was absolutely a lot more than cost. It was truly transformational in terms of platforms, systems, processes and capability. It was fairly holistic in terms of what we tackled. Cost was just a part of it. In effect, what we said was, we would reduce our costs by some 25 per cent but at the same time we would uplift our service and capability significantly too. It seemed almost counter-intuitive but that was the goal and dare I say it, at least to some extent, that’s what we’ve achieved.
SO: Just to build on that point: I think if you then look at another aspect of this, you are basically building for two items ultimately from an HR point of view. One is the data that goes into the system and then there is the output that comes out the other side. One of the things we are beginning to find with a lot of our clients is, much as they are interested in reducing costs, they are also interested in making sure that the data they have hangs together.
NH: And it also provides an insight into the organisation. Once you have the foundation in terms of good quality data and consistency in terms of your process, you can then start to build up that warehouse – and the warehouse gives you the insight into what’s going on within the organisation. Andrew, I wonder about organisational insight: where did that fit in in your roadmap, in terms of transformation and how successful has that been?
AF: One of the areas we are still struggling with at the moment is that data MIP. We have lots of MI and data but it is very labour-intensive to produce. It’s not in the position where we would like it to be organisationally – on the people (or HR) front, but also on other fronts as well, other parts of the business. Because I agree with the fact that if your solution includes the proper production of fiscal accurate MI then it does need to enable further change through the insight that you’ll gather from your data. That’s an area we are still struggling with.
NH: You’ve had a journey of five years – how did the business change side of that journey go? I was just wondering what approach you took transforming the background, given that if you’re talking about ESS and MSS, if you’re changing the shape of the role of the line-manager…
AF: I think the first thing is that in the UK we implemented ESS and MSS before the transformation journey started. Again we didn’t do it via outsourcing: we did it via offshoring, we did it in-house. Now I think if we look back, we would have done it slightly differently, because I’m not sure we sold it into the business particularly well. Some of our other countries and regions are still in the process of converting to MSS and ESS – and some of our businesses aren’t and don’t want to. But in the UK and in the European region, we manage that change programme like you would expect any other: robust planning, thorough communication, selling and training – I don’t think there’s anything special about what we do or how we implemented it, but we did it.
LM: When we are talking about the idea of data, I think one of the real values in having an excellent outsourcing partner is they can help you plan to get to the end stage where you have the data you need, but the outsourcing partner sometimes has to help especially newer clients who may not articulate their needs well. They may say, “I need global payroll” and we’ve seen a lot of global payroll deals, but underneath it is not necessarily a big concern of who cuts what cheque; it is the payroll data they want to be able to understand what’s happening with the labour costs and the labour force around every area they have, whether it’s different business units or different countries.
O: How easy is it to have that kind of holistic, long-term, well thought-out understanding of where you want to get to, right at the beginning of the project?
LM: I think that many people in fact don’t have it, but if they’re short-term thinking too much then that’s where you start to see the problems of having to change systems and vendors and rip and replace, after you’ve developed additional ideas of where you need to go. Too much short-term thinking isn’t good. A general long-term plan is very possible.
NH: I think we can see varying views. We see some where HR functions are still very much in reactive mode. I think there are some where they’ve recognised that they have to take a more transformative view, because just trying to continue and improve is no longer an option. I think we see also those where there is clarity around how HR strategy aligns with business strategy. I think roadmaps are always an interesting option because short-term pressures, and continual changes in business content, do present a lot of challenges with being able to maintain a path on that roadmap. Ultimately, that’s the role for providers such as Logica, now part of CGI, to help organisations to do that. There’s no magic answer. There’s no single solution. It’s about understanding your business content and how you can drive value out of changing an HR function and align it with the broader business goals.
O: Let’s move on to looking at multi-sourcing. Andrew: you’ve said that you don’t envisage a situation where it would be possible to load all your eggs into one basket anyway, so working with multiple-vendors isn’t just an option for you but a pre-requisite of any kind of outsourcing-based transformation. Can you outline some of the challenges that you have had to deal with and how you developed a philosophy around multi-sourcing?
AF: Well I can try… For example at the moment we are considering outsourcing our recruitment globally and I know there wasn’t a single provider that could provide that service globally for us in a standardised way. So what happens is that managing multiple suppliers becomes a new competence that you have to acquire; you shouldn’t assume just because you’ve been able to manage one outsource partner in the past, that you can now (for the same transaction globally), manage multiple ones. I think it’s a different capability set – and I’m not sure that this exists widely at the moment in the profession. The issue that we’ve had is we’ve had to distinguish between where we really need a different provider, or where one of our regions is just being precious and actually can come online with an existing proposed provider. That’s the first thing we always have to decide: are we sure we can’t do it with one provider or do we genuinely have to have multiple providers? When we do, it’s a new capability set in terms of being able to manage that properly, so that you don’t destroy value, but you still create value from having these multiple relationships all delivering one thing – be it resourcing, or payroll, or whatever you choose.
O: Andrew, do you think people see vendor management being a core competency of the customer or the provider?
AF: I think at the moment it’s a core competency of the provider not the customer. I think that business in general, and HR typically, have got a lot to learn in terms of optimum management of external parties, providers, suppliers etc. I think it’s come a long way in the last couple of years, but I think it’s still got a long way to go and its a capability that I think the function would do well to perfect because it’s a level of commerciality in some respects that HR functions historically haven’t had; they’ve just relied upon their procurement pot but procurement will approach it like any other transaction – and it’s not like any other transaction; it’s quite different and often more complex.
O: Nick does that fit in with your own perspective?
NH: I don’t think there’s a right or wrong answer in terms of where it fits. I think it is certainly more complex than perhaps some other outsourced domains; I think there should be more to come in terms of commercial innovation around outsourcer HR services and I think you will see those top-tier clients who are best in class, certainly have those commercial skills very quickly and I think you’ll also see more and more providers moving to the supply chain enrichment piece as well. Andrew, have you looked at having one outsourcer manage the other relationships? Was that something that was considered in that context?
AF: It was – and in fact when you outsource your recruitment to a single provider, then that provider immediately takes on managing the relationships with other agencies on your behalf, so there’s already precedent for that – that part typically works. We have done that, but because of our geographic breadth, I don’t think any one provider could satisfy our needs around being able to truly manage it on a global basis. I’m taking recruitment as a specific example. What we’ve ended up with is, we will have the capability to manage two or three providers who will do it globally for us – each of those two or three will obviously manage other providers as part of the standard operating model.
SO: What we are beginning to hear is about ‘best of breed’. So if you’re going to go for multiple vendors, but not be tied in to one particular solution, all of a sudden you might find yourself with a payroll provider, resourcing provider, benefits provider and an HCM provider. All of a sudden, like Andrew said, you need to develop a new skill – or get somebody alongside you to manage multiple vendors to deliver a complex solution. What happens is that all of a sudden your choices of vendor begins to be impacted by who you take as your lynch pin.
LM: I fully agree. People are trying to come up to speed to match companies like our banking partner here, so they can meet their needs with one vendor who can assure them that – whether it’s through partnerships or whatever – it’s well integrated and well managed. I think we can learn from the mobility people that provide international relocation services. Some of them have almost zero footprint. They manage almost totally through partners and their skill is supplier management. The comment that this is a new skill (to manage outsourcing and suppliers) I think is right. It’s not a new skill in the business; but it certainly is a new skill in HR.
O: Nick, from a vendor’s perspective how do you see yourself fitting in with that idea?
NH: I think there are two aspects to this. First of all we recognise what our core capability is; we are not trying to be broader or to span the entire breadth of what you might consider HRO. For example, we do have partnerships, interestingly, in the RPO space. We would typically go to market with another organisation. I think certainly an element around what we’ve termed ecosystem management, in the sense of looking at the end-to-end ecosystem, is something that we see as a key component of any HR solution in its broadest sense. That’s something that organisations can obviously choose to take on themselves or something they can use an outsourcing provider to do. It is recognising that no one provider is ever going to meet every single need; it’s about making sure that you’ve got integration at all the right points – so you’ve got the integration from a service perspective, you have it at the process perspective, and also at the technology level there’s integration required . Ultimately it’s how you architect the solution in the fullest sense that counts.
LM: I like the concept of the lynch-pin provider, for larger organisations going onto transformation. That’s the idea that there is a lead provider that is working in partnership with the client to help this occur. What is developing are some strong regional players for different parts of the globe and for some companies that may be the solution, rather than trying to find one vendor who can do everything.
AF: I also like the concept of the lynch-pin provider and as I sit here and try to think forwards, I think that will drive the trend of in-sourcing what you outsourced previously. You’ll have to go down that route because of the complexity. That’s going to drive costs up because every person in that value chain has to have a margin. In terms of innovation, I think I might take a more cynical view and say that it might be stifling innovation because the energy is going in to making the processes work and to outsourcing them and to managing the service level agreements and the relationships and the complexity – and offshoring, when that’s accompanied with outsourcing. I’m not so sure that it isn’t a detractor from innovation.
NH: I think we see two views to innovation. Typically first-generation outsourcers don’t necessarily see the value of, if you like, embedded innovation into the service and the deal because they’re only on step one of the journey and they don’t necessarily have the experience. Certainly second-generation outsourcers are much keener and recognise that when you’re signing a long-term deal, it’s important that you have a mechanism for innovation and you have a clear understanding of how and when you introduced it, how you demonstrate the value of it, and how to make the right decision. There are now in the market some more sophisticated mechanisms for putting innovation into a typical outsourcing deal. I think that HR technology from outsourced providers has not kept pace with technology in other places – but that could just be the maturity of the HR outsourcing market.
LM: Something that is innovative one day starts to become standard on the next day – but I still think innovation is relative to what your current capabilities are. I think another place where I see innovation in HRO – more at the small end, but it is definitely both transformative and a disruptive force – is Software-as-a-Service that you can just pay for as you go instead of having to have a licence etc – this is truly transforming a lot of offerings. We’ve mentioned you have to have a margin and our current economy, which has put a really ruthless perspective on cost, has made many vendors not be able to move forward on innovation-type things, especially if they can’t be easily monetised as we’ve seen in the past.
NH: Linda, on the idea of access any time, anywhere from any device: the success of that will be around the concept of bring-your-own-device. Where’s the maturity of that?
LM: Well, I think security is one of the top issues. Certain organisations are not going to let things go out of house. But we have so much mobile access in our private lives that the pressure is building to bring them into the workplace. We have to face the challenges and manage them. Pretty much most of the suppliers that I work with have at least basic access now – they’re starting to put fairly simple decisions and functions that are actually transactional online.
SO: This is where you really need to depend on the IT infrastructure of the organisation as a whole, and HR then becomes something that is piggy-backing on something that already exists; so we have a client at the moment who has just signed up with a vendor primarily because the vendor has promised that they can do very basic HR transactions like an absence, and managing certain elements of their MFS, on an iPad. Security is always going to be top because you’re talking about HR data. Will we see this revolutionise the back office? Maybe not yet, but definitely in terms of the line manager doing one transaction for one employee in an internet cafe or on his way to the airport, approving an absence, you can begin to see that as a possibility. As we tie in the ability to develop apps and then develop portals, all of a sudden the concept of innovation almost comes upon you by force because your customer is beginning to ask you for that innovation.
LM: In the lead on some of this are the RPO vendors – who are often dealing with the younger generation where simply to be a recruiter, you have to be able to manage social media and multiple points of access. It can also be good for the service centres to be able to support the client through multiple channels and to reduce the use of waste channels which allows more back-office work to be anywhere in the world it needs to be. I think there are going to be some advantages for the clients, the vendors as well as the end users if they manage this well. It’s just going to be hard to keep pace with what’s happening in our private lives to bring it into the business and into HR.
AF: I think this is a very important debate which is going to occupy more and more time in the future. I think organisationally, our approach so far has been quite a traditional one in that you can’t use your personal device because of security reasons, but increasingly our external customers want access to their data and to be able to transact via mobile devices. So we are developing it there, and I think HR should be able to piggy-back on those sorts of developments.
To see other content in our series ‘OutsourceXplores Getting Out of the HR Jungle with Logica’, go to the series index.
Each OutsourceXplores is a separate content series created in collaboration with a commercial partner. The Outsource editor retains final editorial control of course. For more information write to firstname.lastname@example.org