Nottingham University Business School

MBA Programme

[Managing the Human Resource (N14M62 MY) (SPR 13-14)]

HR Outsourcing-Internal Department

Study Provided to KCF Limited

Management

(Assignment 2: Individual Report)

[Racha Zohour Adi]; Student ID: [014132]

Original Copy [2]

Word Count: 2271 (Excluding Table of contents and References)

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Table of Contents

Introduction: ........................................................................................................................................... 3

HR Outsourcing Trends ............................................................................................................................ 5

What to outsource? ................................................................................................................................. 6

Levels of outsourcing: .............................................................................................................................. 8

Tactical outsourcing: ........................................................................................................................ 8

Strategic Outsourcing ...................................................................................................................... 9

Transformational outsourcing .......................................................................................................... 9

Why do we outsource HR functions? ..................................................................................................... 10

When do we outsource HR functions? ................................................................................................... 11

Disadvantages of Outsourcing ............................................................................................................... 12

Benefits for KCF Ltd.: ............................................................................................................................. 13

The challenges to KCF ltd. ...................................................................................................................... 14

Recommendations on implementing HR outsourcing project for KCF Ltd: .............................................. 15

Conclusion: ............................................................................................................................................ 19

References: ........................................................................................................................................... 20

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Introduction:

In this globalized and competitive business world firms are forced to disaggregate their value

chain into separate pieces and reach for external forces, inputs, partners and markets. The

discrete pieces of the value chain are handled sometimes in-house and others are outsourced to

exterior vendors. Companies hope to reduce costs, risks and gain the benefits of their partners or

contractors expertise. Outsourcing is a conscious handing over of particular value chain activities

to external sources1. A firm can disaggregate several functions and keep sensitive functions in-

house, while outsourcing others. For example, software companies can outsource the

programming of new software programs which are crucial for their competitive advantage, while

keeping the architectural knowledge and design in their headquarters2.

1 (Manning et al., 2008; Pyndt and Pedersen, 2006).

2 Farok J. Contractor, Vikas Kumar, Sumit K. Kundu and Torben Pedersen Rutgers, Reconceptualizing the Firm in a World of

Outsourcing and Offshoring: The Organizational and Geographical Relocation of High-Value Company Functions, Rutgers

University; Discipline of International Business, University of Sydney; Florida International University; Center for Strategic

Management and Globalization, Copenhagen Business School

4

The outsourcing of HR functions is now a reality for many companies from small businesses to

enterprises. The below figure shows a number of companies who are outsourcing their HR

functions:

Figure 1: companies outsourcing HR functions

The benefits can affect owners, executives, the managers of HR and the employees as well as the

whole performance of the firm. However, there are challenges and disadvantages towards

implementing this solution and can affect the same segments of the company. This report

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provides a detailed study about HR Outsourcing and the advantages and disadvantages of this

solution, followed with recommendations regarding applying this resolution.

HR Outsourcing Trends

According to a recent research conducted by a global HR and business processes outsourcing

provider (Talent2), 80-90% of HR excvutives are using HR outsourcing as a solution to major

challenges in HR functions such as recruitment 64% and retention 50% . (Nelson Hall’s) June

HR Outsourcing Index backs this survey up with reporting a 10% increase in confidence in the

HRO sector as it is seen as a solution for addressing skills shortage and focus on investing on

development3.

A large-scale study carried out in 1999 covering 3964 organizations (each with more than 200

employees) in 15 European countries found that “97 percent of the HR departments outsource

some of their HR activities”. According to this study, nearly “half of all organizations are

reporting an increase in the use of service providers over the last three years”. In a recent survey

by The Conference Board, more than three-quarters of companies who responded reported that

“they currently outsource a major HR function or plan to in the near future”, And a recent SHRM

study reported that “more than 42 percent of employment and recruiting functions have been

outsourced”. According to Dataquest Inc., “the HR outsourcing market in the U.S. is expected to

grow from a $21.7 billion industry in 2000 to a $58.5 billion industry by 2005”4.

3 Shalini Shukla, HR Outsourcing - Talking point, HRM Asia 2013 website

4 Outsourcing Your Human Resources Functions, Nelson Family of Companies, available at www.nelsonstaffing.com

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What to outsource?

The usual HR operations are divided into two categories: operational and strategic. Each

category holds various functions such as following:

Operational

Strategic

Payroll

Insurance

Recruitment

Newsletter

Database

Career management

Participation

Selection

Organization Change

Compensation

Training

Performance management

Table 1: HR operations

According to a survey done by PASO (2003) and listed in a research paper by Personnel Review

Journal, the most outsourced functions are described in percentages in the below table:

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Table 2: Incidence of HR outsourcing5

While the level of HR activities outsourced by companies in numbers are presented as follows:

Table 3: Levels of HR outsourcing6

5 Source: Jeroen Delmotte and Luc Sels, “HR outsourcing: threat or opportunity?” Personnel Review Journal Vol.37 issue 2008

6 Source: Jeroen Delmotte and Luc Sels, “HR outsourcing: threat or opportunity?” Personnel Review Journal Vol.37 issue 2008

8

The listed tables can show that most tactical or operational transactions are commonly

outsourced. Aon Hewitt, Business Development (SEA & India), says that. “What is outsourced

and what aspects are retained depends on the governance and control mechanisms in place.”7

The privacy regulations and policies within the company and the confidential of an operation as

well as its strategic importance will be a key aspect to consider when deciding which functions to

outsource which is related to the levels of outsourcing.

Levels of outsourcing:

Tactical outsourcing:

There are situations where help is needed only for a temporary period or for routine and

redundant functions which doesn’t relate to the firm’s core strategies. Sometimes the lack of

talents or resources,the need to reduce head counts and restructure the company are good reasons

to do tactical outsourcing. They can generate instant cost savings, reduce the need for future

investments and relieve the burden of operations such as staffing8.

Sometimes tactical outsourcing is a good opportunity to enhance the relations with the partnered

outsourcing company and move forward to strategic outsourcing9.

7 Shalini Shukla, HR Outsourcing - Talking point, HRM Asia 2013 website

8 Munirah Looi, Brandt International HR Outsourcing, Brandt International 2014 9 Pankaj Agarwal, Strategic vs. Tactical Outsourcing: Understand the Difference, Optimus Information Inc. 2011 website

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Strategic Outsourcing

In this level, the relation between the company and the outsourcing vendor moves from a buyer

and supplier relation to a partnership. If something went wrong both parties can work together to

set it back on track where the outsourcing partner handles all functions of one area. It helps in

reducing in-house administration and costs and focuses more on strategic issues and benefit from

the outsourcing expertise and deliberated processes. Examples are IT outsourcing, payroll

outsourcing, legal outsourcing, hiring, training & development outsourcing10

.

The difference between tactical and strategic outsourcing relies mainly in the relationship

between the company and the vendor, as long as the company is aware of the benefits and

challenges of each level, and have the right decision, outsourcing projects can be very successful.

Transformational outsourcing

This means partnering with another company to accomplish rapid, significant and sustainable

enhancements in enterprise-level performance. It is focused on creating the value and reduces

costs. This type can be seen in long term collaboration programs and partnerships for research

and development (Knowledge process outsourcing (KPO)) or growth strategies.

The type of outsourcing on which HR functions are considered and is the most popular is called

the business process outsourcing (BPO). These processes are divided into front office tasks and

back office tasks.

10

Munirah Looi, Brandt International HR Outsourcing, Brandt International 2014

10

Front office tasks are frequently related to customer-oriented matters like customer service,

marketing and technical support.

Back office tasks generally deals with internal work such as payroll, purchasing and billing11

.

Why do we outsource HR functions?

HR outsourcing is becoming more desirable to achieve focusing on strategic activities of a

company rather than day to day activities that are non-added value. It compromises many

benefits such as reducing business operating costs to improve in company focus, Improving

effectiveness and efficiency, enhancing the business image of the firm, Having a more supple

and adaptable organizational structure, Gain access to world-class capabilities, Free internal

resources for other resolutions, Accessing to resources that are not available internally, Save

tangible and intangible administrative cost, Save the cost to buy the Payroll and Human

Resource e-Modules, Save time and cost to upgrade hardware and payroll software due to

changes of government rules and regulations and Disaster Recovery12

.

The below pie chart symbolizes the top 10 reasons companies outsource HR operations:

11

SMA, Outsourcing Tips 2011, www.outsourceronline.com 12

Shalini Shukla, HR Outsourcing - Talking point, HRM Asia 2013 website and Charles Liaw, Director, Times Software

11

Figure 2: top 10 reasons companies outsource HR operations13

When do we outsource HR functions?

It becomes serious to consider outsourcing some of the HR functions when it turns out to be:

“Need flexibility”: Some functions are recurs only in specific times in cycles or are

temporary

13 Source: http://m2mresource.net/HRADVISORYSERVICES.aspx

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“Non-core”: there are activities that aren’t essential to producing profits or competitive

success.

“Repetitive”: routine tasks that are non-added value to the company and are just wasting

time and energy

“Create opportunity cost”: it is true that some functions are cheaper to be performed in

house, but they drain resources that could be better used elsewhere.

“Save money”: the task is cheaper to be performed externally than in-house

“Fun”: the activity isn’t one that people enjoy doing.

“Knowledge”: the skill required is too specialized that is impractical to have a regular

employee do it14

.

However, regularly considered with the advantages before any decision on outsourcing is

embarked, but the following signifies some of the probable disadvantages often dwelled upon:

The Disadvantages of Outsourcing

There is a possible “loss of control” over a company’s business processes

Shortcomings in performance vis-à-vis expectations

There will arise an irritated customer base coupled with infuriated employee unions

(which is the case happening in KCF)

Problems related to quality and turnaround time

Issues pertaining to lingual accent variation

14

Council of engineering and scientific society executives, www.cesse.org

13

There is still a lower than expected understanding of benefits of outsourcing and its

results

Sluggish response times coupled with slow issue resolutions

Benefits for KCF Ltd.:

As a multinational company, KCF ltd can benefit from outsourcing in three main areas as

following:

Strategy Cost Employee Benefits

Greater focus on your

core business Fewer

compliance issues &

employee

lawsuits

More time

Workers compensation

insurance at

competitive rates, with

no deposit or annual

Audit

Reduced

administration and

processing cost.

The cost of BPO

services from most of

providers is less or

equal to performing

Higher “take home”

pay

Greater understanding

of company policies

and procedures

Improved safety

awareness and fewer

on the-job injuries

Happier, more

productive employees

Better, more affordable

benefits

14

the same tasks in-

house

The additional savings

will come by

reorganizing talents,

reducing turnover

percentages,

decreasing the

workplace injuries and

therefore avoiding

employee lawsuits.

Table 4: benefits of HR outsourcing for KCF ltd15

The challenges to KCF ltd.

As we are having an opposition to HR outsourcing decision making process from the employees

union, we are suggesting the below procedures;

Issue recommendation

Objection From Trade Unions Communicate the intended strategy in a

15

The pros and cons of HR outsourcing, slide share website, available at http://www.slideshare.net/GAPartners/the-pros-and-cons-of-hr-outsourcing

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transparent and informative approach

listing all the compensating and

overcoming actions will be taking

towards reducing the impact of it

Treat laid-off employees with

respect and sensitivity

Offer more generous severance benefits

Give survivors a reason to stay

Legal Issues

By effectively following the guidelines

mentioned under WARN Act and the National

Labor Relations Act

Table 5: how to handle KCF Ltd challenges regarding HR outsourcing

Recommendations on implementing HR outsourcing project for KCF Ltd:

There are a plenty of Outsourced HR providers and the services they provide are going to be

tailored to suit our company’s precise requirements. However, we have some recommendations

regarding taking such project into consideration, we propose looking at the following model for

successful outsourcing:

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Figure 3: Model of successful outsourcing16

As a large multinational company, we recommended outsourcing HR operational functions as

following:

Provide advice on employment law changes and amendments

Manage employment disagreements, disciplinary actions and/or personal objection cases

Provide advice

Manage change

Providing advice on restructures

Manage recruitment processes

16

Source: Douglas brown and Scott Wilson, the black book of outsourcing, how to manage the changes, challenges,

opportunities

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remuneration & salary reviews

Job evaluations

HR policies

Job descriptions

24/7 HR helpline 17

Exit interviews

It also important to Find consultants from (Society for Human Resource Management website)

which include listings for certified HR consultants. Selecting the consultant based on the below

criteria:

Experience in the field

Experience with firms similar to ours

Details on who will work on our project

General methodology

Pricing – retainer, time, or project

Billing terms and practices

References18

KCF Ltd. Has also to ask for an RFP (request for proposal) from the outsourcing company and

have them outline what they are going to do, how they will they do it and most importantly how

much it will cost. Then KCF can discuss critical success factors and administrative

considerations, agree on the following expectations:

17

Cornerstone Human Resources, Inc 18

Cornerstone Human Resources, Inc

18

Clearly defined results

Appropriate contacts

Included changes

Timetables and milestones19

.

Also pay attention to:

Confidentiality agreements

Copyrights and material licensing

Workers compensation and/or insurance requirements.

After selecting the partner20

KCF should involve with the outsource partner habitually to spread the costs. It should work

closely with them, have consistent meetings on progress and direction and insure having them

complete a scheduled audit.

19

Clare Parkes , Outsourcing your HR, Employment Today 2011, Clarian HR 20

Cornerstone Human Resources, Inc

19

Conclusion:

The main business drift nowadays is improving and fostering core business competencies, and

this requires focusing on employees development and enactment. Therefore the most convenient

solution for KCF is outsourcing. With outsourcing, KCF will be able to have the flexibility to

choose tailored support service to address its distinctive needs. For HR department who need to

return the focus on HR strategic and core processes, BPO will help relieve regular administrative

burdens which permit more efforts to be expanded into strategic initiatives. There are a plenty of

affordable HR Outsourcing providers and they have the ability to considerably decrease

operations costs, streamline business operations and pave the way growth and gaining

competitiveness.21

. Choosing the right partner and applying conscious policies towards dealing

with this partner will contribute to the success of implementing an HR outsourcing project.

21

Outsourcing and the Future of HR, ADP Tota lSource, www.adp.com

20

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