Do you have the metrics needed to make the decision?
Human resources outsourcing is one of the most hotly debated HR issues of the past few years. In one camp are HR vendors and their clients who tout outsourcing as the universal remedy. In the other camp are those HR executives who remain skeptical and, in some cases, threatened by the trend.
Some of HR’s reluctance to embrace broad-based HR outsourcing (HRO) is based on uncertainty about the gains to be had.
Traditionally HR has operated without specific measures of performance. Walk into any manufacturing facility, talk to the plant manager and the manager can say, to the penny, what it costs to produce each widget.
Ask a typical HR executive for the cost of absenteeism or payroll and it’s not as readily available. As well, because HR has traditionally not emphasized objective measures of performance, outsourcing relationships tend not to be as comprehensive as those in, say, IT or logistics.
Without appropriate internal process measurements, firms may be setting unrealistic expectations for HRO, designing faulty service level agreements, creating improper metrics and rewards, and entering into flawed HRO relationships.
HRO has appeal
For customers, HRO can be awfully enticing. According to Everest Group, a leading outsourcing consulting firm, and other studies, when managed properly, HRO can generate short- and long-term costs savings for HR departments in the range of 15 to 20 per cent. This at a time when many are faced with a quadruple whammy of increased foreign competition, a rising Canadian dollar and CEO demands for cost-cutting and increased HR service levels.
Regrettably, many HR executives are so pressured to “do something fast” they jump into outsourcing and skip important steps in the process, especially at mid-size employers.
Two areas are typically treated too lightly by HR executives exploring outsourcing. One involves understanding the company’s true HR costs. The other concerns the establishment of effective service level agreements.
Know where you are before deciding where you’re going
An HR department must have a crystal clear picture of its in-house HR costs and processes. This is done by gathering all costs associated with HR, including:
•People planning — benefits, terminations, resignations, absenteeism, labour relations.
•Hiring process — executive, IT, operations and temp staffing.
•Payroll and administration — costs of payroll staff, payroll processor.
•HR department — salaries, training, communications.
•Information systems — HRIS, technology management.
•Risks — workers’ compensation fines, ministry of labour fines, payroll remittance errors, payroll compliance and human rights claims.
The result of this diagnostic should provide the firm with a base line overview to establish its current state before a decision is made to enter an HRO arrangement.
Case study: Measuring whether to outsource
For an example of how the measurement process might work, consider the following scenario of one company deciding whether to outsource payroll.
In this example, Company ABC has 1,000 employees, two payroll employees and already outsources the “payroll processing.”
The firm is thinking about fully outsourcing payroll to:
•reduce costs;
•improve risk management (one payroll employee is thinking of leaving);
•focus on core competencies (payroll staff could be of better service in another part of the business);
•gain access to payroll expertise;
•eliminate administration; and
•gain access to more accurate reporting and data.
Identifying the current benchmarks is relatively straightforward.
1. Clarify exactly what processes and activities comprise “payroll.” Identify all items associated with current payroll processor, all internal data entry, any third-party remittances and reporting, records of employment, year-end reconciliation, adjustment summaries, and reporting and employee questions.
2. Map out the flow of payroll information: Who gets what components and when?
3. Identify employees involved in these payroll activities.
4. Confirm how much time is spent on payroll activities by all staff and allocate a percentage of time accordingly.
5. Document the cost of these resources, including benefits and overhead.
Company ABC has two full-time and two other staff in accounting and finance who spend one-quarter of their time on payroll activities. Finally, there are 100 supervisors and managers who spend roughly one day per year on payroll-related issues. With all this information in hand, the company is able to determine it spends $7.92 per employee per pay. (See table.)
Company ABC now has a solid grasp of total payroll costs and so is able to weigh all costs and benefits to make a fully informed decision about outsourcing.
Know where you’re going: Service level agreements
If the organization decides to move ahead with HRO, a critical element is a carefully created service level agreement (SLA).
The following 10 items provide an overview of the key elements of a SLA. These are compiled from the article, “Ten key questions for developing effective service level agreements,” written by Brad Peterson and published by www.outsourcing-center.com.
1. Determine which service levels to measure. These may include items such as quality, speed, availability, reliability, user-friendliness, efficiency or effectiveness of services.
2. Identify the exact measurements. Each service level must be precisely defined.
3. Determine processes for measuring performance. These must be accurate, have an associated cost and be visible.
4. Define the time period for measuring performance. Typically these are by month or quarter.
5. Identify what reports will be provided, when, and what they will include.
6. Define the minimum or target service levels.
7. Be prepared to adjust the target service levels over time.
8. Establish service level credits. A service level credit is one that the vendor grants to the customer after a service level failure.
9. Be prepared to implement service level bonuses for work performed by the vendor that exceeds contractual obligations.
10. Outline when failure to meet service levels allows termination for cause.
As the success of HRO continues to grow and as the industry evolves, more and more HR executives will begin to explore it as a viable solution to rising business costs and limited HR budgets and resources.
With the proper amount of work up front to scope-out the firm’s total HR cost and service structure, as well as in creating a detailed SLA, HR executives can make more informed decisions about HRO ventures.
Stephen Smith is the director of marketing at Pivotal Integrated HR Solutions which provides HR consulting, recruitment resourcing, payroll and full-scale business process outsourcing. He can reached at (905) 890-8558 or [email protected].
Some of HR’s reluctance to embrace broad-based HR outsourcing (HRO) is based on uncertainty about the gains to be had.
Traditionally HR has operated without specific measures of performance. Walk into any manufacturing facility, talk to the plant manager and the manager can say, to the penny, what it costs to produce each widget.
Ask a typical HR executive for the cost of absenteeism or payroll and it’s not as readily available. As well, because HR has traditionally not emphasized objective measures of performance, outsourcing relationships tend not to be as comprehensive as those in, say, IT or logistics.
Without appropriate internal process measurements, firms may be setting unrealistic expectations for HRO, designing faulty service level agreements, creating improper metrics and rewards, and entering into flawed HRO relationships.
HRO has appeal
For customers, HRO can be awfully enticing. According to Everest Group, a leading outsourcing consulting firm, and other studies, when managed properly, HRO can generate short- and long-term costs savings for HR departments in the range of 15 to 20 per cent. This at a time when many are faced with a quadruple whammy of increased foreign competition, a rising Canadian dollar and CEO demands for cost-cutting and increased HR service levels.
Regrettably, many HR executives are so pressured to “do something fast” they jump into outsourcing and skip important steps in the process, especially at mid-size employers.
Two areas are typically treated too lightly by HR executives exploring outsourcing. One involves understanding the company’s true HR costs. The other concerns the establishment of effective service level agreements.
Know where you are before deciding where you’re going
An HR department must have a crystal clear picture of its in-house HR costs and processes. This is done by gathering all costs associated with HR, including:
•People planning — benefits, terminations, resignations, absenteeism, labour relations.
•Hiring process — executive, IT, operations and temp staffing.
•Payroll and administration — costs of payroll staff, payroll processor.
•HR department — salaries, training, communications.
•Information systems — HRIS, technology management.
•Risks — workers’ compensation fines, ministry of labour fines, payroll remittance errors, payroll compliance and human rights claims.
The result of this diagnostic should provide the firm with a base line overview to establish its current state before a decision is made to enter an HRO arrangement.
Case study: Measuring whether to outsource
For an example of how the measurement process might work, consider the following scenario of one company deciding whether to outsource payroll.
In this example, Company ABC has 1,000 employees, two payroll employees and already outsources the “payroll processing.”
The firm is thinking about fully outsourcing payroll to:
•reduce costs;
•improve risk management (one payroll employee is thinking of leaving);
•focus on core competencies (payroll staff could be of better service in another part of the business);
•gain access to payroll expertise;
•eliminate administration; and
•gain access to more accurate reporting and data.
Identifying the current benchmarks is relatively straightforward.
1. Clarify exactly what processes and activities comprise “payroll.” Identify all items associated with current payroll processor, all internal data entry, any third-party remittances and reporting, records of employment, year-end reconciliation, adjustment summaries, and reporting and employee questions.
2. Map out the flow of payroll information: Who gets what components and when?
3. Identify employees involved in these payroll activities.
4. Confirm how much time is spent on payroll activities by all staff and allocate a percentage of time accordingly.
5. Document the cost of these resources, including benefits and overhead.
Company ABC has two full-time and two other staff in accounting and finance who spend one-quarter of their time on payroll activities. Finally, there are 100 supervisors and managers who spend roughly one day per year on payroll-related issues. With all this information in hand, the company is able to determine it spends $7.92 per employee per pay. (See table.)
Company ABC now has a solid grasp of total payroll costs and so is able to weigh all costs and benefits to make a fully informed decision about outsourcing.
Know where you’re going: Service level agreements
If the organization decides to move ahead with HRO, a critical element is a carefully created service level agreement (SLA).
The following 10 items provide an overview of the key elements of a SLA. These are compiled from the article, “Ten key questions for developing effective service level agreements,” written by Brad Peterson and published by www.outsourcing-center.com.
1. Determine which service levels to measure. These may include items such as quality, speed, availability, reliability, user-friendliness, efficiency or effectiveness of services.
2. Identify the exact measurements. Each service level must be precisely defined.
3. Determine processes for measuring performance. These must be accurate, have an associated cost and be visible.
4. Define the time period for measuring performance. Typically these are by month or quarter.
5. Identify what reports will be provided, when, and what they will include.
6. Define the minimum or target service levels.
7. Be prepared to adjust the target service levels over time.
8. Establish service level credits. A service level credit is one that the vendor grants to the customer after a service level failure.
9. Be prepared to implement service level bonuses for work performed by the vendor that exceeds contractual obligations.
10. Outline when failure to meet service levels allows termination for cause.
As the success of HRO continues to grow and as the industry evolves, more and more HR executives will begin to explore it as a viable solution to rising business costs and limited HR budgets and resources.
With the proper amount of work up front to scope-out the firm’s total HR cost and service structure, as well as in creating a detailed SLA, HR executives can make more informed decisions about HRO ventures.
Stephen Smith is the director of marketing at Pivotal Integrated HR Solutions which provides HR consulting, recruitment resourcing, payroll and full-scale business process outsourcing. He can reached at (905) 890-8558 or [email protected].
