Companies cannot seem to decide whether outsourcing or keeping things in-house is the best way to go. The last Arvato quarterly Outsourcing Index revealed that total outsourcing spend more than trebled in the third quarter of 2015 compared to the second quarter. The index also found that the average contract length grew 38% from Q2, and uncovered a trend towards more companies dabbling here, or at least forging relationships with new providers, with 55.5% of deals in 2014 being first-time outsourcing agreements, compared with 33.5% in 2013.
The index revealed the large percentage HR deals contribute. A fifth of all outsourcing deals signed in 2014 was for HR services, with Q3 2014 seeing a 24% increase year-on-year in the average value of HR deals. What this leaves us with is something of a disconnect. On the one hand, looking at the stats, HR outsourcing activity is booming, fuelled (according to the Avarto index) particularly by renewed post-May election 2015 confidence. On the other, it’s hard to find anyone who does not cite insourcing as the latest thing.
For Jones, this contradiction “might be the Pareto principle” at work. “I think 20% of the companies are using 80% of the outsourcing,” he suggests. “But 80% of companies are saying this represents a risk, unadaptable contractual relationships and poor experience. And it’s the Unilevers and Sainsbury’s and mega employers who are doing this because they have the scale to make it work.”
Rob Bolton, a partner in KPMG’s Global HR Centre of Excellence, explains that just because the outsourcing market is thriving relatively well compared to recent years, does not mean we have returned to the homogenous picture of the late ‘90s and early 2000s. Here there was an element of fad-driven activity, he says. “The HR function does tend to follow some fashions. There is a lack of thinking through things for your context,” he says, adding that the allure of the trendy seems thankful to now be lessening: “I think what we are seeing now is more evidence being applied and people making decisions about what’s right for them, which is why we are seeing more of a nuanced picture,”
The trend that is emerging in HR is much less about outsourcing vs. insourcing – it’s more about choosing the right solution for your organisation to help you achieve your strategic agenda. For the many passionate advocates of more evidence-based HR, this is highly encouraging. But to summarise that today’s state of play is purely one of everyone doing their own thing, with companies diverging completely in terms of which HR areas they outsource, would be to risk overlooking another interesting emerging trend.
What this new, more evidence-based approach is leading many to is something of a reversal of the outsource-all-the-operational elements-but-keep-the-strategic-in-house trend. Where it was previously assumed that no good would come of outsourcing strategic elements, now many are having a rethink. Which provides further explanation as to why the stats and anecdotal picture does not seem to quite stack up.
What is now emerging is a landscape for which the traditional terms ‘outsourcing’, ‘insourcing’ or ‘in-house’ do not perhaps quite cut it. The principal of Mercer’s UK talent business Julia Howes explains that concerns over quality and representation of the employer brand are not the only motivations driving people to bring transactional operations, such as recruitment, payroll and benefits, ‘in-house’. With the advent of ever-more sophisticated HR software, people are realising they can do things more cost-effectively with tech than with a traditional outsourcing arrangement.
Howes confirms growing appetite among HR departments to call on the expertise of those leading their field in one very specific strategic area. Again though, ‘outsourcing’ is perhaps not quite the right term. A better one, Howes suggests, is ‘talent eco-system’, with HR departments a microcosm of the wider picture of more permeable freelance- and supplier partnership-reliant organisations.
“It’s moved away from ‘what are our core activities where we can get efficiencies?’ to businesses asking themselves ‘where are some of the core capabilities we need to develop and is it going to be more effective if we do it through this more dynamic talent ecosystem?’” she says. “My background is in strategic workforce planning; that’s an area that has started to become outsourced.
“Another area people are looking to is the digital and analytical side,” she continues. “Most organisations are struggling to get the right data capabilities. We are seeing a lot of organisations saying they want the internal HR analytics capability to be around business partnering and telling the people story with data, but the actual number crunching is going to be much more effective in a pro-sourcing arrangement.
Though Morrison is a fan of keeping most strategic activity in-house for the above reasons, his department conforms to some extent to Howes’ description, with rarely-used and highly specialist elements outsourced. ‘’Where there is a high skill requirement that you do not use very often I think it makes sense to outsource it. For example global mobility. Unless you process enough moves to set up a team internally you are better off outsourcing. Then the expertise remains up-to-date, the costs are shared with other companies, and you get responsive service.”
Brian Sommer, industry analyst and founder of TechVentive, claims HR departments will become smaller as new technologies allow employees to participate directly in HR processes. He explains, “Many businesses are going to get a lot of capability done by better technology, more self-service and the employee doing a lot on their own.”
While employees begin to shoulder a larger part of HR’s administrative duties through self-service portals, Dr Janice Presser, CEO of The Gabriel Institute, predicts many transaction-heavy HR jobs will be outsourced entirely. Dr Presser goes so far as to say, “Entry-level HR jobs, as they currently exist, will all but disappear as transactional tasks are consigned to outsourced services.”
But despite the shrinking size of in-house HR, the human resources function will endure. As Chip Luman, the COO of HireVue, explains, “Given the ongoing regulatory environment, the need to pay, provide benefits, manage employee relations issues and process information will go on.”
Munodiwa Zvemhara is a consultant at Industrial Psychology Consultants (Pvt) Ltd a management and human resources consulting firm.
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