Our People Should Be Supported Locally

This barrier is parochial and, in some circles, would be viewed as rather politically incorrect. Business is global and its support infrastructure must become global as well. This does not mean localization is not important, but it also does not mean localization can only occur with local delivery people. Most users of business services rank quality and cost of service much higher than the physical/nationalistic attributes of those delivering the services.

The degree to which country of origin matters relates to how it contributes to service quality. It can impact service negatively (for example, undecipherable accents, which reside from New York to Texas to Bangalore) and positively (such as live person at an affordable cost). While sensitivity to country of origin matters more in certain situations (call-center support for consumers), in HR operations organizations are dealing with their own internal staff and may still have frustrations dealing with culture and language issues. In many cases, organizations have not recognized the role they can play with the outsourced provider in assisting offshore staff. This includes everything from writing scripts to assist with localization to understanding the meaning of a 401K plan.

Cannot Define A Solid Business Case

Building a business case from the cost perspective is not terribly difficult when considering offshore HRO. More often, the difficulty is in setting realistic cost-savings expectations. Many organizations overestimate potential benefits by ignoring factors beyond the disparity in labor rates. Some of these factors include increased transition and governance costs, travel and communications costs, and increased process inefficiencies from working with remote delivery centers staffed with personnel with different cultural backgrounds. All of these factors exist in any outsourcing arrangement but are typically greater in offshore outsourcing.

These additional costs can amount to anywhere from 10% to 25% of the total cost of the contract. So, while lower labor rates may drive 30% to more than 50% cost savings, these other costs must be factored in when developing a business case and ROI. This does not mean a compelling ROI is unachievable, just that it is often below initial estimates that typically don’t include all management costs.

Assessing soft costs is always more challenging in HRO. Many organizations do not have a good handle on their quality, service, or process-performance levels, nor on the work performed within business units and divisions supporting the HR function. This makes it difficult to estimate how much outsourcing could (or not) improve the quality cost and what is an equitable price to pay (or cost to compare) for the improvements. This is why it is critical to benchmark HR processes both at the performance and cost level prior to undertaking an outsourcing effort to define a baseline, and then throughout the effort to monitor improvement or degradation levels. The focus on performance also enables an organization—to the degree it deems reasonable—to assess softer elements like employee satisfaction when having to deal with sentiments of being serviced by “non-locals.”

Viable Functional Areas For Offshore HRO

Despite the broadening offshore capabilities of HRO service providers, some HR processes today are more suited for offshore outsourcing than others. The HR areas cited overall in the EquaTerra study as needing the most improvement were training and development. Recruiting was also identified as an opportunity. The requirement for improvements in training and development ranked higher among smaller organizations than larger ones, while recruiting and compensation administration rated higher with larger firms.

Training/development and recruiting are areas that are less viable for offshore outsourcing, given the nature of the work and the current capabilities of offshore service providers. Organizations should not always eliminate these processes from scope, however, without further review. Many of the transactional aspects such as course scheduling, administration, reference checking, and employment verification can be completed from offshore service centers and administered through self-service applications. This leaves only the strategic, employee-facing work to be delivered by HR.

Compensation administration is a particularly viable candidate for offshore outsourcing, as are benefits administration and payroll. Overall, more transactional-focused HR areas are currently the most feasible for offshore outsourcing. Offshoring’s potential varies by individual functional area and is rapidly changing as providers increase services in processes within HR historically considered off limits.

Organizational Readiness

Regardless of the offshorability of processes, the organization must be prepared to communicate and manage the change required with any offshoring initiative. Internal resistance, both overt and covert, can undermine even the most viable offshore initiative. Properly planned change management is both strategic and critical to managing long-term offshoring success. Without communications and change-management processes in place, internal resistance may show up in passive forms that are difficult to identify but can have detrimental impacts on the project.

Organizations considering outsourcing as a means to reduce HR costs and improve or transform HR performance need to recognize the increasing global nature of the market. Organizations should perform a thorough analysis of HRO opportunities, develop a solid and realistic business case, undertake a rigorous sourcing process, and establish an adequate and reasonably funded outsourcing governance and relationship-management program. Barriers can exist to offshore HRO, as do benefits, but an organization cannot understand how to rationalize its own situation without vetting the barriers and benefits accordingly.

Robin Rasmussen (robin.rasmussen@equaterra.com) and Stan Lepeak (stan.lepeak@equaterra.com) are managing directors of research at EquaTerra, an offshoring advisory firm.