Letting Go: Outsourcing HR

There’s no denying the trend toward HR outsourcing. In fact, most of the U.S. companies currently experiencing rapid growth – 83% – are outsourcing at least some or even all of their HR functions, and they say they plan to continue to do so for at least the next two years (“Almost All,” 2005). But organizations must outsource in a thoughtful way. Before spending countless hours reviewing vendors’ offerings, they should consider the following points.

First, know your reasons

Whether and what to outsource will be influenced by the reasons for outsourcing. Companies often share similar motives. Below are some of the top reasons mentioned in recent surveys conducted by Hewitt Associates (Stopper, 2005), Towers Perrin (2005), Mellon Financial Corporation (2005) and PricewaterhouseCoopers (“Almost All,” 2005):

• achieving cost savings and freeing up capital for use elsewhere
• allowing HR professionals to focus on the core business of the company
• improving business processes
• improving services to employees
• providing access to leading-edge technologies
• shedding the burden of navigating through the complexities of regulatory compliance
• focusing on strategic HR
• improving quality of service.

Beware the fallout

With all of these good motives, executives sometimes overlook the impact outsourcing can have on employees. Even if the decision to outsource doesn’t result in any employees losing their jobs, change can breed fear and doubt among both HR workers and those who rely on them. Failure to address the people issue can lead to lower morale, lower productivity and a poor outsourcing relationship. Mark Goulston, SVP of emotional intelligence for business consultant Sherwood Partners, emphasizes that communication is critical during an outsourcing event. “Rumors are really destructive.... Uncertainty breeds fear, fear breeds panic, and panic breeds paralysis. Employees who don’t panic start polishing their resumes,” says Goulston (Overby, 2004.

And, certainly, a tense work environment and unwanted turnover can interfere with the perception of the positive outcomes of HR outsourcing. Therefore, time and effort should be invested in preparing both the HR staff – and employees companywide – for the changes they will experience.

Reduce the pain

The time for communicating the outsourcing decision is sooner rather than later. Terry McKenzie, director of employee communications at Sun Microsystems Inc. in San Francisco, advises telling the HR staff even before a provider is chosen. And no one should be so naïve as to think the message will not be shared. If the organization does not plan and shape the message, others will – and not necessarily with the same positive spin. The announcement should be crafted with consideration for what the company would like employees to know, feel and do. Managers should describe the business rationale for the decision and the way success will be measured. Supervisors should be trained to deal with the emotional responses of employees. And, above all, employers must handle employees fairly, with dignity and respect. The organization’s credibility and trust is all- important at this time (Grensing-Pophal, 2005.

Employers should keep a close eye on service. Service quality may be a rationale for outsourcing, but it’s also the most common reason for employers bringing outsourced functions back in-house, according to Hewitt Associates’ 2005 HR Outsourcing Trends & Insights survey. Therefore, the vendor selection process, with an emphasis on cultural fit, is vital to providing employees with a positive experience, as is establishing service excellence goals (Geisel, 2006).

Outsource the right things

Not all HR responsibilities are likely candidates for outsourcing. Human Resource Planning magazine lists what it considers to be core responsibilities that need to remain within HR. These include developing the HR strategy that will drive results for the company, designing the HR programs, coaching and supporting executives, helping managers with HR-related issues, assisting strategy planning for mergers and restructurings, managing the HR budget, and managing the relationship with the external HR service providers (Stopper, 2005). This combination of strategic and high-touch responsibilities makes good use of HR’s unique talents and helps to ensure that decisions to outsource are made with benefits to the larger organization in mind.