Outsourcing Now Viable For Even Small Operations
By: Mark Reid
Outsourcing is becoming more prevalent as companies realize an outsourcing provider offers the advantage of economies of scale when it supplies similar services to a whole host of clients. Mark Reid, of Hewitt Associates, looks at the factors that determine whether an outsourcing arrangement succeeds or fails.
The word ‘outsourcing’ has become a well-known term in business circles and is even creeping into everyday speech. For instance, people talk of ‘outsourcing’ their yard work or housecleaning to those who specialize in these areas. They choose to hand over responsibility for mundane, but necessary, chores to those who can do the work faster and better, leaving them free to focus on things that are more important in their lives.
The fact that this terminology has made its way into common vernacular reflects the fact that outsourcing is becoming more prevalent in the business world. Canada, with fewer large organizations, has been slower to jump on the outsourcing bandwagon than the United States. However, advances in technology and increased expertise on the part of those offering outsourcing solutions have resulted in outsourcing becoming a viable option even for smaller organizations with respect to some services, including human resources administration.
And outsourcing continues to evolve. In Business Process Outsourcing (BPO), organizations look to end-to-end solutions, where most, if not all, administrative processes are handled outside the organization. In HR terms, the shift is one from outsourcing discrete functions like benefits administration or payroll, to outsourcing all administrative functions, keeping only those HR responsibilities that are considered essential to the business, like leadership development.
Does this growing trend mean that outsourcing is always the right solution? Not necessarily. There are pros and cons to outsourcing. There are also key factors that must be present in order for outsourcing to be truly effective.
Benefits Of Outsourcing
There are several arguments in favour of outsourcing. The first is the significant efficiency gain that results. This can take the form of cost reduction, but also of capital avoidance. An outsourcing provider offers the advantage of economies of scale when it supplies similar services to a whole host of clients. The organization benefits by being able to leverage the provider’s infrastructure, management, and tools. By outsourcing, the company is able to avoid the substantial cost of upgrading systems while still having access to the latest technology.
At the same time, when all soft- and hard-dollar costs are taken into account, the organization’s administrative tasks may well be performed more economically. The cost of processing a transaction is rarely captured accurately. Better technology that enables employees to process transactions themselves without interaction with their manager or HR staff significantly reduces ‘hidden’ processing costs.
The second positive aspect of outsourcing is the access it provides to specialized talent. This does not necessarily mean access to better talent. Many organizations have great HR departments. What it does provide is expertise that is focused on deploying commercial grade operational tools and centralized operational models. The outsourcing provider’s employees focus on performing administrative tasks better, faster, and more cost-effectively. The access to experienced talent is generally a significant positive factor for a company that chooses the outsourcing route. Employees benefit from having better service and better tools, which in turn results in better choices. Senior management receives fewer complaints about HR administration and the process generally runs more smoothly and effectively.
In addition, HR professionals are able to focus on the tactical aspects of human resources. Without the distraction of administrative chores, HR is able to focus on more strategic initiatives and ensure they are aligned with, and designed to meet, business objectives.
Another positive aspect of outsourcing is access to data. The provider’s operational model generally allows it to measure a great deal more than the company did before turning to outsourcing. The fact that the provider uses standardized systems in a common format also means that data is more accessible. Being able to ‘slice and dice’ relevant data easily and quickly enables the company to track trends, measure successes, and plan better for the future.
Certainly a concern raised by some companies about outsourcing is the loss of control that ensues. It takes a leap of faith – as well as a solid understanding of roles and responsibilities – to hand over mission-critical elements of the business such as payroll and benefits administration to a third party. If these aspects are not handled well, the company has a major problem.
These fears are largely allayed when the organization understands that it does not hand over complete control of outsourced services to its provider. The company must establish a team dedicated to both overseeing the implementation of the outsourcing relationship and monitoring it on an ongoing basis. This continuing involvement, with the opportunity to provide input and feedback, is essential to a smooth outsourcing relationship.
Another possible ‘con’ when it comes to outsourcing is the effect it has on the organization. The transformation of employees from generalists to strategists once administrative work is taken on by the outsourcing provider is not always easy. The company, with the help of the provider, should recognize the challenges associated with this transformation and implement a comprehensive change management plan.
A final drawback to outsourcing is the simple fact that it has associated risks. The risks may be exacerbated when the company and the provider try to do too much too quickly. While there is an understandable desire to ‘get the ball rolling’ once the decision to outsource has been made, sufficient time has to be allocated by both parties to ensure that objectives, timelines, and consequences are clear, and that the implementation of the new system is as risk-free and smooth as possible. When appropriate measures are taken up front, associated risks – for instance, the protection of confidential information – are minimized.
Key Factors For Success
In order for an outsourcing strategy to really succeed in achieving identified goals, certain conditions must be present. If they are not, a move to outsource non-core activities will almost certainly fail to meet expectations.
- A common strategy of shared services: If an organization does not have a common strategy of centralization, then outsourcing may not be the correct approach. Some companies have a strategy of autonomy with separate business units that are each fully accountable for their own profits and losses. By centralizing certain functions, some of that autonomy is taken away. If there is no desire or common strategy of bringing shared services together, outsourcing will not work.
- Similar business models. Some organizations are highly fragmented with disparate business models. These distinct parts of the company need separation because they simply don’t have that much in common with one another. The organization may be more like a holding company with very distinct approaches in each business unit. Again, centralization of services may not only be challenging in this situation, it may limit the company’s flexibility if it wants to spin businesses off, run them separately, or develop shared equity positions in them. When these types of dynamics exist, both the organization and the provider must carefully evaluate whether a centralized approach to administration and outsourcing is going to work well.
- Senior management support. For outsourcing to work, there has to be a business case for taking this approach and endorsement of that business case on the part of senior management. The first step is for organizations to clearly understand their sourcing strategy. They must know what core activities the company must perform itself to drive business success. They can then determine other activities that could be outsourced, assuming there is a viable external provider. Senior management must be convinced that the provider can handle these tasks more efficiently and more cost effectively than the organization itself or the outsourcing relationship is not likely to even get off the ground. Even if presented with a convincing business case, some executives will not endorse an outsourced solution simply because they do not believe that the benefits outweigh their concerns about loss of control, risk, or no longer having that ‘personal touch’ for employees.
The decision to outsource requires selfevaluation on the part of the company, along with careful consideration of the pros and cons of outsourcing. Above all else, however, for an outsourcing relationship to be successful, there needs to be the right ‘fit’ between the company and the provider. This is a very important, potentially longterm and certainly expensive relationship between the parties and both must be certain that it is the right one before they make a commitment.
Mark Reid is an outsourcing business leader at Hewitt Associates.
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