Organizations, globally, have focused on outsourcing their non-core activities so as to invest further time on their core activities. One of the key processes which has seen a growing trend in outsourcing is Human Resource function. Outsourcing is a method where companies contract out a business process to an independent firm, which the firm provides as a service. In Outsourcing, the service provider is an expert in that area. This in turn gives an opportunity to the company to hire the best service provider and the organization can instead focus on other higher value-added and core activities. Studies have shown that HR Outsourcing has become a strategic decision which is taken to improve the bottom line of the company. As per Business Standards, 71% of CEOs believe human capital as their biggest contributor to sustained economic value, this statement signifies the importance of Human Resource, and hence it should be utilized to the maximum, resulting in the growth of the organization.
HR Outsourcing Trends
Human Resource Outsourcing is not a new phenomenon. Organizations have been outsourcing various components of human resource functions, such as payroll and benefits administration, for years. But off late it has become a point of discussion for one and all because, recently, giants like global Fortune 500 companies have chosen to outsource their entire HR function.
• 50-60% of organizations view employee retention as a concern
• Administrative duties & employee concerns take up as much as 70-80% of the time
• Costs associated with employee turnover range from 30-150% of employee salary
• In-house HR costs range from 20-30% higher than outsourcing
• About 54-60% of all job applications contain inaccurate information
• Analysts have forecasted the global HRO requirement to grow at a rate higher than 12%
Strategy for Outsourcing HR Functions
An organization can outsource its HR functions partially or completely. When it outsources partially, the company retains some control over the outsourced functions and may share access to information with the vendor. When the functions are outsourced completely, the organization relies upon the vendor to carry out the entire function. The strategy to outsource HR function completely or partially shall depend on the many parameters including, but not limited to, Employee strength.
Organizations with smaller employee strength (i.e. up to 150 employees) can completely outsource their HR function, since it shall reduce the cost for the organization to have HR experts of varied levels at a lower cost than hiring an FTE. On the other hand, organizations with huge employee strength, should focus on outsourcing part of the HR functions including strategic & operational HR like:
• Background checks
• Training & Management Development Programs
• Executive Development & Coaching
• Employee Benefits Administration
• Employee Relocations etc
Reasons for HR Outsourcing
Organizations are gradually migrating to HR Outsourcing as they have realized that if done so, there is a considerable reduction in operating costs which helps the company to save substantial money to invest in its core business. By outsourcing to service providers who have expertise in certain areas, companies are able to achieve improved legal compliance and control.
With HR functions in place, processes within the organization become more streamlined which helps the team to decide about allocation of employees to tasks. Once processes become organized, it helps to identify loopholes in resource planning and hence, reduce underutilization of resources and also develop a
suitable training plan for employees who require grooming and training. This automatically boosts the motivation of employees and increases team-work within the organization.
When there is a functional HR team in the organization, the employee performance management system is also designed appropriately for the employees. This includes proper succession plans, fair appraisal and feedback process and motivating rewards and recognition system. This motivates employees to strive harder and eventually increases the quality of work in the company.
Case In Point
One of our clients, who is a strong player in Warehouse & Logistics Management, UAE, with an employee strength of less than 100, decided to outsource its HR function, after the owners of the company were majorly involved in all the issues pertaining to employee management.
We, along with our team of experts, suggested the client to outsource its HR function to us so as to reduce their time involvement and enhance the overall HR management. In the process, we conducted a detailed HR Audit of the client to identify the areas of priorities to focus. We identified that the client did not have a proper structure for its HR functions. Functions like Payroll, Leave Management, Recruitment and Performance Management were taken care by the various divisions. For example, Payroll was managed by the Finance team, administration team took care of the Leave applications and approvals and there was no standard operating procedure followed for performance appraisals. The owners had to be involved in every decision, small or big, which took away their time to make strategic decisions.
Once we started as their HR advisors, we brought the focus on streamlining the process including implementing SOPs for leave management, financial assistance like loan and payroll, performance management, rewards and recognition process, and exit process. All these processes were performed following the UAE labor law. All HR functions included in the Employee Life Cycle were taken
care by our team; right from selecting the appropriate person for a role, on-boarding process, performance and leave management, succession plans and exit procedures. This proved beneficial for the company as when these functions were outsourced, it allowed the owners and senior management to focus on its core business and other strategic decisions. This also made up for the lack of inhouse expertise.
As we took care of all HR functions within the organization, employees had a dedicated point of contact to communicate their issues. This helped employees to resolve their issues faster and better, which in turn helped them dedicate their time to their work and perform better and improve the company’s service deliveryWith
With this, the company could also save money on hiring a permanent full-time HR in the organization and hence, reduce operating expenses. Overall, the decision of outsourcing benefited the company to streamline its processes, to control legal risk and improve compliance and most importantly to reduce their operating cost associated with the hiring of full-time HR in the organization, to the tune of 25% of the budgeted cost were saved in the process.
A dysfunctional HR roadmap or ineffective HR management strategy has long-term consequences for an organization. It affects the performance of a business and the productivity levels of employees. Customer service on all fronts gets affected. The loss of customers and medium-term revenues is quite immediate.
Over a period of time, the freefall leads to an impact on the bottom line of an organization.
When human resource functions are outsourced to service providers with expertise, all processes in the organization become streamlined systematically. This automatically motivates employees to work and create a positive corporate ethos in the organization.