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HR Executive Insight

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The Best Practices Used by World-Class HR Organizations to Get the Most Out of Their Outsourcing Investment
Management Issue

By Stephen Joyce and Nathalie Bression

Executive Summary
The recession opened many HR leaders eyes to the necessity of being able to quickly scale SG&A costs to remain in line with revenue changes. As a result, outsourcing, which for two decades has been used as a point solution for HR processes like payroll and benefits, has come to the fore as a broader strategy. Successful outsourcing generally requires client processes that are simplified, standardized and enabled by technology. Further, outsourcing requires clients to implement change management concepts. Understanding these and other key practices of world-class HR organizations reveals how outsourcing can be used effectively to improve the performance of the HR function.

Introduction
FIG. 1 Total HR cost per employee, 2009
$2,185
17%

$1,821

HR leaders have been given a mandate to reduce their costs and align their organizations to a volatile business environment. When done well, outsourcing can help in this regard, because it allows companies to take out cost without compromising quality and value contribution. By contrast, legacy HR service delivery strategies are largely unable to fully support the companys operating model and strategies when business conditions change, as they were not designed to realize maximum economies of scale, scope and skills. For outsourcings potential savings to be achieved, it should not be considered in a vacuum. Rather, improvements should be considered from the wider perspective of what can be achieved through process improvement, leverage of technology and talent, and optimization of organization design. Getting to world-class performance requires a sustained focus on eliminating, simplifying, automating, and finding the best sourcing channel for delivery of services.

Peer Group
Source: e Hackett Group, 2009

World-Class

Outsourcing Leads to Improved HR PerformanceWhen Integrated in a Broader Performance Improvement Strategy

World-class HR organizations deliver higher levels of efficiency and effectiveness at lower cost. This has been a consistent finding since Hackett began benchmarking HR organizations in the 1990s. In 2009, world-class HR organizations spent 17% less than peer-group companies, yet still delivered superior services (Fig. 1).

2009 The Hackett Group, Inc.; All Rights Reserved

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Hackett HR taxonomy: Transactional processes

T  otal Rewards Administration - Health and welfare admin. - Pension and savings admin. - Compensation admin. P  ayroll Services - Time and attendance - Payroll admin.  Data Management, Reporting and Compliance - Compliance mgmt. - Employee data mgmt. - HR reporting
FIG. 2 World-class HR organizations' holistic approach to outsourcing balances their effectiveness and efficiency
Top decile HIGH
World-Class EFFECTIVENESS World-Class

Rather than view outsourcing as a stand-alone strategy, world-class HR organizations consider outsourcing as part of an integrated approach to improve their performance. Other approaches include: Identifying and reducing complexity in their organizations, with the knowledge that minimizing customized, unique activities is better for their employees and costs less to administer. Having a plan to standardize and streamline targeted processes, which focuses both the company and the provider on moving toward world-class performance. Optimizing their service delivery model to eliminate redundancies and streamline the channels available to deliver services to the organization. Leveraging self-service technology to improve cycle time, accuracy, and productivity. Utilizing all pertinent and available data to make business decisions. This holistic approach drives higher efficiency and effectiveness in the HR function at an optimum cost (Fig. 2). What also distinguishes world-class HR from the rest is the way they balance work done internally and by third parties. They spend less on labor and outsourcing because they have done the hard work required to eliminate, simplify, streamline and automate their practices and processes. Further, they use outsourcing strategically and intelligently, working in partnership with their suppliers, guided by service level agreements, and measuring the progress of both sides through end-toend process costs and other measurements. The result is that world-class HR organizations are able to devote more of their budget to high-value employee life cycle and strategic/management processes (Fig. 3).

1D 1Q EFFECTIVENESS

Top-quartile effectiveness and efficiency

World-Class EFFICIENCY

LOW

EFFICIENCY

1Q 1D

HIGH

Top decile
Source: e Hackett Group

FIG. 3 World-class HR spends less on transactional costs, making more available for internal talent management activities
Transactional process cost per employee, 2009 $750 26%
26% 23%

Internal talent management process cost as a percent of total process cost, 2009 32% 11%

$555 11%

15% 12% 6% World-Class

4% Peer Group World-Class Peer Group

WORKFORCE DEVELOPMENT ORGANIZATIONAL EFFECTIVENESS STRATEGIC WORKFORCE PLANNING

Source: e Hackett Group, 2009

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Learning from World-Class Organizations

Getting to world-class performance requires a sustained focus on improvement based on eliminating, simplifying, automating and then finding the optimal sourcing channel for delivery of services (Fig. 4).
FIG. 4 Getting to world-class performance
Self-service portals World-class HR organizations... Business process outsourcing Shared services centers (SSC) Centers of excellence (COE) Specialized BU delivery

Leveraged delivery Automate Standardize Simplify Eliminate Strategic alignment

3
Reduce manual effort and errors through technology leverage

2
Reduce complexity and implement best practices across enterprise

People Process Technology Enablers

Corporate

1
Determine services needed, and delivery/management model to support strategic objectives
Source: The Hackett Group

4
Deliver services through most appropriate channel

Hackett definitions
Process costs: Fully loaded internal labor costs plus outsourcing costs. Outsourcing costs: All external costs associated with the delivery of a given process or service. Internal talent management: In Hacketts HR taxonomy, these include Strategic Workforce Planning, Workforce Development Services and Organizational Effectiveness.

Below are some of the key practices HR organizations embrace that help them make the most of their outsourcing decisions and opportunities.

Key practice #1: Reduce complexity, streamline, standardize, and automate before outsourcing. World-class HR organizations do not accept complexity in their organizations. They are relentless about simplifying their environment, whether this is achieved by reducing the number of compensation and benefit plans, job codes or transactional systems.
If this is not an option prior to outsourcing, make sure it is addressed early in any outsourcing relationship. To transform policies and practices, HR organizations need broad executive and organizational support. Lining up support for simplification and standardization efforts well before outsourcing contract is signed is essential.

Key practice #2: Create a realistic business plan and then execute against it. For many HR executives, the reason for creating a business case for outsourcing is to use it for securing project approval. Once approved, it is rarely referred
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2009 The Hackett Group, Inc.; All Rights Reserved

to again. By contrast, leaders of world-class HR organizations treat the business case as a living document, one which is critical to deliver the results promised to senior management. Increasingly, it is also viewed as a kind of executive report card, which has the power to either enhance or damage credibility with the business, depending on how well promised results are delivered. The business case needs to be realistic and achievable. It should address all major decisions required to achieve its objectives. According to Hackett data, world-class HR organizations are consistently more successful at achieving their business case for outsourcing. As part of their due diligence in developing the business case, they address all policies, processes and procedures that will be affected or which need to change to ensure successful handoff of activities to a third-party provider.

Key practice #3: Design and budget for well-structured governance model to manage the outsourcing relationship. Create a solid governance system, beginning with some form of executive-level steering committee. This will enable appropriate directives regarding the assigning of roles and responsibilities and will put in place a chain of command for handling problems at each level of responsibility. It will also permit better oversight of the planning assumptions and promote better executive-level understanding of expectations for the outsourcing project. Finally, it will help coordinate the collaboration of various functional and operating units.
Beyond the executive committee, also set up a formal group consisting of representatives from all major stakeholders, who are empowered to make decisions about anything that might affect their respective areas. The governance model provides executive oversight as well as project continuity. It also is necessary for effective change management during the life of the outsourcing project. Therefore, the governance model should define and enable strong project management. Governance of an outsourcing contract is a necessary cost, but if retained personnel are costing more than 3%-8% of the cost of the contract, the vendor is either being over-managed, an indication that controls are overly complex, or retained staff have reassumed some of the work.

Key practice #4: View the provider as a business partner, not an adversary, and leverage its expertise. Outsourcing relationships are generally complex and can last a long time. Further, there is a natural, inherent amount of conflict between clients desire for the lowest cost and outsourcers need to make a profit.
The first step in establishing an effective working relationship with an outsourcer is to allow the outsourcer to get close enough to the clients business operations to understand its goals and business model. Outsourcing partners are generally quite receptive and willing to offer ideas for streamlining or eliminating work, or absorbing work in a way that allow the HR organization to eliminate a cost.

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Frequently, contracts have clauses that encompass a vision of improving outsourced processes over time. The lessons learned by the vendor when working with other clients can be leveraged, sometimes yielding significant economies of scale. Clients should ask the outsourcer for help in identifying areas of its expertise that can help lower costs and improve quality.

Key practice #5: Reconfigure retained roles and processes to accommodate outsourced processes and hold HR staff accountable for performing their new roles. Organizations that outsource need to redesign and restructure processes that involve work to be eliminated, replaced by technology/automated workflow or handed off to a third party. Roles and responsibilities must also be redesigned or newly created. This is most important for manager roles and for those affected by the outsourcing initiative. For example, HR generalist roles, which handle the transactional and administrative activities to be outsourced, must be refocused and redirected to higher-value activities. This may well result in increasing the scope and the business or geographic coverage of responsibilities, as well. HR staff must be held accountable for performing these reconfigured roles. If not, these staff members may keep a hand in the processes rather than stepping out of the way. While their efforts may be well-intentioned, this adds cost, slows processes and a dilutes the ability to leverage the retained resource pool for other activities.
Additionally, the job of managing a vendor relationship is different from managing a team or transactional processes. It definitely requires a new job description with different responsibilities.

Key Practice #6: Ensure that the right skills and competencies are in place within the retained team to manage the relationship with the outsourcer. Installing a relationship or project management officer is essential to ensuring that the people and operations kept within the enterprise are compatible with those of the outsourcer. Relationship managers help manage costs by eliminating shadow processes (i.e., the same work carried out simultaneously in multiple locations) that may develop between the third party and the business units being served. Duplicate systems mean employees are doing redundant work and wasting time and money. Someone with the skills and power to root out and eliminate duplication will help maintain efficiency, keeping managers and their departments on task. Relationship management can also facilitate better cohesion between the outsourcer and the client, which means more cooperation and better communication.
However, vendor management skills are not normally at the top of the list when traditional HR staff are hired. The internal outsourcing team therefore will need to be trained in the skills necessary to make an outsourcing relationship successful. These include partnering, relationship management, strategic thinking and process improvement. Business and financial skills will need sharpening, as well.

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Key practice #7: Leverage technology to keep costs down. Companies must leverage technology to the maximum extent possible to help increase productivity, which ultimately reduces cost. For example, world-class HR organizations encourage or require use of manager and employee self-service channels to a much greater extent than typical HR organizations. Higher utilization rates reduce unit costs. By contrast, processes that involve customization and manual work raise both the clients and its outsourcers costs. Some companies are disappointed at the lack of savings achieved when outsourcing, but this is usually traceable to the fact that they permit internal staff to insert themselves into processes designed to be done through self-service technology. This slows down the process and increases the outsourcers cost to deliver the service. Key practice #8: Establish results-oriented service level agreements (SLAs) with outsourcers and ensure that these agreements are communicated clearly to all affected. Service level agreements (SLAs) are primarily used to ensure that outsourcers meet their performance goals, and that customers live up to their responsibilities in turn. When properly used, SLAs communicate vital information to customers, help improve processes, document costs, and provide a comparison between expected and delivered business unit performance.
Unfortunately, many times the initial SLAs are focused on activities instead of results: for example, they may focus on call answering speed vs. first-call resolution. This may be caused by inserting SLA metrics in the initial contract before having detailed conversations with HR operations team members on defining the right measurements. Many of these decisions may be better off delayed until after detailed design sessions between knowledgeable staff from the client and outsourcer. If service levels are being changed to reduce costs, or are being defined for the first time, make sure that these new expectations are communicated to affected parties.

Key practice #9: Utilize a holistic, integrated change management program when transitioning work to an outsourcer. Change is inevitable when a company looks for ways to use new resources, information and flexibility throughout the enterprise. Therefore, HR organizations should direct efforts and resources toward change management before, during and after making the decision to outsource work. In many cases, change as a result of outsourcing is so significant that it requires a complete transformation, as companies rethink years and layers of overlapping policies and procedures that in many cases were only in place to accommodate the limitations of existing technology.
Leaders of world-class HR organizations understand that successful change management requires repetition and reinforcement. A comprehensive change management program includes significant, well-planned communication and training. It requires identifying pockets of cultural resistance and devising strategies to overcome that resistance. It also requires internal champions to lead the organization through the changes taking place.

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Key practice #10: Build metrics and measurements into outsourcing agreements to measure the end-to-end process not just the outsourcers part of the process. Most outsourcing agreements include a provision to periodically benchmark costs. However, this is generally a one-sided assessment of competitive outsourcing rates. For a true partnership to evolve, it is critical that both parties commit to the outsourcing projects objectives through joint measurements. World-class HR executives follow management guru Peter Druckers famous principle: What gets measured, gets managed.
World-class HR organizations use a process cost approach, which measures both the internal and external costs of delivering end-to-end HR services. This allows them to hold constructive, fact-based discussions with their outsourcer about where to focus efforts to improve performance. Other measures should be defined based on the objectives, as defined in the business case. Process improvements are possible throughout the life of a contract. The arrangement should not be the same in the fifth year of the contract as it was in the first. Identify a mutually agreeable timetable for reviewing the relationship and its performance. This way, if the client wants to reduce costs, the reviews can focus on identifying those costs and how the vendor and the client may work together to realize those savings.

Strategic Implications
Outsourcing is a tool that can be used by HR organizations to improve performance and reduce costs. However, by itself, no tool can overcome error-prone, over-designed, non-standard processes. Nor will the mere signing of a contract ensure that organizational resistance to change will melt away. However, outsourcing can be used effectively to improve the performance of the HR function if the objectives for the outsourcing project are clearly defined, supported by the broader business organization, and implemented effectively. Overall, companies should commit to reviewing the outsourcing relationship at least annually and more often quarterly or semiannually at least in the early phases of the relationship. Reviews offer the provider a chance to raise issues and highlight emerging problems that might require process improvements or other changes. The key is to make the outsourcing relationship a living, evolving partnership. One final caution: HR organizations that are looking for significant cost savings purely though labor arbitrage will likely be disappointed. For truly significant cost savings, it is necessary to look inside ones own organization for opportunities to contribute to reduced costs. Improving outdated, redundant processes and practices either before the outsourcing relationship begins or shortly after the work is transferred is the most important step companies can take when modeling their behavior to achieve world-class performance.

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About The Hackett Group

The Hackett Group, a global strategic advisory firm, is a leader in best practice advisory, benchmarking, and transformation consulting services, including shared services, offshoring and outsourcing advice. Utilising best practices and implementation insights from more than 4,000 benchmarking engagements, executives use Hacketts empirically based approach to quickly define and prioritise initiatives to enable worldclass performance. Through its REL brand, Hackett offers working capital solutions focused on delivering significant cash flow improvements. Through its Hackett Technology Solutions group, Hackett offers business application consulting services that helps maximise returns on IT investments. Hackett has worked with 2,700 major corporations and government agencies, including 97% of the Dow Jones Industrials, 73% of the Fortune 100, 73% of the DAX 30 and 45% of the FTSE 100. Founded in 1991, The Hackett Group was acquired by Answerthink, which was renamed The Hackett Group in 2008. The Hackett Group has global offices in the United States, Europe and India and is publicly traded on the NASDAQ as HCKT.

Related Hackett Research

The World-Class Cost Advantage: How Top Companies Operate at $234-$404 Million Less Than Their Peers, May 2009 Seven Ideas for Reducing the Cost of Your Outsourcing Deal, March 2009 Highlights from Hacketts 2009 Metrics and Practices from World-Class HR Organizations, August 2009

About the Advisors

Stephen Joyce
Human Resources Practice Leader, The Hackett Group

Mr. Joyce is responsible for thought leadership, practice management and advising HR executives on how to improve efficiency and effectiveness in their HR organizations. He has over 25 years of experience in human resources, HR consulting, and HR system implementations. His experience includes conducting and HR benchmarks to integrate into the HR strategic planning process, future visioning, workshop development and execution, process redesign and program management, with hands-on leadership experience in compensation, HRIS, and as a business partner and generalist. Mr. Joyces experience includes four years as the managing director of the PeopleSoft Solutions group within Answerthink.

Nathalie Bression
Senior Business Advisor, HR Executive Advisory Program, The Hackett Group

The Hackett Group

Email: info@thehackettgroup.com +44 207 398 9100 www.thehackettgroup.com

Atlanta +1 770 225 3600 London +44 207 398 9100 Frankfurt am Main +49 69 900 2170 Paris +33 15 343 0400 Amsterdam +31 20 301 2210 Zurich +41 43 813 3010 Hyderabad +91 40 235 51432

Ms. Bression has over a decade of human resources experience, with a focus on general HR management, talent acquisition, performance management, process improvement, compliance and employee relations. Prior to joining The Hackett Group, she held various HR roles in both private and public companies, including a Fortune 500 organization. She is certified by the Society for Human Resource Management both nationwide and globally.

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