outsourcing effects on hr leadership

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PERSPECTIVES William G. Stopper, Editor

Outsourcing's Effect on HRLeadership DevelopmentWilliam G. Stopper, Partner, The Walker Group

All indications are that HR outsourcing ishere to stay. Companies and their HR leadersare adjusting to the change, and the out-sourcing firms themselves are maturing. Weseem to have a pretty good handle on thecompetencies needed to succeed in both are-nascorporate and outsourcing firm. Theconcern expressed in this Perspective revolvesaround the development of future HR lead-ers. Readers are asked to join in contributingtheir insights into the issues and questionsthat follow.Background

The pressure to reduce HR costs throughoutsourcing fits wonderfully well with thedrive of HR to become more strategic: Moveout transactional workbackroom work, ifyou willto allow more attention and timeto be devoted to front office work (address-ing issues that have greater long-term influ-ence on business performance). Outsourcingfirms have multiplied to absorb the trans-ferred work and to make a business of it. Thebook Human Resources Business ProcessOutsourcing: Transforming How HR GetsIts Work Done (Lawler, et al., 2004) chroni-cles the rise of Exult as major com panies out-sourced many of their HR activities to it.

HR outsourcing is a big business, in the$30-to-$40 billion per year range. Despitethe occasional horror story that causes acompany to "back-source," there are noindications that this is a fad that will pass. Infact, what began as a large-company phe-nomenon is now becoming more common-place among mid-size and smaller companiesas they see less risk in the experience of theearly adopters. It should be mentioned thatsending HR activities offshore has not hadmuch play: Only about 3 percent of HR out-sourcing is offshore. Activities that do notrequire direct employee contact, like claimsprocessing, may be sent offshore, but so far,companies seem reluctant to have theiremployee's questions answered by someonewith a foreign accent located in a call center

in another country.HR outsourcing is having a number of

positive effects. As companies enter out-sourcing negotiations, they come with agreater understanding of the mission of thefirm and its core business. They also comewith greater clarity around the true and totalcosts of HR and what priorities to assign

more willing to put their HR activities in thehands of a single outsourcing firm ratherthan spread them around to separate nicheplayers in compensation, staffing, payroll,401(k), etc. Having to contract and interactwith one partner (vendor) is preferable todealing with many.Competencies and Careers

In this new outsourcing world, what willit take to be successful? What are the careertrends? The competency domains articulatedby The Society for Human ResourceManagement are a good starting point andseem to be holding in the new environment:strategic contribution, personal credibility,HR delivery, business knowledge, and HRtechnology. These can be fleshed out bystudying the requiremen ts in recent recruitingads by companies seeking senior HR talent:

The pressure to reduce HR costs through outsourcing fits won-derfully v/ell with the drive of HR to become more strategic:Move out transactional work ... to allow more attention andtime to be devoted to front office work (addressing issues thathave greater long-term influence on business performance).

various HR activities. Once under contract,there is much more emphasis on measuringresults, on doing work that needs to be doneversus work that is nice to do, on doing workright the first time without the fits and starts,the fuzzy requirements, the rewrites, that areoften the bane of an HR professional's life.

Within the outsourcing firm, functionalareas of HR become revenue and profit-pro-ducing activities rather than overhead costs.The backroom becomes a business with realcustomers and incentives to grow. Thosewho have transferred to outsourcing firmsreport their satisfaction with having respon-sibility for client relationships, with the fastpace, with being paid on results. They likedealing with multiple customers. As internalHR professionals, they knew a lot about onecompany, not much about the market. In theoutsourcing firm, they know more about themarket although not as much about a givencompany.

Some sorting out among the outsourcingfirms, some consolidation, are expected. Partof this sorting out is seen in the entrance ofthe large HR consulting firms like Mercer,Hew itt , and Towers Perrin into the outsourc-ing field through acquisition and partner-ships. At the same time, companies no w seem

Strategic analysis and problem-solvingskills

Business, functional, and internationalknowledge

Change management/influence andcommunication skills

Project, team, and vendor managementskills

Technology skills MetricsOn the other side, the outsourcing firms

advertise different requirements for the twotypes of positions for which they recruit:1. Client Services

Leadership, client management, andclient relationship skills Risk management and negotiation skills

Regulatory knowledge Project management skills Initiative and decision-making compe-

tencies2. Operations

Expert functional knowledge and atten-tion to detail

Customer service Time management and technology

skills

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Written and oral comm unications, andfacilitation skills

Process management, and data analysisand interpretation skills

The ability to implement newapproaches

The lists are not particularly new; thecombination and emphasis placed on differ-ent skills is informative, and should providesome guidance for those deciding how todirect their careers. In the outsourcing firms,the premium will be on credibility as a high-quality service provider (on time, on budget,on point) with technology, process, and met-rics as key skills. In companies after out-sourcing, citing Ed Lawler again, this timefrom the article "HR on Top" in Issue 35 ofStrategy+Business, what will remain is "ahigh powered staff group that focuses onhow human capital should be managed,developed and teamed in order to implementan organization's business strategy." Changemanagement and organizational design skillswill be critical.

An article in the October 2004 issue ofHR Magazine suggests consideration of threecareer options:1. Stay with the company after outsourcing

and place emphasis on vendor manage-ment and innovation.

2. Mov e to the outsourcing firm if your inter-ests include service, process, and prof-itability.

3. Move to an organization with no plans tooutsource to pursue traditional roles andactivities.The article continues with some overall

career advice for all HR leaders and profes-sionals: Embrace outsourcing (it is not g oingaway), hon e your skills on projects related tocultural change and the speed of change, andvary your work experience.HR Leadership Development

The business side of HR outsourcingseems to be fairly well in focus, as are thecompetencies required to be successful in theoutsourcing world today. What has notreceived much attention yet is the longer-term effect of outsourcing on HR leadershipdevelopment. The outsourcing firms assume,as evidenced from their Internet recruitingads, that higher-level corporate experiencewill be available to them for openings theymay have. But what if that source dries upover time?

Those of us who grew up in large compa-nies remember that not too many years ago.

armed with a college degree and perhapssome management experience, we built ourHR portfoliolearned the tradeby rotat-ing through a series of functional jobs in ourcompanies and positioned ourselves tobecome HR business partners, HR internalconsultants, functional managers or direc-to rs , etc. Companies looked upon thispipeline of HR expertise as the source offuture HR leaders and invested in its devel-

quickly to mind:1. Given the limited number of outsourcing firms, will companies be able to recruisufficient strategic HR experience fromamong the senior levels (client services) othe outsourcing firms? One possibility heris that companies and their outsourcingpartners would establish agreements fothe movement of talent between the twoorganizat ions .

W h a t has not received much attention yet is the longer-termeffect of outsourcing on HR leadership development.

opment. Downsizing affected the numbers inthe pipeline but not the concept. Likewise,HR generalists in small companies learnedthe trade by touching a variety of functions,only all at once and typically under greatpressure to learn fast, as they often wereand still aresingle-person departments.

Outsourcing almost by definitionremoves much of the pipeline experiencefrom the company. So where will the compa-

EXHIBIT 1Company

Strategic HROutsourcing Firm

Client Services

Transactional HR

ny get its HR leaders when the incumbentsmove on or retire? It is an im porta nt q uestionand one that we ought to think about nowrather than later.

The immediate answer is from the out-side: Current HR leaders in other companies,HR generalists from small companies whomay not have outsourced, or from the out-sourcing firms. The first two outside sourcesare not new. The only trouble is that if all ofyour HR leadership talent is hired from theoutside, rather than being mixed with inter-nal talent as before, you gain fresh view-points b ut lose cultural insight and linkage toline management. At some additional cost,investment in targeted development will benecessary to bring this new outside talentalong to the level required to function strate-gically within your organization.

The third source, the outsourcing firms, isnew, and there are two questions that come

2. Are outsourcing firms motivated to invesin HR leadership development, and are companies willing to pay for it in their serviccontracts? The firms are selling functionaexpertise and may invest in improving thaexpertise but may find investing in strategicHR capabilities unnecessary to their businesmodel, especially for employees in offshoreoperations, given, among other things, thecost of international assignments.

A third question arises from thinkingabout the long-term strategy of HR outsourcing firms. W hat if the outsou rcing firmsplan to take it all? Here are the elements ofthis scenario. HR outsourcing is a growthindustry. The major consulting firms withtheir expertise in HR strategy gain a majorstake in the industry. As the consulting firmsprove their capabilities for providing focost-effective, high quality, measurable HRservices they go upstream and gain companyacceptance for performing more and more ofthe strategic HR activities. The managemenof small- and medium-sized companies maybe particularly taken with outsourcing theentire HR functionin Lawler's terms, trueHR business process outsourcing. After allreturn o n investment is built into the businessmodel.

EXHIBIT 2Outsourcing Firm

Client ServicesStrategic HR

Transactional HR

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Nothing is wrong with this scenario. Thecompany is interested in ensuring thathuman resource management is done anddone well, strikingly like Microsoft establish-ing a Windows platform for the PCs boughtby multiple companies. But there are anumber of implications:1. The consulting/outsourcing firms will haveto be clear in their pricing that managing HRis different than consulting. It is probablyunrealistic to expect to run an HR outsourc-ing firm as a partnership.2 . The consulting/outsourcing firms will haveto gain regular access to line managementand will have to be more flexible in contra ct-ing to accommodate the ebb and flow ofmanagement demands. Today, HR absorbsthis give and take with management "with-out charge." Internal HR has struggled to beat the strategy table for years. Getting thereby contract may be easier initially, but theconsulting/ou tsourcing firm will have to keepproving its value.3 . HR may become more of a commoditywith p otentially less and less tailoring to indi-vidual company cultures. The tailoringwould have to be accomplished by skilledline managers, something preached by HRfor years and invested in heavily in leadershipdevelopment programs. The absence of inter-nal staff may motivate managers to acceptthis responsibility.4 . On the company side, the HR organiza-tion will look dramatically different, withvendor managers occupying significantsenior positions. In this scenario, not much issacred. Even the traditional functionsreserved to internal staff, like executive com -pensation and succession planning, can bedone, and are already being done in someinstances, by outside firms.

These questions and implications deserveconsideration. If they seem extreme, remem-ber that HR is the only function in recentmemory to have two major business publica-tions {Fortune an d Fast Company) argue forblowing it up. The purpose here is to invitediscussion among the members of TheHuman Resource Planning Society and thelarger HR community. Do you as companyleaders have concerns about the futurerecruitment and development of your HRstaff? Do you as leaders of HR outsourcingand consulting firms see the questions raisedhere as real or imaginary?

We value your insights, and welcomeyour dissent.

Send your letters confirming, expandingon, or challenging this discussion [email protected]. Your letters may bepublished in a future issue of HRP.

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outsourcing effects on hr leadership

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