According to the UK Chartered Institute of Personnel and Development (CIPD), around 39% of small and medium-sized businesses outsource some if not all of their HR functions in the UK. Payroll services are the most common element of human resources which are outsourced. That’s not an insignificant figure.
The benefits are obvious - reduced overheads, increased efficiency, access to expertise and knowledge, immediate guidance for changes in legislation and employment law to name a few. On the downside, companies may feel they lose local knowledge, that their HR function becomes diluted and ineffective.
In this blog we’re going to look at HR outsourcing in more depth and of course, we’ll be putting forward the Q&A People Matter opinion. For us, we’ve been providing outsourcing services for over 20 years - it’s been our business for decades so we like to think we know what we’re talking about.
An introduction to outsourcing
Outsourcing can mean very different things to different businesses. Depending on the services being provided you may well have a recruitment expert, a legal advisor, a training and development coach, a marketing whizz or an IT guru at your disposal. Whatever the service being provided, the fundamentals are the same - it’s a move from an in-house provision to a third party service and with that transition there will be issues to consider.
We’re not advocating that businesses should outsource their entire HR function - it may make more business sense to outsource a specific process such as payroll or recruitment. Because there are so many elements to the HR function, it is possible to be flexible in your approach and cherry pick what you need to arrange for a specialist company to provide on your behalf.
The CIPD’s People Profession in 2020 survey, found that outsourcing was fundamentally used by SMEs and payroll was the most common service to be contracted to an outsourcer.
The Business Case for Outsourcing
The first thing any company needs to do is assess the effectiveness of the current HR function. Why does the existing setup need to change? What efficiencies are you looking for? What improvements need to be made? Certainly, if the current function isn’t assessed accurately and fairly, you’ll be hard pushed to feel satisfied with the new arrangement Do your homework first.
The benefits you’re seeking for your business are going to be some or all of those cited below:
- Reduction in costs to the business - salaries plus benefits and overheads can be replaced with a less costly professional services contract.
- Also consider the cost reduction in terms of poor people management. Costs resulting from a failure to comply with employment law can be substantial - especially if the situation results in a significant claim at an employment tribunal. By outsourcing your HR function you’ll have direct access to a specialist with a greater understanding of employment law - with experience of how to successfully manage a conflict between employee and employer.
- Improved efficiencies - consider the rather costly recruitment process. By outsourcing this function, the HR outsource team can manage the advertising, telephone screening, interviewing and administration of psychometric tests. Once on board, the induction process could also be delivered by your HR partner.
- Access to HR systems and IT processes without incurring additional overheads.
- Access to management information and analytics.
- Processes such as payroll and pensions will be legislatively compliant since an HR outsourcing specialist will have a greater understanding of the legislation underpinning the process.
- Increased flexibility - what parts of the HR function are you looking to outsource? Are you looking to outsource just learning and development or are you looking for an ‘all or nothing’ approach? Perhaps you just need help with payroll management, retirement plans and employee insurance? You get to choose how much or how little is outsourced to a third party.
- Outsourcing HR is a good match with your current business strategy - for example, other parts of the business are already outsourced i.e. IT/marketing.
- Mitigation of risk - the resources available can be scaled up or scaled back. Perhaps just focus on one or two areas of HR to outsource initially and as the business grows, revisit the scope of the agreement.
- Enables HR to operate more strategically whilst the business can focus on growth.
And the challenges - these need careful consideration
Ensure before you outsource a function that it’s understood by both parties what services will actually be delivered. Poor communication from the start will obviously be costly both in financial and productivity terms.
Will changes need to be made to the roles of the existing HR workforce? Will redeployment need to be considered? These changes will also need to be built into the transition process. It goes without saying that ongoing communication with existing employees is vital to ensure the success of the transition.
You'll also need to gain an appreciation to some if not all of these factors:
- Overall responsibility for HR provision still resides with the company.
- Good people management is still central to the business operation.
- The outsourcing provider will need to have an excellent understanding of the current business goals as well as long term strategies. It’s not uncommon for outsourcing contracts to last between 5 and 10 years so it’s vital that both parties understand the business plan.
- Local knowledge will be lost over time.
- Appreciate that processes will be those of the outsourcer and not your own. Those day to day processes will be split from the business strategy and planning - for small businesses especially it may feel as if you’re relinquishing control as you’ve been used to referring to an HR colleague on a daily basis. On the plus side, you’ll have access to a team of people experienced in HR with additional legal expertise.
- The agreement will need to be subject to ongoing review to assess synergy (or lack of) between the service provider and the business. The economic environment may impact on requirements going forward and accept there may be a case for bringing services back in-house.
- Communication is absolutely vital to ensure the contract still delivers according to the business goals.
Making the transition to an HR outsourcing arrangement
If making the transition itself is holding back your decision then perhaps these pointers will assist:
Do consider that setting up an outsourcing arrangement is a significant organisational change. Procedural changes will also come into effect, for example there may be new HR self-service systems to implement, new HR call centre support for teams and managers, new payroll arrangements to put in place.
All these changes will need strong leadership from the business’s management team and clear communication by HR leaders. Managing the change and transition is equally if not more important than the ongoing services and processes your outsourcing partner will provide.
How do you choose your outsourcing partner?
Choosing your HR outsourcing partner.
First and foremost, this is a contractual arrangement, much like any third party contract - the CIPD gives advice as to what actions and decisions should be taken during the tender process:
Ensure you have a clear understanding of your current HR provision - costs, responsibilities, services levels, definitions and so on - if you don’t have a firm grasp of what your current in-house service provides, you won’t be able to convey what the outsourced provision needs to be. Evaluating your existing HR function will also help you compare bids from potential partners.
Assess your future business strategy - how will this fit with your plans for outsourcing HR? Is there a good match? How will the service evolve - does the agreement build in scalability and potential growth?
Consider building into the agreement your ‘wish list’ - for example, do you want to implement an employee recognition programme? Do you want to start measuring employee engagement? Do you want to develop new initiatives for mental health awareness? Use the outsourcing tender process to develop new programmes for your business.
As we’ve mentioned before - do your homework. Draw up a shortlist of preferred suppliers. Seek testimonials from companies already using them. Ask questions:
- Are they satisfied with the service?
- How successful was the transition?
- What would they do differently with the benefit of hindsight?
Ask yourself whether the potential outsource partner is a good ‘fit’ with your business. Is there a cultural synergy?
Managing the outsourcing partnership
From the outset, appreciate that your employees will need time to feel comfortable talking to new HR personnel who are no longer based in the same building. Dealing with sensitive issues can therefore be more difficult to manage. By making sure you and your outsourcing partner share a similar ethos and there's a cultural fit, the transition to the new service is likely to be more straightforward.
Assign key staff to the transition and agree who will oversee the relationship going forward. Ensure your existing HR personnel are involved in the selection and contracting process. Assigning negotiations to the procurement department (if your business has one) is likely to create issues where particular services and considerations are overlooked.
And now for the small print:
The contract will obviously need a defined length but building in contractual flexibility is a good idea. Make provision in the contract for regular ongoing reviews of the service(s) being delivered. Ensure metrics and data can be provided by the outsourcer for evaluation. Agree the service level agreements (the CIPD suggests businesses should include benchmarks for acceptable and unacceptable ranges).
Include in the contract a clear governance process - how will a change in business strategy impact on the outsourced function? How will internal decisions be communicated and to what timescales?
And last, but not least, the contract should include a ‘statement of work’ - whereby the responsibilities of the service provider are documented. Communication and open dialogue is key in any outsourcing agreement; the flow of communication between both parties is absolutely critical. For example, responsibilities and accountabilities need to be clearly defined in order to avoid potential misunderstandings (and what action should be taken if they do crop up).
How can Q&A People Matter help?
Our team at Q&A People Matter have expertise and experience delivering people management services but differently from some of our competitors, we offer an insourced solution where our team or a ‘resident expert’ can be based on your business site.
This has a number of advantages. We've mentioned in this blog that communication can be more challenging because the outsourced team is based in a different building - that scenario can be avoided under this solution.
All our services are modular; you can select which services you need help with so you can concentrate on growing your business.
As a guide, we can offer these services:
- Payroll and pension administration
- Recruitment - from establishing a policy to making sure your hiring process is robust and identifies the best talent
- Administration of HR processes - including management of probationary periods, salary increases, appraisals, promotion and resignation
- Payroll and pension administration
- Compensation and benefits advice and administration
- Adhoc HR advice and support - guidance on legislation and compliance
- Health and safety healthcheck
- Development of HR policies
- Training and development programmes
- Documentation reviews - covering your Staff Handbook, contracts of employment, job descriptions and so forth.
Our website, Q&A People Matter provides more information, but we’re very happy to have an initial chat about which parts of your HR provision need a sanity check and we’ll go from there.
Please contact us.