Research
Extracting Greater Value From HR Outsourcing
With one eye on the economy and the other on achieving business outcomes, many of today’s global businesses are looking again at business process outsourcing as a strategic solution to deliver value through efficiencies in time, cost, and access to specialized expertise that might not be available to them in-house.
Human resources (HR), pivotal in today’s dynamic business landscape to determine success, has evolved significantly over recent years. With growing demands to remain competitive, an increasing number of businesses use HR outsourcing and generative artificial intelligence (Gen AI) to drive greater efficiencies to focus on core competencies.
But at The Hackett Group®, we know it’s not always easy. Managing the outsourcing relationships beyond the early honeymoon period – keeping that love and continuing to extract value through the outsourcing life cycle – can be challenging … but it doesn’t have to be.
In this blog, we’ll share our own expertise and thoughts from three of our HR outsourcing partners, drawing on lessons learned on how to reset and extract greater value from your HR outsourcing relationships.
The beginning!
HR outsourcing has grown from being a niche practice to a mainstream strategy employed by businesses of all sizes. It involves contracting with a third-party outsourcer to deliver transactional services that are either routine and standardised, require specialist expertise, or where outsourcing is more cost-effective and value-driven than delivering it in-house.
Common examples include payroll processing, benefits administration, talent acquisition, sourcing and onboarding, training, case management, time and attendance, and specialised services, including health and safety, global mobility, technology, and data analytics.
HR outsourcers offer these services as a single process or bundled packages, depending on client needs and outsourcing strategies. The days where HR outsourcers do everything are probably over; services are nuanced and focused on specialist areas.
Open-source research suggests the global HR outsourcing market will reach $45.8 billion over the next five years (The Hackett Group’s own research suggests a more moderate $15 billion) but, nonetheless, the numbers represent impressive growth and a huge thumbs-up for HR outsourcing as a strategic solution for HR to access resources and expertise with confidence over the coming years.
Mike Orlic, Business Development director at Arvato, says, “We’ve seen a steady increase in enquiries for HR contact centres and innovative, technology-led solutions. This tells us how outsourcing is evolving and seen as transformational, more so than just transactional.”
Prasanth Nair, vice president and Global Markets leader at Infosys, goes further, “The HR function is seeing outsourcing differently. It’s not just about cost savings and sending HR transactions abroad, but more and more it’s reimagining outsourcing in the context of transformation and the employee experience.”
Value creation
HR outsourcing is dynamic. HR is continually evaluating its outsourcing strategies with evolving needs and business priorities. HR recognises outsourcing as a catalyst for value creation to deliver more than just cost savings.
Tapping into outsourcers’ resources, expertise and technology can lead to greater efficiencies, streamlined processes, reduction in overhead costs, and improved compliance. This strategic shift facilitates better resource allocation and improved business outcomes, which enables HR to concentrate on its core competencies.
It can provide HR with access to resources such as state-of-the-art technology and expertise that may have been out of reach otherwise. Nair says, “HR services have moved to the cloud, so automation, AI and first point of contact for employees with chat boxes, digital assistants, and on-demand information are now available 24/7.”
This can open doors for organisations that are struggling with talent and retention challenges, and help them provide an elevated response to the needs of a multigenerational workforce and their expectations for an employee experience based on quick consumption and instant information access. Nair adds, “The demand is to get a personalised HR service in real time – not next week, but now, in the moment – when they need it.”
Outsourcing has a significant impact for chief human resources officers looking to improve efficiency and effectiveness. The Hackett Group’s research shows that Digital World Class® HR organisations outsource transactional activities significantly more than their peers, which helps them deliver greater business value and operational excellence.
If you’re considering outsourcing to strengthen your HR service delivery or reset your existing outsourcing relationships to extract even greater value, we share our experience – from clients and partners – to highlight some key lessons learned to help you move ahead.
Key Lesson 1: Define your expectations
HR can leverage outsourcing to strengthen its service delivery and enhance overall performance. But it starts with a smooth transition of HR policies, processes and other resources. Before starting any outsourcing, it’s critical to define what you’re looking to achieve so you and your outsourcer can understand what’s expected and avoid misunderstandings and future conflicts.
Make sure you jointly complete a comprehensive hand-off plan and have a framework for ongoing support. Open communication and collaboration between you, your team, and your outsourcing partner will be imperative to ensure a good understanding of the HR processes, culture, and values.
“For us it’s about collaboration to understand our client’s pain points and desired outcomes. We use a number of comprehensive templates that guide our clients through these critical data-gathering stages and won’t move forward until this is complete and signed off,” says Orlic.
Geraldine Fox, senior manager of Business Transformation and Sourcing at The Hackett Group®, stressed why it’s important to be realistic. “Understand where you are at the moment and the changes, you’ll need to make for outsourcing to work.” She reminds us that “HR outsourcing has evolved significantly and offers more comprehensive and value-driven solutions to support success, prioritising the strategic value you’re wanting over just cost reduction.”
Key Lesson 2: Build a strong partnership
Outsourcing encourages a strong partnership. It’s an important element of ongoing success and the foundations upon which you could identify other potential services to outsource in the future. But only if you’re already seeing the value you’re expecting from outsourcing.
It’s critical to create, define and agree on your service-level agreement (SLA), which sets out your expectations and helps you track your outsourcing efforts and measure success, for example, cost savings, quality, and turnaround times.
Tony Kavanagh, director of Business Consulting at CGI agrees, “SLAs are important for hygiene measures such as response and resolution times, but they set the minimum expectation from a contractual perspective. Our direction, and for the industry generally, is on XLAs, which measure the experience for users consuming an outsourced service.”
But, of course, business doesn’t stand still. Your SLA and experience-level agreement (XLA) may need course correction over time so give yourself space for continuous improvement. Monitor and evaluate what’s being delivered with your outsourcing partners to achieve even better results.
“Maintain a positive and cooperative relationship with your outsourcing partner but be prepared to take action when things go wrong,” said Andy Macdonald, director of Business Transformation and Sourcing at The Hackett Group®. “Relationships generally fail due to lack of attention and focus.”
Key Lesson 3: Effective communication
Every partnership – no matter how perfect – can become difficult. Regular meetings and open dialogue with your outsourcing partner can help resolve issues early, keeping you and your outsourcing partner on track.
Agree what type of communication and frequency works best and stick to it. Frequent check-ins can make sure you’re on the same page and create greater opportunities for relationship-building, more understanding, and collaboration. “If we’re referred to as a vendor or supplier, it doesn’t feel like we’re partners,” says Kavanagh. “We work closely with all our clients and have regular reviews to maintain high levels of trust.”
Key Lesson 4: Good governance
When things do go wrong, good governance with a clear line of sight to key decision-makers and an escalation process is really helpful. Macdonald reminds us that all outsourcing partnerships are ultimately “a commercial relationship, and your contract will determine what you get from it, especially as cost is often cited as one of the key reasons for choosing outsourcing.”
He stresses the importance of picking up signs of trouble early. “If they build into something bigger, you may need an experienced third-party mediator, like us, who can help identify problems and facilitate the necessary follow-up actions. For example, to reset a working partnership, it might be necessary to review the SLA or renegotiate the original contract. Being open to changes, flexible and a desire for ongoing improvement are key to a win-win situation.”
The balance of power is always with HR but remember that outsourcing is not self-managing.
To thrive in the competitive business landscape, HR can use outsourcing as a strategic tool to unlock value and efficiency. With the administrative burden lifted, HR can focus on the employee experience, job satisfaction and retention leading to increased levels of productivity. Outsourcing can be increasingly relied on to provide people-based data – some of the richest within any organisation offering insights such as engagement, retention, absenteeism, well-being and productivity, and technical expertise to help businesses make the right decisions.
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