News & Articles

Human Resource Management
Published in the Rochester Business Journal
October 4, 2002
© 2002 HR Works, Inc.

The case for outsourcing HR
By Candace Walters

The way that organizations view human resource management has reached a critical crossroads. Consider the following:

A recent report from the U.S. Small Business Administration (SBA) estimates that small-business owners spend 7 percent to 25 percent of their time handling employee-related paperwork. The figure jumps to 45 percent when factoring in the owner’s time spent on all other HR tasks!

In companies without HR managers, these time-consuming HR activities usually fall to the president, CFO or controller – depriving such organizations of the essential contributions that senior managers must make in order to grow the company. To alleviate this drain, some organizations either hire a full-time human resources employee or designate someone in house who is considered a “good people person.”

But consider also:

An article published a few years ago by Fortune magazine advocated abolishing human resource departments. The piece criticized the traditional HR department as bureaucratic and unable to quantify its contributions. Fortune argued that many of the services provided by traditional HR departments could be better handled by outside service organizations that offer economies of scale, often reducing risks while improving service.

Why outsourcing works

Chances are, outsourcing is nothing new to your organization. You’ve probably been contracting out your information technology function for years. It makes sense: Information technology is a critical function but, unless you’re in the IT business yourself, it falls outside your company’s core competency.

Outsourcing is defined as the process of contracting with outside organizations that possess the ability and expertise to manage specific functions of a business.

When considering other tasks that may lend themselves to outsourcing, look at those that: involve complex, ever-changing regulations; require technology that’s expensive to develop and maintain; and/or drain valuable senior management time. You’ll probably find that most or all of these conditions apply to human resource management.

In recent years, tougher competition and tighter margins have pushed organizations of all sizes to consider the strategic implications of divesting more and more functions. As organizations become more specialized, fine-tuning their offerings and markets, they are less willing to divert talent and capital to non-core activities.

Adopting an expanded outsourcing strategy can work as well for small firms as for giants like International Paper, Bank of America and Prudential Financial, who use the services of California-based Exult, Inc., a publicly held, leading provider of HR business process outsourcing.

Regardless of the function involved, a company that outsources usually does so in order to:

• Obtain the expertise of specialists who can keep the company current on compliance issues, offer best-practice advice and help improve operations and service;
• Enjoy scalability by transforming a fixed cost into a variable cost and buying only the time and services that are needed, when they’re needed;
• Eliminate the cost of purchasing, updating and maintaining in-house systems;
• Improve business processes and the quality of the company’s offerings;
• Remove distractions and focus on the activities central to the company’s missions; and
• Obtain strategic advice from long-term partners who will be accountable for savings.

Establishing a strong HR presence

The complexity of contemporary human resource management has become daunting. It’s rare if not impossible for one person to keep current on all the facets – equal employment opportunity, affirmative action, health and safety, benefits, employee relations, wage and hour issues, compensation and a multitude of other compliance issues. Lawsuits are rampant. Make a mistake in one of these areas, and your business will suffer, possibly even fail. Shackle your senior managers to such matters, and your competition will surpass you.

Why struggle with HR management – wasting money, dissipating energy, bearing unnecessarily high risks and forgoing technological leaps – when it’s possible to use strategic HR to create a competitive advantage? If your company is striving to be a leader in its industry, developing a strategic approach to HR and best practices will assist you to:

• Reduce your exposure to lawsuits.
• Develop a performance culture through metrics and rewards.
• Prioritize programs, focusing on those with the highest business impact.
• Incorporate systems that eliminate manual recordkeeping and processes, and generate reports that measure results of management initiatives.
• Enjoy your vendors’ economies of scale.
• Enjoy your vendors’ technical tools and expertise. Using a vendor’s technology for Internet-based employee self-serve administration, for example, is cheaper and quicker than developing such expertise in-house.

Choosing a vendor

Once your company decides to pursue outsourcing HR, you’ll find that an array of service providers is available to handle everything from a single task, like payroll, to the full spectrum of HR activities. But vendors must be chosen carefully and skillfully. Beware of choosing the lowest bidder, who may offer substandard services.

A thorough checklist should include the following:

• How long has the vendor been offering its services? Does it appear stable?
• What kind of QUANTITATIVE results has the vendor delivered for other companies?
• Does the vendor carry essential insurance coverage such as Professional Liability Insurance and Errors and Omissions?
• How substantial is the vendor’s backroom of resources? The best vendor is one that offers the skills of several professionals, important tools and technology, and systems for constantly sharpening those skills and tools.
• How do the vendor’s pricing and terms stack up? Can the vendor show a satisfactory “return on investment”?
• Do the vendor’s services meet or exceed professional quality standards?
• Will the terms of the agreement be satisfactory? Does the vendor offer a warranty, and is the company likely to remain in business long enough to back up its work?
• References, references, references! What do the vendor’s clients say about the company?

As human resource management grows more complex, the options for responding to the challenge fortunately continue to broaden and become more creative. If your company is spending too many precious resources on this activity, you owe it to yourself to explore the possibilities.

HR Works, Inc., is an HR management outsourcing and consulting firm serving more than 600 clients out of offices in Rochester, Buffalo and Philadelphia. HR Works provides part-time and interim HR managers, HR*Stars recruitment services, legally reviewed employee handbooks and supervisor manuals, employee benefit statements, affirmative action programs, compensation programs, training and more. HR Works also provides services through its allied offices in Syracuse and Baltimore/Washington, D.C. To offer comments on this column, write walters@hrworks-inc.com.

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