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Why Outsource, Why Now?

Executive Brief

A spotlight on payroll
and HR outsourcing

IN PARTNERSHIP WITH

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Executive Brief

Why Outsource, Why Now?

In todays uncertain business climate, executives and organizations need to be


financially stronger, more adaptable, and more efficient to respond to shifting
market conditions. The Economist Intelligence Unit found that nearly 90% of
executives believe that organizational agility is critical for business success, but
more than a quarter of respondents feel they are at a competitive disadvantage
because they are not agile enough to adapt to market changes. To be able to adapt
to change, organizations need to free up resources and become more responsive
to changing market conditions. Companies that do this the right way are likely to
be more productive and have stronger operational processes in place to rebound
faster from economic downturns.

Outsourcing is one way for organizations to build implementing quick fixes, such as reducing stock and
agility into their operations by providing the flexibility making substantial reductions in head count. However,
needed to navigate changing business climates, be some reactionary responses may inhibit the ability to
it entering an upturn, downturn, or times of stability. recover from the recession and expose companies to
When an organization is able to focus its attention on greater risk.
its core business, and away from tasks that could be The bleak economic backdrop gives new urgency to
better outsourced to specialist providers, McKinsey & the perennial search for business efficiency, according
Company among others, argue that outsourcing has to Jesper Lillelund, co-founder of CorporateLeaders,
the potential to deliver up to 50 percent improvement the independent network for business executives.
in business processes. While theres not much scope for growth in the
So the question is, if an organization is not already current business environment, organizations can
outsourcing some of its business processes, then why survive and even increase their profitability by
not and why not now? The arguments for outsourcing cutting costs, improving efficiency, and streamlining
are strong. Success rests on the maximization of three business processes, he says. Outsourcing can
key focus areas: Resources, People, and Processes. enable companies to do those things, which is why
they should be considering this now, given the state of
the global economy.
The business response to a
global economic slowdown
Leveraging outsourcing to meet
The global economic crisis that began in the U.S. executive needs
sub-prime mortgage market in 2007 still shows no
signs of ending. Even the economies of Brazil, Russia, Organizations opt to outsource HR activities for a
India and, above all, China which in recent years whole host of reasons. Context is king and the size,
have accounted for the bulk of world GDP growth, are sector, strategic objectives, and available skills of
now slowing down. As a result, banks are still risk the organization will all influence the outsourcing
adverse. Access to credit is more difficult, customers decision. That said, companies typically outsource, in
are spending less, and inflation is pushing up prices the first place, because of the need to reduce costs.
all of which are having a drastic impact on cash An uninformed reaction is to simply reduce head
flow and profitability. Many companies have been count (as it was done in the U.S. circa 2008-2009),
responding to this uncertain business environment by which can be catastrophic for businesses, leading

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to the loss of knowledge, expertise, demoralization arrangement must focus on maximizing the following
of the workforce, and increased exposure to risk. By three areas: Resources, People, and Processes.
purchasing outsourced services from an experienced
provider who acts in partnership, an organization can 1. Resources Maximizing cash flow
instead ensure that costs are reduced while services Outsourcing enables organizations to reduce the size
are actually improved. of nonstrategic functions and scale operations to meet
HR services, most commonly considered suitable changing business needs. This ultimately improves
for outsourcing, tend to be transactional processes gross margins and increases cash flow, which allows
such as payroll, health and welfare benefits, and businesses to make investments that will better
pensions administration. By outsourcing these position themselves to not only survive the current
routine transactional processes from daily work, economic conditions but emerge as leaders when the
companies not only achieve cost savings, but also free economic conditions turn in their favor.
up the HR organization to be more strategic and a The ADP white paper Payroll Outsourcing in Europe
better business partner. estimates the average annual HR costs across Europe
Small-to-midsized enterprises (SMEs) that lack the to be 1,500 per full-time employee, of which 200 is
capacity to handle all aspects of HR are the most likely spent on payroll and 250 on personnel administration.
to outsource their entire HR functions. By contrast, A further ADP study conducted in France showed that
larger organizations are more likely to outsource companies, who processed their payroll on internal
transactional activities, such as those associated systems, believed the cost per pay slip was 17 per
with payroll, employee benefits, recruitment, and month, whereas the actual costs turned out to be 37
training. More sensitive areas including strategic per pay slip per month. That is 240 per employee per
policy-making, leadership development, and change year in unexpected costs. Hidden costs like that can
management tend to be kept in-house by large be challenging to companies that need to leverage
organizations. their cash for more strategic activities. Therefore, its
no surprise that 20% of Europes payroll is already
To cope with these external pressures, many companies outsourced, a number which continues to grow year
are considering or actively planning to increase the after year.
scope of their outsourcing contracts. During previous
economic slowdowns, says global services analyst SaaS (Software as a Service) and cloud-based
firm HfS Research, many companies regarded outsourcing platforms are providing organizations
outsourcing as potentially disruptive to the business, with a lower cost alternative and the chance to convert
often viewing it as a unique and somewhat risky fixed HR costs into more flexible variable costs. This
strategy. However, the leading offshore IT services frees up operating cash while providing the ability to
providers continued to grow their businesses scale with the business as it changes. SaaS enables
throughout the last downturn. Moreover, many areas organizations to leverage best-in-class technology
of BPO that posed substantial cost-reduction gains and avoid the capital expense needed to implement
were definitely viewed as disruptive last time out, are and manage their own internal systems, thereby
now proven mainstream offerings. maximizing cash flow. Larger outsourcing providers
are able to exploit economies of scale to deliver state-
of-the-art technology solutions that may be out of
Business drivers for reach for many organizations, especially SMEs.
outsourcing: In addition, outsourcing can help eliminate costly
The Three Focus Areas duplication of nonstrategic activities. This is often
a key benefit for multisite organizations where
Businesses need to be ready for change and be able traditionally every location would have its own HR
to scale up or down, depending on the market. This, team, delivering the same services as all the other
along with increases in internal productivity and teams and incurring the same overheads. Such
employee engagement as non-essential functions duplication becomes unnecessary when services are
become externalized, are the main business drivers delivered centrally to every part of the organization by
for outsourcing. For outsourcing to be successful, any a single external partner.

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Executive Brief

Why Outsource, Why Now?

2. People maximizing productivity How employee engagement


Even before the current economic crisis struck, it
was clear that HR professionals needed to create relates to business results
added value by taking on a more strategic role and
collaborating more closely with business managers.

27%
Yet, many people continue to spend their working
lives on tasks that could easily be automated and of organizations
handed over to external providers. Regardless of are more likely
the employment rates, companies are becoming to report higher
increasingly aware that they need to focus on retaining profitability
their top talent because not doing so is costly and has
a negative impact on employee productivity.
A study commissioned by ADP, HR Outsourcing
Redefined: Options for Workforce Management,
found that HR teams of midsized companies spent
nearly half their time (45%) on a combination of

50%
payroll-related activities (18%), HR administration of organizations
(14%), and benefits administration (13%). HR teams are more likely
that devote so much time to administrative tasks are
to have lower
clearly not going to play a strategic role in leading
staff turnover
their organization forward focusing on activities
that help the organization achieve its core business
objectives.
In the early days, outsourcing was perceived to have a
potential negative impact on employee engagement.
Now that outsourcing is much more understood, there
is actually a positive impact. When people are freed
from the administrative burden of their roles, they

38%
are then able to apply their skills and experiences to of organizations
the more knowledge-intensive parts of their job. They are more likely to
become more engaged, more productive, and are have above-average
more likely to remain with the organization. Gallup, productivity
the research-based, performance-management
consulting company, has run extensive studies to
show how employee engagement relates to business
results. They found the most engaged workplaces
were 27% more likely to report higher profitability,
50% more likely to have lower staff turnover, and
38% more likely to have above-average productivity. Source: Gallup
On average, a company loses $1 million for every
10 professional employees who leave, according Companies that seize these opportunities and become
to PwC Saratoga, publishers of HCM intelligence. leaner and more focused on core business activities
Disengaged employees will leave the organization or, are likely not only to ride out the storm, but also
even worse, sit and radiate negativity until everyone have a more productive and engaged workforce, and
around them is also disengaged. take advantage of the recovery quicker than their
competitors.

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3. Process Standardization and keep organizational processes ahead of such changes,
compliance rather than reacting, which can be costly. Outsourcing
transfers risk from the purchasing organization to
Companies that have strong internal processes are the vendor an important consideration in times of
more flexible and can take advantage of competitive uncertainty.
opportunities more easily. Current market conditions
may present opportunities as well as force companies
to change their business models to adapt. The current BPO market
Companies that are forced to react in the short-term to According to the research firm Global Industry
economic conditions often reduce or reallocate head Analysts, the HR Outsourcing market will reach $162
count responsible for managing internal employment- billion by 2015. This includes both large enterprises
related processes. This can have an enormous impact looking at BPO for multinational operations, and
on engagement and productivity and may expose the small-to-midsized businesses increasingly attracted
company to greater risks. by the advances in outsourcing technology and
Partnering with external providers can offer decreased prices. According to IDC, a global research
automated processes and higher levels of specialist firm, outsourcing Human Resources functions has
knowledge and expertise that organizations may not grown by close to 70% over the past six years.
have or choose to maintain internally. Again, this is an In Western Europe, where the outsourcing business
aspect of outsourcing that is especially likely to appeal model has existed for years, research firm Gartner, in
to SMEs. While they may lack know-how in relation their June 2012 report Magic Quadrant: Payroll BPO
to HR activities that they carry out only occasionally, Services, estimates that at least 50% of companies
for an outsourcing company this know-how is a core already outsource payroll. The report continues, We
competency. believe the general global recession and the acute
Eurozone crisis are leading many more companies
In France, alone, there were 58 to adopt outsourcing as a way to cut costs than they
did when the recession began in 2008. The emerging
payroll-related legislative reforms business markets of China and India have produced
from July 2011 to July 2012 that environments in which companies have become
businesses had to implement. outsourcing consumers rather than only providers,
as they have traditionally been viewed. Also, Latin
America, the Middle East, Southeast Asia, and (to a
Regardless whether an organization is growing, lesser extent) Africa show similar signs of growing
decreasing, or maintaining stability business adoption of payroll outsourcing.
continuity has never been more important. Changes The outsourcing industry research firm, Everest,
in key HR personnel can plunge an organization into recently reported that the global multi-process HR
crisis. Outsourcing some or all HR activities goes a outsourcing market would grow to an estimated
long way toward mitigating this risk by shifting the annual contract value of $3.3 billion during 2012
onus of hiring and training to the service provider, and with emerging markets, particularly in Asia Pacific
so ensuring service continuity. and Latin America driving this growth. The practice
A hidden danger is that these same economic of contracting out activities in such areas as HR,
conditions that offer opportunities, also often trigger IT, finance, and marketing to external providers is
greater employment compliance requirements and widespread in developed economies and, increasingly,
legislative changes, which companies find difficult to in the BRIC countries and other emerging markets.
keep up with. In France, alone, there were 58 payroll-
related legislative reforms from July 2011 to July 2012
that businesses had to implement. Outsourcing helps

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Executive Brief

Why Outsource, Why Now?

Summary

Businesses need to make the best decisions today to position themselves for the
company they want to be, once the economy recovers. Therefore it is essential
for companies to be ready for change and be able to adapt quickly, depending on
market conditions. Companies cannot save their way into prosperity by cutting
costs and reducing head count as this removes vital knowledge and expertise from
their businesses. When the market enters an upturn, these companies will have
to go through the costly exercise of rehiring people, limiting their ability to take
advantage of the recovery, while still having the same issues.Good costs are spent
to grow the business and bad costs, such as inefficient processes, areexpunged.

Outsourcing enables companies to be flexible while The demand for outsourcing is growing fast among
ensuring that they continue to provide essential multinationals and small-to-midsized businesses
internal services necessary to run their business. alike, increasingly attracted by the advances in
Outsourcing allows companies to maximize three areas outsourcing technology and decreased prices.
that are essential to success. Resources, People, and According to Gartner research, the payroll BPO
Processes: 1) Outsourcing enables organizations service market alone grew 5.2% in 2011. With the
to improve Resources such as increasing gross World Bank recently advising countries to prepare for
margins, freeing up cash flow for mission-critical a long period of volatility in the global economy, many
objectives, reducing costs, and providing scalability; companies have been actively planning to increase the
2) The outsourcing of routine, administrative tasks scope of their outsourcing contracts. Doing things the
allows People to take up more strategic work, wrong way, however, can do more damage than not
increases productivity, and engages the workforce; outsourcing inefficient processes in the first place.
3) Outsourcing providers can deliver Processes more
quickly, efficiently, and more cost-effectively than
internal functions.

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Tips for outsourcing success

Be clear about your objectives


Potential outsourcing providers need to understand what you are hoping to achieve in order to present
you with realistic proposals. Provide them with as much accurate information as possible about the
work you plan to outsource, the level of service you expect, and what your scheduling requirements
will be.

Look at the providers record


Examine the providers past performance record by talking to other clients. Make sure the provider is
financially stable and has the experience of working with broadly similar organizations, in both type and
size, as your own. A provider that has previously dealt only with small companies, for example, may not
have the capacity to provide good quality service to a company with several thousand employees. Above
all, dont be afraid to ask searching questions. The provider must also take the time to understand your
business: a key difference between simply being a vendor and being a true business partner.

Consider the cultural fit


Visit the providers premises and talk to employees to make sure that there is a good cultural fit between
the two organizations. Discuss your own organizations culture and employer brand with the provider.

Agree on the right price


While its never a good idea to select a provider on the basis of price alone, the price of the deal will
obviously be of critical importance to your organization. Ensure that the contract you sign links payments
to the achievement of clearly defined performance targets, so that you know exactly what you are paying
for. When considering the total price of the deal, remember to factor in any investment you will need to
make in developing your own organizations vendor relationship management skills.

Build in flexibility
With outsourcing partnerships likely to last many years, the contract also needs to set out dates for
reviewing the arrangement. This will allow you to adjust the relationship as needs change in either your
own organization or in the wider business environment.

Manage the relationship


As a client, you should expect your provider to invest in the skills and techniques needed to provide
quality service. But, your own organization also needs to invest in developing the capacity to manage
the outsourcing relationship. As CorporateLeaders Partner Jesper Lillelund puts it: Any transition
from in-house to outsourced provision of HR services represents a major change for the purchasing
organization and needs to be managed as such. But if its handled correctly, HR outsourcing can play
a key role in helping organizations survive through the current economic turbulence and prepare for
whatever the future holds in store.

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About

Automatic Data Processing, Inc. (NASDAQ: ADP), CorporateLeaders is an exclusive independent network
with about $10 billion in revenues and approximately that inspires business and leadership by providing a
570,000 clients, is one of the worlds largest providers trusted forum for executives to network, exchange
of business outsourcing solutions. Leveraging over 60 ideas, share lessons learned, and drive business
years of experience, ADP offers a wide range of human forward in an ever-changing environment. We focus
resource, payroll, tax and benefits administration on providing exclusive membership services, intimate
solutions from a single source. ADPs easy-to-use and content-rich networking events, research, thought
solutions for employers provide superior value to leadership and advice on business transformation with
companies of all types and sizes. ADP is also a leading the executive needs and experiences at its core.
provider of integrated computing solutions to auto,
truck, motorcycle, marine and recreational vehicle, corporate-leaders.com
and heavy equipment dealers throughout the world.

adp.com

About the Magic Quadrant


Gartner does not endorse any vendor, product or service depicted in its research publications, and does not advise technology users to select only
those vendors with the highest ratings. Gartner research publications consist of the opinions of Gartners research organization and should not be
construed as statements of fact. Gartner disclaims all warranties, expressed or implied, with respect to this research, including any warranties of
merchantability or fitness for a particular purpose.

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In the business of your success is a service mark of ADP, Inc.
All other trademarks and service marks are the property of their respective owners.

Copyright 2012 Automatic Data Processing, Inc.

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