To Outsource or Not? That is the Question!

Robin Throckmorton, M.A., SPHR

This has become an increasingly popular topic within the human resources field.  Gartner Dataquest reported that human resources outsourcing in the Unites States is expected to grow from $21.7 billion to $58.5 billion by 2005.  But why?  Well, as we all know, our human resources departments are getting leaner and leaner but are expected to still do more and be more strategic.  So, is outsourcing the answer? “It depends…”

First, let’s be sure we all are on the same page on what outsourcing means.  To me, outsourcing is the process of using outside expertise and / or support to perform a specific need.  A specific need does not necessarily mean the entire human resources function; it can also include pieces such as a special project (i.e. revamping the performance management program), interim support (i.e. during a medical leave or peak demand), or specialized function or service (i.e. recruiting or benefits). 

What could you outsource?  Mary Cook states in her book Outsourcing Human Resources Functions that “…up to 94 percent of companies outsource at least one human resources function.”  According to Glenn Davidson’s article “Companies Increasingly Seeking to Outsource Human Resources,” the most often outsourced areas include 401(k) programs, health benefits management, and pension benefits.  Some other areas that are often outsourced include payroll, recruiting services, compliance management, compensation analysis, training, cultural surveys, coaching, and special projects.

How do you know what you should outsource?  The best place to start is by creating a strategic plan for human resources.  (For tips on strategic planning, see our previous article “A Fresh Start” in the February 2002 issue of GCHRA Resources or http://www.strategichrinc.com/Articles/Art_Fresh.htm)  You need to have a clear vision and mission and the related goals and objectives needed to meet them.  Once you have this spelled out, you can evaluate your internal resources to determine if you have the time or more importantly the expertise to meet those goals.  Conduct a cost benefit analysis of the activity internally versus externally and I don’t just mean dollars but also timeframe, quality, and of course sanity.

To help you with this analysis, let’s talk about some of the reasons or advantages of outsourcing.  In Glenn Davidson’s article, he states the “top reasons for outsourcing include cost savings, higher service quality, access to expertise and technology, and the ability of staff to focus on core activities.”  In “Outsourcing Human Resources” by Rosemary Thomas, she even states that companies end up saving 30 – 40% of their cost through a reduced headcount.  She goes on to say that quality is higher because you have more options for automated services and the opportunity to use an expert to fulfill the need.  Plus, vendors can provide neutral advice without regard to the office politics.  Most importantly, we can’t do everything and outsourcing let’s us focus on what we do best and have an expert do the other things best as well.

But, outsourcing isn’t always the answer.  There are some potential disadvantages that you will want to consider.  To begin with, the activity does not entirely go away.  You will still need someone to be responsible and accountable for the activity and maintain communication and coordination with the outsourced vendor.  Plus, sometimes the outsourcing can demotivate employees because they feel it is work they could have done or would have “grown” by doing if given the time and opportunity.  Another disadvantage is that you are putting your company and confidential matters in the hands of an outsider.  You will need to address each of these disadvantages as well as the cost to be sure you and the vendor you select can turn them into advantages.

Okay, now you have decided you want to outsource, let’s talk about how.  As with anything, the number one way that you are going to find a vendor that can do the job for you is networking.  Talking with others that have done the same thing to learn who they used and why.  But, if you have nobody to talk to, there are many other resources to help identify vendors:  national and local associations, outsource suppliers, schools, online contractor services (i.e. http://ww.experiencenet.com; http://jobfolder.com/ http://www.eLance.com; http://www.bid4geeks.com; http://www.freeagent.com; or even your recruiting websites like http://www.monster.com). 

Once you identify potential vendors, you have two options.  First, you can meet with each vendor to discuss their background, strategy, and fee structure with regards to your need and ask them submit a written proposal. Or, you can develop a written Request for Proposal (RFP) and send it to interested vendors to complete.  Your RFP should include details of the services required, activities to be performed, and end results expected.  To avoid multitudes of calls, be sure to include as much detail as you can but definitely the deadline for submission and date a decision will be made. 

As you review the proposals from your vendors (and yes, I would get it in writing from anyone you are considering friend or not), there are some simple things you can consider.  First of all, you will want to determine if the vendor has similar values and thoughts to yours but will also introduce new ideas that you may not have thought of.  You will want to assess their skills and experiences with the task you are outsourcing with specific criteria or needs in mind.  Ideally, you’d like the vendor to have related industry experience.  Also, be sure to find out the vendor’s availability to do your work in the timeframe required.  And, of course, you need to consider price.  I save this for last because it is an important piece to your selection puzzle but shouldn’t be the only piece.  Remember, you get what you pay for – so don’t always go with the cheapest.

Once you have selected your vendor, you need to formalize the arrangement in writing.  Your vendor may provide you a contract or you may need to draw one up yourself but be sure to include the duration of the assignment, when and what payment will be, who will have ownership of materials, and an option for either party to terminate the contract if needed.

Also, you will want to assign a point of contact on your staff and with the vendor’s staff.  These two individuals must have regular and ongoing communication.  Upfront and throughout the project, the needs should be clearly clarified so you know who is doing what.  Also, you may want to establish milestones and/or metrics to monitor productivity, quality, and customer satisfaction.  Be sure you give your vendor credit when credit is due.  They are human too and need your feedback both positive and negative and will be even more valuable to you if they feel beneficial to you. 

Since outsourcing is a very broad term and can mean one project or the entire HR function, it is worth mentioning there are a number of legal issues to consider.  To begin with, you will have to be able to show that your vendors are contractors and not employees.  There is an excellent tool on http://www.HRtools.com to help you conduct the independent contractor test.  But in general, you should consider who has control over details of the work, who provides supplies and office, how long is the assignment, what is the method of payment, is the work a regular part of your business, and will you be including the vendor in company programs or events.  Plus, you will also need to determine who is responsible or worker’s compensation and unemployment insurance, especially if you are outsourcing your entire human resources function.    

Bottomline is you can’t do and be everything to everybody no matter how good of an HR manager or director you are unless you are willing to work twenty-four hours a day seven days a week.  Use some of the tips in this article to help you assess what activities are important and need kept in house and which ones just make common sense to outsource.  

Robin Throckmorton, MA, SPHR, a Senior Human Resources Management Consultant is President of Strategic Human Resources, Inc. (http://www.StrategicHRinc.com) and Partner of e-HResources.com (http://www.e-HResources.com).