Whether an HR department is looking to outsource for the first time, increase its outsourcing position or even insource some tasks or processes that it has been outsourcing, the choice can be a difficult one, fraught with pitfalls for the unwary. There is much to learn and many things to study before such a decision can be made.

This article discusses how to make the right decisions when outsourcing. An article in the last issue of Perspectives (see "Threading Your Way Through the Ins and Outs of Outsourcing to Build an Effective HR Solution; Part 1") looked at what functions HR is outsourcing now and why.

The Outsourcing Spectrum

Before an organization makes any decisions about outsourcing, the range of outsourcing opportunities needs to be thoroughly understood. There are, of course, many different ways of outsourcing. Every deal is unique. There are, however, two types of outsourcing that cover most arrangements:

• Sole Source Under this arrangement, sometimes referred to as "one-stop shopping," all functions are outsourced to a single outsourcer. While such outsourcers may not be the best at managing a specific function, they are able to broadly manage most HR functions.
• Multiple Source In this case, different functions are sourced to different outsourcers for a "best-in-class" approach. One manages recruiting, another payroll and so on. They are chosen because of their ability to perform the required function. More common than sole sourcing, multiple sourcing is a more complex model that is often used by organizations with one or more complex functions (e.g., extreme complex payroll issues).

Whether an organization chooses to sole source or multiple source, it will probably co-source. That means that some responsibilities are shared between the HR department and the outsourcer. In most cases, only a portion of the processes required to perform a particular function or service are outsourced and the rest are performed in-house. What typically remains in the control of the organization is strategy, design, employee relations, contract negotiations, employee communications, reporting/analytics and compliance.

Figure 1 below shows a typical example of a co-sourced payroll plan. In this case, the HR department is thinking about insourcing more responsibilities, which would mean moving the sourcing line to the right and having the HR organization handle back-end processing. Coordination of effort with the chosen vendor is crucial for success.

 

Source: Sibson Consulting

When a large organization chooses to fully outsource rather than co-source, frequently the outsourcer will acquire a few of the existing key employees to maintain company-specific knowledge and practices. This often helps in the transition to a fully outsourced environment.

Choosing the "Right" Sourcing Mix and Platform

Sibson has divided the marketplace into seven different kinds of platforms (products or services). Figure 2 illustrates some of the most common mixes of sourcing type and platform. Not all the platforms are compatible with all sourcing options. For instance, organizations that insource must use:

• An enterprise resource planning (ERP) suite — an integrated information system that serves all departments within an organization - or
• An on-premises human capital management (HCM) suite — a system that specializes only in HR functionality.

Those that co-source have six options:

1. An ERP suite,
2. An HCM suite,
3. A niche HCM provider — an HR system provider that specializes in a particular function with HR (i.e., compensation, benefits or recruiting),
4. An HCM application service provider (ASP) — a service provider that hosts HR software on its own servers or premises,
5. Traditional HR/benefits/payroll outsourcing or
6. An HR business process outsourcer — an organization that provides HR technology, people and services that can fully deliver an entire HR process to a customer.

Finally, those that fully outsource can choose between:

• An HR business process outsourcer and
• A professional employer organization - a company that serves as an offsite human resources department to small and medium-sized organizations.

   

  

  Source: Sibson Consulting

  
  

Organizations must be familiar with the available mix of options before they begin searching for outsourcing products or services. It is also recommended that they finalize their strategy of sourcing preference before beginning the selection process or going to market. Making this decision early will save time and money and reduce confusion from "apples to oranges" comparisons.

How to Decide What to Outsource

It is important to realize that deciding what to outsource is typically based on many different factors and dimensions. Does the HR department want to outsource entire functions or just pieces? Anything that gives an organization a competitive edge should remain in house. It is important to make the sourcing decision before beginning vendor review/selection. An organization should never base the outsourcing decision solely upon costs.

Figure 3 is an easy-to-use tool that Sibson has developed to help illustrate the most common factors and dimensions in a sourcing choice and can help an organization choose between outsourcing and insourcing. Companies can use this tool to review what they are considering for outsourcing and analyze each individual component, one by one. Go through the questions and circle the correct answer for the organization. Typically, a pattern will emerge — a preponderance of circles will fall in either the "insource" or the "outsource" column. Share the results with others involved in the decision-making process and get people to think about them.

 

Source: Sibson Consulting

What to Watch Out For

Organizations going through an insource/outsource decision should:

• Be aware of advisors' relationships with outsourcers. Question their choices/decisions when they maintain financial relationships with outsourcers.
• Make the insource/outsource decision before going through a vendor selection process. This will save time, money and confusion in the end.
• Avoid basing the decision solely on costs. There are many dimensions to the decision-making process.
• Carefully consider those people/processes/technology that are candidates for outsourcing. Organizations will likely want to maintain those where it maintains a competitive advantage.

Conclusion

HR can achieve its objectives with either type of sourcing choice; however, with the proper combination of sourcing it can accelerate its success and deliver better quality of service at the most appropriate costs. Successful sourcing mixes are different for every organization. There is no "one size fits all" approach. Organizations should closely study the alternatives that are appropriate to their unique requirements.

About the author:

Michael Eck is a vice president and eHR practice leader in the New York office of Sibson Consulting. He focuses on assisting clients in developing strategies that use process improvement and technology to improve the productivity of their workforces. He can be reached at 212.251.5907 or meck@sibson.com

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