4 OutsourcingtheHRFunction For Review Literature

Outsourcing the HR Function
Possibilities and Pitfalls
Corporate Research Forum
Corporate Research Forum, London, 2006

Possibilities and Pitfalls All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means without the prior permission in writing of the publisher. Corporate Research Forum CountyMark House 50 Regent Street London W1B 5RD
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ISBN: 0-9553273-0-X

Possibilities and Pitfalls
Anthony Hesketh
Centre for Performance-Led HR Lancaster University Management School
Corporate Research Forum, May 2006
Report sponsored by
Contents
Contents Acknowledgements Introduction 1 2 2.1 2.2 2.3 2.4 2.5 3 3.1 3.2 3.3 3.4 3.5 3.6 3.7 4 4.1 4.2 4.3 4.4 5 5.1 5.2 5.3 5.4 5.5 5.6 6 6.1 6.2 6.3 6.4 7 7.1 7.2 EXECUTIVE SUMMARY SIZE, SCOPE AND WHOS WHO IN HRO Context of outsourcing Evolution of outsourcing Emergence of HR outsourcing HRO providers and offerings The HRO industry ISSUES FACING HRO DECISION-MAKERS M HRO hysteria Strategic debate over HRO Offshoring myths The shared services option Transforming organisations through HRO Criticisms of BTO HRO risks and the HR director SETTING THE BUSINESS CASE FOR HRO Importance of the business case Increased efficiencies within HR Increased HR effectiveness Improved strategic focus from HR HRO DEALS: MAKING THE DECISION Decision-making context Thinking strategically Identify critical stakeholders Insource or outsource? Ensuring a return on investment Financing the deal HRO DEALS: MAKING THE TRANSITION People strategies for HRO Managing your HR talent Transparency for stakeholders Managing the transition MANAGING AND MEASURING HRO PERFORMANCE Context of HRO performance Performance measurement and HRO iii v vi 1 4 4 4 5 6 8 10 10 10 13 13 15 17 19 21 21 21 22 23 26 26 27 29 30 31 31 33 33 33 34 34 36 36 36
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Corporate Research Forum, 2006
7.3 7.4 7.5 8 8.1 8.2 9 9.1 9.2 9.3 9.4 9.5 9.6 9.7 9.8 9.9 9.10 10
Sample metrics Tomorrows HRO metrics Towards reflexive performance TRENDS AND DIRECTIONS General trends Recommendations and future directions HR OUTSOURCING - THE CRF OVERVIEW Why commission this report? Outsourcing is not new Suppliers and the HRO industry Matching needs to solutions HR capabilities and new roles The shared services option Managing internal relationships What the new HR function will look like Is HR outsourcing a healthy development? Top ten recommendations for HR outsourcing CASE STUDIES
37 38 40 44 44 45 47 47 47 47 48 49 49 50 50 51 51 53 53 55 58 64 65
10.1 Once more into the breach: the BT/Accenture HRO renewal 10.2 Manufacturing excellence: the Royal Bank of Scotlands shared services 10.3 The people behind the science: the DuPont/Convergys mega-deal REFERENCES BIBLIOGRAPHY
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Acknowledgements
The author thanks these participating organisations.
BBC BT Cap Gemini Credit Suisse CSC Deutsche Bank Gartner Ministry of Defence The Royal Bank of Scotland Standard Chartered Bank Hewitt IBM PA Consulting Royal Mail Group Shell Siemens Xchanging
I also thank the 28 interviewees for their part in this report. Not all who were interviewed have been cited, with several preferring to remain anonymous. The contribution of Nick Starritt, managing director of Sirota Consulting, Europe, is appreciated for his reflections on the original BP/Exult HRO deal. While much of what is reported here results from the input of respondents, I should note that the usual disclaimer concerning interpretation applies. The enormous support offered by Andrew Kris (chairman) and Deborah Kops (now head, program planning and development) of the Shared Services and Business Process Outsourcing Association (SBPOA), is gratefully acknowledged. Readers wishing to keep abreast of key developments in the HRO world would do well to regularly visit their web page: www.sharedxpertise.org. The author thanks Andrew Lambert and his team at CRF for their support. The Forums networks are deep and wide, representing manna from Heaven for an academic used to watching the HRO industry from the outside looking in. I also thank my editor, Chris Ashton. His work certainly moves well beyond the capabilities I have encountered in what are supposed to be some of the best publishing houses in the world. Thanks also to Louisa Mathie for work on design, Linda Breakes for layout and Artisan Studio for print and distribution. CRF thanks HRO Today and Editor in Chief, Andy Teng, for their kind permission to publish the DuPontConvergys case study which first appeared in the January/February 2006 issue. Visit www.hrtoday.com. We also thank Orion Partners for permission to publish Top 10 Tips for HR Outsourcing from their forthcoming paper, Overview of HRO. See www.orionpartners.co.uk.
Introduction
As John Sullivan noted in an article on his website (drjohnsullivan.com), CEOs are from Mars and their distant HR directors are from Pluto. Should you require any proof of this observation, a story is currently doing the rounds in the outsourcing industry. An HR director was asked by his CEO to produce a report on the implications of outsourcing for the HR function. By the time the report was complete, the deal had already been signed. Hardly surprising, then, that HR outsourcing (HRO) has been a sore point for people in HR. The subject carries a reputation akin to being the last turkey-in-the-strategy-shop. For many HR directors, HRO is often something done to you - rather than a strategic business decision taken by you. This CRF report aims to remedy such a state of affairs. In particular, it seeks to guide HR professionals in their dialogues with executives around the key talent and human capital management decisions facing them in the current business climate - and how HRO can shape these processes.
Key Questions
HR outsourcing can be framed by these questions.
What is HRO? How does it vary - by type or provider offering? What are the strategic factors driving HRO? What in HR can be outsourced? What must be retained? How do HR directors make decisions on whether to use HRO and on which HR activities to outsource? How is HRO implementation best managed - both in the transition of HR services to a provider and going forward? How can HRO performance be evaluated for the more efficient and effective delivery of HR services - and for its contribution to business transformation provided by the HR function?
Section Themes
The questions above guided the content of these sections.
Section 2 defines the relatively esoteric HRO business model and investigates the different choices from many variations on offer from the HRO market. Section 3 discusses some of the issues facing HRO decision-makers as they scope the future for HR functions - and cope with the many complexities of HRO deals. Section 4 examines three specific aspects of the business case for HRO - efficiency, effectiveness and strategic focus. Section 5 explains the key decisions around HR outsourcing, clarifies the often a long and complex process and presents the messages that HR directors should use in boardroom discussions. Section 6 covers the make or break factors and risks of many HRO deals - the transitions to be made as HR service lines are handed over to third party partners. Section 7 aims to make sense of how HRO performance is evaluated - and presents a new model for understanding performance. Section 8 draws together the findings from research and predicts what the future for HRO might look like. Guidelines are provided for HR practitioners, HRO providers and advisers.
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Section 9 is the CRF overview on HR outsourcing, along with recommendations for members. Section 10 provides three case studies - the BT-Accenture HRO renewal, shared services at the Royal Bank of Scotland and the DuPont-Convergys HRO transformation deal.
Research Process
Research for this report was conducted between November 2005 and April 2006 using desk research and face-to-face interviews with 28 senior executives in the UK, US and Europe. They represented different roles within HRO.
A number of HR professionals including global HR function directors, HR chief operating officers, HR VPs and heads of shared services, along with managing directors. On the provider side, interviewees included chief executive officers, managing directors, VPs of business process outsourcing, and account leaders on some of the world's largest HRO contracts. The research directors from two leading advisory consultancies in the global services delivery market.
Guided by independent and objective research, this report addresses a primary concern in the HRO market - that independent and objective data is lacking on which to base rigorous evaluation of the business case for HRO and its actual performance.
Notes for readers

The content of this report is for HR practitioners familiar with the many debates about the role of the HR function, its performance and contribution which, we believe, can be improved through HR outsourcing. The main parameters of HRO are defined. That said, outsourcing is an industry of complex terminology and acronyms - added to which is an intricate and multi-faceted business model. Attempts have been made to simplify this.
Additional Sources
Readers wanting to explore HRO issues in more detail might look at Outsourcing for Radical Change by Accentures Jane Linder who contributed to this report. Those seeking an authoritative HRO text with an emphasis on its evolution would enjoy Human Resources Business Process Outsourcing, co-written by Ed Lawler, Jac Fitz-Enz, Dave Ulrich and one of the HRO industry's founding fathers, James Madden, the former CEO of Exult - now owned by Hewitt. Useful sources for HR shared services include How To Get Best Value From HR: The Shared Services Option by Peter Reilly and the Royal Bank of Scotland's Tony Williams. This provides an excellent overview of the processes involved, with case studies. The former BPO team at PricewaterhouseCoopers provide a more comprehensive and technical analysis in Shared Services: Adding Value to Business Units. Academic texts are deeply theoretical and complex, drawing on transaction cost economics and institutional theories. Accessible articles can be found by Paul Adler in California Management Review (2004) and various outsourcing papers by Leslie Willcock and colleagues. A reference list and further reading appear at the end of the report.
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This report, published in June 2006 by the Corporate Research Forum, is the first independent review of the development of the outsourcing market for human resources functions.

CRF is a centre of expertise in organisation development and performance. It is a membership organisation with over 100 large employers as members, from a wide spread of industries and both the public and private sectors. CRF provides members with a variety of means of developing and sharing good practice, and contributing to thought leadership. This includes involvement in several research projects undertaken each year and a symposium to debate the results. To access CRF's knowledge base, organisations need to join CRF as a corporate member. For details see www.crforum.co.uk.
This report
The principal author employed by CRF was Dr Anthony Hesketh of the University of Lancaster. Additional content and editing was provided by Andrew Lambert and Chris Ashton of CRF. The report was debated by CRF members at a symposium on 8 June 2006.
Report sponsorship
The production of the report was sponsored on this occasion by one of CRF's members - Accenture. Note that sponsors of CRF work have no control over the contents of CRF's publications or meetings, although they may be interviewed as part of the research if relevant to the subject material. In this case, Accenture features in a case study on BT, in their position as supplier.
Obtaining copies of CRF reports

Generally, these can only be obtained by joining CRF as a member organisation. Report sponsors are allowed to distribute reports they have supported on a limited basis. For membership enquiries please contact CRF at +44 20 7470 7104 or write to CRF at CountyMark House, 50 Regent Street, London W1R 5BD, UK.
1 Executive summary
A primary concern of the HR outsourcing (HRO) market has been the lack of independent and objective data for rigorously evaluating the business case for HRO and its actual performance. This report is the first of its kind to bring together different stakeholders within HRO - including practitioners, suppliers, academics and consultants - to produce an independent, objective academic research project. in their size, culture, HRO methodology and track record. However, they offer their services in three distinct ways.
Single-service or transactional solutions for a particular HR activity. Multiple HR services as part of a large-scale deal. Transformational deals which radically change the purpose and role of HR.
What HRO is
The increasing focus on HR's contribution to the performance of the wider business has led to more emphasis on cost reduction. HRO has grown out of this debate - from re-engineering and cost reduction on the one hand to a potential transformational capacity on the other. HRO is an evolving industry and can be defined as:
The purchasing by an organisation of ongoing HR services from a third-party provider that it would otherwise normally provide for itself.
Three different types of providers are active in the HRO market - pure HRO specialists, business/HR transformation firms and HR process technology suppliers.
Selling points of HRO

HRO providers use these main selling points.
Increased efficiency of HR with estimated cost savings of up to 50%. Increased effectiveness of HR through operational improvements. Improved strategic focus from HR on business goals. The role of HRO in transforming the performance of HR and the business.
HRO is a strategic tool aimed primarily at chief executives. Though organisations may have different strategies and performance models, all will relate in some way to HRO. These can involve the following.
Capability: for any organisation where there is a need to either improve or acquire HR capability. Scale: providing for large organisations with 50,000 or more employees well-delivered HR administration and services - and to justify the return on investment. Technology: for most organisations where technology can be acquired and leveraged through shared services or outsourcing.
While many HRO users can point to improvements in the first two points, evidence is lacking for the impacts on strategic focus and business performance. This is a major problem for the HRO industry.
Strategic debates around HRO

These debates are ongoing in HR outsourcing among user - or prospective buyer organisations, providers, HRO advisers and academics.
The future purpose and contribution of HR because of the possibilities of functions being transformed, or part-outsourced, through HRO deals. The strategic and management complexities of HRO deals, especially so-called mega-deals. Deciding what is core and non-core in HR - the critical competencies to be retained versus peripheral activities that might be outsourced.
Outsourcing varies dramatically by type, level, contract and provider.
HRO providers
While HRO providers may seem to offer little that is different between them, differences do occur
The difficulty that HR has in assuming more strategic or value adding roles after implementing HRO. The position of offshoring as it affects HRO decisions and raises emotive issues such as job losses and redeployment . The challenges of trying to manage HR process delivery on a global scale and across different cultures.
specific lines of HR they intend to outsource.
The HRO logic

No amount of preparation, however extensive, can safeguard outsourcing deals completely. Leaders need to clarify what their core logic is for creating value by demonstrating the following.
How HRO can enable the organisation to meet the requirements of its stakeholders - be they internal (employees) or external (customers). How outsourcing will transform the way the HR function works in a radical and sustainable way. Crucially, how transforming the HR function will influence the planning, operations and performance required by the business model.
The HRO debate ultimately turns on the perceived quality of, and returns from, investments in the HR function. Those organisations under pressure to reduce costs are more likely to consider outsourcing at least part, if not all, of their HR administration.
The future of HR
HR itself is also locked in a debate over its future. Though some organisations have evidence that the function is an integral part of its capability to deliver business success, many view HR as
over-resourced inefficient vulnerable to the cost reduction possibilities of HRO.
Managing the transition

In some organisations, HRO is akin to changing the engine while the plane is still in the air which is a potentially catastrophic exercise. The consequences of HRO must be thought through - before agreeing a contract. Handing over single, multiple or all HR service processes represents for many organisations their first experience of complex projects project management is a critical HR capability for HRO to work well. A successful transition minimises employee angst - but botched handovers could have longstanding repercussions on relationships with providers, employees, other stakeholders and corporate image.
HR outsourcing raises questions over HRs future skills, capabilities and career paths. Its developments are creating pressures for practitioners to shift from being reactive and administrative problem-solvers to more proactive, value-driven business partners.
Shared services
Research revealed much discussion about the definitions and position of shared services. For our purposes, it is defined as
the transfer or insourcing of HR services and their resources to a separate unit within the business and often with a separate P&L system.
Governance of HRO performance

Managing and measuring performance after HR outsourcing is pivotal to the relationship between HRO client and provider. Performance measurement in HRO traditionally concerns the following.
Efficiency: mainly through cost reductions. Effectiveness: through improved service outcomes against criteria in service level agreements (SLAs). Transformation: indicators of deeper change at the
Shared services is often adopted by organisations who are against outsourcing as a matter of principle - but still seek some of the transformational and streamlining advantages connected with outsourcing. Alternatively, some organisations use shared services as a halfway house to prepare the
level of the organisation, its employees, systems and at intangible levels. Strategic governance: evaluating the management of performance - including the decision rights, rules and agreed management processes defined with and before providers are engaged.
Future directions and recommendations

Research for this report found these trends.
Increased outsourcing of higher value HR processes such as recruitment. Increasing use of shared services models. Performance issues surrounding HRO deals. The continued evolution of e-HR activities. The emergence of new HR roles and competencies. Continuing debates over HR and HRO measurement.
Guidelines are offered for HR practitioners, third party providers and HRO advisers. In addition, CRF's position on HR outsourcing is explained to help members come to an informed view of a crucial topic. This is supported by recommendations.
2 Size, scope and whos who in HRO

In this section, we examine outsourcing within the context of wider business process outsourcing (BPO) developments. The interpretations and scope of HRO are discussed. HRO industry trends are identified as are some leading providers and their offerings.
Examples of outsourced HR processes and services

Recruitment Training Payroll Employee records Performance management Compensation Benefits Expatriate relocation Domestic repatriation Organisation development HR strategy Labour relations Employee relations Severance Accounts payable Accounts receivable Time and expenses Procurement
2.1
Context of outsourcing
When all is said and done, more has been said about outsourcing than done. Nowhere has the debate been as intense as in the HR functions of major global organisations. Unlike what many commentators might suggest - particularly those outside HR - the back office functions in these organisations do not amount to small beer.
Some three trillion dollars is the latest estimate of the value of a back office by Xchanging, a leading player in the HRO market. There are good reasons for this huge figure organisations are intensifying their investments in human capital management.
outsourcing various technology-intensive HR services such as pensions and payroll to large-scale third party providers to the more centralised yet devolved in-house alternative of shared services.
Despite a massive growth in the human capital management and measurement industry, the debate over outsourcing the HR function has largely taken place outside the HR profession. In part, this reflects
the failure of HR to engage with a strategic vision to transform itself, which is also threatening to some functions consulting houses choosing to take their outsourcing solutions and bids over the heads of HR directors to chief executives, chief operating officers or finance directors.
HR outsourcing is far from a passing fad. According to the latest available data from the Everest Research Institute, an advisory consultancy, some 2.75 million HR staff are currently under the direct operation of an HRO deal. And, the numbers are projected to rise dramatically.1
2.2
Evolution of outsourcing
Outsourcing has moved on substantially since 1989 when the concept was first uttered by Eastman Kodak's CEO. He announced the outsourcing of the company's computer operations as "lock, stock and mainframe, and farming them out". BP followed, stretching the concept of IT outsourcing into its financial services by transferring accounting and settlement processing for off-shore oil rigs to the then Andersen Consulting.
Claims and counter-claims now occur regularly between the HR and consulting professions as both sides attempt to fix in the minds of their paymasters the justification for their strategic alternatives. The choice for HR has been a grudging one along a continuum from
Consulting houses realised the potential of integrating the specific skills of re-engineering business processes with IT. By unbundling or scaling transactional processes in business activities, labourintensive or 'back office' administrative tasks could be executed through sophisticated software systems written by IT experts working in firms such as Accenture, CSC, EDS, IBM, etc. These developments led to the emergence of business process outsourcing (BPO) - and, by the turn of this century, BPO had become a $119 billion market.2 See the box below. According to its providers,
BPO is now radically improving business capabilities crucial to an organisation's success factors business leaders appear to be in agreement current data from TPI estimate that contracts awarded in 2004 alone amounted to a record annual high of 58 billion euros.3
outsourcing and BPO that the industry has rebranded itself as the 'global processes delivery' industry.
2.3
Emergence of HR outsourcing
The outsourcing of HR processes emerged in the late 1990s, pioneered by firms specialising primarily in IT outsourcing - although not exclusively - in the US such as ACS, EDS and Accenture. Many transactional HR processes are outsourced and are increasingly associated with electronic delivery - or 'e-HR'. Much day-to-day HR administration can now be transferred to third party providers. Payroll and benefits is widely outsourced with organisations benefiting from economies of scale and powerful Enterprise Resource Planning (ERP) solutions. Competition among HRO providers has dramatically reduced prices. Other advantages for clients include
cost reductions service improvements upgrading technology being better able to respond to business change.
These achievements have been made despite a highly circumspect position adopted by the media, which sees outsourcing and offshoring as an opportunity for large organisations to offload record numbers of workers. Such have been the negative perceptions of
Origins of HRO outsourcing

HR outsourcing (HRO) is the application of different business models and techniques to new forms of activities - or processes - and radically redesigning them to create outputs of value for end users such as customers or employees. HRO can be traced back to the definitive work of Michael Hammer and Jim Champy in Re-engineering the Corporation. This e spawned the business process re-engineering (BPR) industry in the 1990s. e Business process outsourcing (BPO) is based on the principles of re-engineering, but also combines them with the ownership and e management of processes on behalf of a client by an outside (hence outsourcing) vendor. Typically, services are improved overheads are reduced many processes are automated - thus reducing people costs.
BPO has been applied to many transactional processes that can be easily defined or 'scaled' and transferred to third party ownership with deeper expertise than themselves. Until recently, the management of IT systems has been the major element of the outsourcing market. An ongoing debate concerns which business processes are 'core' to organisations - in the sense of core competencies that drive competitive advantage. Any non-core - or peripheral - activities are outsourced. c
The choice for HR is whether to use comprehensive outsourcing when many HR processes are 'bundled' and managed by a third party - or whether to take a more 'silo' approach. Here, specific HR activities are outsourced to suit both function and business needs. Each option has advantages and disadvantages.
'Transformational' deals in which HR's role is significantly changed and leveraged using technologies and approaches that drive enterpriselevel performance.
The main HRO value proposition is simply to provide enhanced value HR services at a lower cost - without sacrificing speed, quality and service.
HRO terminology
It is not uncommon to find HRO being referred to as outsourcing, offshoring, BPO, BTO, nearshoring or onshoring all in the same conversation! This point alone requires that HRO is more carefully defined. An all-embracing definition of HRO is difficult but for the purposes of this report, we define it as:
The purchasing by an organisation of ongoing HR services from a third-party provider that it would otherwise normally provide for itself.
The Scope of HRO

HRO Terminology Workforce Administration HR Services Included HRIS maintenance and customisation Employee self-service and customer s service for: - employee data changes - HR policy and procedure support Employee data capture and maintenance Leave administration Payroll Administration Labour management reporting and scheduling Time and attendance data capture and reporting Gross-to-net payroll processing t n Tax withholding and reporting Compensation Administration Salary and bonus administration Job classification Stock option and purchase programs Executive compensation and benefit programs Benefits Administration Defined contribution plan administration Defined benefit plan administration Health and welfare plan administration Non-qualified plan administration q Claims adjudication Recruiting and Staffing Applicant tracking Candidate sourcing (internal and external) University relations Executive placement Global mobility and domestic relocation Workforce Development Learning administration, including content development course registration
This definition can become complex because different HR processes or services are involved, such as those shown in the box on Page 4. A whole new lexicon and common vernacular is emerging within the HRO industry - in addition to what is already a complex business model. The table here provides an overview of key terms and services.
2.4
HRO providers and offerings

Naturally, HRO providers attempt to differentiate themselves from their competitors, most claiming distinctive value propositions. These are summarised in the table opposite. I should state that this is for guidance only - it is my own view of the market based on publicly available information. HRO providers offer their services in three ways.
Single-service or 'transactional' solutions in which one particular service is transferred to a single provider - payroll or recruitment, for example. Several HR services are bundled as part of a large-scale or 'mega deal' comprising many, if not all, HR function lines.
Performance management Succession planning Abridged from TPI: www.tpi.net
The Value Proposition of Major HRO Providers

Provider Accenture Value Proposition Claims able to unlock capabilities of HR to transform workforce performance, deliver strategic business value and reduce costs by 20%-40%. Branded as 4 'enabling HR to deliver high performance business.' Major ITO player now leveraging Global Service Centres. Economy of scale from a major provider. Provides 'measurable results for organisations of every size.' Offers full-scope HRO from basic processing s through managed services to comprehensive outsourcing services. Major partnerships with SAP and Microsoft. Offers major streamlining of costs opportunities. Major contribution lies in transforming capability of HR through consulting to serve all client workforces. Evidence Major contracts in the HR space with BT HRO mega-deal renewal, although cost savings are 'not d in the public domain.' Number 2 in HRO market.
ACS
Full HRO contracts with GM Europe, Goodyear (North America) and Motorola. Claims 'HR is our core business.'
ADP
Less forthcoming about clients, but do have 190,000 employees under their comprehensive outsourcing solution and 590,000 clients worldwide. Major transactional contracts with impressive list of clients including AT&T, American Express, JP Morgan, Abbott Laboratories and Motorola.
Aon HRO
ARINSO
Claims to build more HR value at a lower cost, incorporating speed, quality and service. Primarily a transactional player. Nimble and focused.
Partners with other providers to deliver solutions. Less forthcoming about HRO clients.
Convergys
Offers increased agilty to HR functions through its solutions. Claims 'a unique combination of people, capability, scale and specialised knowledge.'
The world's largest HRO deal signed with Dupont in November 2005 with a total client value of $1.1.billion. Covers 30 countries and 18 languages. Expanding. Major player in ITO market place with major public sector contracts. Key player in armed forces. HRO contracts with CIBC, BP and BBC. Application of IT to HR major strength. HRO contracts with ABB, Agilent, Bank of America, Fleet Bank, GM and IBM. A major IT-enabler of HRO. e
Excellerate HRO
Partnership between EDS and Towers Perrin. Claims to be 'the world's most experienced outsourcing services company.' 'Knows technology and HR processes better than anyone else in the industry' Major ITO player seeking to leverage major economies of scale. Whole raft of innovative eenabled HRIS. Business model based on a true, multi-client approach. c Only pure play HRO specialist boosted by acquisition of Exult in 2002, the world's first major HRO player. Claims to be the HR expert and has 2,300 HR consulting engagements
Fidelity
Hewitt
Market Number 1 with 37% HRO market share. Over 300 HRO clients including BP, Credit Suisse, GSK, Marriott, Prudential and Safeway.
IBM
Major player in ITO but less so in HRO although clear strategy to move into HRO transformation market with its BTO and On Demand offerings. Covers whole spectrum of HR services with Abridged from TPI impressive research and consulting. Major ITO consultants now moving into e-enabled e Value Proposition HRO space. Not a significant HRO player although Accenture HR Services recent manoeuvres (white papers, for example) suggest a strategy to expand in this area. Wrongly perceived omain.' Number 2 in HROin fact 'not in the public d as HRO pure play when also a major player in the financial services market. outsourcing space. Pioneers of the transformational aspects of outsourcing to bring about radical ACS improvement through its Xcellence methodology.
Clients include Dana Corporation, P&G, Qantas and HSBC.
LogicaCMG Provider
Major bableofficenlock capabilities withR to transform Claims ack to u payroll contract of H Metropolitan Police Authority. workforce performance, deliver strategic business value and reduce costs by 20-40%. Branded as 4 'enabling HR to deliver high performance business.' Major HROplayerBnow ystems - firstGlobal Service f Major ITO with AE S leveraging all-function mega-dealconomy K.f Otherfrom acmajorinclude d Centres. E in the U o scale HRO lients provider. Compass 'Group, LSCs,results for organizations of Provides measurable SAAB, Illium Insurance together with Deutsche Bank and Lloyds. every size.' Full HRO contracts with GM Europe, Goodyear
Xchanging Major contracts in the HR space with BT HRO mega-deal d renewal, although cost savings are
Though HRO providers may seem to have little between them, differences do occur in size, culture, HRO methodology and track record.
2.5
The HRO industry

Commentators tend to agree that the HRO industry has progressed through these stages to its present state.
Pioneering Stage: between 1998-2001, during which General Atlantic Partners provided venture capital for two major HRO contracts - Exult with BP and Xchanging/BAE Systems. Emerging Growth and Development Stage: from 2002 to the present, featuring several mergers and acquisitions (Mercer acquiring SynHrgy and Hewitt acquiring Exult, for example) and partnerships such as CSC with Aon and Towers Perrin with EDS. The last two-and-a-half years account for around 60% of the deals of this seven-year-old industry. Maturity and Standardisation Stages: the future, with multiple standards and models among a number of legitimate suppliers who focus on transaction cost economics to drive down HRO costs.
ADP 2% Convergys 4%
IBM
Arinsco 1% All others 10%
5%
Hewitt 38%
ExHRO 7%
Fidelity 7%
ACS 11%
Accenture 15%
Source: Everest Research Institute, June 2005.
distribution of contracts and their total value. For example:

Hewitt can claim to be responsible for 38% of the HRO market and 34% of its total contract value (TCV). But, according to the Everest Research Institute in 2005, the firm has less than a quarter of all current transactions - 23%. While a number of smaller providers account for just 5% of TCV, they amount to 28% of the entire HRO industry. Arguably, therefore, market share by TCV does not necessarily reflect market confidence. Nevertheless, other patterns are as predicted. The top four providers by HRO market share (Hewitt, Accenture, ACS and Fidelity) account for 58% of the entire HRO workforce - 19%, 14%, 10% and 15%, respectively.
The extent to which HRO has, in the words of Geoffrey Moore, "crossed the chasm"4, and moved from an emergent to a mature business model is a moot point. We return to this below.
Market Share
There are essentially two main players in the HRO market - see the chart above.
Hewitt is the largest provider, having acquired Exult in 2004. How far this dominance is a reflection of the HR community's preference for this provider's sole focus on HRO is unclear. Hewitt themselves certainly see this as a key business driver. Next is Accenture, combining its IT and consulting expertise in outsourcing. Along with Accenture HR BPO Services, the firm might also be described as an HRO 'pure play' - although a greater share of its overall outsourcing portfolio comprises BPO and ITO contracts outside HRO.
Market Spend
There is some debate over the extent to which demand for HRO has been supply-driven. While this issue is discussed later, we conclude here that the growth of HRO has undoubtedly been strong - as shown by the figures for Annualised HRO Spend opposite.
In part, these data on market share hide more subtle differences in the scope of the HRO market and the position of different providers. These differences are revealed in the
2.6
HRO methodology
Based on the business methodologies and
models of providers, the HRO market can be split into three categories.
Pure Plays: only one major firm fits this category the market leader, Hewitt, who focus solely on HR markets. Whether their market leadership is a cause or effect of this 'pure play strategy is a matter of debate. Transformationalists: key players here are Accenture, IBM and Xchanging who all offer a change model based on business transformation outsourcing (BTO). This combines sophisticated technology platforms with complex HR change initiatives. Technology Enablers: traditional ITO providers with major market share are now rolling out technology-enabled HR processing products on a massive scale. Key players in this market are ACS, ADP and EDS - the latter via its new brand, Excellerate HRO.
The primary justification for these different approaches is this business rationale - that the more efficient and effective use of financial resources to improve HR performance will, in turn, enable HR to drive better performance across the organisation.
Annualised HRO Spend (1998-June 2004) US$ million

1,562 1,354
970
622
316 75 YE 1998 128 YE 1999 YE 2000 YE 2001 YE 2002 YE 2003 YE 2004 E
Source: Everest Research Institute, 2005.
3 Issues facing HRO decision-makers

This section deals with some of the issues, myths and difficult decisions behind HR outsourcing - HROs potential for transforming HR functions, for example. Respondents' thinking about different HRO models is provided, as is a summary of HRO risks. they focus too much on administration and process activities - and less on what they could contribute to business performance. Ulrich's prescription is to refocus on 'deliverables' rather than 'do-ables'. So started a trend towards the strategic business partner notion, the HR scorecard and on to trying to understand Ulrichs latest prescription, HR's value proposition.
3.1
HRO hysteria
It is ironic that the majority of the 18 million employees served at least once a month by HRO market leader Hewitt - whether by pay cheque, expense claim, car lease scheme or pension - are probably entirely unaware they are being serviced by the outsourcing industry. They might be among the nine out of ten who typically say they are satisfied with these services - in marked contrast to the media claims of universal dissatisfaction with the conventional HR function in most organisations. As examples:
Keith Hammond headed his now infamous Fast Company Magazine article, 'Why We Love to Hate HR'.5 Before long, he will, perhaps, write 'Why We Love to Hate Outsourcing'. a 2005 article in HRO Today magazine concluded that the three most frightening letters in the English language, next to WMD, were BPO.6 People Management rarely wastes an opportunity to throw mud at the HRO industry. The most bizarre story yet in 2005 claimed the global spread of MRSA disease might be attributed to increased labour movements associated with offshoring and nearshoring - not a word was printed about the potential impacts from the meteoric rise of the cheap airlines industry!
HR value proposition question

"HR is being split in half. Much of the traditional, administrative and transactional work - payroll, benefits administration, staffing policies, training logistics, etc needs to be carried out more efficiently. Most large firms have either built service centres and invested in HR technology or outsourced these transactions. What is left after transactional HR has been automated, centralised, eliminated or outsourced?" Dave Ulrich and Norm Smallwood: The
HR Value Proposition
Despite the fact that not all HR functions follow Ulrich's original model - and that part of this remains unworkable - these developments below suggest that HR has responded to Ulrichs criticisms.
Certain types or 'architectures' of HR are claimed to release high value adding practices - enabling people and organisations to improve performance. A vast amount of published research - Ulrich's The HR Scorecard with colleagues Mark Huselid and Brian Becker, for example - has identified some key attributes of a high-performing HR architecture. This architecture, combined with employee engagement practices, helps HR to unlock latent potential in their organisations. HR can deploy itself in a more strategic and consultative role through the business partner concept - advising executives on how to align people strategy with business strategy, among other things. The belief that dispensing with HR activities and allowing a third party to look after your 'most important asset' - employees - is viewed by the HR profession as effectively abdicating the responsibilities of being a good employer. Not all business leaders agree.
Love it or hate it, HR outsourcing conjures up emotions - and none more so than in the HR community as HRO fuels the debate about what HR should do and deliver.
3.2
Strategic debate over HRO

Should we do away with HR? In books, articles and on conference platforms, Dave Ulrich has used this type of question to call for value adding work from HR functions. He argues that
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Underpinning these developments is the claim that improved HR leads to improved organisational performance. However, the causal linkages from HR deliverables can be so far downstream that connections between HR and organisational performance have not been clearly established.
branch, corporate and business banking. So you end up having a high business partner to business ratio - simply because of having to understand the key differences, and to some extent, the sheer geographical scale with 2,000 retail outlets. If you're not careful you stretch people too far. In a business that is quite uniform, like the Royal Mail, although their business units are hugely diverse geographically, what they actually do in a geography is very similar. A postman leaving a depot in Glasgow is the same as a postman leaving a depot and delivering in Birmingham. In selling retail financial services there is more of a difference. You have to reflect the [market] you are in.
Critiques of HR
This lack of an established and measurable causal link between HR and organisational performance has led to several critiques being targeted at HR. One head of shared services in financial services pointed to the problems of ratios as indicators of quality - and some of the deeper issues behind the business case for reducing headcount.
If you've outsourced shared services, 1:300 is doable, so long as you're not a hugely diverse organisation. The problem we had was that strategic drivers - such as credit cards and the mortgage business - were quite different from the retail financial
Other critiques of HR include the following.

Debates continue on the distinction between what is 'core' to the organisation, and what is 'peripheral'. Many place most HR activities on the peripheral side of the strategic fence - thereby leaving it susceptible to cost-cutting and/or outsourcing. See the HR Curve below. An over-burgeoning HR architecture represents an uneconomic use of resources.
The HR Curve
High Overall HR Strategy In-Business HR B Labor Relations Strategy Compensation and Benefit Policy/Design Strategic Workforce Planning and Analysis HR Policy Laboor Relations Vendor Management Change Management Consulting Corporate Learning Management Governance Integrated Disability Case Management Services International Service Personnel Administration Recruitment, Assessment and Selection Training Administration Policy Inquiries and Resolution Relocation Services Benefits Administration Job Posting Professional Employment Changes and Advisory Payroll Employment Services Benefits Sign-up u Services Form Submission Employee Record Keeping HRIS Transaction Services High Source: http://www.tpi.net/solutions/hr.aspx Complexity of Interaction Low
Low
Value Added
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Critique: costs and HR ratios

The costs of HR far outweigh the benefits obtained. The corollary of this has been a dramatic downturn in the ratio of HR staff to employees. Recent data from Saratoga Institute estimate this ratio to be in the region of 1:71. Other forecasts in the US predict this to rise to 1:300 or even 1:500.7
of their HR administration. This approach appears to be already wellembedded in larger organisations. Recent research from IDC suggests that 90% of the Fortune 1000 and FTSE 100 organisations have outsourced certain service lines of HR.8 The thinking here is straightforward. Outsourcing the administrative tasks of the HR function - payroll, pensions administration, some aspects of recruitment, and so on - releases crucial resources. It also enables these to be used for more strategic - and what is perceived to be more value adding - activities, which may or may not be located in HR. This also raises important questions over the future of the HR profession. Career trajectories are becoming increasingly blurred, as HR practitioners find themselves expected to shift from being reactive and administrative problemsolvers to become more proactive, value-based business partners. According to Emily Lawson and Jens MuellerOerlinghausen in The McKinsey Quarterly, 2005, Number 2.
"European companies appear to be struggling to find HR professionals with the right mix of skills to support business unit managers. A survey of HR directors at
There is considerable downward pressure on the typical cost of HR per employee - estimated by analysts to be in the region of $1,000 per FTE. A debate now concerns the costs of those activities described as administrative or transactional, and where they are located. See the diagram below, Locating Value in the HR Function. Most of what HR does - and its corresponding budget - tends to be low value process activities and their management. Those activities adding the greatest value are believed to be associated with strategy formulation which, in turn, are relatively inexpensive.
What the HRO debate hinges on

The debate over outsourcing the HR function turns, then, on the perceived quality of, and returns from, investment in HR. Organisations under pressure to reduce costs are more likely to consider outsourcing - at least part, if not all,
Locating Value in the HR Function

Time Spent Cost per Ee HR Policy & Planning Compensation and Jobs Competencies and Careers Industrial Relations Communication Health and Safety Staffing and Recruitment Training and Education Strategy 10% 40% Management $ 140 $ 520
Benefits admin. Personnel admin. Payroll admin.
Administration Data collection, control processing, reporting, enquiries, third parties, filing, legal maintenance and IS
50%
$ 540
$ 1,200
Source: ADP
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20 UK-based global corporations found that core HR services, such as employee data management and recruiting, are often poorly executed. The troubling gulf between the needs of the business and the ability of HR to respond, will force many companies to rethink their approach to the recruitment, training and development of HR employees."
pale into insignificance when compared to the heady days of the 1990s - then, 3,100 layoffs in the US took place daily with over 650,000 jobs lost annually.10
The third myth is the inaccurate forecasting of offshore numbers.

Recent data suggests that Deloitte have overestimated the rush to offshore. Data released by Gartner at the November 2005 HRO Annual Conference in Brussels, indicate that only 5% of the jobs involved in all BPO contracts in the EU were offshored. For HR, recent data reported in People Management suggest that 15,000 HR jobs were offshored in 2003/2004 - with estimates of a further 200,000 jobs by 2010.11
3.3
Offshoring myths
It is worth dealing with the three major myths of offshoring in this discussion of HRO issues. First, the myth that offshoring is outsourcing.
Offshoring is not outsourcing per se, but is based on the economic theory of labour arbitrage defined as the completion of the same task in a different location where the costs are significantly cheaper. Offshoring may involve transferring jobs to locations such as India, China, South Africa or the Philippines. But it also includes nearshoring with jobs in countries such as Poland. The UK government has sought to benefit from a 'domestic' labour arbitrage where jobs located in London are being redeployed to other regions such as Manchester and Bristol in the wake of the Gershon Report. Another HRO example is the BBC's recent announcement that it is transferring a number of jobs to Capita's HR centre in Belfast.
One experienced head of shared services, talking about a previous post at a bank, suggested the debate over offshoring could be spun whichever way people want to spin it:
"We had a serious problem finding people to take over from others and deal with complex queries. Some are in favour and some are against, and both tell you stories which confirm their prejudices. The real question about offshoring for me is this - if you have a process so simple that you can do it in India with little training, why didn't you just automate the process in the first place?"
There remain potential pitfalls for those using offshoring.

The management and governance issues of process delivery on the other side of the globe. The accusations of the mismanagement of talent, which is, perhaps, the subject of a future report.
A second myth is that outsourcing causes downsizing.

A research report published by Deloitte in 20059 estimated that around two million jobs would be relocated away from the US and mainland Europe to offshore and nearshore sites - thus, in the minds of many, associating outsourcing with major downsizing programmes. Downsizing is a fact of Western organisational life as developed economies continue to do more business with fewer employees. Indeed, increasing productivity of employees is government policy in many developed states. Even if the figures given by Deloitte prove to be correct, recent estimates of the impact of offshoring
Readers wishing to familiarise themselves with these issues would be well served by Vashistha and Vashistha's The Offshore Nation: Tata McGraw Hill, 2005.
3.4
The shared services option

Many in HR view a shared services model as a precursor to the more operationally adventurous outsourcing model. The reverse is probably more accurate.
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Shared services is often deployed by organisations which are against outsourcing as a matter of principle - but seek to gain some of its transformational and streamlining advantages. Alternatively, some use the model as a halfway house in order to prepare the specific lines of HR they intend to outsource. Definitions of shared services, 'insourcing', 'captives', etc, are numerous, but for our purposes we define it as follows.
Shared services is a strategic tool using some of the benefits of outsourcing through the transfer or insourcing of HR services and their resources to a separate unit within the business - and often with a separate P&L system.
with HRO. While the shared services model of insourcing is seen as internal and consequently more palatable to employees and the HR media, it still involves many of the costreducing features of the outsourcing model and its potential pitfalls. Not only do organisations risk losing crucial tacit knowledge, but they also let a third party provider mop up their low-hanging fruit - the quick wins or cost reductions associated with relocating staff, streamlining and the reengineering of HR processes. See the box below.
Picking up our silver pounds

"We decided to set up [the HR Shared Services] unit internally as opposed to outsourcing because we didn't understand what we had - and the countries didn't want to share what they had, as they would lose power, influence and the ability to move if they did so. "If we outsourced, we thought we would lose value add, knowledge and intimacy within the businesses of Shell. As an analogy, we could pick up the silver pounds lying on the beach quicker than letting Hewitt or IBM do it! There were efficiencies we could effect ourselves, so why pay someone else to do it? "It is ironic that in the same month we decided to globally insource our HR offering, BP decided to globally outsource theirs to Exult. Two diametrically opposed decisions were taken by two smart companies, both with smart people." Lee Patterson, Global HR Strategy, Shell
In addition to the centralisation of HR services are these features that mirror some of the characteristics of HRO.
The 'user is the chooser', meaning that actual services and delivery methods may not be corporately determined but are shaped by customer requirements - managers and employees. Despite the customer-driven language of shared services, many analysts and organisations see it as a driver for cost-cutting. The elimination of services duplication represents one of the largest cost reductions delivered by shared services. Like outsourcing, shared services also involves dramatic headcount reductions as centralised services remove the requirement of individuals being close to the business lines they serve. Some see shared services as the first stage of a step-change model in which HR is insourced to a shared services centre in order to dramatically reengineer and quantify 'as is' processes and costs before outsourcing to a third party provider. Shared services can even be combined with outsourcing. Transactional services such as payroll and pensions are outsourced to a third party, with other HR services - perceived to be of higher value or more sensitive - remaining captive in internallyowned shared services.
Deciding on whether the organisation adopts HR shared services clearly made an impression on a number of respondents. For Luis Rojas, chief operating officer at Standard Chartered Bank, it was a case of capitalising on the wider business strategy.
"Different strategies work for different companies and insourcing was the right one for us. We have been operating in India for over 100 years so it doesn't seem foreign. Also, insourcing in HR was part of Standard Chartered's bigger plan. Right now, we have a global shared services centre in Chennai with 4,000 people, 300 of whom are in HR. So it's a distinct compound within a bigger unit and we leverage the same principles behind a global shared services centre."
Shared services, therefore, clearly incorporates many of the operational changes associated
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3.5
Transforming organisations through HRO

The HR profession remains deeply circumspect of the transformational debate surrounding HRO. For many, this needs to move on from cutting costs to unlocking the transformational powers of outsourcing. It is here where reality fails to keep pace with the rhetoric.
The development of business transformation outsourcing (BTO) represents a head-on challenge to the sceptics of the outsourcing model in general and of HRO in particular. Most HRO providers covered in Section 2 would claim their services are transformational. There are, however, only two key players in the BTO market who have wrapped their HRO offering around the notion of BTO - Accenture and IBM.
enterprise-level change."13
This is arguably an unfair caricature of others' offerings, clearly highlighting one of the major downsides of the HRO market - namely, the marketing activities of the consulting houses involved, which border on propaganda. Rather than taking Linder's word, a quick view of IBM's own materials reveals that they too have a similar product. See the box.
IBM: what is the difference between BTO and BPO?

BTO is used to execute large-scale change projects s designed to increase shareholder value. BPO is primarily a tool to cut costs and is applied to organisational processes on a piecemeal basis As a large scale transformation technique, BTO is designed to provide step changes that can deliver managed growth, together with the agility to sustain benefits in the face of competition.
Source: IBM White Paper: Business Transformation Outsourcing
A definition of what transformation actually is in HRO is problematic. In her book, Outsourcing for Radical Change, Accenture's Jane Linder refers to 'transformational outsourcing' as "big change, fast". She also provides a more formal definition.
Using outsourcing to achieve a rapid, sustainable, step-change improvement in enterprise-level performance.12
BTO Benefits and Claims

The benefits of BTO claimed by providers over conventional outsourcing are numerous. For example, a more sophisticated and deeper level of 'partnering' between BTO providers and clients is asserted. It is less clear what this advanced level of collaboration actually amounts to - although BTO providers talk of both client and provider having "skin in the game" and of moving "beyond champagne and hot tubs" to "real personal chemistry". The idea is that if partners work closely together, each can learn from the other and forge a winwin and close working relationship - instead of the adversarial negotiations thought to typify more transactional-based HRO. We heard evidence of this from a chief operating officer of HR in a bank.
"We chose [our HRO services provider] because they had a global presence which matched our own. They were big in the HR outsourcing market, but we had a couple of other people involved, not first, but second and third.
Linder is quick to warn off competing providers who also claim their services are transformational. She adopts a strong stance, worth quoting in its entirety.
"Transformational outsourcing has gained some currency. As a result, many outsourcing vendors are touting their work as transformational. In most cases, it is not. And this media hype just confuses executives about exactly what the concept means and how it works. "Just put the words transformational outsourcing into an Internet search engine, and you'll find that Compaq, Cognizant, Schlumberger, IBM global services, Alltel, Collaboratech, Cap Gemini Ernst & Young and others all claim they can transform their clients' businesses through outsourcing by implementing new technologies. "This isn't it. Transformational outsourcing often requires new technologies to be implemented, but the defining factor isn't the new technology. It is the purposeful use of outsourcing to achieve dramatic
15
"I don't think our contract was their number one concern. It was their approach and dealings with us in an holistic way. The way they approach it and the people you meet during the process carries much weight. They had a strong team, and where we thought there might be problems, they did what was necessary to get the A-team on board.
produced from the alignment of people, processes and technology - in line with the clients service requirements. A possible reason for a higher likelihood of success in major BTO projects may lie with the extensive senior executive sponsorship expected by providers. BTO is presented as the direct result of top-level leadership in which CEOs take hands-on roles in guiding the change programme. Real life case studies are often provided in which CEOs either
adopt a hands-on role and drive BTO projects to success or serve as examples of project failure, when they delegate their responsibilities to a lower-level manager with catastrophic results.
There is supposed to be an increased chance of in organisational transformation, achieved partly through third party expertise. This enables a BTO client to realise major economies of scale and comparative advantage in a particular process (in this case, HR) by leveraging superior provider capabilities. These enhance the client's own core capabilities.
success
Consider this respondents comments.

"We're quite an aggressive company. We want the best and are a very demanding client. We expect a service level agreement of the highest degree. But we also expect some realistic pushback. You need people who've done it before. They have to have the right people in the right places, understanding the chain. "You don't want people saying, 'Yes, we can do this and we can do that', and then, behind your back, saying 'There's no way we can deliver on that'. I want people to be honest and open. It's fine for the senior players who put together the deal. But what you want from a provider is the knowledge of the process and the ability to say, ''That's just not possible. We can't get 99%, We can only get 95%'"
BTO deals are also financially highly innovative. They have to be. Significant levels of investment are required to underwrite BTO projects, thus raising the level of input - both financially and emotionally - for the success of transformation. See the box opposite. BTO differs from conventional HRO in its tackling of business critical processes. The logic here suggests that a highly skilled and motivated business partner can drive through improvements more effectively than the client. Speed is of the essence. Delaying transformation programmes while deciding what to keep and what to shift, not only precludes accelerated performance but also places at risk the entire strategic agenda. With a focus on results has come a greater
BTO also provides instant financial and operating gratification through accelerated 'time to benefits' or 'speed to value' of HRO interventions. This is mainly because BTO offers large-scale transformation at rapid rates of implementation, supported by expertise in radical change management. Consequently, BTO requires a 'bold agenda'. Without this, BTO providers claim business leaders have little chance of realising the groundbreaking changes they seek. They need to think outside the box. Exactly how this service differs from conventional outsourcing is less clear. One possible point of delineation between HRO and BTO lies in the provider sharing the risks of the transformation. They are held accountable under contract for the expected business results
emphasis on transparency and improved control. Service expectations have increased, requiring tighter contractual obligations for BTO providers. More transparency has been achieved simply through BTO's capacity to provide enhanced timeliness and accuracy in executive reporting, which leads to stronger contractual compliance.
Arguably, the most contentious claim of BTO is its capacity to transform the culture and
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Financial markets like outsourcing

Securing capital has been made easier in the markets because of the trend identified by Business Week where outsourcing announcements boost share prices. It appears both financial markets and shareholders like outsourcing. Partnering with the 'right' BTO provider can enable clients to capitalise on their partner's brand in financial markets to secure the necessary up-front costs borrowed f against future results. The provider can also buy assets from the client and lease them back over time - immediately removing assets from the balance sheet and producing quick wins through improved return on assets. motivation of the HR workforce. This can be
be attributed to several observations.
Lack of critical mass

The so-called HRO 'mega-deals' for outsourcing an entire HR function - BP and Exult (now Hewitt), BAE Systems/Xchanging and BT/Accenture, for example - have not reached critical mass. By way of definition, a lack of critical mass in HRO refers to
... the inability of providers to move from the one-to-one services provision associated with major HRO deals, to a one-to-many services provision. Here, multiple clients are served by one service centre enabling the provider to capitalise on economies of scale. This is the multiple services model.
achieved though a change in mindset from a bureaucratic, 'back office' mentality to what has been labelled a 'front of office mindset'. This is usually associated with BTO providers whose core business is providing a specialised service in the HR area. A more entrepreneurial and business-focused mindset is claimed to prevail. It is this profound change that is the driving force behind enterprise transformation. Finally, the pice de rsistance of BTO is its unashamed focus on enterprise level results.
Conventional HRO is viewed as offering nothing more than respectable improvements in the costs, service levels and support capabilities of HR systems. BTO, claim providers, places unrelenting emphasis on outcomes that shareholders and competitors can see. Examples often promised include a doubling of profits or the achievement of market dominance.
Paul Knowles, of Siemens Business Services, made exactly this point by illustrating how one of the major BTO providers sought to do this but failed. For Knowles, this model - or what some, such as Cohen & Young, refer to as Multisourcing - has yet to take off in HRO. The main problem is what Knowles labels as 'silos'. See the box overleaf. Consequently, BTO has not, as previously claimed by Michel Janssen of Everest, "crossed the chasm from innovative business deal to pragmatic inevitability". BTO, at least in HR terms, has yet to reach a tipping point. There are rejoinders to this observation. Major
deals appear to be back on the horizon. The recent announcement by DuPont of its $1.1 billion HR outsourcing contract with Convergys is an example - see the case study in Section 10. So too, claim BTO advocates, is the recent renewal of the landmark BTO deal between BT and Accenture - see Section 10. The BBC has also recently outsourced the majority of its HR services to Capita.
3.6
Criticisms of BTO
For all the noise made on account of BTO, little supporting evidence has found its way into the public domain. Although the concept is relatively new, this has not precluded a number of providers claiming deep, long-standing expertise. The jury is still out, deliberating on the results of the major BTO deals. This lack of certainty can
These deals are all the more compelling, claims Marc Pramuk of the Outsourcing Institute, because buyers appear to have become smarter. Also, the spotlight of BTO deals has shifted from total cost of ownership to total cost to serve which takes into account all the hidden HR costs
17
around IT and software that plagued early HRO deals.
Related to the previous point, questions still

remain unanswered regarding BTO's capacity to radically transform the HR function itself. Too
Lack of value add

Building on the points above, BTO has failed to attract more value adding processes into the HRO net. At present, it remains focused on reactive, transactional HR processes and has not acquired much in the way of transformational services. This can be explained partly by the lack of mega-deals in HRO. See the table opposite. It also reflects the reticence of many organisations to outsource HR service lines at the top of the value curve, such as assessment and performance appraisal.
much emphasis is placed on cost and headcount reductions - leaving many in HR to question where the HR expertise in BTO is? Such HR transformation is often described in
dramatic cost reduction terms or vast improvements in the number of training days delivered or the reduction of days to fill vacant posts, etc.
These cost and volume metrics highlight the rhetoric underpinning BTO, along with the headline performance of the organisation itself.
The elusivity of the back office standardisation/front office customisation model

"A provider went into a joint venture with one of its clients [a major telecommunications firm] because they thought money could be made out of the [BTO] model by going to market with the product and selling it to other customers. "The problem was, they couldn't standardise the processes to a degree that allowed them to offer other services. There was still so much of this to do, it made more sense for the provider to buy out their client partner - but they never reached the point where they could use that centre for other clients. They have now widened the service offering across Europe. "Providers still haven't managed to move to the multiple services model. In the US, some deliver [multisourcing] but they do it in silos. It involves a factory of back office administration. You need to have technology capability generic HR administrative processing capability HR consulting expertise.
"Payroll and pensions are probably the areas that have been most successful in outsourcing because they're regulatory driven, there are clear standards associated with them and there are generic delivery models. Therefore, you can standardise the back office against some form of regulatory framework. "When you look to outsource processes that relate more to the culture of the organisation - how you recruit, how you train, what sort of terms and conditions you offer, whether you offer flexible benefits, career breaks, maternity leave, etc - the ability to standardise the back office for more than one client becomes more complex because you don't have a standardised process. The customer is also concerned that their image, or relationship with their client and their employees, will be damaged if they don't have the ability to flex it to suit their circumstances. "Consequently, most of the big outsourcers will look to sell the idea of 'back office standardisation and front office customisation'. They will claim they can look after you, run your processes, and adapt them so they will not be seen as X Provider but Y Company Service, and so on. That means you end up with a dedicated centre for that client. "And if you consider the market, there are few HR BPO providers able to demonstrate multiple client service from one centre across multiple silos. You can have a payroll or recruitment centre for multiple clients, but as for general HR administration across the disciplines, I can't think of any large-scale provider that provides the administration for two or three clients through one centre. s "They can handle the volume. So they take on a Proctor & Gamble, or a DuPont. But could you put Proctor & Gamble and DuPont in the same service? Nobody has yet done that, in my opinion. Being flexible with different customers across different silos is problematic. In the future, I can see the bigger outsourcers servicing payroll or pensions from one centre. But, general administrative centres will remain specific to the client.' Paul Knowles, General Manager, HR BPO & Transformation Services, Siemens Business Services
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What Organisations Will Not Outsource

Total HR function Employee communication Assessment and performance appraisal Career and succession planning Compensation Leave 93 91 88 85 82 76
their functions. While perhaps the greater risk is to do nothing, HR directors need to appreciate both the direct and knock-on effects of HRO. Neil McEwen, in an article for HRO Europe Magazine, cites three risks that were especially prevalent during the early days of HRO.
Initial claims for potential cost reduction and improved effectiveness were sometimes exaggerated or unrealistic - leading to disappointment when they were not delivered. People often failed to appreciate the effort required to make HRO work - given that it affects all employees served by HR and has a huge impact on the HR community. Some companies thought that, by outsourcing an organisational mess, they could make it someone else's problem. However, this would boomerang back to them when the HRO supplier experienced the same intractable issues.
Source: SBPOA/ADP HR Transformation Survey, November 2005
Thats because few, if any, current BTO metrics demonstrate how the quality of HR processes the content of training or the quality of people hired, for example - have improved. Or, whether they have delivered overall value to the business. Critics of BTO claim that too much has to be taken on trust. Said one respondent.
"I have never yet found an organisation - and HRO is no exception - that is good at tracking performance. You ask them, 'Two years ago you made a commitment to make this money. Have you made it yet?' They always seem to live in the current year and may look back at the year's budget. But, providers are not good at looking at year-on-year and breaking it down to a divisional level. You have to be specific about it in the contract."
Now, the HR director faces other potentially riskcreating issues - even if the three above may no longer apply.
HRO inevitably involves a loss of direct control over a number of HR activities. HRO will only succeed if the 'left-behind' organisation within the business is also transformed. Different people with different skills doing different things will be needed to support the outsourced transactional piece, to influence and educate the business and to contribute to corporate strategy.
Finally, the theory of partnership has not necessarily stacked up in practice. According to Xchanging's chief executive of HR services, Hugh Morris,
"It's all about trying to avoid having one year of love followed by four years of trench warfare.
The final risk, said McEwen, is around systems.

"Essentially, the business needs to decide whether to own its HR IT systems or have them hosted by the outsource provider. However, what happens to them if the agreement breaks down? If they are being kept in-house, can the often enormous costs of replacing piecemeal legacy systems with an HR ERP-type system be justified?"
HR professionals remain highly circumspect of the capacity of governance to maintain the close working relationships required within a BTO project.
3.7
HRO risks and the HR director

HR outsourcing requires HR directors to understand and manage risks that are critical to the organisation in general, and especially for
McEwen notes that such risks are by no means insurmountable, given the right approach, controls and safeguards. He identified five key areas on which an HR director should focus during the deal negotiations and after HRO transition and operation.
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Measurement and metrics: for service levels with 'fit for purpose' metrics. Service management organisation: actively and continuously managing the relationship and contract with the provider. Behavioural change: recognising the scale of change required in employee behaviour for the HRO benefits to be realised - supported by communication and training programmes. Remain realistic: do not make overblown estimates for HRO - and don't promise anything that you cannot deliver.
McEwen's final area of focus is to understand that HRO is a major change both for HR and the organisation as a whole. Even if the drive for outsourcing is primarily initiated by the CEO, the HR director needs to stay actively involved, demonstrating ownership and leadership throughout. Don't let delegation turn into abdication, he cautioned. McEwen, N - The Fab Five HRO Risks and Responses: HRO Europe Magazine, May 2005.
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4 Setting the business case for HRO

In this section, we examine what needs to be considered to set a business case for HRO. Three themes are discussed - administrative and overhead efficiencies, systems/process effectiveness and an improved strategic focus.
Major cost reductions from vertical (dis)integration through transaction cost economics. This term is used for how the market for business process services effectively drives down the costs of buying, rather than in-house, HR services. The majority of early cost savings are immediately realised through headcount reduction and the transfer of remaining employees from the client organisation to the provider. A combination of process re-engineering and advanced IT systems enable significant economies of scale in the operation and delivery of HR services. Greater financial control is also gained - as a significant part of HR expenditure shifts from flexible to variable costs. The increased costs associated with the 'waxing' (hiring additional staff) and 'waning' (releasing excess staff) of resourcing, are also transferred to the provider.
4.1
Importance of the business case

HRO providers have focused on this order of selling points for the business case.
Improved strategic focus from HR on business goals. Increased effectiveness of HR through operational improvements. Increased efficiency of HR with estimated cost savings of up to 50%. Potentially, the role of HRO in transforming the performance of the wider business - see 3.5 above.
For reasons that are not entirely clear, discussion over these attributes often takes place in reverse - with costs to the fore. One respondent, who wished to remain anonymous, neatly summed up this peculiarity of the HRO industry.
"I saw some research recently that had 'reduced costs' down at third or fourth place. That's rubbish. It's always at the top of the list. If anybody tells you differently, they're not telling you the real driver behind their decision to outsource."
Secondly, where HRO differs from conventional business process re-engineering is in the
transfer of control to the vendor for the management of HR as well as its execution. As
Jim Champy, co-author of Re-engineering the Corporation puts it: "Outsourcing is more than throwing work over a wall". Consequently:
major efficiencies can occur from the management of HRO operations and performance, a combination of which is estimated to be in the region of 90% of total HR costs such efficiencies occur when the HRO provider combines standardisation and business transaction prices through one-to-many and many-to-many economies of scale, brought about by the dynamics of the HRO market for services.
4.2
Increased efficiencies within HR

The efficiency gains associated with HRO can be impressive - but how realistic they are is a matter of some debate, to which we shall return to below. There are three main ways to deliver such efficiencies. First is the separation of HR administration from its associated management and handing over these activities to a third party. This stems from the 'make or buy' decision applied by Coase in the 1930s - not just to inputs into final products but also to processes in corporate functions. The benefits include the following.
Thirdly, good governance of HRO projects. This is described by Linda Cohen and Allie Young in Multisourcing as
'the assignment of rights and responsibilities for all decisions relating to the use and management of internally and externally provided resources and services, enables enhanced focus on the costs of services'.
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Efficiency and effectiveness

"It's no small task taking out cost. That, in itself, should allow the residual HR function to claim some form of victory in the unrelenting pressure of minimising the organisation's cost base. As long as an HRO provider has done their job, that is all you can reasonably expect. By doing their job, I mean examining discombobulated HR processes and introducing some rigour and discipline, scaling them up and applying technology so they can be delivered efficiently and effectively. "HRO suppliers can then reveal what they have achieved and the ongoing unit costs to their clients while, at the same time, providing them with the ability to make their HR costs more variable. "So what is the internal HR function doing? It's developing policy, aligning HR initiatives with business priorities, helping managers identify and develop talent. There is evidence that internal HR has improved, but I still see examples of it not adopting the same commercial rigour as HRO providers." Nick Starritt, Managing Director, Sirota Consulting,
Europe, reflecting on the original BP/Exult HRO deal - he was Group VP of BPs Global Human Resources function at the time.
4.3
Increased HR effectiveness
HRO providers readily point to their capability for transforming the operational effectiveness of clients' HR systems, as well as reducing their costs. Indeed, many providers see effectiveness and efficiency as two sides of the same transformational coin. A number of operational improvements can be derived from HRO. First, HR functions and systems evolve over time for increased effectiveness. With evolution comes increased demands, leading to these possibilities from HRO.
Not all HR functions have the requisite skills for their organisation's needs. Using HRO is a way of sourcing scarce skills - the almost universal outsourcing in the US of 401(k) retirement plans is an example. Similarly, not all HR functions and their organisations are either capable of, or willing to meet the costs of, sustaining the technological architectures required for HR administration, such as SAP, ERP, etc. For example, the HRO deal between BAE Systems and Xchanging involved the provider investing 100 million in the client's technology platforms to handle new HR systems. Partnering with HRO providers enables clients to source the latest IT software packages and transfer their costs to providers who, in turn, can deliver these packages cheaper than in-house rates.
Suffice to say that the governance of HRO projects has laid the foundations for service level agreements. Through these, the costs of HR processes become transparent and form targets in contractual agreements. Fourthly, reductions can be realised from the people costs of HR activities - and in streamlining processes such as recruitment, payroll, training and so on. The main reasons for cost reductions here include the following.
Being able to control people costs gains HR respect and credibility among senior executives and reinforces the legitimacy of HR's seat at the table. Organisations going through mergers and acquisitions and other forms of organic growth continually need to centralise and re-integrate, through their HRO provider, newly-acquired HR functions and systems - costs are reduced by eliminating duplication. Operating in global labour markets requires ongoing evaluation of legislation concerning international employment, usually provided by legal teams - it is now a technical service supplied by many HRO specialists.
Secondly, as HR has evolved, so too has the demand for specialised expertise. As one respondent in a separate survey put it:
"You outsource when someone else can do it better than you, at less cost".14
There is a balance to be made between deciding which expertise to retain and invest in, against whether it should be sourced externally. Such decisions are guided by the following.
HR is becoming an increasingly complex and technical profession requiring specific expertise - as in legal matters, pensions and benefits, etc. Many HRO providers specialise in such advice. Much of the expertise once located in HR has been
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lost, primarily through downsizing in the 1990s. HRO represents a way of buying back - and keeping up with - this expertise, at minimal cost. Organisations may prefer to hire the services of HRO specialists on an intermittent basis when demand arises - therefore minimising expensive HR recruitment costs. Third party providers are arguably more objective than internal staff when conducting, for example, senior management evaluations.
4.4
Improved strategic focus from HR

It is one of HRO's paradoxes that where the greatest value is seen to lie, the least evidence is available to show it. While the business case for the strategic contribution made by HRO is compelling in narrative form, material evidence is less forthcoming. This point was not lost on one global HR director who wished to remain anonymous.
"What [our HRO providers] don't do is tell you what the key strategic deliverables to the business are. They do it, in part, by freeing-up resources to give you time to play with more sophisticated stuff. They take care of the bottom half much more efficiently. It's about upskilling your HR function and creating a vision about what you want to do."
Thirdly, time pressures are reduced. HRO provides a number of choices, including the following.
Recruitment can be of particular benefit as HR directors often find the demand for new recruits outstrips the time available to recruit them - with HR's operational capacity, therefore, being stretched. Training is another example - providers can supply more customised services which may be delivered more quickly. Extreme demands for HR services can place considerable pressures on HR functions - HRO offers a viable alternative, as peak demand can be handled more effectively.
The arguments put forward by providers for improved strategic focus are not helped by the complexity of HRO solutions, which require new thinking about the concept, formulation and delivery of HR services. Also, innovations in financial accounting can be used for projected cost reductions and added value from operational synergies. A major claim is HRO's capacity to improve the
Fourthly, vendors not only improve efficiencies but can also deliver enhanced service because they specialise in different activities.
Aligning service requirements with specialist providers improves efficiency and also customer satisfaction. Many HRO providers can deliver world class service in niche areas that significantly improves HR service administration - although the potential consequences of reduced service quality through HRO should be borne in mind.
strategic contribution of HR in relation to improved business performance. HRO is either: a reflection of HR achieving influence in the boardroom by shifting its administrative and contingent management roles to act in a more consultative capacity - see the box below or, conversely, HR is regarded as a drain on valuable
HR: not at the boardroom table, but in the meeting

"The HR community in Shell is facing a debate that we can't sit at the table. Our first global business was in chemicals and HR was on the executive team making capital and people decisions. Each of our executive teams in the global business has HR representation. And at board level - our five senior people - HR attends the meetings but is not formally on the board. It's a technical rather than practical issue that the HR director of Shell is in all the meetings. It's not the same in other companies where they decide the HR function isn't core, and that they should outsource HR, finance and procurement functions. It's a philosophical decision made by CEOs about what is core to their business. Lee Patterson, Global HR Strategy, Shell
Fifthly, HRO providers can effectively act as agents in negotiations on behalf of their clients the delicate negotiations involved in executive level search, for example. The final operational benefit of HRO is a potential reduction in the costs of liability and risk. For example, capitalising on the shift to providers of liabilities behind the complex issues of international legislation concerning employment across multiple global locations.
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Business reality for HR

"When I hear my ex-HR colleagues talking about the H Promised Land or Nirvana of being held in high esteem, having a seat at the board table and being strategic, I point out that I don't deny that being strategic is of value. But I have yet to experience line management as always being strategic. Real life in business is a mixture of the prosaic and mundane activities - which HR would call administration - with those more exciting, such as creating strategy and helping a business expand and grow its activities." Nick
Starritt, Managing Director, Sirota Consulting, Europe, reflecting on the original BP/Exult HRO deal - he was Group VP of BPs Global Human Resources function at the time.
A further problem is the lack of suitable evidence to indicate that HRO can impact on business performance - partly because of the difficulty HR has in assuming a strategic role after implementing HRO, unless it already has this role. According to Luis Rojas of Standard Chartered Bank, HR plays, or should play, a fundamental role in helping the organisation achieve its mission.
"I faced these issues when I announced I was moving into HR. 'Luis, what are you doing? Have you lost your marbles, going into HR?' My response was, 'I'm moving into the most important function of the bank', and they all laughed. For me it's very simple. What drives business performance? It's all about people, right? And who's focused on people? HR! The challenge is finding the linkage [between HRM and performance] and for this you need to move to the next level to understand what's going on."
financial resources - no longer does it represent a necessary evil, but a collection of business processes that need to be outsourced to cheaper alternatives.
Many executives outside HR are between these two sides of the debate. Either way, HRO is the beneficiary, acquiring many back office transactional processes as well as more strategic processes further up the HR value curve. Part of the problem relating to the strategic contribution of HRO lies in establishing what it is after reducing the excesses of administration and transactions. What value adding work remains for HR to focus on? Providers and HR practitioners suggest these areas.
An enhanced strategic focus will help HR better align its function to business strategy - talent and its supporting architecture, for example. Such focus introduces a more sophisticated approach to HR in leveraging third party capabilities to improve operational efficiencies - that may drive both business and revenue performance. HR executives are released from onerous management responsibilities to provide business solutions for employee and customer problems. High-performing organisations routinely have a disproportionate strategic emphasis on what they do best - their core competencies - and outsource less strategic, non-core or 'no-longer core' functions. HR's perceived administrative role increases the likelihood of services being outsourced, which explains why HRO, as a $68 billion industry, is now the largest sub-section of the global services market outside IT outsourcing.
Eric Lesser, associate partner with the IBM Institute for Business Value, takes this argument further. He alludes to the capacity of HR outsourcing not just to transform itself and its operating model, but to transform the business model too.
"It's very much a strategic alliance in which the destiny of the business and HR are intertwined. This involves working together with a provider to find the win-win opportunities for the business. It involves rethinking the business model and how, through HR's transformation, you can change it."
An underperforming HR function or unfocused business strategy?

Research from Accenture in 2004 revealed that 70% of chief executives agreed HR was 'very critical' to corporate strategy. A research project from McKinsey in 2005 found only 1:10 executives worldwide felt HR clearly understood their business strategy. The study suggested that this might explain why only 50% of all HR directors view their functions as critical to the success of the business. When questioned by Accenture, just 1:10 chief executives and chief operating officers were satisfied with the performance of their HR function. HR may be seen as strategically important - but the function is failing to live up to performance expectations.
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How HR can be strategic

"At last there is the recognition that HR needs data to fulfil its expressed aspiration to be more strategic. I've sat round many boardroom tables and I have never been at a strategy session that doesn't begin with context and data. This doesn't mean executives don't have opinions they have strong opinions! But data is the basis on which businesses make decisions. If HR wants to be taken seriously in terms of helping an organisation derive competitive advantage, it needs data to show when and where it can intervene in the matter of talent. "Without data, all you have is opinion. Unless you have data to support your opinion, you will lose. Having effective administration from which to derive data is no less important to the HR function as it is to the accounting function. "If you can create a strong people database with smooth administrative systems to benefit the consumers, you will probably derive insights into important people themes. How many are we recruiting? How many are we losing? What's the segmentation of our loss? What's the cost of our training initiatives? How does career development work? What are the cover ratios for the top jobs in our organisation?' Nick Starritt, Managing Director, Sirota
Consulting, Europe, reflecting on the original BP/Exult HRO deal - he was Group VP of BPs Global Human Resources function at the time.
This fit between organisational strategy and insourcing - or the internal business case represents a major challenge to the HRO industry, a point not lost on Stephen Randall at Hewitt.
The balance is shifting. There are more people reaching out and asking us to talk to them about HRO. There are some companies who are genuinely saying that they need to find a better way of doing this, therefore we need to look at outsourcing as a method. Our biggest competitor is the internal business case. We are seeing this more and more. It's not so much us versus IBM or Accenture, but it's more us versus the internal business case. In searching for a more sensible way of doing things organisations look at the internal model as well as the outsourcing model, which is the right thing to do. If you've got the time, talent and money to do this, by all means do it yourself. But most organisations don't have the time, talent or money. The internal case inevitably takes longer and often runs out of steam.
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5 HRO deals: making the decision

This section examines the decision-making process for HRO. The focus is on strategic questions, a typology of HR transformation, involving stakeholders and some of the financial decisions to be made.
Get advice or pay later

We can reach one quick conclusion on the HRO decision-making process. Without a well-articulated plan, m a a sensible timescale and plenty of advice, the likelihood of failure is almost as high as the unnecessary costs incurred when ploughing through the problems that should have been dealt with before the HRO contract was put out to market, let alone signed.
5.1
Decision-making context
Making the decision whether to outsource or not and who to partner with, is plagued at many stages with possible pitfalls and hazards.
There are masses of information on HRO available from different HR analysts - supplemented by data amounting almost to propaganda from the providers themselves. The situation is further complicated by the growing outsourcing adviser and provider markets. There are many HRO models are on offer. What seem like small differences at the outset may, over the life of a contract, equate to millions of dollars.
companies put together contracts:

"The potential for Chinese whispers, gossip and rumour in the HRO industry is unbelievable. It can be attributed to the secrecy and complete lack of transparency surrounding deals."
Of course, the industry is replete with advice on the 'key decision steps', 'critical pathways' or 'maxims' that 'must' be taken into account if HRO deals are to succeed. Why, then, would HR directors or their CEOs
choose to initiate a major change programme that has the potential to touch or disturb every employee inside the organisation - yet only reduce overall
For HR professionals and CEOs, the choice is mind-boggling. And, this is not all. Leaders face a barrage of marketing and branding campaigns from the 'Big Six' HRO players - its difficult to walk through an airport without seeing a well-known golfer urging you to improve your swing to deliver high performance for your organisation! Such marketing hits leaders where it hurts - their egos. Burning platforms and the compulsion to raise performance quickly or stand down, are well understood, if unspoken, phenomena in leadership circles. The window to deliver on high expectations appears to be dramatically shrinking in time. It is difficult to over-state how tough it is staying at the boardroom table having once reached it. For HR, the challenges appear positively Herculean. The stakes are high - and errors are costly. And, the case for HRO is not helped by the lack of an industry standard as to how a major HRO deal is constructed. In the words of one HRO adviser helping
HRO: the last turkey in the strategy shop?

"I didn't receive criticism in my last outsourcing contract from anyone in HR generally, only from people in the business. I don't want to go to shared services, I want control over it. Then HR professionals started going to their line boss. There was a huge MD lobby because people thought they were under threat. They thought I was going to take away their empires, so they began fighting back. I think many people like absolute control, yet in my view, there is probably more control with outsourcing than with your own people because it's a contractual relationship. "But, many equate ownership with control. It's still seen as a brave move mainly because MDs in business units don't want to lose those people either. We've been fighting to do this for two years and they've [the board] finally come along and said, 'we think this is the only route'. So it is the last turkey in the strategy shop. And the driver is that our technology will be obsolete in 18 months." Tony McCarthy, Group HR Director, Royal Mail
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operating costs by around less than half of one per cent? involve themselves in a process shrouded in mystery, without a definitive standard of what an HRO contract should look like?
Not the budget you manage, but the budget you influence
"You have to get the basics right. Take financial management and discipline. You should not discuss budgets without knowing the numbers - that's basic. But you have to have it so you can have that different conversation. If you don't, you're going to be bogged down with questions on your budget, about your forecast and you don't want to do that. You want to demonstrate that you can manage your budget and have a good handle on driving value. "If you think about the budget we have, it's tiny in comparison to the budget that we influence around people and other indirect costs. We don't focus on the budget we control - but on the rest that we influence through adding value. Once you have that, then you start changing the conversations." Luis Rojas, COO HR, Standard
Chartered Bank
The HRO industry is quick to point to the need for every deal to be unique and to reflect client requirements. This has the corollary of creating an image of HRO deals having to be tailormade. No amount of preparation, however extensive, can safeguard outsourcing deals completely. HRO is no different from any other business solution sourced with a third party. Flexibility is not an option, but a given. Below are some experiences of those who have taken this route.
5.2
Thinking strategically
"Being strategic and able to lead, rather than being tactical and following, is a big ask - and is not where most people in HR come from. You either come up to the plate or there's no reason to be there." Nigel
Paine, HRD Director, BBC.
critical. See the typology overleaf which shows how transformation means different things to different businesses. Crucial here is knowing what kind of HR transformation the business is seeking. According to Deborah Kops, former global head of transformation for Deutsche Bank,
"The main reason why organisations don't get transformation is because they don't know what to ask for in the first place."
According to Accenture's Jane Linder,

"transformational outsourcing initiatives rarely fail - but when they do, they fail for errors of strategy, not execution".
Peter Clarke at Hewitt believes there are two areas of transformation.

One is the transformation of transactional services that are defined for the outsourcer to provide. This focuses on moving often disparate, disconnected, unconsolidated processes into an integrated selfservice environment - with access to on-line policies, employee data and workforce management information. "The second is focused on how the outsourced HR service is used as an enabler for transforming the retained HR organisation - and the value it provides to the business by supporting the overall business strategy. "HR must direct its retained organisation to maximise the value of their investment in outsourcing. This involves focusing them on what they are doing for the company - rather than day-to-day administration.
This is not conveniently side-stepping the responsibility for HRO project failure. Linder argues that leaders need to construct a business model - their core logic for creating value - for HR to demonstrate how HRO will transform the function so it can influence business performance. All too often, HR focuses on the budget it manages and ignores those parts of the business it can dramatically influence. See the box above on this issue. Cost cutting is not a 'strategy' - it is a by-product of HRO deals. But, savings obtained from streamlining people and processes can be reinvested in the business to drive over-arching business models. How the HR function is to be transformed is also
Here, according to Clarke, HR outsourcing
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releases more value from the HR organisation by

freeing them from administrative tasks using business intelligence and metrics to understand more about their workforce assessing what is causing workforce issues setting strategies and policies to optimise workforce performance.
Enhanced
For organisations in accelerated states of growth requiring

more sophisticated HR systems and deeper capabilities to meet diversifying demands on HR an emphasis on cost-minimisation a step-change in HR services with enhanced valueadding processes such as recruitment, training and development, etc.
Four types of transformation

Here again the business model of the organisation is of crucial importance. There are four broad types of HR transformation from HRO.
1 Embryonic
This type of provision is a major HRO growth area in HR services for SMEs.
3 Standardised
Often associated with start-ups and having these features.

Off-the-shelf HR architectures to cope with the increasing demands of their growing workforce. New HR systems which are primarily transactional in nature - payroll, pensions administration, etc.
For under-performing organisations in need of re-energising. HRO has a key role in revitalising people, processes and systems. The emphasis is on
streamlining and realigning HR systems - the socalled 'low-hanging fruit' simultaneously conveying the need for culture change and continuous improvement.
The costs of acquiring such systems are minimised by paying a 'price per drink' rate and by keeping the costs of capability and technology to a minimum through leveraging the capacity of the HRO provider's systems, people and expertise.
In such situations, HRO helps improve levels of information and data analytics for decisionmaking.
4 Reflexive
This approach involves a radical re-engineering
HR Transformation - A Typology
Client Strategy Start-ups u Business Impetus Growth requires more developed HR transactional architecture HR Services Required New HR systems to provide speed, volume and cost-effective roll out for e new capabilities Deeper and wider HR capabilities with continued downward pressure on costs Major impetus on reducing waste, providing improved HR architecture and systems World class capability and execution, matched by speed, volume and efficiency with clear HR value proposition HRO Strategy Embryonic
Growth
More sophisticated HR to meet employee requirements
Enhanced
Revitalise
Re-vitalise flagging HR community v and reduce replication and costs
Standardised
Transformation
Taking HR to next stage to deliver people strategy to support business strategy and add value
Reflexive
Source: Anthony Hesketh
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of critical HR processes and service lines to develop a 'transformed mindset' and focus on HR's value proposition for the business. This is described further in 7.5 below. HRO at a reflexive level occurs through
partnering with a provider of world class capabilities, technology and expertise in HR evidence-based decision-making that enables HR to assume a strategic role transformed HR systems facilitate the delivery of enterprise outcomes the possibility of taking shared services to the next step of outsourcing.
case for the HRO intervention, making clear any cost-savings or windfalls expected - and the anticipated avenues for re-investment within HR and/or across the business. The performance case: keep in mind that HR's future performance will be more important than low HR function headcounts or lower costs.
5.3
Identify critical stakeholders

Stakeholders must be considered. These may include
customers employees
In summary, these four types of transformation have fluid boundaries and are not mutually independent - much will depend on the performance of different aspects of the HR system at which HRO is targeted. Indeed, it is not uncommon for organisations to partner with two third party providers. One may deliver more standardisation of processes, with a second providing more reflexive and value adding HR services.
line managers senior management and possibly others - suppliers, for example.
Sourcing their views will help your organisation establish just how good, or otherwise, the HR function is. For many, HRO effectively acts as a truth serum for establishing the benchmark performance or current 'as is' state of HR. The support of stakeholders should not be taken for granted. For example, sponsorship from senior executives is essential for HRO success. Yet, research from the Economist Intelligence Unit suggests that an overwhelming majority of global CEOs think their HR functions are underperforming. This may be construed as evidence for major change interventions. Nevertheless, this source also noted that only 16% of over 500 CEOs felt HR was critical to realising their corporate strategy in the next year - compared to 56% for sales and marketing.15 Employees, too, are key stakeholders in success, as are line managers. An experienced HRO adviser commented:
"Executives are very enthusiastic about the people [stakeholder] issues in HRO strategies until it gets closer to the announcement - and then they begin to soften the strategy."
Managing expectations
A key to developing any HRO strategy or business model is to manage expectations. It is not uncommon to hear of executives keen to ensure a smooth ride for their HRO plans who overstate cost savings or value added. Information vacuums are filled by others' expectations - and thus render a successful HRO strategy delivery a 'failure' because of stakeholders' inflated expectations. Crucial here are four considerations.
HRO objectives: clearly state these and how they are to be achieved and measured. There should be no 'sacred cows'. All aspects of HR should be included until reasons emerge to remove them from the list to outsource. Delivery proposition: identify the critical capabilities required to achieve the HRO strategy and meet stakeholder expectations - while simultaneously rolling out services consistently and profitably. The business case: tightly quantify the business
The message then, is as follows, for stakeholder management.
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Clearly set out your strategy and stick to it. Define the role each stakeholder will play, especially at the top. Think about the HRO implications for all stakeholders. Be transparent about the possible benefits and wider implications of the HRO deal for all stakeholders. Seek the buy-in and input to the HRO strategy from all stakeholders. Roadshows and focus groups are useful approaches to consider.
External benchmarking
If establishing your 'as is' costs is your compass point, externally benchmarking them against other organisations is where 'True North' lies. Without this yardstick, it is virtually impossible to accurately decide whether your current services - be they internal or external - are doing well or poorly.
3 Competitive advantage
Finally, it is crucial to set the key performance indicators that will measure HRO providers against the current in-house HR service offering. Other methods of assessment can be used activity value analysis and activity based costing to map and evaluate different process costs, for example.
A debate in boardrooms and academic circles concerns the competitive advantage lost or gained through HRO. This is effectively the core versus non-core issue - or, as HR is now described in less favourable circles, 'no longer core' debate. Two contrasting points are important.
Outsourcing HR is seen to represent a loss of competitive advantage through investment in largely transactional administration - rather than focusing on those aspects of HR that will deliver such advantage. Talent management and development is an example. Outsourcing is seen as a better deployment of resources. If an HR system is not genuinely world class, an organisation is giving up competitive edge. By outsourcing HR to the best in the world, its value is being increased - while at the same time costs are reduced. 4 Making sense of choices
5.4
Insource or outsource?
As discussed in Section 3, the choice between insourcing and outsourcing can be an emotive one. The decision-making process over whether to keep HR 'captive' - in-house - or outsource some or all HR services requires careful thought. Gartner recommends these four decision stages.16
1 'As is' services
Establishing a baseline of service criteria is essential to guide future choices and decisions. This is not easy - arguably, it is the most difficult and time-consuming part of the decision process. You should evaluate:
Service levels: existing level, service level needed and what the business expects from insourcing and outsourcing. Service cost: 'as is' costs need mapping against expected costs, including any future costs of human capital. Human capital assets: compiling an inventory of the competencies of HR employees. You will need to keep them informed as to why the inventory is taking place, how it will be used and the timelines for decisions. Other assets: these include both physical assets equipment, leases, software licences, etc - and knowledge assets, such as process or industry best practices.
HRO has evolved. When once a simple choice would be made between retaining HR services internally or outsourcing them, different HRO demands, capabilities and models have extended those choices:
Insourcing - internally delivered: this is the classic inhouse HR delivery model without attempts to standardise service delivery across different business units or regions. Insourcing - shared services: an internally-owned company with a different P&L centre offering standardised and centralised HR services to the whole organisation through one or several service centres. Outsourcing - full service: all function lines across HR are offered, with examples being the BAE Systems/Xchanging and BP/Exult/Hewitt deals. There will be a trade-off between economy of scale
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and less complex management versus the scarcity of HRO providers excelling in every aspect of HR and the increased emphasis upon governance. Outsourcing - prime contractor: this model is now widespread across ITO and is an increasing feature of BPO deals in financial services. The option has one prime contractor who has relationships with multiple providers to deliver different HR services. A variation is when the purchasing function negotiates itself with all providers on an individual basis - this gives more control but adds complexity and cost to HRO deals. Outsourcing - joint venture: the creation by two or more partners of a separate business entity by combining their distinctive capabilities. An example is the vertical expertise of Xchanging and BAE Systems' leverage in technology to create Togethr. The e-Peopleserve venture between BT and Accenture is another example.
The choice process: costs involved in arriving at a decision can be prohibitive in opportunity costs alone. Also factored into this should be the costs of external advisers - and, it does not pay to cut corners on advice. Transition costs: these can drive up the costs of contracts and include service interruptions and decreases in quality resulting in underperformance, training and knowledge transfer. Transfer costs: costs are also attached to physical assets (property, leases, etc), people - movements to new centres, for example - or the transfer of contractual arrangements to new providers.
This issue is summarised by a senior executive in shared services at a bank.

"The fundamental issue around cost basing HRO is that if you do a good job of creating shared services, it is hard. Simplistically, if you're moving from an old model [standard internally-owned HR provision] to a new [HRO] model, you can probably take out about 40% of existing costs. With our shared services, we achieved 35%. With VAT, HRO providers have to improve our cost base by 17.5% just to maintain the status quo. Banks have a different VAT rating. Any VAT we pay on services is a net cost which cannot be claimed back. "So if I transferred to a provider my asset and it had a cost base of 10 million and they did nothing to it simply charged it back to me at 10 million - it would cost me 11.75 million. Effectively, the HR service comes with a 17.5% premium. The outsourcer has to be 17.5% better just to stand still. He then has to make a return on capital and show me some savings."
5.5
Ensuring a return on investment

As regards the different costs that will impact on HRO decisions, one respondent described this scenario.
"Before going to the board I went to see the group finance director, who said, 'Give me the summary'. I responded, 'The bottom line is that if it all goes well I can save you 3 million a year in net present value. If it all goes wrong, it will cost 3 million a year more!' In a bank with a 2 billion cost base, it's really not worth the management time and trouble. We run the risk of entering into a partnership with somebody who may actually increase rather than decrease the time spent on managing the function with the provider."
Weighing up the 'make or buy' decision requires careful thought and, as Linda Cohen and Allie Young of Gartner suggest, exact dollar figures are not crucial at this stage. HR directors and colleagues need to consider the following.
Full costs: the dangers here are failing to recognise the requirements of investment, the time involved in standardisation and the additional costs of choices these hidden costs can erode expected cost savings. Governance costs: managing the client-provider relationship drives up costs significantly - this is discussed further in Section 7.
5.6
Financing the deal

In the words of Dick Brown, chief executive at EDS, "If you pay for a Vauxhall, don't expect a Bentley". Too many organisations start with the intention of reducing their costs, and translate downward pressure on finances into their original financing of the HRO proposition. This is dangerous, as cutting corners in the short term almost inevitably leads to additional costs in the mid to long term. A major problem with HR is its lack of expertise in the financials underpinning HRO deals -
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which is one reason why most providers bypass HR in favour of chief executives or finance directors. This is far from satisfactory.
HR professionals must immerse themselves in such financial matters - see the table below for guidance. This will lead to a more informed grasp of the resources required to deliver HRO services and value propositions in relation to the business model. It also raises the credibility of HR directors and colleagues among senior executives.
HRO advisory companies - market share 2005

Advisor TPI Equaterra Everest Towers Perrin Hager Strategic Deloitte Other
Source: TPI (2005) HRO outsourcing engagements
% Market 36 20 20 8 4 4 8
One HR executive in a separate survey noted, "We gain credibility with senior management when we demonstrate we can manage budget and headcount".17 This point was alluded to by more than one of the HR directors we spoke to. Two sets of costs need considering when devising the HRO business case.
Costs of options: publicly-available costs on other contracts are unreliable because they are subject to financial engineering - consider buying-in consulting support at this stage, although this too, needs to be reflected in your calculations. Cash flow and variable costs: HRO offers
particularly flexible options regarding cash flow and variable costs - shifting the costs of obtaining services from fixed to variable, enables organisations to buy more (or fewer) services, if and when required.
All key choices and decisions can be made with support from a specialist HRO advisory firm. The main ones, with their market share, are listed above. They offer four capabilities.
Depth of subject expertise: expertise in outsourcing is a given. Less clear are the HRO credentials of firms. Equaterra, Nelson Hall and TPI all offer extensive experience in HR. The HR Outsourcing Association (HROA) and its sister organisation, the Shared Services and Business Process Outsourcing Association (SBPOA) have extensive experience, data and educational offerings. Experience: not all HRO deals are the same. Consequently, the best choice is an advisory firm with experience of different clients. They should also understand variations between the value strategies and propositions offered by different providers and their outsourcing methods. Deloitte, McKinsey, AT Kearney, Towers Perrin, Watson Wyatt, Accenture and IBM are examples. Research and market data: a major attraction of HRO advisors is their provision of benchmarking services for costs, quality and complexity. Nelson Hall, Gartner, TPI and Equaterra have extensive datasets - as do Hackett and Morgan & Chambers. Global familiarity: advisers should be able to deal with particular geographies and should understand the global nature of HRO, along with its associated management processes. Equaterra, Everest Consulting and TPI are good examples.
Financing the Deal - Business Model Overview

Value Proposition Who are our stakeholders? What do we offer them? How do we reach them? What do they give us in return? Delivery Proposition How do we produce what we sell? How do we meet our stakeholders needs? Financial Proposition How do we get the resources to deliver on our offers? How do we make the most of our financial resources How Do We Make Money? Distinctive revenue implications? Distinctive cost implications? Distinctive tangible/ intangible asset implications? Source: Jane Linder, Outsourcing for Radical Change, p. 90
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6 HRO deals: making the transition

This section discusses handing over single, multiple or all HR processes which, for many, represents their first experience of HRO projects. The success factors, issues and foundation stones of any transition process are covered.
The business world is changing

Capability and capacity have improved but equally, expectations have risen. Why do I say that? The old employment deal has expired and has been replaced by a new deal. The manner in which HR is delivered has changed appreciably as a result of technology - and, to an extent, has become depersonalised. "Middle managers in particular, who have been squeezed and burdened by increasing demands, have less time to spend with their team members to give the kind of coaching and structured feedback they provided previously. Yet increasing demand is an enduring feature of modern life. I think managing and supervising people is one of the most difficult things you can do. It's hard to get managers to maintain focus and concentration on people development when there's a lot of pressure." Nick
Starritt, Managing Director, Sirota Consulting, Europe, reflecting on the original BP/Exult HRO deal - he was Group VP of BPs Global Human Resources function at the time.
6.1
People strategies for HRO

The aim here is simplicity itself, described by Accenture's Jane Linder, as "giving people the means to make their own choices". However, the people issues inside HRO deals are complex - and if the HR function cannot manage its own HRO, the irony will not be lost on senior executives, managers and employees. These considerations should be part of any transition plan.
6.2
View employee anxiety as a given: it is inevitable that some employees will lose their jobs, others will see their work change beyond recognition and some will be relocated. End-users of HR - other employees and their line managers - may experience major changes in their method of working due to structural and process changes in HR. Clear people plans: such anxieties need to be efficiently planned for and dealt with. People will respond to HRO announcements or rumours by asking, "What does this mean for me?" Answers need to be in place. All people implications, such as redundancies, pensions, relocation packages, Transfer of Undertakings Protection of Employment (TUPE) conditions and career progression must be planned carefully before the announcement of an HRO deal.
Managing your HR talent

A crucial decision in any HRO intervention is who goes - be they transferred to the provider, re-deployed or made redundant - and who stays. Choices for the latter are often overlooked. A temptation is to transfer most of those connected with the HR service to be outsourced. But this raises the issue of who will be left behind to manage the interface with the HRO provider? In addition, HR and organisations need to think about these points.
Retain strategic capability: it is not simply a question of having somebody left to handle the provider. The retained team needs to be capable of liaising with, negotiating and managing the HRO in an efficient and added value way - this is not an easy task, even for well-motivated and experienced people. Define your HR staff requirements: those who remain behind should not be the 'chosen few' of senior management. Wider role requirements and criteria should be agreed through a transparent process, including the key competencies needed for the HRO - a particular mindset for, and orientation towards, the new business, service skills and behavioural attributes. Staff will react much better to
Horror stories abound in which employees have been outsourced with just one year to run before triggering their pensions - and companies not being ready with answers as to how such issues should be dealt with. If you drop this ball, employees will not forgive you.
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clearly stated criteria when they are made widely available. Consider these key questions. How many posts can you fill with the people you have? Will they require additional training? What kinds, by whom and at what cost? What is the timescale for selection and induction?
Does the City like outsourcing?

According to a study of the FTSE 100 companies by Morgan & Chambers, a BPO analytical and advisory firm, the City clearly endorses outsourcing announcements. The main conclusions of the study were as follows. Strategic outsourcing positively impacted on share value, with a difference of 5.3% above the individual sector average and 4.9% above the FTSE 100. Some 57% of those companies showed positive impacts, 38% were negative and the rest (4%) showed no discernable impact. Of those with negative returns, none had a communications plan to tell the market that outsourcing was part of a strategy with set objectives - cost cutting, for example - endorsed and sponsored by the board.
Andrew Kris of the Shared Services and Business Process Outsourcing Association (SBPOA), comments on the issues facing HRO transition.
"Change requires real HR leadership and the ability to implement strategy. It calls for the total support of executive management, employee buy-in, sound technology, solid governance and education. Education? Yes. HR transformation and operating in this new environment demands new skills. A lack of skills in HR is the biggest hurdle to HR transformation and these must be re-learned."
Source: Morgan & Chambers, Outsourcing in the FTSE 100: The Definitive Study: Episode Two: Impact on Financial Performance.
need not always be adversarial - although it often is if unions are invited for discussions at the earliest stage possible. Your community may have more than just a passing interest. Offshoring in particular has become a major issue in the US - attracting the attention of politicians and the media in particular. Plans need to be in place to announce HRO arrangements and to cover issues regarding the offshoring of any related posts. Investors also require clear messages of the strategic intent of HRO deals - and particularly the financial implications. While there is evidence to suggest stock markets like outsourcing - see the box above it is also often a prescription offered by the business media for ailing companies. Note that customers react badly to negative messages of companies they do business with.
6.3
Transparency for stakeholders

Communication should be both relevant and accurate. This may sound obvious, but it is not uncommon for executives to avoid sensitive issues or to be conservative with the truth at key stages. It is better to deal with difficult issues at the outset to avoid uncomfortable situations that may damage the HRO project. Consider buying advice from experts. Think carefully about the content of messages and how they will be delivered and received. Across the organisation, champion the business case by explaining why HRO is being deployed and what it means for the business, both in the short and mid-term. Apart from senior executives, managers, employees and representative committees as internal stakeholders, external stakeholders should be considered.
As noted above, unions need to be involved in negotiations surrounding TUPE issues. This process
6.4
Managing the transition

The launch of an HRO deal is a crucial event and will also be its first activity in the public domain. Many issues need to be prepared for. Here are some to raise with your HRO provider:
Select a project transition team: having already decided who goes where, a team of trusted, experienced and knowledgeable staff needs selecting to liaise with the provider and manage arising issues that typically occur during the transition of HR services. This team should be well-resourced and supported by senior management and key staff
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from the HRO provider. Testing and phasing will be needed to ensure the technology works before roll out of new HR systems. Many HRO providers and advisers recommend transferring old systems and then transforming them - rather than installing new systems immediately. Fix a timescale and stick to it. Training staff: there are many useful forms, including work shadowing and 'buddying' between previously transferred workers and new movers. This helps people to quickly adapt to their roles and understand where the new service - and their own prospects - are heading. End-users also need training support, particularly line managers who will have to use the new systems.
It is worth highlighting the inevitable emotional factors behind staff moves. These require careful management. Marketing literature from some HRO providers hints at how work-life will be better than with their previous employer. Indeed, data are often used to indicate how salaries of transferred staff increase at faster rates than those left behind, especially in public sector organisations were it can be as much as 25%. But a note of caution. Many employees trade-off higher salaries for the job security of the public sector - the very thing they can lose if they transfer to a new employer. Emotions run high during transitions.
Stories of anger, bitterness and frustration. Individuals have to leave geographic areas and see colleagues being made redundant.
They also have to adapt to new working conditions and feed their tacit knowledge into the vendor's systems that have been installed to reduce the consequences of staff having to leave. With HRO, it's emotional!
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7 Managing and measuring HRO performance

This section discusses the issues behind managing and measuring HRO performance. Current and future metrics are described, as is a new model for understanding performance.
Outcomes of HRO 'transformation' have yet to be articulated, let alone delivered. The promise of enterprise-level results can take several years to be realised as performance gains.
7.1
Context of HRO performance

If we don't count something, it gets ignored. If we do count it, it gets perverted. David Boyle, The Tyranny of
Numbers
Added to these points are end-user concerns revealed by Deloitte Consulting's benchmark study of 2005, Calling a Change in the Outsourcing Market: The Reality of the World's Largest Organisations. It analysed so-called 'problem HRO deals' and found that 'customers' in these generally had been poorly serviced. The study raised major questions about how HRO performance can be monitored and managed.
You cannot manage what you cannot measure. To many outside the outsourcing industry looking in, this old McKinsey mantra is alive and well in HRO. Providers and buyers are less convinced, however, as anticipated results are proving elusive. Writing in Harvard Business Review, June 2005, BPO expert, Professor Peter Davenport, predicted a world in which business process standards would dramatically increase the level and breadth of outsourcing and reduce the processes that organisations perform for themselves.
"With objective criteria to evaluate whether a company can save money or get better process performance by outsourcing, it's likely that more firms will take advantage of external capabilities, he said.
7.2
Performance measurement and HRO

Questions need asking to see if current approaches to performance measurement in HRO actually help executives to monitor and manage.
What does good performance look like? At what levels of service and for which stakeholders? Are current HRO metrics adequate measures of providers' actual contribution and performance? Which metrics drive business performance through HRO?
Crucial to Davenport's analysis is the notion of a 'standard' which is

... an agreed way of measuring the minimum benchmark and impact of business processes.
HRO metrics: cause or effect?

At a recent high-llevel meeting in the HRO industry, an HRO adviser presented data to support the claim that world class organisations achieved better business results through HRO - and simultaneously spent less on their HRO contracts. The reasoning supporting this seemed sound to most present. Measured against literally hundreds of metrics, those organisations scoring in the upper quartile of performance and HR service lines were also spending less on their HRO contracts. But is this 'world class performance' the result of HRO? Might it be that such organisations are more likely to run tighter contracts and demand higher performance levels from their vendors - at both the initial contract negotiation and the HRO project going forward - thus driving down project costs?
His thinking is being applied by HRO providers as they seek new levels of accountability and transparency for clients to cut costs and drive improved performance. Yet, as we have noted throughout this report, dissatisfaction with the HRO industry and providers is occurring because performance claims have not been forthcoming - at three levels.
The promise of major cuts in costs of up to 50%.
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Outsourcing Metrics
Transformational (Share Price)
Effectiveness metrics can also be contractually set. An example is building service level increases into SLAs as improvement targets for providers, especially for critical services identified by clients.
However, metrics for transformational outsourcing are far from clear because of its intangible elements. According to Accenture's Jane Linder,
Strategic Governance "when the goal is business transformation, the ultimate metric is how much value is created".
Efficiency (cost reductions)
Effectiveness (SLAs)
Accountability is a key concept in outsourcing metrics, being seen as synonymous with client power. As Xchanging's head of Xcellence, Bryony Moore, revealed.
"We are very much into measurement because, having taken control of the resource away from BAE Systems - the people who undertake the work - we have to give back to the customer another means of control. That means is through data, measurement and performance statistics."
To recap, traditional HRO performance management and measurement focuses on three areas.
Efficiency: represented and measured by cost reductions. Effectiveness: represented by the delivery of services against agreed criteria through service level agreements (SLAs). Transformational: involves deeper change for the organisation, its employees and systems - and at intangible levels.
In addition, the emerging notion of HRO governance pulls together the management of performance, including
decision rights, rules and processes agreed management processes defined with and before providers are engaged.
Note here Moore's distinction between measurement and performance. Transformational outsourcing uses broadlybased metrics for the financial performance of business units, and outcomes are only loosely related to actions. This diminishing level of control was identified by the Deloitte study as a major source of unease among executives. But, this is precisely where new HRO metrics are taking us.
Outcomes, not just processes

Deborah Kops of Deutsche Bank explained the importance of distinguishing between outcomes and process metrics when referring to the key performance management issue for BPO clients.
Inputs focus on efficiency and/or effectiveness and are crucial for managing HRO providers. Outcomes, however, represent something entirely different. See the box overleaf.
7.3
Sample metrics
Different levels and types of metrics are currently used in outsourcing contracts.
Metrics for efficiency seek out economies of scale through a combination of labour arbitrage, process re-engineering, scaling processes on technology systems and headcount reductions. Cost reductions tend to be fixed through contractual obligations with heavy downward pressure - they are thus highly visible and accountable.
Impacts on business performance can be measured through the percentage of customers retained each year, new product sales, profit per customer, market share, and so on.
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Measure outcomes, not just processes

Processes are often measured by metrics which relate in part to efficiency and effectiveness. Examples might include total number of training days, the number of days it takes to resolve a pension query, or the level of accuracy when paying new employees. But it is outcomes that matter, as they are paramount to the successful setting of performance goals. Examples include changes in HR practice, or identifying levels of differentiation in value generated by key HR processes. Processes and outcomes are, in effect, two sides of the same performance management coin. Processes are represented by the measurement of particular service levels, by an HRO provider, at an agreed cost. Outcomes are measured for impacts on the organisation's performance - stages in business change or identifying the key HR practices that demonstrably impact on business performance, for example.
nature to do that. HR needs to do it. It needs to be more assertive about what it can do and how it contributes to the performance of the organisation. "HR is notoriously bad at articulating where it adds value - partly because people in HR have nonnumerical backgrounds. It's not normal to think about cost-benefit analysis. Some decisions are made, which, if a simple cost-benefit analysis had been used, it would have been an easy win. They should look at cost savings and cost benefits. But HR doesn't do it that way. It's more a case of looking at our three-page paper on the subject. It needs to be much more aligned to how the business works."
One possible answer is to pass responsibility to HRO providers for identifying how transformation is to be achieved. Francisco D'Souza, COO of Cognizant Technology Solutions, made exactly this point to Linda Cohen and Allie Young.
"When a client specifies the work, it reduces our ability to bring best practices to bear. If a client lets us determine the best way to do the work for them, that's when we can add most value."
A major challenge for the HRO industry is how outcomes like these, at a business level, can be attributed to HRO. Part of the problem is that too many clients spend too little time thinking about:
what they seek from their HRO provider how they will measure whether the provider delivers what they seek.
Providers can then, more likely, deliver on the promise of reducing HRO costs while releasing clients from management and other activities to spend more time advising the line. The performance issue then becomes one of getting down to what matters. Initially, work on SLAs essentially defines responsibilities, enabling those managing performance to establish what is important. Both buyer and HRO provider can then talk through performance issues. After this comes simplification. As trust and familiarity with processes evolve, key metrics can be agreed, starting with six-to-ten 'super measures' or high level targets which then break down into layers of more specific metrics. It is an iterative and experiential learning process.
It is not enough for potential clients to leave the answers to their advisers or HRO provider. This challenge led Deborah Kops to argue for 'smart clients' or 'good customers'.
"Good [HR] customers make informed decisions and informed decisions ensure delivery performance," she explains.
One experienced HRO respondent, who requested anonymity, commented on HR's capability to be a 'smart client' and organisations' failure to grasp this concept.
"It's not just what you do, it's how you do it. I think those subjective elements are difficult to put into an SLA. Most HR functions could work more effectively. I haven't yet found one I can honestly look at and admire. HR thinks it has to do everything for everybody and we rarely 'push back' - it's not in our
7.4
Tomorrow's HRO metrics

What, then, might tomorrow's HRO metrics look like? What will they seek to capture? How can we be sure of their accuracy?
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HRO versus internal HR: how do the costs stack up?

HRO clearly has a success story in the making. Recent data estimates that the cost of HR per employee in the world's largest organisations is around $1,000 per annum. According to recent data published by the Everest Research Institute, in outsourced HR functions the average cost in 2004 of HR per full time employee (measured across 65 possible transactions) fell by 20% in small enterprises ($1,003 to $740), and by a massive 35% in larger organisations ($673 to $397). How do your HR costs compare?
Causality: that which can be counted does not always count, Einstein taught us. And not everything that counts can be counted. The HRO industry has largely overlooked this important distinction, focusing more on trends rather than results - on what HRO does, rather than on what HRO delivers. Method of measurement: part of the problem lies in the observation made by Galileo when referring to our tendency to look for what we have lost in places where we can see - rather than searching places where the lost item might be. Looking for a bunch of keys under a light is an example. In short, do we have the right metrics with which to measure the performance of HRO?
These were questions raised by respondents clients, providers and advisers - during the research. One thing was clear from their responses. HRO's impact on performance is certainly more complex than the simple input-output models used to explain impacts of outsourcing and HR in the past. A consensus on what new HRO metrics should attempt to measure, and how, has yet to emerge. In what follows, we present a new way of understanding the black box into which inputs are made and outputs are hypothesised. Key to understanding the new HRO metrics is the distinction between transactional and transformational processes. This is an important issue.
The HRO industry's response to these problems has been to largely ignore the issue of articulating transformation. A definition is essential if potential clients are to grasp the nettle of HRO performance.
Transformational impact
What does transformation in practice actually mean?
It lies deep in the experiences of individuals and teams working in HRO projects. It brings together underlying patterns of behaviour and activities.
What does transformation look like? The BT view

"You need to be clear about the benefits to be derived. Is it cost? Is it service? Is it something less tangible such as freeing HR resources to be upgraded? Usually, if administration is outsourced, the resources left behind are not capable of performing the higher functioning role expected of them. Be sure of what you're doing and why you're doing it; make sure it's right and test it." Alex
Wilson, Group HR Director, BT
Transactional service
This is represented primarily by behaviour with clear lines of sight to process outcomes which are highly tangible - and consequently, easily quantifiable. They can be measured with straightforward analytics. Examples might include the number of rings to answer a telephone call, the number of days it takes to resolve a pension query or the number required to fill a vacant post. Costs can easily be attributed to many transactional level services. This is the bread and butter of SLAs. Two significant measurement problems face the HRO industry and its providers.
What does transformation look like? The CSC view

"Transformation is usually associated with the technical journey CSC has to fulfil - what is the Target Technical Solution we have committed to? When we take on an account, we go through a short transition process making sure payroll is in order and setting up service level measurements, etc. Then we move on to what our internal people call transformation - but what I call the implementation of our Target Technical Solution. We are committed to, and contracted to, client-side s transformation as well." Guy Haines, CEO, EMEA, CSC
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Ultimately, it shapes the mindsets and cultures of those who deliver services.
demands in the line. A lack of proactivity was lamented - and was seen more widely as a major developmental complication facing HRO and HR.
3 Enhanced capability
Influencing these represents both the challenge and attraction of HRO for two executives who have led outsourcing projects. See the box on the previous page. Not everybody is convinced, however. As one leading HR director active in the HRO industry suggested, when asked to comment on the claims of transformation made by the HRO industry,
"They're all trying to sell something and you have to have a sense of reality on it!"
This is the deepening (knowledge) and widening (expansion) of capability in HR. A particular emphasis is on aligning capability with new HR service lines and the delivery requirements that new systems and operational practices require. But the question still remains as to how HRO enables such transformation to take place. To answer this, we need a new way of explaining the interplay between HRO and organisations' HR systems.
Interpretations of transformation
The reality is that transformation means different things to different people. During the research, at least three interpretations of transformation were voiced.
1 Standardisation and control
7.5
Towards reflexive performance

Reflexive performance is a way of thinking about how we interpret the relationships, linkages and interactions between HR interventions (activities, processes, systems), and outcomes. These are the results of reflexive performance whether measured by metrics, financials or other forms such as engagement. See the Reflexive HRO model opposite. As much of what HR does cannot easily be measured, the key word in reflexive thinking is 'interpretation'. We have to interpret what we think the impacts of HR, and HRO, might be.
How might we define and then measure transformed service, people or processes? We have data from measuring efficiency and effectiveness, but what do HRO providers and their clients do to achieve such results?
This involves dramatically reducing costs and, consequently, improving the internal standing of HR at board level - along with standardising HR processes/systems and freeing retained HR staff to focus more on strategic activities. The challenges here lie in establishing what retained HR seeks to achieve with its new strategic agenda. This is a challenge not just for HRO, but also for HR itself.
2 Commercial consciousness
One HR director stated, somewhat facetiously, that bringing in outside providers "raises significantly the gene pool in HR". Others referred to it as introducing a more entrepreneurial spirit into the HR function, listening more closely to its customers, and responding to business and operational
"You want to lock in an annual reduction in operating costs. You want to lower the time overhead of shared services in terms of HR distraction. The challenge is to avoid the future investment to keep the service improving. These were our key drivers: get the cost reductions down, have a service that wasn't continually on everybody's agenda and avoid spending more money." John Quinn, Ministry of Defence, on his previous organisation.
We have already defined three points of the diamond in the model. To summarise.
Business value creation: the top-level enterprise performance - as well as share price, other financial proxies may be used at business unit or even team level. Efficiency: the cost reductions associated with streamlining HR - improved services, headcount reductions, etc.
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Reflexive HRO: A Model

Business Value Creation (Share Price) Reflexive Architecture
Reflexive systems
Reflexive systems capture the work and orientations of individuals engaged in actual HR activities. They are reflexive because they cannot simply be executed. They are enacted, which involves interpreting how best to perform them - how to provide assessment feedback or the programming design of an HR portal, for example. HR processes for service delivery are based in open systems - that is, they can influence other processes and people and, in turn, be influenced by them. For example, a 'people portal' may be easy to use by one employee or with difficulty by another. See the box below for a systems example. In addition:
Systems combine activities - other HR tasks, processes, structures, etc - which in turn are shaped by other combinations such as rules, resources, IT software and so on. Reflexive systems act transfactually - that is, sometimes their impact is present and active. At other times, certain attributes - knowledge, for example - is present but inactive. This distinction is crucial in understanding how different combinations interacting in reflexive systems may or may not 'enable' - as opposed to 'cause' - particular outcomes. Certain HRO interventions work well in some places and not in others because of the different actors involved, the situations or structures in which they find themselves, and the nature of the combinations in play. Reflexive systems can, in part, be measured for both cost reductions and SLA outcomes. To understand how such outcomes are generated requires deeper
Transactional
Tangible and Operational Causal
Efficiency (Cost Reductions)
Enabling
Effectiveness (SLA Delivery)
Transformational
Intangible and Systemic
Reflexive System
Reflexive Performance Reflexive Transformation (Value Adding)
Source: Adapted from Anthony Hesketh (2005) Adding Value Beyond Measure (Warwick: AGR) Effectiveness: agreed SLA outcomes - providing three qualified interview candidates for each opening, processing invoices within 72 hours of receipt, etc.
These three points are standard for the industry. The challenge lies in understanding how HRO transforms the HR function's ability to add value to the wider business activities - that is, the fourth point of the diamond, reflexive transformation. Three features of the model help us grasp such a contribution from HRO:
Reflexive systems: actual HR activities and processes - what gets done. Reflexive architecture: People and methodologies to execute HR processes - how HR gets done. Reflexive performance: moving beyond efficiencies and effectiveness to understand and attribute linkages for how HR systems and architectures impact on performance at organisational, people and process levels.
Reflexive systems: four boxes

According to John Quinn of the Ministry of Defence, HR process transformation equates to four boxes - and all four have to be right. Shared services or outsourcing with the right technology. High level strategy team for direction and strategy. Business partners to drive the delivery of strategy. Managing employees effectively at line and work area levels.
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level reflexivity (interpretation, understanding and expertise) of the HR processes, management tools and technology used to enable their achievement, and the responses of those employed. This is not a straightforward task. Reflexive HRO is not a 'drag-and-drop' approach to change management. One has to be able to grasp the deeper levels of change and their implementation in different contexts - this is why some HRO providers are preferred, or 'fit', with certain clients, and not with others.
through a client/HRO provider partnership - to underpin performance and cultural change. Reflexive architecture can partly be shaped by tangibles such as budgets, the work environment, the availability of technology, etc. But, its transformational capacity comes mainly from intangibles at a systemic or cultural level - mindsets, behavioural models, for example. Crucial to shaping reflexive architecture are the different methodologies used by HRO providers. For example, - Xchanging seeks to transform reflexive systems through their Xcellence methodology, instilled by key values. - CSC does so through its Target Technical Solutions. - Capgemini's approach to transformational change is through a 'service oriented enterprise' (SOE). Key to these systems is the reflexivity of the individuals involved and how both reflexive systems and reflexive architectures are combined to transform HR service activities.
Reflexive architecture
This is based on Ram Charan's notion of social architecture, or the collective ways in which people work together to support the business model. Reflexive architecture extends such collaboration through a more disciplined approach to evaluation - and not just measurement - which features critical reflection on how well processes are working and how the desired changes can be introduced. See the box below. Note these points on reflexive architecture.
Many of its tools are not unique or even new. But when the different operating tools of HR activities (reflexive systems) are brought together, they can change the human side of performance. Reflexive architecture, therefore, brings about change in people's service or commercial orientation through their behaviour, beliefs, social interactions and the nature of their decision-making. HR processes are tightly mapped and articulated
Certain combinations within reflexive architectures may trigger particular transactional results or outcomes in efficiencies and effectiveness - these may or may not replicate across different organisations. Essentially, unlike conventional models of change - where a universal and causal model of change is inferred - HRO transformation is facilitated more by 'complementary' reflexive architectures, as in a cultural and technical fit between the HRO provider and client.
Reflexive performance
This is the mechanism through which reflexive systems and architectures are brought together to achieve enterprise-level results articulated in an HRO contract.
It is not simply about high-level metrics, such as revenues, service margins, and process delivery. Reflexive performance measurement is also complemented by quantifiable statements describing different 'organisational states' - employees are satisfied with the quality of service from a service centre interaction, for example. Reflexive performance focuses, or re-focuses, client/provider discussions of transformation because
Reflexive architecture: people and execution

"In every part of my career for the last 20 years, the common thread has been people. Whether in technology, finance or operations, if you have an individual playing to their strengths and talent, they will be engaged, recognised and rewarded - and you can climb mountains. HR is a great function if it can enable the organisation to achieve its strategic intent. The differentiator does not come from people and strategy - it comes from people and execution. Where companies can make a difference is when people are engaged and executing better than anybody else." Luis Rojas, COO HR, Standard Chartered Bank
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they use the same criteria. Although anecdotal and qualitative information remain crucial, they are judged against their 'contribution' to the transformational template agreed by the two parties. Statements include 'how much are our people focused on customers?' or 'are we getting employees to follow the HR practices we want?' See the box for provider and client comments.
Reflexive performance: combining architecture and analytics

'"You need to focus on enabling the workforce so as to maximise your investment. This involves focusing them on the job they are doing for the company, and not overinvolving them in administration. In this way, you release more value from your people. Use business intelligence and metrics for them to understand more about their work and what's causing any workforce issues - such as how they achieve better performance through certain practices. It's all about understanding your workforce and how it works." Peter Clarke, VP, Hewitt
In short, reflexive performance is about discovering what Charan refers to as 'toll gates' - the right combinations of HR practices and processes which are understood to be crucial to the successful completion of any HR service process. This is not just a case of grasping the what, but explaining the why and how. Luis Rojas, chief operating officer, HR, at Standard Chartered Bank has a clear view of the next level for HRO and reflexive performance.
Reflexive performance: the important beats the urgent

"What's the role for HR? It's not driven solely by cost or efficiency factors. It's also about making sure HR plays a different role in the business. If people are performing a number of different tasks - and those tasks range from the strategic to the tactical, to the reactive to transactional the urgent will always beat the important. "You are not able to identify and create the space necessary to have conversations that are more important and strategic in nature. HR can now have very different conversations with the businesses, executives and line managers about what's important to them from a business point of view." Luis Rojas, COO HR, Standard Chartered
Bank
The next level

"So what's next? How do we gain the next benefit? Shifting from financial value to value in terms of capability, scalability, technology, quality of services or a range of different factors? Doing this could enable us to declare, 'We've now moved on to the next generation of achievement'. It's not about efficiency. It's about taking HR to the next level. The reflexive model may not apply to everybody - I do emphasise that. But, if you look at what we do, HR has moved up the value chain. It used to be very simple, very transactional in nature - even the relationship itself was just transactional. Over the years it has changed. An example is the SSC, a unit that handles international mobility for the whole group. It's not transactional, it's relationship management. Plus, they're becoming more proactive. Now they say, 'Here are some analytics around expatriates' or 'here's the cost globally for expatriates'. From this single source of HR data, we now have information about linkages between expatriates, performance management costs and attrition. They have taken the activity to another level it's more about anticipating and adding value. It's not just following orders.
"Each year, investment is required to reach the next level. Eventually, the next level will become harder and harder to reach. Improvements can be in quality, technology, efficiency, unit costs or a combination of factors. It's all about scale and volume."
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8 Trends and directions

8.1 General trends
A sea change has taken place in the delivery of HR services. Over 90% of the Fortune 1000 and FTSE 100 constituents outsource major parts of their back office transactional services. The primary drivers here are cost - and an ability to spend more time focusing on strategic issues of importance to the business as a whole.
Good practice HR
"Good practice HR is now adopting web-based solutions, b communications and administration for their employees. This is the myHR version of HR. It enables individuals to manage everyday transactions, such as changing their address, together with more enticing and appealing operations, such as modelling one's future pension, applying for a job on line, and obtaining information about terms and conditions. "All this was kicked off in BP some years ago and now has widespread acknowledgement with many companies adopting their own style of myHR delivery. HR receives little credit for that but has undeniably improved across the piece in the US and the UK." Nick Starritt, Managing Director,
Sirota Consulting, Europe, reflecting on the original BP/Exult HRO deal - he was Group VP of BPs Global Human Resources function at the time.
Patterns in HRO
Patterns in the development of HRO further up the HR value curve are less clear-cut. However, there are indications.
The so-called HRO 'mega-deal', in which an entire HR function is outsourced, has defied predictions of both its demise and acceleration. Large-scale contracts do continue to be signed (Capita and BBC, Convergys and DuPont) and renewed (Accenture and BT) - with rumours rife of other FTSE 100 companies following suit. Increased outsourcing is occurring in higher value HR processes such as training and development, and recruitment. Confidence in HRO is growing. The majority of HRO deals are motivated by cost reductions, and most contracts have achieved or even surpassed such targets. The trend of HRO under-performance has perhaps been overstated, although there is evidence of 'problem deals' in the market.
HRO contracts
Negotiating tailored HRO arrangements with the provider is crucial. These are the general trends in HRO contracts.
Contracts often last between five and seven years, with various clauses for performance or evaluation built in at three-to-five years. It takes between 6-24 months from preparing the HRO business model to actual procurement. Most organisations invest in advisers to help them select appropriate candidates for shortlisting, initiate requests for proposals (RFP) submissions and use benchmarking. Governance is emerging as a key area, particularly at due diligence, as buyers seek to establish clauses for under-performance and/or changing business conditions. The majority of organisations put together a bespoke team to deal with the outsourcing provider(s), and to plan for transition and implementation. Research suggests the majority of CEOs and CFOs are also involved in early contractual negotiations but then tend to remove themselves from transitioning and implementation. The HR director or equivalent and their team have a vital role to play in scoping HRO deals. Specific roles include: - establishing 'as is' costs
The rise of shared services

Increasing numbers of organisations are using a shared services model to centralise and manage HR services, streamline headcount and reduce costs. There is evidence to suggest that some HR directors view the shared services route as a stepping-stone to future HRO. Insourcing enables organisations to redeem their own cost savings rather than handing them to a third party provider. However, as the HRO business model evolves and the procurement process shortens to become less expensive, some may well considering moving straight to HRO deals.
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- mapping existing HR provision - reviewing the HR market - benchmarking services - ensuring the buy-in of internal HR staff and other employees - handling HRO announcement queries. 3
Be a smart, reflexive partner. For advisers Cease to rely on trends in favour of actual performance of HRO. Although benchmarking and cost reduction metrics are important, the future of HRO relies on whether it can deliver transformation to those clients who genuinely require HR change. Encourage smart, reflexive clients and providers.
Performance of HRO deals

There is a well-established consulting world offering evaluation services for existing HRO deals and benchmarking facilities. However:
Most of the data available is heavily engineered, with more difficult issues embargoed by both clients and their vendors. Although countless metrics are now used, the majority focus on cost reduction activities that drive the efficiency and effectiveness of HR. Fewer are available on how HRO transforms the HR function, or the extent to which its own improvements contribute to enterprise level targets.
These are some predicted trends affecting the HRO market.
The changing nature of HR

The relationship between individuals and their organisations will become increasingly transitional, raising the need for good management of talent issues inside and outside HR. Talent is increasingly marketable and transferable in very fluid labour markets.
e-HR H
HR will continue to evolve into new forms of delivery, particularly at transactional levels. E-enabled HR systems make it easier for large organisations to shift responsibilities for managing HR transactions onto managers and employees through sophisticated technology platforms. A rise in the demand side of HR services will occur, with managers and employees pulling information and services from the HRO provider. Increasing volumes of life-event HR advice - pensions, for example - delivered in real time will put pressure on service levels and provision.
8.2
Recommendations and future directions

There are general recommendations for each of the major stakeholders in the HRO market.
1 For HR Articulate how the HR function can change through HRO to enable the business - not just the function to achieve its business goals. Show how HR can become financially and commercially fluent in order to drive through required culture change, improved performance and evaluation. Be a smart, reflexive client. 2 For providers Clarify your HR capability and seek to engage with the HR function and its mission. Work with the capability already available in-house. Be transparent and accountable over the value you bring to your client's HR function and the wider business.
The HR in HRO: new HR competencies

New HR competencies will be required to deal with changing delivery propositions, most notably in - service specific skills - designing technical architecture, HRIS management, etc - business skills - understanding business practices; commercial awareness; management data/analytics; managing change; planning, mapping and prioritising administration; project management; customer focus and communication. - behavioural skills - creativity, innovation, results focus, coaching, delegation, developing colleagues,
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strategic awareness, influencing and negotiating skills, conflict resolution, adaptability and entrepreneurialism.
HRO strategy
Strategy formulation is a complex process. Attention should be given to the following.
Absolute clarity surrounding the decision to outsource. This includes what - and what not - to outsource, why and how. This is the client's responsibility not the provider's, who will inflate HRO costs for such an additional service. Your HRO provider cannot give you the precise service you want unless you know precisely what it is you want delivering. There is a commercial risk connected with a weakly articulated HRO strategy. The decision to use HRO must be accompanied by a clear statement advising investors how it will drive enterprise performance. Senior management buy-in should be ensured from the start - this may be the first driver of HRO. End-to-end performance management is crucial. Be clear on the expected performance gains, how they will be delivered and, ultimately, how performance will be measured. An appropriate governance system should be used which sets the parameters for responsibility at senior levels in an HRO relationship. Communicate with employees at the outset concerning any HR outsourcing decisions. This applies not just to those working inside the function but also to its end users.
Demand for, and performance against, these skill sets will be an important part of clients' decisions to hire HRO providers or not. Analytics and benchmarking will drive new levels of accountability, transparency and competence among HRO providers.
The (mis)management of HR talent?

A recent McKinsey survey highlighted the dearth of HR talent. This raises two issues.
The transformation of the HR profession. Not everyone wants to be a strategic HR partner, focusing exclusively on value-adding processes and strategy. Not all HR talent will be able to fulfil this role. An audit of HR talent is essential if organisations are to understand their existing requirements - and the levels of investment required to move forward target states.
New roles
A range of new positions is increasingly common in large organisations.
The HRO business partner: an extension of the HR business partner acting as the HR director's right-hand person. The COO - or chief outsourcing officer: mainly responsible for ongoing HRO operations and performance management - along with contract renewal, tendering, new contracts, major transition programmes, etc. HRO associate: represented by the increasing numbers of HR professionals transferred to HRO providers from clients. Together with the skill sets above, associates will also need - ongoing development aligned with the provider's changing and evolving demands from different clients - career management and new career paths, supported by agreed criteria for career enhancement and possible moves between the service provider and retained HR functions.
The measurement debate

HRO's gift to the HR function is the level of transparency it brings to the cost and value aspects of its work. It is crucial, however, that HRO does not render HR aware of the cost of everything and the value of nothing. A focus on perception, SLAs and cost reductions needs to evolve into new ways of understanding - and capturing the benefits brought about by - how transforming people and HR services benefits the enterprise and all key stakeholders.
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9 HR outsourcing - the CRF overview

In this section, Andrew Lambert, who commissioned this report for CRF, puts the sprawling topic of HR outsourcing into perspective. He provides guidelines on trends, providers, solutions, options and HRO relationships - along with the implications for HR functions. training, pensions support, recruitment, and so on. So why the fuss about HR outsourcing? What's new is the scale of HRO now being undertaken or promoted. As our author points out, most budget and activity in 'traditional' HR departments is still devoted to what is broadly described as 'administration' - and it is these parts of HR that are most susceptible to being outsourced, aided by advances in technology.
9.1
Why commission this report?

Outsourcing has become a topic of growing heat within the HR community in recent years. A burgeoning market has emerged which is, as yet, quite immature in respect of large-scale outsourcing. The business and HR media regularly focus on the subject and dedicated magazines are published. There's evidently considerable apprehension and suspicion about HR outsourcing (HRO), particularly in the HR community, about these kinds of issues.
Its benefits and consequences. The robustness of the proposition. Whether the reasons for considering major outsourcing are clear. An impression that HRO is supplier-led, rather than demand-led.
9.3
Suppliers and the HRO industry

As the IT outsourcing market matured, service providers looked for new growth areas. HR was identified as an outsourcing market. Why?
HR was seen as the function most needing a business case for improvement and cost saving. Administrative and information services became the target for providers to offer better technology and economies of scale.
The authors interviews reflect familiar comments about HR being a soft target because of its perceived weaknesses. For some time, through various reports, CRF has examined these in depth and proposed positive ways for HR specialists to improve their function's reputation. See especially the CRF Publishing report, The Future of HR: Creating a Fit for Purpose Function. There are good reasons for caution in considering the claims of providers.
HRO is a very young 'industry' - much experimentation is underway and track records are just being established. A strong sense of 'hustle' and hype is apparent, with specialist media and trade conferences at times displaying almost evangelical fervour in favour of outsourcing. A community of interests is united in seeking to profit from HRO - and the key players all know each other. A 'bandwagon' effect is in motion, with organisations sometimes considering HR outsourcing simply because others are doing it.
And there's the language. Providers and advocates of HR outsourcing have obscured the subject with terms that value complexity over clarity - and heap acronym on acronym. This ongoing flow of terminology and concepts can appear impenetrable to the uninitiated. CRF decided to invite Anthony Hesketh, an independent academic specialising in this field, to review developments, identify trends and recommend useful practices. Our aim is to enable CRF members to make better decisions and manage any outsourcing processes more effectively after reading this report.
9.2
Outsourcing is not new

It has always been common practice for organisations to use suppliers to support what they do - as have personnel or HR functions for
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The most 'buzz' occurs around the 'mega-deal' large-scale outsourcing. Here, suppliers potentially make most money, and the claims of cost-reduction are ostensibly greatest. Inevitably, it pays then to promote this benefit - which also happens to be where the client risks are also greatest. The baited hook of cost-reduction encourages providers to see the key HRO decision-makers as CEOs, chief operating officers and finance heads more than HR directors. The issues of value and stakeholder benefit become lost in the process - and there is also a suspicion of 'divide and rule' as a sales tactic. Little hard data is evident as yet to quantify the value for stakeholders - independent and clear evaluation is proving elusive. A major mismatch potentially exists between the pace of change in organisations and the kind of long-term deals that providers seek. Even in a fiveto-seven year period, organisations may change structure and strategy significantly, through organic growth, mergers and acquisitions and joint ventures or because of shifts in technology and global markets. Informed advice is in short supply. As this report points out, the HRO industry does include consultants offering such assistance. Here, too, it is incumbent on the client to source well.
opportunity to remove unnecessary duplication, complexity and low value activity. This report provides many pointers for matching needs to possible solutions. Here are the most important ones.
A thorough and independent review of needs including all stakeholders and a future needs focus should precede any HRO decision. (The RBS case study provides a good example of what to do.) Intended goals from stakeholder consultation should clarify a range of benefits, not just save money evaluation needs to be robust in measuring whether these benefits are realised. Be clear about the different types, levels and areas for outsourcing. Selective outsourcing is a useful way of building expertise, learning about the supplier market - and who does what best. Generally, the most advantage from a large outsourcing deal occurs when significant improvements in administration quality and technology investment can be gained. Do not use an outsourcing provider to fill any gaps in needs assessment - nor as sticky tape to improve HR practice in your organisation
CRF argues that it would be wise for the HRO industry to attend to its own reputation, given the points above. In our view, providers may need to be seen to concentrate on articulating and achieving lasting benefits for all types of stakeholder, to avoid HRO being characterised by impressions of sharp sales talk but long-term regrets.
A real issue is what will benefit the organisation, not necessarily the HR function. Ask yourself these questions before initiating outsourcing discussions.
What will benefit the deployment of people resources? What will help people to be truly productive and give of their best, develop their strengths, win their commitment etc? Is the current HR agenda based on a clear assessment of both strategic needs and stakeholder satisfaction goals? How will the tensions between these potentially conflicting needs be managed?
9.4
Matching needs to solutions

Start by knowing what you currently have in terms of resource and service levels to agree internally on what to aim for in future - and, therefore, what suppliers should deliver. Just establishing this base position can be quite a test in time and skill. Equally challenging can be getting internal stakeholders to agree on their future expectations, and thus needs. On the other hand, this provides a great
The message here is clear. A searching review of both organisation and HR choices is critical to avoid a piecemeal, ill-conceived, and fractious approach to HRO. Finally, enter any contractual arrangements with care - and with an eye on the risks. Appreciate
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the possible dangers of having to rely on too few suppliers. Contracts should cover targets, benefits or outcomes, the consequences if they are not delivered, renegotiation terms and exit clauses. Meanwhile, a cautionary note for providers. In practice it is not in your long-term interests to be seen to be too powerful. It is easy for poison to enter a relationship, hard to extract it. That's bad for new business, as it's also easy for word to get out.
understanding of supplier markets, and being able to get the best out of business partners.
New roles to support HRO will typically cover procurement, contract management, service analysis, and internal customer relations. Note, however,
levels of expertise will not be easy to acquire or develop quickly if new people are hired, they will need time to master the internal HRO context new roles and job types have to be clarified and communicated to all stakeholders.
9.5
HR capabilities and new roles

The author echoes important recommendations from CRF's work over recent years on HR's capabilities and roles.
Measurement and evaluation: a historically weak area for HR, the need is to evaluate both people management and the performance of the HR function. Management of technology: these capabilities are essential for understanding HR service outsourcing - and to participate in high level discussions within the organisation and with prospective providers. Project management: any major outsourcing project will require a high level of competence here, especially in managing implementation internally and the change that HRO always brings. Supplier management: although there are many good client-supplier relationships in HR, it is fair to say that suppliers of all types can provide war stories of poor capability, experience and continuity - and, too often, clients provide an unclear purpose and objectives.
Staff being transferred under an HRO agreement will need to get used to new ways of working - typically with greater emphasis on service and performance. Selection and development processes should be used as early as possible to ensure that both the provider and the client have a motivated and capable group of transferees. As the author points out, important changes in shaping HR careers, skill-sets and working interrelationships - from HR business partners to contract managers - can be expected. This is against a background of doubts about the extent of talent within the HR function to step up to new opportunities. 'HR talent management' must incorporate smart ways of attracting smart people from varied functional backgrounds. This requires integrated recruitment and development - and acting in advance, not arrears.
9.6
The shared services option

As the report shows, organisations can opt to provide services more efficiently by applying a shared services model to some or all of what are included in the concept of 'services' - and then choose whether or not to outsource the remainder. Some large organisations have by now accumulated a degree of experience in designing and managing this 'insourcing' approach. However, note these points.
Many of the same precautions apply as in any
This report makes it clear that new roles and skills need to be defined and developed to ensure that supplier contracts are entered into wisely - but also actively to manage what may be a relationship of strategic and stock-price importance. For instance
to improve HR's metrics ability, skills from outside HR's traditional area can be sourced internally statisticians, finance, IT and consulting, for example managing significant supplier relationships effectively will require purchasing experience, a deep
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outsourcing contract - for example, thorough analysis of needs and capabilities needs doing before designing new structures and processes. Unless there are tangible benefits for the organisation, managers and employees, shared services could be a waste of time and resources. Shared services may serve as a stepping stone towards outsourcing - and in theory it can. However, new investment in systems and ways of doing things will mean that, probably for several years, it is unlikely to be attractive to an outsourcer to take over financially or operationally - given that their systems are likely to be different. Simply moving to a shared services model does not necessarily result in HR staff becoming as focused on internal customer needs as is desirable - in comparison, say, with the transition they would have to make if employed by an outsourcing provider. See the RBS case for some pertinent comments on this point.
management plan. Underinvestment here can fatally undermine the changes. Act early to create understanding and build involvement. Relationship management activity will intensify during any transition process. The way it is undertaken will
be observed and felt most acutely by those involved create the understandings, expectations and atmosphere that will govern what follows.
If off-shoring is involved, the preconceptions, attitudes and behaviours of existing stakeholders requires expert management. Meanwhile, the off-shored staff will want to feel part of the organisation and to empathise with end-clients - whether they are working as part of a shared services structure or an outsourced entity.
9.7
Managing internal relationships

This is a significant issue. Much time tends to be devoted to 'the deal' and its potential costsavings. Ensuring all stakeholders are identified and appropriately communicated with at each step of the HRO process attracts rather less attention.
Early on, internal customers may well be suspicious that intended changes are not really designed with their interests at heart - nor will they be involved in measuring success. The organisation's choices and reasons for choosing outsourcing need clarifying. Their support is more likely if they feel involved. Those directly affected, such as HR staff, will naturally be fearful for their future - keeping and motivating the best will be affected by how the rest are treated. Other suppliers may also be similarly fearful - be clear about how best to manage those relationships in the organisation's long-term interests. The attitudes and perceptions of 'peripheral' stakeholders should not be neglected - customers, unions, pensioners, alumni, employee families and, potentially, local communities and local/national government.
9.8
What the new HR function will look like

The report rightly weaves in the issue of how HR functional transformation should be handled. The transformation plan should precede the plan to outsource, and shape the latter, to avoid the accusation "we've got the solution, now what's the question? Where a significant outsourcing is undertaken, time in modelling the new HR function and understanding how it will work best should be invested. Success in a slimmed down function will likely depend on having really capable people in a relatively small number of key positions. Much will be at risk without these in place. With a relatively lean structure - and a very different ratio of HR staff to employees attitudes and behaviours will need to adapt, within HR and among its customers. Time will be spent more on shaping policy and influencing leadership, as day-to-day advice for managers and employees is likely to be available from the supplier. The latter should, of course, be endeavouring to ensure that its service feels as 'internal' to the customer as possible, and can be measured on this.
An outsourcing project of any scale should have a robust communication and relationship
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We know there can be pressures from line managers to creep back towards the 'handholding' service they may have been used to in the past. Some in HR may indeed be willing to do this. Where line managers feel they are being asked to fill a gap in HR administration, attitudes to service centres - insourced or outsourced can be negative from the start. This underlines the importance of investment in line manager understanding and capabilities along with transforming HR - given that it is the line that actually has prime responsibility for managing people. A question we posed at the outset concerned the core functions of HR that should be retained. There are clear answers.
People or human capital strategy. Organisational policies. Recruitment and selection decisions. Employee relations. Pay and bargaining decisions. Talent management. Exit decisions.
All in all, it is critical for both organisational leaders and HR to be clear about the essential core competencies to enable the effective management of human capital.
9.9
Is HR outsourcing a healthy development?

CRF would say yes, overall, but with these cautionary notes.
Clients need to be wise and well-prepared - we hope this report points them in the right direction. Providers need to be collectively careful that the reputation of the new HRO industry does not become tarnished. Internal customers need to be communicated with continuously from start to finish about what will happen, what has been achieved and why what has occurred is better. They need to feel supported, not taken for granted.
As the author stresses, hard data indicating degrees of success is not yet openly available, although there are some positive signs. However, much depends on the judgement and skill of those involved on each side of the contract - and that cannot be regulated. Caveat emptor applies!
While service providers may make advisory and support contributions in many of these areas, the organisation itself must visibly take responsibility - health and safety is an example. Furthermore, it is the chief executive, together with business heads, who are ultimately responsible for all the areas above. Personnel or HR should, in principle, only provide specialist knowledge and day-to-day support. In the lean HR function, top management will have support from HR's strategic and business partners, preferably as full participants of the management team. Business partners in turn need to obtain value from the support and advisory services they do not necessarily 'own' in the old functional sense. Strategic partners - the HR director or equivalent - must ensure that the whole HR architecture delivers value.
9.10 Top ten recommendations for HR outsourcing

To conclude, here is a useful checklist of recommendations included in a soon-to-be published overview of HRO by Orion Partners, an independent consultancy advising on HR outsourcing decisions and management. See www.orionpartners.co.uk. Before an organisation embarks on outsourcing its HR function, it should have:
identified how outsourcing fits with strategic objectives agreed which core strategic competencies must be kept in-house and what can safely be outsourced identified a complete view of internal HR service delivery costs, the main cost drivers and the potential savings and investment assessed internal outsourcing and explored how
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shared services might deliver the same benefits but with greater retained control identified the technological challenges and solutions around outsourcing - have the costs of running and retiring legacy systems been calculated accurately, for example? developed a clear view of the capabilities and reputation of each of the main outsourcing providers standardised and simplified processes and procedures prior to considering outsourcing discussed in detail the concept of outsourcing with customers (employees and business managers) and other key stakeholders in the organisation defined the key success measures that will be used to judge the performance of the outsource provider and the structure of the deal considered the history of the organisation in terms of managing complex transition processes - is there the organisational will to see an outsourcing initiative through to completion?
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10 Case studies
10.1 Once more into the breach: the BT/Accenture HRO renewal18
Introduction
The announcement in February 2005 of the contract renewal for the HRO deal between BT and Accenture was a significant moment in the industry. Not only did the deal represent a shining endorsement for the HRO industry as a whole, it also reflected a significant escalation of the outsourcing process across BT's entire global offering. Not surprisingly, Accenture themselves see this deal as a major endorsement of their product:
"BT took a bold step some five years ago. The resigning of the agreement ... and its extension to 44 countries outside the UK not only vindicated that original decision but is also a clear demonstration of the value that full-scope HR outsourcing can deliver. It is a massive boost for the industry." David Clinton,
Former Managing Director, Accenture HR BPO Services
reduced HR's transactional lines from 26 to nine key sites. Its own in-house shared services model was rolled out in 1992, elevating this to what BT describe as an 'internal trading model'. By 1997, BT was well-positioned to initiate what was seen as a highly innovative strategic move for HR - the outsourcing of transactional services. The aim was simple: to liberate HR professionals from day-to-day functional tasks for them to focus on operational and strategic issues. In August 2000, the company stepped into the HRO market, signing the flagship deal with Accenture and simultaneously launching ePeopleserve. This was a new 50/50 joint venture between the two parties to offer their unique combination of HR and technology expertise to third party clients. BT and Accenture worked together to form a full, end-to-end HR solution covering the typical employee lifecycle - training, performance, reward, employee relations, safety, health, and exit. A total of 1,100 staff were transferred into Accenture. At this time, any plans to incorporate their entire and quickly expanding global offering into HRO were put on hold due to the rapid acquisitions BT were engaged in at the time. There were early problems, as employee relations and HR policy director, Joe McDavid, explained.
"We were persuading people on both sides that we had a commercial, rather than some sort of artificial, relationship. The service wasn't bad and the costs reduced slightly, but the venture didn't deliver the benefits we expected. As a result, we decided to sell our half of the joint venture [ePeopleserve] to Accenture. After that, the quality of the service we received and the quality of the relationship really started to improve."19
The Yankee Group agreed.

"BT is ahead of the game. The company has clearly benefited from its earlier experiences from HR BPO. Signing a decade-long deal with Accenture validates their choice of supplier, and also the business and operational benefits they have received from choosing the HR BPO path." Yankee Group, February 2005
The deal
Details of the new contract involve further cost savings for BT. Accenture HR BPO Services now serves all 102,000 BT employees globally, compared to the previous deal's total of 87,000. All 182,000 former BT employees remain under the same aegis with significant developments in the re-engineering of BT's HR traffic. For BT, the journey to outsourcing began in 1990 when 14,500 HR professionals served 250,000 employees. There were 26 separate HR systems, 30 telephone helplines and more than 26 physical sites - each aligned to 26 separate geographic districts. By 1991, the company had
The focus then shifted to delivering enhanced service and relationship management to BT's employees. By April 2004, the companies were locked in discussions about a new and expanded contract, reaching agreement in January 2005. BT certainly had every intention
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of making Accenture work hard for the contract renewal.

"We did a lot of internal work on producing a detailed 80-page statement of requirements to prepare for a possible ITT [invitation to tender] to other vendors. We spoke with all the players in this space and some of the newer ones with ambitions. We explained what we were looking for and talked about the savings and service levels we wanted on a global basis. We then commissioned an external benchmarking study to line up the players."20
case handling frees your business partners for different types of discussions and interaction with the line.
The data are certainly impressive.

Handling customer enquiries for so-called 'Tier 0' (intranet-based for information, eHR, transactions and setting up of customer cases, etc), and 'Tier 1' (Service Centre-based for answering queries, transactions and setting up of customer cases), accounted in 2000-2005 for 80% of all engagements with employees, line managers and business units. Today, Tiers 0 and 1 account for nearly 90% of all customer enquiries, enabling HR to deal with more complicated case resolutions (Tier 2) and deeper policy and strategy issues across the business (Tier 3). In short, more time is available for retained business partners to focus on value adding work.
For their part, Accenture were keen to avoid the contract going out to tender. Frantic discussions took place as the provider attempted to hit the stretching cost reductions and service levels BT expected, to prevent progression to the ITT stage. BT fully acknowledged the provider's high project performance to date - a point not lost on Duncan Mears, director for Accenture HR BPO Services:
"On our side was the fact that our customer satisfaction surveys were exceptional, in the high 80s and 90s. Our KPIs were very strong and in excess of our expectations. Meanwhile, our SLAs over the course of the five-year agreement with BT were 'green' in all key areas. The benchmarking activity that BT undertook showed that in the majority of areas, we were among the best in terms of performance, quality, and service, with the lowest position in price."21
Of course, there will always be questions from outsiders regarding the extent to which HRO cuts into the bone of HR's capability to undertake talent management and service effectiveness for the client organisation. For Wilson, this simply meant thinking about not what the business needed in terms of HR services, but what it wanted.
"They gave us more than enough evidence about what could be done to hit the cost reductions we were seeking if we made certain assumptions and changed the nature. It meant taking away Rolls Royce services and becoming more like a Jaguar in a number of HR activities. It meant taking the work away from the UK. They offered us a whole series of different options."
The results
Crucially, BT's decision to renew with Accenture was based on results, not promises. Alex Wilson, global HR director identified three main reasons why Accenture HR BPO Services were awarded the renewal.
"One, they have improved the reputation of the function. Two, they've improved service levels and taken out cost which, in mid-contract, is always a great idea! If you're an HR director and your provider informs you that 'We can do something to help', it may give them a win in terms of performance - but it also gives me a win by improving my margins during the life of the contract. Thirdly, taking on the front-line
For Accenture's part, and contrary to much of the negative media on HRO, the provider began to listen to what BT really wanted and then attempted to fulfil the company's expectations.
"We provided highly skilled people with strong and dedicated HR backgrounds, who also understood the telecommunications business, to articulate and transact with BT in a language of understanding their strategy. This team developed a new set of products and services that enabled BT to accelerate its HR agenda, implementing new products and
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performance management systems services, new reward processes, learning programmes and reporting programmes. BT realised that Accenture was a company that could continue to drive this agenda and HR innovation through the next decade."
Duncan Mears, Director, Accenture HR BPO Services
own shared services model which would reduce some of the cost before outsourcing. In this way, you gain initial benefits which can be supplemented by your provider. "Another view, if you have a disparate function, is to accept that a five or six year contract would give away more margin than you would like, but will get you there in one go. You gain efficiencies with the external group - especially if they have their own system that you can capitalise on when you have none of your own or if you have disparate systems that are outmoded. I know of one big FTSE 100 company thinking about doing this simply because they have a disparate system."
Of course, the journey is still far from finished and BT continues to seek improvements in their services and costs as part of the new deal. Key for Wilson is an inverted emphasis in which value creation and business transformation remain top of the agenda for BT, but Accenture HR BPO Services have, as the main driver of their agenda, the value for money BT seeks.
"One of the board directors commented on how the HR function has progressed. As an analogy: if a successful journey is travelling from London to Edinburgh, we're probably around Leeds and possibly York, but by no means are we near the end. This is not a complete exercise for us in terms of upskilling the function. We have a vision. We are tracking activities and cost, looking at the core capabilities we need, in combination with administration handled by Accenture, and driving this through."
And thirdly, be a good client - and offer clarity about what you seek and how you intend to measure the returns:
"If you do outsource, be clear about the services and processes you are outsourcing, have them marked and defined and have a clear service level. If you're not specific about what you're doing, what the processes look like - if you don't map it and tightly specify it - your provider could say, 'We didn't understand. If you want to do that, it's going to cost more money'.
Learning outcomes
When asked to reflect on the key decisions in assessing any major HRO deal, Wilson pointed to three. First, you have decide what it is you want to achieve.
"You need to be clear about the benefits to be derived. Is it cost? Is it service? Is it something less tangible such as freeing HR resources to be upgraded? Usually, if administration is outsourced, the resources left behind are not capable of performing the higher functioning role expected of them. Be sure of what you're doing and why you're doing it; make sure it's right and test it."
10.2 Manufacturing excellence: the Royal Bank of Scotland's shared services22

Introduction
The award winning shared services HR 'manufacturing' at RBS is held up by many as an alternative to HRO. Neil Roden's appointment as HR director in January 1998 was a key trigger for change. Although Roden found an HR department with a high reputation within the business, weaknesses were apparent in its lack of centralisation, an inability to contribute to the management of strategic or value adding issues, and a desire to improve customer service - but with no clear strategy as to how to attain it.
Second, comes alignment.

"Make sure you have some alignment within your organisation. Then, if you then have the time and opportunity, think about outsourcing in one go. Alternatively, you may want to consider creating your
Chrysalis
Roden and his team set about building an agenda for change in which senior managers
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were asked to outline their future hopes and aspirations for the development of the HR function. It soon became apparent that two drivers underpinned the desire for change.
Deliver high quality services, with a strong focus on getting the basics right and delivering significant cost reductions. Signal a shift in culture and activity away from transactional HR administration to more value-added roles with optimum performance.
- Enhancing professionalism. - Value delivery focus. - Change and implementation skills. Less than 10% of the existing HR staff had the ability to immediately step into the 'business partner' role. Crucially, up to a third of HR employees were seen as incapable of making the transition to a new consulting role. This latter group were to be redeployed into the shared services function as they had the right transactional skillset such as supervisory skills, workflow and operations management, etc.
Project Chrysalis, as it became known, set out to centralise HR activities in order to release significant cost reductions. The first exercise was to evaluate the current or 'as is' HR offering in RBS. This revealed the following.
The work of the HR function was broken down into 18 activities, each comprising between four and seven tasks. A team of over 200 HR employees completed a four-week study of their own processes, forming an 'activity dictionary' which was evaluated by different HR managers before being signed off. This activity dictionary revealed that 60% of HR's activities were administrative, 25% advisory, and up to 15% viewed as 'value-adding' or business 'partnering'. A problem was a lack of uniform data and metrics to evaluate the performance of HR across the key activities identified.
Combining shared services with outsourcing

A number of HR processes - flexible benefits scheme, maternity processing, referencing, HR policy and procedural information and key management information reports, for example were all outsourced to Hewitt. RBS's logic was to use an external provider whose skills and technology could convince sceptical end-users within the business of the potential value of centralising HR. Moreover, given the relatively higher investment in technology by third party providers, RBS could effectively reduce its capital outlay while simultaneously improving service quality. Hewitt have since delivered several improvements working in partnership with RBS's shared services - not least a new questionnaire establishing why potential recruits turn down job offers from RBS. In addition, training is provided by Hewitt for all their employees working on the contract specifically relating to the bank in customer service and reporting accuracy. HRdirect, a call centre facility outsourced to Hewitt, has not only won awards, but has enabled technology to dramatically reduce the administrative burden on the HR team.
The shared services strategy involved some bold steps.

To reduce the administration activity of HR by 25% and replace it with more strategic activities. A shift to higher value adding work including new work roles - openness to change, relationshipbuilding skills, good diagnostic skills, etc - and strategic work, such as facilitating business change programmes and coaching senior business unit leaders. In all, six competencies were identified for future development. - Diagnostic and advisory skills. - Managerial skills. - Communication and influencing skills.
Outcomes
The shared services facility has helped the business step up from serving 22,000 employees at the Royal Bank of Scotland to a total employee base of 120,000 across different brands including NatWest, Direct Line, Ulster Bank and different retail networks. In short.
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Shared services now offers a single point of accountability for HR transactions and processes. A new rigour has been applied to management and measurement. Real indicators are now in place for performance, quality, efficiency and productivity with customer feedback and continuous improvement. Full realisation of significant efficiency savings.
"The challenge is scale and multi-branding. But it will happen one day. The Proctor & Gamble and IBM deal involves scale and multi-branding and we've been watching them closely. I think it's possible, but not yet. They are more experienced globally than we are.
Commenting on the achievements of the shared services function at RBS, Tony Williams and Peter Reilly observed.
"The bottom line is that there is no single measure to prove the success or otherwise of shared services. What is needed is the faith to see the job through and create a single centre of excellence for all HR 'manufacturing' activity for the Group - and to review the benefits at the end of the process, not halfway through."23
Nevertheless, the Bank continues to make increasing demands on service quality of HR shared services. Costs have been reduced and services have been improved. For McClaren, the next challenge is developing a commercial mindset within HR services provision.
"We're now at an interesting crossroads with shared services. With efficiency, shared services is still getting a tick in the box. But the challenges in the business now revolve around questions of how much better the service actually is. It's not about efficiencies anymore. It's about how you transform the services of HR."
The process of change has not stopped there. Indeed, RBS itself maintains a constant eye on the feasibility of HRO, although at present it remains doubtful. This was pointed out by its current head of shared services, Brian McClaren.
"You never say never. Currently, we would need to be convinced of a provider's capability to absorb and deal with the scale of our operations. We're serving 120,000 staff in numerous countries, recruiting 25,000 people a year from 165,000 applications. That's the scale of what we do. "I've yet to see a provider on a scale that means we would not absorb too much of their business. But there are elements of HR that we will continue to examine. Every three years, we test the market. There's no fundamental disbelief underlying why we are not taking that route. We simply haven't seen the market mature to the degree expected."
The future of shared services

But for many, a main attraction of outsourcing lies in its ability to dramatically change the mindset of employees. This involves breaking them out of their routines and forcing them to focus on the customer. McClaren conceded that the shared services model does not provide employees with the same commercial edge of fully-blown HRO.
"We're keen on commercialisation internally and outsourcing moves people in this direction. It's only words to people in shared services. They don't understand 'commercialisation' or 'Who's the customer?' They need to move to an environment where they are genuinely commercial. How do you encourage people to think, 'I might lose my job here if I'm not commercial?' Of all the arguments for outsourcing, this is the one I'd major on. We're doing a lot at RBS about serving the customer but you don't get that edge with an internal services provider."
When asked to articulate what would, in his opinion, convince RBS to consider HRO, McClaren pointed to the double-edged sword of combining volume with complexity.
"We haven't seen evidence of dealing with scale and complexity. We have a multi-brand strategy. We have eight business divisions running 48 brands! Nobody has yet offered a service for such volume. They would have to deal with all the intricacies of our different brands in terms of language, paper, etc.
RBS continues to drive a commercial and entrepreneurial spirit into the HR shared services mindset.
"We have culture change programmes. We try to encourage our people to think about engagement.
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For example, the person they are dealing with on the phone may be beginning their career. They need to be dealt with end-to-end. I'm not sure we have the edge as we may have with outsourcing. But I think we have 85% of it and this narrows the point of differentiation to outsourcing. Outsourcing for us has to be 20% more efficient before we can consider it. They have to be 20% more efficient and they have to have that edge. I think we're more efficient. We can always supplement this with culture change programmes. The issue turns on whether the edge is worth it."
account in Whirlpool - DuPont essentially threw everything at it, except the proverbial kitchen sink. It contracted the provider to take over
organisation and employee development workforce planning and deployment compensation management benefits administration payroll integrated health services recruiting employee and labour relations HR process support administration work environment support performance management employee data management vendor management HR consultative services.
The extent to which shared services can evolve from the functional silos to offer services that can optimise business processes and drive value remains one of the central questions of the HRO debate at RBS.
10.3 The people behind the science: the DuPont/Convergys megadeal

Introduction
When chemical giant DuPont set out to transform its HR model, calling in a service provider wasn't its only choice. But after weighing all the options, HR leaders realised outsourcing was their best - and that set in motion a $1.1 billion, 13-year deal that has the entire industry paying attention. This case study is written by Andy Teng, editor in chief at HRO Today, whose magazine first published the article in the January/February 2006 issue. 'The Miracle of Science' might be Wilmington, Delaware-based DuPont's slogan, but these days it's the strategic value of people which garners the attention of the global chemical giant. That's because in November 2005, it entered into one of the largest multi-tower HR outsourcing deals ever. The company's decision to spend $1.1 billion over the next 13 years will surely become a remarkable chapter in the book on HRO.
DuPont said it expects the accord will help the company cut HR costs by 20%, with savings reaching 30% after five years. The company declined to say how many layoffs will result from the agreement. The deal will surely shake up the 200-year-old company, a well-recognised corporate name with a pro-worker image. While the Convergys deal is not the first time DuPont has dabbled with HRO - company officials say they have outsourced various
DuPont Background
Few corporate names reach more consumers around the world than DuPont. Its products include everything from Tyvek (used as protective wrap on homes and as gowns in the operating theatre) to paint and coatings (applied on cars, buildings, and many other goods) to well-known Corian and Teflon brands found in most k kitchens. Posting 2004 sales of $27.3 billion, DuPont operates in more than 70 countries, employing over 60,000 people. With a vast network of HR processes to manage its enormous workforce, it was no surprise that DuPont's HRO deal was so sizeable.
The deal
Partnering with Cincinnati-based Convergys which in 2005 also landed another whale-size
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functions over the past decade - this accord is by far the most sweeping in its history. But to hear Jim Borel tell it, this is not a tale about outsourcing. A tall and striking figure, the senior vice president of HR said outsourcing is just one component of DuPont's HR transformation. The goal, he emphasised, is to simplify, standardise, and automate HR processes so that employees spend less effort on administrative and more on strategic functions. Also, the company wants to provide management, at any level, with transparent data, so as to make better decisions. Said Borel:
"It's not just about outsourcing. It's about our HR transformation and putting in place what it takes for HR capabilities to help businesses win. Part of that is standardising and simplifying processes, part is the automation, and the final part is the partnership with Convergys to help us through the journey. It's all about helping DuPont's businesses win."
Establishing a provider business. Further expanding a shared services centre in Spain.
So, even though outsourcing holds the promise of savings, so did other choices. Lareau explained that the real issue was the value DuPont would gain from a partner, someone who was going to
help with the transformation requirements take a fragmented set of processes from around the world and simplify and standardise them implement them globally on SAP HCM (human capital management software).
"Most people can give you competitive pricing," he said. "The real differentiator is who will be our transformation partner - and have they the skills and capabilities to take us where we want to go?"
Planning for HR transformation

Enabling DuPont's HR department to transform itself is no small task. Its 60,000 employees, speaking scores of different languages, pose a formidable challenge - how to standardise and simplify all those processes in more than 70 countries while remaining receptive to their needs? Moreover, with a corporate history of 200 years, cultural shifts are akin to a sea change. It's a problem management realised from the beginning. So, to plan for the transformation, Borel, Lareau and their team did what every good manager does to build a case for change - they collected masses of data in a highly disciplined manner. The campaign was applied with Six Sigma rigour and helped the team to listen to, analyse and understand the needs of the employees. Gathering external benchmarks, examining best practices and weighing all the options gave HR leaders a clearer roadmap of the paths available for reaching the company's lofty goal of simplification, standardisation, and automation. It also helped executives better understand why transformation was necessary.
Reasons to outsource
Winning is something DuPont has not been able to do recently. In January 2006, the company again issued earnings warnings after failing to meet analyst expectations. This occurred after the company missed targets in 2005 as well. Some of those analysts have publicly called for the company to more aggressively cut costs in order to help revitalise earnings - which have been ruffled in the past year by higher raw material costs and production disruptions as a result of the two major US hurricanes. A renewed focus on profits may be one reason why management is squarely behind the outsourcing push. Cutting costs at a time of weak earnings makes sense, but company officials say savings is only part of the reason. Besides, added Ernie Lareau - a director in DuPont's HR department and one of the key architects behind the outsourcing deal - the company had other alternatives to achieve the savings. These options included the following.
Transforming internally.
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Problems to address
What the HR team found was an organisation mired in transactional services. According to Lareau, the company operated in a very traditional model, with only about 10% of HR's energy fixed on policy and strategy - most of the time, it dealt with administrative and transactional issues. What senior leaders wanted instead were clear HR processes that provided critical data for DuPont to better manage its human capital to meet business needs. For instance, Lareau pointed out, if the company plans to expand its business in China by a predetermined amount, HR should know average revenues per sales employee for that market. Armed with this data, it can better target the ideal number of workers to hire, to enable the business reach its sales goals in the budgeted timeframe.
"Our problem was how to get to [a state] where our people are driving policy-setting activities and strategically supporting the businesses. How do we get our HR leaders, with our business teams, to understand what the business needs are - and then give them access to the data to provide strategic support in the area of people or human capital management? "We were expecting our leadership to focus on policy and strategy planning to support the businesses, with minimal effort on the administrative service-delivery aspect."
(planning started five years ago), and its success showed that DuPont was capable of achieving realignment on its own. Still, the burning question remained - did the company want to tackle transformation on its own or with the help of a partner? Management went back to the basics.
"One of our considerations was, 'Would we consider doing this and becoming a provider?' We quickly concluded that it was not core to DuPont and we would not go there," Lareau recalled.
He added that the company decided to

"test the marketplace and find out if there were other people able to provide DuPont with the services and capabilities which would allow us to focus our resources on higher priority items within the corporation."
Borel said that two key factors stood out in the decision to outsource.
Leveraging the knowledge of an experienced provider who has worked with multinationals. Reducing the execution risks. "Having somebody who has been through the experience with a number companies would be a huge help.
Two-year roll out effort y

Most companies that have embarked on the HRO journey understand that these are the same questions posed in the past. For DuPont, however, the answer didn't come as easily. Because of the massive scale of its transformation - the company said it would take two years to implement the outsourcing accord - there were many more considerations as it weighed its options. HR leaders took comfort from its shared services centre in Spain emerging as a model it could emulate on a global scale. The centre began operations some three years ago
Contrary to perception, DuPont's decision to embrace outsourcing did not signal a shift in culture. With some services already outsourced over the past decade, HR had already dealt with third parties. Doing so on such a massive scale only integrated those services under the auspices of Convergys. Furthermore, the decision to automate would give employees the same self-service tools, regardless of whether it was implemented internally or externally. Even in instances when employees needed the 'high touch' of an HR specialist, a seamless transition to a service provider would ensure that workers received the same attention as they did under the old model.
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Selecting the HRO partner

So it became clear that the company was better off with outside help. But when you outsource on the scale of DuPont, even vetting the candidates can be a lengthy process. After examining the key players in the market, the company sent out requests for information (RsFI) to 16 top-tier providers in the fall of 2004. The field then narrowed to nine, with some partnering and others realising they were out of their league. The company further narrowed its selection to four and asked those to submit request for proposals (RFPs). It didn't announce the selection of Convergys until November 2005 about a year after it began the selection process. Myriad factors were considered in the selection process, and diligence was needed to ensure DuPont chose the right partner. The company also looked to the expertise of EquaTerra as its sourcing advisor. Borel said that choosing the right partner was critical to a successful outsourcing effort because the biggest risk, he cautioned, is making the wrong choice and creating a badlyfitting structure.
"The partnership should be an extension of the company ... and that's going to be a key part of service delivery.
HRO market and provider capabilities

Although Borel and Lareau say Convergys stood out among the providers and that they are comfortable with their selection, they also point out that the outsourcing market is still playing catch-up to client needs, especially those of large multinationals. They contended that no major provider can deliver all services in all geographies - and servicing a company such as DuPont will stretch capabilities. Even Convergys did not have everything that DuPont needed for its transformation. In fact, the provider partnered with Deloitte Consulting one of the original 16 suitors - to ensure a smooth transition. It looked to Deloitte for data porting expertise. Convergys' shortcomings, though, are not unique, Borel noted.
"A partner that has absolutely everything, all around the world, already in place and proven, just does not exist.
So how do buyers reconcile a provider's skills gap with their own needs? Convergys, Borel pointed out, assuaged his fears with a proven ability to adapt and grow. As a buyer, he wants assurances that the partner can anticipate his growing and emerging needs. Convergys' track record of acquisitions - as well as its recent wins with large, DuPont-like companies - alleviated some of those concerns. Indeed, Convergys has aggressively sought to fill the gaps in its capabilities, said Karen Bowman, president of the company's Employee Care business. For instance,
in 2004, the company acquired an Asian business to establish a presence in one of the world's fastest growing markets in 2005, it purchased a San Francisco-based talent management business to further bolster its offerings.
Another dominant concern is how the partners will handle change management, perhaps the most critical component in implementation. DuPont's HR leaders say a lot of effort will go into making sure the organisation is ready for change at each stage of the process. However, they also point out that having an experienced provider instils confidence though much of the burden falls on the client to ensure a seamless transition, Lareau said.
"We spent a tremendous amount of time building the governance processes. We identified them all, mapped them, and placed individuals as process owners to manage the various processes with Convergys and with our [employees].
Bowman said Convergys' experience is not unique and that across the board major providers are choosing distinct market segments in which to invest. They understand
61
that large customers now expect providers to offer a broad spectrum of services - and more buyers will only look for vendors that can meet all their needs.
"I think companies like DuPont are looking for a holistic, integrated provider who can provide the majority of services being outsourced.
good data or integrated processes. We're in the process of designing that future state. "We don't have robust processes around strategic workforce planning, so that has to be done. And part of that is making sure business leaders understand the potential value that they haven't experienced before."
Another reason why the company chose Convergys was for its strong SAP capabilities, Lareau said. DuPont had already made significant investments in SAP for its own ERP system, so the question of platform was settled by the time RFPs were issued. Beyond assuring buyers that their contracted needs and metrics will be met, HRO vendors are increasingly being asked to provide valueadded intangibles which, while hard to define, help solidify a partnership. In DuPont's case, this was no different. Borel described these requirements as anything that "helps DuPont to win", and other buyers may have a similarly nebulous definition. For instance, having a cultural alignment builds trust on both sides, but how can this be expressed in a contract? Often, offering services and performance above contractual obligations defines the value-adds, but Lareau pointed out that Convergys' datarich, solution-oriented processes are a complete match for DuPont's own approach. "It was just one more merit for the Cincinnati company," he said.
And if DuPont can reach all those goals over the next few years - under the watchful eyes of the industry - it will be able to get back on track towards winning and focusing on its core business of developing the miracles of science.
Lessons from the HRO market

When DuPont HR director, Ernest Lareau, an expert in HR processes, began considering outsourcing options, he had a comprehensive understanding of the marketplace - or at least he thought he did. As the company moved closer to clinching a deal with provider, Convergys, Lareau said he realised that DuPont was actually establishing itself as a leader, and not a follower, of HRO practices.
"I had been following the BPO market for about five years in prior assignments, so I had a view of what was state of the art in the industry. We thought we were jumping into the middle of it, but then discovered we were at the leading edge. It was an interesting perspective."
Future steps
As they look ahead, Borel and Lareau say they are confident that the HR transformation project will be worth the effort. While risks accompany each step of the roll out over the next two years, the rewards will bring DuPont into a new era - a time when HR will become more strategic than it is today and when business leaders turn to the department for input on business growth. Said Borel:
"We wanted to be able to do more and be better, but we were hamstrung because we didn't have
Lareau's experience might have been eyeopening, but it also speaks volumes about the maturity of HRO - providers are playing catchup to the demands of super-size clients. Even as the provider community touts its capabilities and services, some buyers are discovering that market hype sometimes overshadows reality.
"I believe the industry has professed itself to be further forward than it really is - at least with the 16 providers we had dealings with.
Still, he noted, many are building the infrastructure necessary to canvass as much of their clients' needs as possible. And with providers such as Convergys willing to shore up gaps, they are helping to put large clients at ease.
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"When you consider all the processes of a global environment in a legal entity structure that DuPont provides, it is probably one of the largest, most complex challenges the industry is facing. But we think [Convergys] is up to the challenge."
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References
1. These data, and much more, are available from the Everest Institute's home page: http://www.everestresearchinstitute.com/ 2. See http://www.everestresearchinstitute.com/ 3. See http://www.tpi.net 4. Moore, G. - Crossing the Chasm: Marketing and Selling Hi-Tech Products to Mainstream Customers: Harper Business, 2002 5. Hammonds, K - 'Why We Love To Hate HR': Fast Company Magazine, 97, August 2005 6. HRO Today, January/February 2005. 7. For example, see Davis, S - 'Is This The End of HR?' in M Effron, R Gandossy and M Goldsmith (eds) Human Resources in the 21st Century: Wiley, 2003 8. See http://www.idc.com/ 9. Calling a Change in the Outsourcing Market: The Realities of the Worlds Largest Organizations: Deloitte Consulting, 2005 10. Greer, C R, Youngblood, S A and Gray, D A - 'Human Resource Management Outsourcing: The Make or buy Decision': Academy of Management Executive, Vol 13, 85-96, 1999 11. People Management, 26th January 2006, pp 36-7, CIPD 12. Linder, J - Outsourcing for Radical Change: A Bold Approach to Enterprise Transformation: Amacom, p 28, 2004 13. Ibid 14. Greer, C R, Youngblood, S A and Gray, D A - op cit 15. CEO Briefing: Corporate Priorities for 2006 and Beyond: Economist Intelligence Unit, 2006 16. For a deeper examination of these issues, see Cohen, L and Young, A - Multisourcing: Moving Beyound Outsourcing to Achieve Growth and Agility: Harvard Business School Press, 2005 17. Greer, C R, Youngblood, S A and Gray, D A - op cit 18. This case study is based on an interview by the author with Alex Wilson, Group HR Director of BT. Additional data and quotes have been obtained from a combination of press releases and HRO media. 19. See 'Second Time Around': HRO Europe, Spring 2005. 20. Ibid 21. Ibid 22. This case study is based on in interview by the author with Brian McLaren, Head of Shared Services for The Royal Bank of Scotland. Additional material has been used from various sources, especially the book by the former head of shared services at RBS, Tony Williams, with Peter Reilly - How To Get Best Value From HR: The Shared Services Option: Gower, 2003 23. Reilly, P and Williams, T - How To Get Best Value From HR: The Shared Services Option: Gower, 2003
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Bibliography
Adler, P - 'Making the HR Outsourcing Decision': MIT Sloan Management Review, Fall, pp 53-59, 2003 CIPD - HR Outsourcing: The Key Decisions: Executive Briefing, CIPD, 2005 CIPD - The Guide to HR Outsourcing in People Management Supplement, February 2006, CIPD Cohen, L and Young, A - Multisourcing: Moving Beyond Outsourcing to Achieve Growth and Agility: Harvard Business School Press, 2005 M Effron, R Gandossy and M Goldsmith (eds) Human Resources in the 21st Century: Wiley, 2003 Greer, C R, Youngblood, S A and Gray, D A 'Human Resource Management Outsourcing: The Make or Buy Decision' in Academy of Management Executive, Vol 13, pp 85-96, 1999 Hammer, M and Champy, J - Re-engineering the Corporation: A Manifesto for Business Revolution: Harper, 1993 Lacity, M and Willcocks, L - Global Information Technology Outsourcing: In Search of Business Advantage: Wiley, 2001 Lawler, E, Ulrich, D, Fitz-Enz, J and Madden, J - Human Resources Business Process Outsourcing: Transforming How HR Gets Its Work Done: Jossey Bass, 2004 Linder, J - Outsourcing for Radical Change: A Bold Approach to Enterprise Transformation: Amacom, 2004 Reilly, P and Williams, T - How To Get Best Value From HR: The Shared Services Option: Gower, 2003 Ulrich, D and Smallwood, N - The HR Value Proposition: Harvard Business School Press, 2005 Vashistha, A and Vashistha, A - The Offshore Nation: Tata McGraw Hill, 2005
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Outsourcing the HR Function

Possibilities and Pitfalls

Corporate Research Forum

Corporate Research Forum, London, 2006

Outsourcing the HR Function

Outsourcing the HR Function

Outsourcing the HR Function

Corporate Research Forum, 2006

Outsourcing the HR Function

Corporate Research Forum, 2006

Outsourcing the HR Function

Corporate Research Forum, 2006

Outsourcing the HR Function

Corporate Research Forum, 2006

Notes for readers

Outsourcing the HR Function

Corporate Research Forum, 2006

Outsourcing the HR Function

Corporate Research Forum, 2006

Corporate Research Forum

Obtaining copies of CRF reports

Outsourcing the HR Function

Corporate Research Forum, 2006

Selling points of HRO

Strategic debates around HRO

Outsourcing varies dramatically by type, level, contract and provider.

Outsourcing the HR Function

Corporate Research Forum, 2006

specific lines of HR they intend to outsource.

The HRO logic

Managing the transition

Governance of HRO performance

Outsourcing the HR Function

Corporate Research Forum, 2006

Future directions and recommendations

Outsourcing the HR Function

Corporate Research Forum, 2006

2 Size, scope and whos who in HRO

Examples of outsourced HR processes and services

Outsourcing the HR Function

Corporate Research Forum, 2006

Origins of HRO outsourcing

Outsourcing the HR Function

Corporate Research Forum, 2006

The Scope of HRO

HRO providers and offerings

Performance management Succession planning Abridged from TPI: www.tpi.net

Outsourcing the HR Function

Corporate Research Forum, 2006

The Value Proposition of Major HRO Providers

Clients include Dana Corporation, P&G, Qantas and HSBC.

Outsourcing the HR Function

Corporate Research Forum, 2006

The HRO industry

Arinsco 1% All others 10%

Source: Everest Research Institute, June 2005.

distribution of contracts and their total value. For example:

Outsourcing the HR Function

Corporate Research Forum, 2006

Annualised HRO Spend (1998-June 2004) US$ million

316 75 YE 1998 128 YE 1999 YE 2000 YE 2001 YE 2002 YE 2003 YE 2004 E

Source: Everest Research Institute, 2005.