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Using external providers to do the job of a personnel or HR department might save money, but the process is not without its pitfalls. GrowthBusiness weighs up the benefits and the risks.

Teneo is a fast-growing IT company, which generates sales of £8 million largely by reselling American products in the UK with added services. The company employs 30 staff but outsources its payroll, employee benefits (including pensions) and much of its recruitment. It even pays an organisation to produce its employment contracts and company handbook.

‘I’m quite clear about what we do as a business, and that means I’m clear about what we don’t do,’ says founder and CEO Piers Carey. ‘We don’t have skills or knowledge in HR matters and we aren’t big enough to be able to afford to have those skills in-house.’

Carey is wholehearted in his praise of the various companies that help him out with the administrative and legal side of HR, but when it comes to recruitment, he’s more lukewarm.

‘It’s the one area that still causes us issues,’ he says. ‘We’ve often felt that [agencies] are giving us whoever they’ve got on their books rather than the right people for the job.’

Though there are one or two recruiters Carey uses regularly, who show more understanding of his business, he admits that finding the right people too often comes down to ‘trial and error’ or ‘pot luck’. Rather than using a set process, he’ll deploy a variety of tools, from staff referrals to job websites. ‘You have got to be tactical and use all the options at your disposal,’ he says.

Rising trend
According to a survey from the Chartered Institute of Personnel and Development, organisations expect to outsource more in the future. While 69 per cent of UK-based respondents deliver administrative HR functions wholly in-house, that number is set to fall to 42 per cent by 2010. That said, most of those who anticipate moving away from an in-house model will still keep some processes within the organisation, rather than outsourcing everything.

One factor that has been critical to the growth of outsourcing is its potential to offer cost savings. It’s a controversial point, not least because those savings often mean redundancies. Phil Clarke, a director of HR consultancy Independent, is ‘convinced’ that cost is still the number one driver of outsourcing decisions, whatever spin outsourcing providers or their clients may put on it.

‘Often, outsourcing decisions are led by the procurement division of a company, which comes at it purely from a cost point of view,’ says Clarke. ‘What’s happened recently, which is encouraging, is that HR [professionals] have led outsourcing decisions. They want to see an improvement in the quality of the service as well.’

Ann Bevitt, a partner at law firm Morrison & Foerster who specialises in outsourcing deals, has a similar view. ‘Cost is either the only driver or one of two key drivers [the other being quality of service]. An organisation is perhaps not being totally honest with itself if it doesn’t accept that.’

False economies
That said, both Clarke and Bevitt are sceptical about the cost savings promised by HR outsourcing. While Clarke stresses the inadvisability of focusing on cost reductions without regard for quality, Bevitt points out that the real savings sometimes turn out to be smaller than anticipated.

She cites the example of a company with five HR staff that announces it is going to make them all redundant and outsource the function. Two of the staff leave to take up new jobs and the company finds it can manage just fine with the remaining three.

In such a situation, which Bevitt says is typical, some or all of the savings attributed to outsourcing could have been achieved simply by trimming down the HR function. So when considering outsourcing, the cost of the deal should be compared to that of a streamlined in-house team.

Bevitt gives another example – a company that has grown by acquisition, with different employment policies originating from the acquired companies. Even if this company did outsource its HR function, she argues, it would be much cheaper to harmonise the differing policies first, rather than passing on the problem and paying the outsourcing provider to handle a more complex set-up.

Mixing it up
The decision of whether or not to outsource can be straightforward if you’re a smaller organisation: if you don’t have the expertise and can’t afford to hire another person, it’s a no-brainer. For larger companies that have ongoing HR needs, it’s perfectly feasible to bring specialists in-house, or use a mixed approach.

Geoservices is an oilfield services company employing 5,000 people worldwide. When Franck Thibault became HR development director last year, it needed to hire 1,000 people in 12 months to maintain its growth trajectory. ‘Recruitment was a big challenge,’ he says. ‘It had not been very successful: people were hired but the level of attrition was a problem.’

Thibault’s strategy has been to use an external recruiter for roles with an international profile, while continuing to find most local-level positions through the company’s well-established links with educational institutions or through adverts. He doesn’t rule out switching to an outsourcing provider for local roles, but says, depending on the country, this might not always be cheaper or produce better results.

Flying start
Airport retailer World Duty Free (now part of the Autogrill group) is another company that recently faced a big hiring challenge: recruiting staff for new outlets in Heathrow’s Terminal 5. Head of HR Geoff Hall says that 150 staff were required, all of whom had to undergo an extensive security check including references going back five years. Given the timescale, the company’s in-house HR team simply could not have coped.

The key to completing such a project successfully, according to Hall, is seeing the outsourcing provider as an extension of your own team. ‘We got them temporary security passes and they came to work in our retail outlets, and talked to staff and front-line managers to help them with the screening process,’ he states.

Cost reductions were roughly 20 per cent when you factor in management time saved, and the pre-interview screening process improved too, so that five jobs were offered for every ten candidates interviewed, as opposed to the usual three. ‘The commitment of the line managers doing the interviews increased tremendously because they were seeing better people,’ says Hall.

The experiences of Thibault and Hall show that there are many ways to blend outsourcing with in-house capability, especially when it comes to more complex areas such as recruitment. It’s not an either-or decision, more a question of working out the result you want and then figuring out how to get there.

Of course, outsourcing arrangements don’t always go smoothly, and they are easier to get into than to get out of, according to Bevitt. ‘They can go drastically, drastically wrong. The danger is, if you outsource, especially if the employees don’t transfer across, you have lost that body of knowledge for good. Even if you take it back in-house, it will take time to build that up again.’

Showing you care
Bevitt adds that keeping some sort of in-house HR presence could be important if you are trying to foster a “caring” culture within your company. ‘Though you may choose to outsource bits, there is still value in having someone there as a human face of HR within the organisation, rather than just giving employees a call centre number.’

Even Carey at Teneo, a big advocate of outsourcing, says he would like to hire a dedicated HR person eventually. ‘We would like to have someone who could be there for all our employees to provide guidance on various issues and interface with our different [outsourcing providers]. But in the short term, that person would support, not replace, our existing arrangements.’

Avoid the traps
Here are five of the most common pitfalls when outsourcing HR functions:

1. Don’t incentivise your outsourcing provider purely through cost, says Independent’s Clarke. ‘Often, a company will structure the deal with its outsourcing provider purely around the cost saving, and not around the quality of service. They will probably achieve the saving, but what will be the consequences?’

2. If your outsourcing decisions involve redundancies, make sure these are handled strictly by the book. Bevitt urges, ‘You’re dealing with HR professionals, so if you get it wrong, they’re going to know.’

3. Teneo’s Carey stresses the importance of providing a clear, detailed brief to recruiters. ‘If you give too wide a brief you will get a whole pile of CVs and end up sifting through them, doing the agent’s job for them.’

4. On the flip side, companies recruiting a large number of people shouldn’t be too rigid in their approach. Thibault of Geoservices explains, ‘When you standardise and rationalise a business, the danger is that you will always recruit the same kind of people.’ As a result, you may lose useful pockets of specialist knowledge in your organisation and end up with an overly homogeneous workforce.

5. Remember the basics. Norman Pickavance, group HR director at Morrisons, says that it’s important to keep a handle on essential admin tasks, such as payroll and the handling of annual leave, ‘otherwise you risk doing great strategic things but not knowing how things are operating on the ground’. Bevitt agrees: ‘Payroll should be the easy bit, but I’ve sometimes seen it go wrong as part of a bigger [outsourcing] deal, and it’s a really bad start.'