HR outsourcing has become a viable option for many companies as they strive to succeed in the tight economic and employment landscape, but is it really for everyone?
In a market facing talent scarcity and raging competition, companies are doing whatever they can to boost productivity. Through this, HR outsourcing has emerged to become an important asset for some organisations. This in turn pushes HR practitioners to take on a role with a higher value purpose.
According to Ken Wong, UOB’s executive director and head of HR planning and operations, group human resources, outsourcing “significantly improves the organisation’s ability to focus on their core competencies.”
This can happen when HR is allowed to adopt a more strategic focus on business-critical activities such as succession planning, talent management, talent development, and people workforce planning.
Roselin Lee, director of human resources at Estée Lauder Travel Retailing, Asia Pacific, explains the concept of a business partner role with an analogy comparing three different scenarios taking place in a race.
The first race, representing a company with an administrative and transactional HR role, is one where the managing director, for example, runs in front and finishes the race first.
He then turns around and tells the HR leader what lies in front and what to look out for.
In this scenario, the HR function is one she describes as reactive. “If people don’t tell you anything, you don’t bother. You continue to do what you need to do on a daily basis,” says Lee.
The second race is where the HR leader and the managing director both run the race together, at the same pace. This is when they share the same vision and are aware of what issues lie ahead of them. This is a business partnership.
However, this partnership can still be improved, illustrated in the third race where the HR leader runs in front – leading the way and planning for the future needs of an organisation.
To outsource or not to outsource?
Apart from freeing up time for HR leaders to focus on core competencies, Wong says HR outsourcing can also improve the quality of work, timeliness and the whole employee experience.
So, with this in mind, shouldn’t all companies outsource their HR functions? The answer to the question lies in the direction of the company itself and what role it wants its HR to perform, says Lee.
If a company chooses to have its HR take on a more business partnership role, “something has to go,” she says.
Companies must carefully consider whether a particular HR role can be automated or outsourced externally. A common mistake, according to Lee, is when outsourcing is seen as an easy way out to reduce their manpower.
An overly “simplistic” view on adopting outsourcing without a “clearly defined end in mind” can be dangerous, says Wong.
“When you have a balanced view in terms of what you want to achieve out of outsourcing, and you work towards that goal, it will probably be a much more satisfying experience,” he says.
Another mistake is outsourcing because of an attractive quotation, while overlooking the quality and sustainability of their service.
“The focus should be on whether the service is going to be provided seamlessly and not cause any grievance or inconvenience to the internal employee,” Lee says.
Nevertheless, quality service comes with a price. “When you pay peanuts, you get monkeys,” says Wong.
While it might not make sense for a company to outsource a function where its core competencies lie, he says, the perfect opportunity to outsource comes when there is a match between the ‘gap’ in an organisation and the capability the vendor provides.
But the choice about whether to outsource or not ultimately depends on the company’s strategy. If a vendor possesses an expertise in a particular function which can be outsourced, it may be useful to forge a partnership with them.
“Outsourcing gives you that flexibility to scale up or down quickly, without burdening your headcount pressure and fixed overhead expenses.”
An extended arm
“The vendor needs to live and breathe our values and our culture,” says Wong, adding a perfect outsourcing company would be one that is “perceived to be an extended arm of the corporation’s HR function”.
He compares an ideal outsourcer to the call centre service staff of a renowned credit card company or bank who represents the interest of the company.
“My expectation is for them to really understand the culture, the values, and the challenges of my organisation…and then represent us as though they are part of the company’s team,” Lee says.
For Wong, the level of consistency should ensure staff “can’t really tell” if functions are handled by a vendor or in-house.
While it is important to maintain the relationship with this “extended arm”, companies should also remember to maintain communication with their employees about any changes. Be mindful of who will be impacted by outsourced arrangements and execute proper change management, if necessary.
“Educate and communicate that (change) to the employees so they will be aware of how they will be affected,” he says.
At the end of the day, no one should be taken aback when discovering their salary, for example, is being handled by an outsourced vendor, for example.
“We have to proactively manage the entire process; we just can’t take it for granted,” he says.
Value added services
Wong says cost saving might not be as significant as it used to be for both companies and vendors, as a result of cost inflation over the years.
In fact, outsourcing vendors are affected as they aim to bring value to their clients, striking a balance between providing competitive prices while also providing quality services.
He adds companies might not even notice cost savings when outsourcing, as the value proposition of vendors starts moving away from cost leadership to value creation.
“You might incur a higher cost, but hopefully the quality of output is worth the investment.”
Looking to the future, he foresees the expansion of service offerings among HR outsourcing vendors, with more consolidation or mergers across different industries. While he doesn’t believe the quantity of HR outsourcing vendors will rise, he believes their value will.
“I do see them moving up the value chain,” he says, adding ‘one-stop shop’ outsourcing providers offering a multitude of services would be ideal for most companies.
Case study: Estée Lauder Travel Retailing Inc.
Roselin Lee, director of human resources at Estée Lauder Travel Retailing Inc. in Asia Pacific, tells Amos Seahabout the challenges and lessons of outsourcing various HR functions internally and externally.
According to Roselin Lee, director of human resources at Estée Lauder Travel Retailing Inc. in Asia Pacific, the company wanted to relieve their HR team of “mundane” administrative functions so they could take on a more business partnering role.
The decision to outsource was prompted by a “global strategy to evolve the HR roles and responsibilities so they can take on a more strategic role partnering the business,” she says.
This gave HR leaders time to sit down with business leaders and discuss other matters, such as whether there was a need to realign or restructure a team in the organisation, for example.
But the biggest challenge was discovering whether the HR team had what it took to become a strategic partner.
Lee emphasised outsourcing was critical to the company. However, it also had to ensure it was as “seamless and consistent” for their employees.
“In terms of service delivery, it has to be as though employees are still working with an internal HR person.”
Internal and external outsourcing
Administrative and transactional HR functions at the company are outsourced to both an external vendor company and a dedicated team based in Hong Kong. The regional team in Hong Kong is in charge of transactional functions such as the generation of letter of appointments, on-boarding, off-boarding, and leave and benefits administration.
It can be contacted via “HR Connect”, a platform for employees to manage their personal information, or go to if they are faced with a certain HR query. Payroll duties, on the other hand, has been outsourced by the company to Prosoft since 2004. Among the many vendors reviewed, Prosoft met the company’s requirements and expectations.
“We were looking to see if they could meet business requirements like the journal entries, quality and the turnaround time,” Lee says.
Additionally, the company’s implementation of Prosoft was in line with a requirement by the Sarbanes-Oxley Act, a standard set for all US companies which required a clear segregation of duties. This meant payroll processes like the creation and entry of data should not be handled by the same person. So the company outsources Prosoft to process payroll, while having its finance department audit and validate them before getting approval for payment.
“With segregation of duties, we minimise any possibility of breach of trust.”
Getting used to change
Lee says it was initially difficult getting staff used to the idea of having their payroll handled by an external vendor.
“People are not comfortable with change,” she says, adding employees had to “trust somebody external” for the first time.To help ease employees into the new mindset, the company carried out several front-end user training sessions and communicated why it needed to do what it was doing.
The “communication sessions” are held every time a change is made, to ensure employees understand the reasons behind it. They cover the objectives, what kind of deliverables and what kind of outcomes will be expected of them, and what benefits the new processes will bring.
As the company approaches its 10th year with Prosoft, Lee is happy to say it hasn’t encountered any other challenges since it was first introduced.
A tight partnership
Lee does as a third party paid to perform administrative HR duties. “They need to become part of the organisation,” she says.
“Vendors need to understand the organisation’s structure; its culture and its values, such that they are able to provide consistent services to our employees.”
An effective outsourced admin function should not compromise on quality or standards and should also be carried out as though it is performed by the company itself.
It is also crucial for companies to build and maintain a strong relationship and partnership with their outsource vendors.”There is always an annual review before the renewal of our contract. We constantly keep the communication with Prosoft,” she says.
Lee advises companies deciding on a HR vendor to find out what it has to offer, and make sure they do not treat a partnership as a mere casual transaction.
As some vendors might fit different companies better in one way or another, organisations should consider the clientele of their preferred vendors and also how well they can take on the size of their business.
They should also ensure they have the required software “to meet both the statutory as well as organisational requirements for that outsourcing activity”.
Case study: Archer Daniels Midland
Choosing the right vendor wasn’t an easy task for Alice Gouk, HR director of Archer Daniels Midland. Amos Seahreports.
Outsourcing was an ideal option for Alice Gouk, HR director for Archer Daniels Midland in APAC, which handles about 600 employees from regional offices in Singapore, Australia, Indonesia and Japan.
She believes outsourcing is beneficial – as long as the vendor provides for the company’s needs, and does a better job at handling the outsourced function. It also makes sense to outsource some administrative functions to free HR up for more “value-added HR functions,” she says.
“If your HR outfit is so lean and you don’t have the manpower to do it, you will have to think of alternatives.”
While outsourcing has aided the company in many aspects, she feels outsourcing should be reserved only for functions which do not require as much of a “human touch”.
One of the disadvantages of outsourcing lies in accessibility, particularly if the company does not share the same office hours as the vendor. In this case, a company would not be able to get desired information as “instantly” as it would be from an internal department, she says.
Outsourcing admin processes
Gouk realised it would be practical for her company to outsource some of their administrative HR functions as they started “aggressively” expanding its footprint into China.
She describes the payroll system in China as one which wasn’t particularly straightforward, and required many different steps.
China also requires companies to practice mandatory filing – a filing system which has to be done every time an employee leaves or a new employee joins the company – and each different location has different requirements and legislations for admin work.
She admits it was difficult to “catch up” with the laws in the different locations they operate in, saying they would have “suffered” without a vendor’s help.
Setting the criteria
The process of choosing a vendor wasn’t easy. One of the selection criteria was the ability to provide services regionally to the different locations they operate in.
“So if I expanded, I can always tap on their global network in one system…without bothering to look for a second outsource vendor,” she says.
Last year, the company eventually chose ADP to handle their payroll duties and social security. Despite the wide range of choices available, she says many of the vendors did not meet her requirements. “Some of them didn’t even speak the language we spoke,” she says.
Apart from being able to provide global and regional coverage, ADP was also a reputable vendor satisfying other requirements such as service capability. ADP’s awareness of legislation changes in China was a “value add”, and with the knowledge it possessed, it was able to advise the company on any labour law changes related to payroll or HR as a whole.
ADP also provided a diverse range of services extending to other areas such as HRMS and online pay slips.
In the process of choosing a vendor, Gouk also looked into “functional” capabilities such as their level of expertise in areas like e-leave application, for example. “If they were doing filing, they had to be an expert in that area,” she says.
She also looked at non-functional capabilities, such as how compliant they were in handling confidential data.
“If I provide them data, they must be able to give assurance that the data security is maintained.”
She compliments ADP as a “very well run company”. ADP also took extra steps to compromise on certain requirements such as with their customised reports, which she felt were too “cumbersome”.
“They were willing to take our feedback and make changes to the system.”
Having settled into a satisfactory partnership with ADP as their outsourcing vendor, Gouk says the effort put into it was worth it. However, she advises companies looking for similar global service providers to ensure they can deliver the required capabilities independently.This is because some outsourcing providers might reach out to other third parties to perform duties at other locations or more “remote areas”.”Make sure the service provider is able to perform those capabilities, and be on their own when providing them.”
If necessary, she recommends companies to meet these “third parties” before committing, as their quality of expertise might be compromised, and there should be room for negotiation with the vendor when faced with such scenarios.
“Each company has their own requirements,” she says, adding they should spend time in the selection process of a vendor, and not rush into it without the setting of a proper criteria.
As tedious as it may be, it will ensure an effective partnership with the right outsourcing partner.
Case study: UOB
Ken Wong, UOB’s executive director and head of HR planning shares why HR outsourcing is all about finding a “win-win” balance in the relationship. Amos Seah reports.
Ken Wong, UOB’s executive director and head of HR planning and operations of group human resources refuses to label HR outsourcing as something which is critical or otherwise. Instead, he believes outsourcing encompasses an ongoing reflection and consideration for whether it is creating the most value for the bank, as well as its employees.
“I think it is part of my operations. I need to look at what is available in the marketplace and balance between what I want to do internally as my core competencies versus what I want to outsource.”
Rather than simply jumping on the bandwagon in order catch up with a “fad”, he says the decision to outsource is based mainly on a “capabilities standpoint”.
At UOB, some of the HR functions outsourced include benefits administration, selected search and recruitment, and targeted leadership and professional skills training and delivery.
Leveraging on external expertise
The company’s payroll processing is handled by outsourcing provider Aon Hewitt, in a partnership which he describes as “constructive” and mutually beneficial.
He emphasises the decision to outsource payroll process was not because it was deemed to be an unimportant transactional job.
“It is very critical and very important because you want to make sure you pay the employee right all the time. There is zero tolerance for error because you have to pay on time,” he says.
However, in comparison to other functions, payroll wasn’t something the company needed to build its capabilities around.
“How do we add more value to the business…to help us grow to be a regional bank?” he questions, explaining payroll processing wasn’t part of the equation when it came to business. He says the beauty of outsourcing didn’t necessarily lie in cost reduction, but rather in the expertise which they could leverage on, from the “right skill sets and people to do the job”.
Other perks include the vendor’s regulatory knowledge, such as in CPF contribution, for example.
“If you look at the end-to-end process, they are really the specialist in that space,” he says.
The devil’s in the details
Wong says the experience he’s had with outsourcing projects has been mostly positive, however, one of the biggest lessons he has learned is the “devil is always in the details”.
This applies to the defining of the master service agreement, service level agreement or the master service contract’s terms and conditions.
“When things are not ‘spelled out’ [in a contract]… when you go down that path, something ambiguous or vague could become a big talking point,” he says.
Such ambiguity could lead to situations where the company has to deal with a negative outcome by itself. “Because of the fact that it is not put pen to paper, it gives room to dispute and sometimes the relationship can be pretty challenging,” he says.
To give an example, he provides a scenario where an employee might leave shortly after being recommended by a vendor outsourced for executive search.While there might be an expectation for the vendor to arrange for a replacement without any extra charges, some vendors might not actually practice it. As a result, a company has to absorb the full cost.
“When that happens, chances you will fall back on your contract. When it is not spelled out, it will be up for different interpretations.”
He emphasises a contract “might sometimes not be an all-scenarios encompassing” one. In fact, a contract which includes all possible scenarios would be very unrealistic.
Creating an alignment
The ability to solve such problems lies in the relationship built between the company and vendor they are outsourcing their duties to. “If the relationship is not built on a solid foundation, it provides a lot of room for dispute. The entire relationship might just go south,” he says, adding it matters how flexible both parties are in “giving and taking”.
A good relationship involves an alignment between the company and its vendor’s mindset, whereby they understand and agree upon how to deal with their perceived expected scenarios.
“You can’t go by the book. If you go by the book, it won’t work out,” he says.
The relationship should centre on the “perfect match” between the company’s goals and the vendor’s expertise, rather than the contract which was signed as a legal obligation.
A warning sign of a failing vendor partnership is one which creates a “win-lose” or “lose-win” situation instead of “win-win” one. When they point to a contract saying “‘that’s not my problem” then you’re in a dangerous situation, says Wong.
“A robust, solid relationship is one where the vendor really understands the situation and collaborates to work out a trade off for what is the best rectification.”
Ultimately, there are two different ways to approaching these situations. Wong describes the first approach as one where a crisis is dealt with only after it arises or is identified.
This is where both parties have an intimate face-to-face discussion, find out what the problem is, evaluate the various alternatives to dealing with it, and finally “jointly decide on the best cause of action”. This is a reactive approach.
The second approach to a crisis is a more “preventive”; where both parties anticipate the challenges and possible problem scenarios.
In order for this to work, companies should have regular periodic reviews in place to keep abreast on what is and is not working well, so “there is always an ongoing closed loop feedback”.
In the long run, the “preventive” or more pro-active approach will be a much better option than the “reactive” one, he says.
The business of a relationship
“Outsourcing is also a relationship business, even though we are talking about transactional operations,” Wong says.An ideal vendor is one that strives to delight their employees in every interaction and touch point, and “really goes beyond the commercial terms.”
“At some point, it’s all about compromise… making trade-offs,” he says, adding this should result in a win-win situation. Most importantly, both parties will learn through their mistakes and know how to prevent them from repeating in the future. Such scenarios might even strengthen the relationship, he adds.
A relationship which is too transactional and too clinical defeats the whole purpose of a business relationship. Wong advises companies to be very clear in defining and articulating what they would like to achieve from their outsourcing vendor. This helps the vendor better understand the company and their operations.
Have checkpoints throughout the life cycle of the partnership, making sure the relationship is being proactively diagnosed, he says, adding it is easy for companies to take these partnerships for granted after going through a few successful cycles.
If given the chance to do anything differently, he says: “I’ll look through the entire end-to-end process and see if I have the entire plan to help me make sure things would work out the way it should”.