Why Outsource, Why Now?

Executive Brief

A spotlight on payroll
and HR outsourcing

IN PARTNERSHIP WITH

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Executive Brief

Why Outsource, Why Now?

In todays uncertain business climate, executives and organizations need to be
financially stronger, more adaptable, and more efficient to respond to shifting
market conditions. The Economist Intelligence Unit found that nearly 90% of
executives believe that organizational agility is critical for business success, but
more than a quarter of respondents feel they are at a competitive disadvantage
because they are not agile enough to adapt to market changes. To be able to adapt
to change, organizations need to free up resources and become more responsive
to changing market conditions. Companies that do this the right way are likely to
be more productive and have stronger operational processes in place to rebound
faster from economic downturns.

Outsourcing is one way for organizations to build

agility into their operations by providing the flexibility
needed to navigate changing business climates, be
it entering an upturn, downturn, or times of stability.
When an organization is able to focus its attention on
its core business, and away from tasks that could be
better outsourced to specialist providers, McKinsey &
Company among others, argue that outsourcing has
the potential to deliver up to 50 percent improvement
in business processes.
So the question is, if an organization is not already
outsourcing some of its business processes, then why
not and why not now? The arguments for outsourcing
are strong. Success rests on the maximization of three
key focus areas: Resources, People, and Processes.

The business response to a

global economic slowdown
The global economic crisis that began in the U.S.
sub-prime mortgage market in 2007 still shows no
signs of ending. Even the economies of Brazil, Russia,
India and, above all, China which in recent years
have accounted for the bulk of world GDP growth, are
now slowing down. As a result, banks are still risk
adverse. Access to credit is more difficult, customers
are spending less, and inflation is pushing up prices
all of which are having a drastic impact on cash
flow and profitability. Many companies have been
responding to this uncertain business environment by

implementing quick fixes, such as reducing stock and

making substantial reductions in head count. However,
some reactionary responses may inhibit the ability to
recover from the recession and expose companies to
greater risk.
The bleak economic backdrop gives new urgency to
the perennial search for business efficiency, according
to Jesper Lillelund, co-founder of CorporateLeaders,
the independent network for business executives.
While theres not much scope for growth in the
current business environment, organizations can
survive and even increase their profitability by
cutting costs, improving efficiency, and streamlining
business processes, he says. Outsourcing can
enable companies to do those things, which is why
they should be considering this now, given the state of
the global economy.

Leveraging outsourcing to meet

executive needs
Organizations opt to outsource HR activities for a
whole host of reasons. Context is king and the size,
sector, strategic objectives, and available skills of
the organization will all influence the outsourcing
decision. That said, companies typically outsource, in
the first place, because of the need to reduce costs.
An uninformed reaction is to simply reduce head
count (as it was done in the U.S. circa 2008-2009),
which can be catastrophic for businesses, leading

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to the loss of knowledge, expertise, demoralization

of the workforce, and increased exposure to risk. By
purchasing outsourced services from an experienced
provider who acts in partnership, an organization can
instead ensure that costs are reduced while services
are actually improved.
HR services, most commonly considered suitable
for outsourcing, tend to be transactional processes
such as payroll, health and welfare benefits, and
pensions administration. By outsourcing these
routine transactional processes from daily work,
companies not only achieve cost savings, but also free
up the HR organization to be more strategic and a
better business partner.
Small-to-midsized enterprises (SMEs) that lack the
capacity to handle all aspects of HR are the most likely
to outsource their entire HR functions. By contrast,
larger organizations are more likely to outsource
transactional activities, such as those associated
with payroll, employee benefits, recruitment, and
training. More sensitive areas including strategic
policy-making, leadership development, and change
management tend to be kept in-house by large
organizations.
To cope with these external pressures, many companies
are considering or actively planning to increase the
scope of their outsourcing contracts. During previous
economic slowdowns, says global services analyst
firm HfS Research, many companies regarded
outsourcing as potentially disruptive to the business,
often viewing it as a unique and somewhat risky
strategy. However, the leading offshore IT services
providers continued to grow their businesses
throughout the last downturn. Moreover, many areas
of BPO that posed substantial cost-reduction gains
were definitely viewed as disruptive last time out, are
now proven mainstream offerings.

Business drivers for

outsourcing:
The Three Focus Areas
Businesses need to be ready for change and be able
to scale up or down, depending on the market. This,
along with increases in internal productivity and
employee engagement as non-essential functions
become externalized, are the main business drivers
for outsourcing. For outsourcing to be successful, any

arrangement must focus on maximizing the following

three areas: Resources, People, and Processes.

1. Resources Maximizing cash flow

Outsourcing enables organizations to reduce the size
of nonstrategic functions and scale operations to meet
changing business needs. This ultimately improves
gross margins and increases cash flow, which allows
businesses to make investments that will better
position themselves to not only survive the current
economic conditions but emerge as leaders when the
economic conditions turn in their favor.
The ADP white paper Payroll Outsourcing in Europe
estimates the average annual HR costs across Europe
to be 1,500 per full-time employee, of which 200 is
spent on payroll and 250 on personnel administration.
A further ADP study conducted in France showed that
companies, who processed their payroll on internal
systems, believed the cost per pay slip was 17 per
month, whereas the actual costs turned out to be 37
per pay slip per month. That is 240 per employee per
year in unexpected costs. Hidden costs like that can
be challenging to companies that need to leverage
their cash for more strategic activities. Therefore, its
no surprise that 20% of Europes payroll is already
outsourced, a number which continues to grow year
after year.
SaaS (Software as a Service) and cloud-based
outsourcing platforms are providing organizations
with a lower cost alternative and the chance to convert
fixed HR costs into more flexible variable costs. This
frees up operating cash while providing the ability to
scale with the business as it changes. SaaS enables
organizations to leverage best-in-class technology
and avoid the capital expense needed to implement
and manage their own internal systems, thereby
maximizing cash flow. Larger outsourcing providers
are able to exploit economies of scale to deliver stateof-the-art technology solutions that may be out of
reach for many organizations, especially SMEs.
In addition, outsourcing can help eliminate costly
duplication of nonstrategic activities. This is often
a key benefit for multisite organizations where
traditionally every location would have its own HR
team, delivering the same services as all the other
teams and incurring the same overheads. Such
duplication becomes unnecessary when services are
delivered centrally to every part of the organization by
a single external partner.

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Executive Brief

Why Outsource, Why Now?

2. People maximizing productivity

Even before the current economic crisis struck, it
was clear that HR professionals needed to create
added value by taking on a more strategic role and
collaborating more closely with business managers.
Yet, many people continue to spend their working
lives on tasks that could easily be automated and
handed over to external providers. Regardless of
the employment rates, companies are becoming
increasingly aware that they need to focus on retaining
their top talent because not doing so is costly and has
a negative impact on employee productivity.
A study commissioned by ADP, HR Outsourcing
Redefined: Options for Workforce Management,
found that HR teams of midsized companies spent
nearly half their time (45%) on a combination of
payroll-related activities (18%), HR administration
(14%), and benefits administration (13%). HR teams
that devote so much time to administrative tasks are
clearly not going to play a strategic role in leading
their organization forward focusing on activities
that help the organization achieve its core business
objectives.
In the early days, outsourcing was perceived to have a
potential negative impact on employee engagement.
Now that outsourcing is much more understood, there
is actually a positive impact. When people are freed
from the administrative burden of their roles, they
are then able to apply their skills and experiences to
the more knowledge-intensive parts of their job. They
become more engaged, more productive, and are
more likely to remain with the organization. Gallup,
the research-based, performance-management
consulting company, has run extensive studies to
show how employee engagement relates to business
results. They found the most engaged workplaces
were 27% more likely to report higher profitability,
50% more likely to have lower staff turnover, and
38% more likely to have above-average productivity.
On average, a company loses $1 million for every
10 professional employees who leave, according
to PwC Saratoga, publishers of HCM intelligence.
Disengaged employees will leave the organization or,
even worse, sit and radiate negativity until everyone
around them is also disengaged.

How employee engagement

relates to business results

27%
50%
38%

of organizations
are more likely
to report higher
profitability

of organizations
are more likely
to have lower
staff turnover

of organizations
are more likely to
have above-average
productivity

Source: Gallup
Companies that seize these opportunities and become
leaner and more focused on core business activities
are likely not only to ride out the storm, but also
have a more productive and engaged workforce, and
take advantage of the recovery quicker than their
competitors.

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3. Process Standardization and

compliance
Companies that have strong internal processes are
more flexible and can take advantage of competitive
opportunities more easily. Current market conditions
may present opportunities as well as force companies
to change their business models to adapt.
Companies that are forced to react in the short-term to
economic conditions often reduce or reallocate head
count responsible for managing internal employmentrelated processes. This can have an enormous impact
on engagement and productivity and may expose the
company to greater risks.
Partnering with external providers can offer
automated processes and higher levels of specialist
knowledge and expertise that organizations may not
have or choose to maintain internally. Again, this is an
aspect of outsourcing that is especially likely to appeal
to SMEs. While they may lack know-how in relation
to HR activities that they carry out only occasionally,
for an outsourcing company this know-how is a core
competency.

In France, alone, there were 58

payroll-related legislative reforms
from July 2011 to July 2012 that
businesses had to implement.
Regardless whether an organization is growing,
decreasing, or maintaining stability business
continuity has never been more important. Changes
in key HR personnel can plunge an organization into
crisis. Outsourcing some or all HR activities goes a
long way toward mitigating this risk by shifting the
onus of hiring and training to the service provider, and
so ensuring service continuity.
A hidden danger is that these same economic
conditions that offer opportunities, also often trigger
greater employment compliance requirements and
legislative changes, which companies find difficult to
keep up with. In France, alone, there were 58 payrollrelated legislative reforms from July 2011 to July 2012
that businesses had to implement. Outsourcing helps

keep organizational processes ahead of such changes,

rather than reacting, which can be costly. Outsourcing
transfers risk from the purchasing organization to
the vendor an important consideration in times of
uncertainty.

The current BPO market

According to the research firm Global Industry
Analysts, the HR Outsourcing market will reach $162
billion by 2015. This includes both large enterprises
looking at BPO for multinational operations, and
small-to-midsized businesses increasingly attracted
by the advances in outsourcing technology and
decreased prices. According to IDC, a global research
firm, outsourcing Human Resources functions has
grown by close to 70% over the past six years.
In Western Europe, where the outsourcing business
model has existed for years, research firm Gartner, in
their June 2012 report Magic Quadrant: Payroll BPO
Services, estimates that at least 50% of companies
already outsource payroll. The report continues, We
believe the general global recession and the acute
Eurozone crisis are leading many more companies
to adopt outsourcing as a way to cut costs than they
did when the recession began in 2008. The emerging
business markets of China and India have produced
environments in which companies have become
outsourcing consumers rather than only providers,
as they have traditionally been viewed. Also, Latin
America, the Middle East, Southeast Asia, and (to a
lesser extent) Africa show similar signs of growing
adoption of payroll outsourcing.
The outsourcing industry research firm, Everest,
recently reported that the global multi-process HR
outsourcing market would grow to an estimated
annual contract value of $3.3 billion during 2012
with emerging markets, particularly in Asia Pacific
and Latin America driving this growth. The practice
of contracting out activities in such areas as HR,
IT, finance, and marketing to external providers is
widespread in developed economies and, increasingly,
in the BRIC countries and other emerging markets.

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Executive Brief

Why Outsource, Why Now?

Summary

Businesses need to make the best decisions today to position themselves for the
company they want to be, once the economy recovers. Therefore it is essential
for companies to be ready for change and be able to adapt quickly, depending on
market conditions. Companies cannot save their way into prosperity by cutting
costs and reducing head count as this removes vital knowledge and expertise from
their businesses. When the market enters an upturn, these companies will have
to go through the costly exercise of rehiring people, limiting their ability to take
advantage of the recovery, while still having the same issues.Good costs are spent
to grow the business and bad costs, such as inefficient processes, areexpunged.
Outsourcing enables companies to be flexible while
ensuring that they continue to provide essential
internal services necessary to run their business.
Outsourcing allows companies to maximize three areas
that are essential to success. Resources, People, and
Processes: 1) Outsourcing enables organizations
to improve Resources such as increasing gross
margins, freeing up cash flow for mission-critical
objectives, reducing costs, and providing scalability;
2) The outsourcing of routine, administrative tasks
allows People to take up more strategic work,
increases productivity, and engages the workforce;
3) Outsourcing providers can deliver Processes more
quickly, efficiently, and more cost-effectively than
internal functions.

The demand for outsourcing is growing fast among

multinationals and small-to-midsized businesses
alike, increasingly attracted by the advances in
outsourcing technology and decreased prices.
According to Gartner research, the payroll BPO
service market alone grew 5.2% in 2011. With the
World Bank recently advising countries to prepare for
a long period of volatility in the global economy, many
companies have been actively planning to increase the
scope of their outsourcing contracts. Doing things the
wrong way, however, can do more damage than not
outsourcing inefficient processes in the first place.

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Tips for outsourcing success

Be clear about your objectives
Potential outsourcing providers need to understand what you are hoping to achieve in order to present
you with realistic proposals. Provide them with as much accurate information as possible about the
work you plan to outsource, the level of service you expect, and what your scheduling requirements
will be.

Look at the providers record

Examine the providers past performance record by talking to other clients. Make sure the provider is
financially stable and has the experience of working with broadly similar organizations, in both type and
size, as your own. A provider that has previously dealt only with small companies, for example, may not
have the capacity to provide good quality service to a company with several thousand employees. Above
all, dont be afraid to ask searching questions. The provider must also take the time to understand your
business: a key difference between simply being a vendor and being a true business partner.

Consider the cultural fit

Visit the providers premises and talk to employees to make sure that there is a good cultural fit between
the two organizations. Discuss your own organizations culture and employer brand with the provider.

Agree on the right price

While its never a good idea to select a provider on the basis of price alone, the price of the deal will
obviously be of critical importance to your organization. Ensure that the contract you sign links payments
to the achievement of clearly defined performance targets, so that you know exactly what you are paying
for. When considering the total price of the deal, remember to factor in any investment you will need to
make in developing your own organizations vendor relationship management skills.

Build in flexibility
With outsourcing partnerships likely to last many years, the contract also needs to set out dates for
reviewing the arrangement. This will allow you to adjust the relationship as needs change in either your
own organization or in the wider business environment.

Manage the relationship

As a client, you should expect your provider to invest in the skills and techniques needed to provide
quality service. But, your own organization also needs to invest in developing the capacity to manage
the outsourcing relationship. As CorporateLeaders Partner Jesper Lillelund puts it: Any transition
from in-house to outsourced provision of HR services represents a major change for the purchasing
organization and needs to be managed as such. But if its handled correctly, HR outsourcing can play
a key role in helping organizations survive through the current economic turbulence and prepare for
whatever the future holds in store.

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About

Automatic Data Processing, Inc. (NASDAQ: ADP),

with about $10 billion in revenues and approximately
570,000 clients, is one of the worlds largest providers
of business outsourcing solutions. Leveraging over 60
years of experience, ADP offers a wide range of human
resource, payroll, tax and benefits administration
solutions from a single source. ADPs easy-to-use
solutions for employers provide superior value to
companies of all types and sizes. ADP is also a leading
provider of integrated computing solutions to auto,
truck, motorcycle, marine and recreational vehicle,
and heavy equipment dealers throughout the world.

CorporateLeaders is an exclusive independent network

that inspires business and leadership by providing a
trusted forum for executives to network, exchange
ideas, share lessons learned, and drive business
forward in an ever-changing environment. We focus
on providing exclusive membership services, intimate
and content-rich networking events, research, thought
leadership and advice on business transformation with
the executive needs and experiences at its core.

corporate-leaders.com

adp.com

About the Magic Quadrant

Gartner does not endorse any vendor, product or service depicted in its research publications, and does not advise technology users to select only
those vendors with the highest ratings. Gartner research publications consist of the opinions of Gartners research organization and should not be
construed as statements of fact. Gartner disclaims all warranties, expressed or implied, with respect to this research, including any warranties of
merchantability or fitness for a particular purpose.

The ADP logo and ADP are registered trademarks of ADP, Inc.
In the business of your success is a service mark of ADP, Inc.
All other trademarks and service marks are the property of their respective owners.
Copyright 2012 Automatic Data Processing, Inc.

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