Research Paper on HRM:
How can an HR sourcing strategy add value to organizational performance?
Human resource management plays dominant role in company’s business performance. It presumes not only performing its direct functions, but also building partnering relationships with financial and strategic departments. There are several reasons why do companies choose to outsource, including that they want to receive access to the expertise from outside, improve service quality and of course realize cost savings. Adequate resourcing is not only important for effective HR service, but also in the major element of all business operations of business itself. Finding right partners for doing business appears often even more important than doing business itself. HR programs can be competitively priced, effective and efficient, but usually it is not enough for management, as it wants to see direct confirmation and return on investments, including expenses for recruitment, development, motivation and compensation, through things that can be measured- higher productivity, lower turnover and positive bottom-line results.
Finding the best partner to outsource some activities can result of HR service delivery cost reduction for about 30%. Outsourcing companies usually have well-structured and developed efficient web-based systems, which can cope with HR tasks effectively with at minimum level of expenses. There are several HR functions that can be outsourced, including payroll, time and labor management and administration of benefits. Use of automated programs that support payroll module can automate the pay process for gathering data on time and attendance of the employees, calculate correspondent taxes an deductions as well as bonuses, generate tax reports of the employees. The labor and time management module uses innovative technologies and methods to estimate employees’ ratio of time and work. Benefit administration module allows HR managers easily follow employees’ participation in benefit programs, including insurance policy, pension plan, stock option plans and medical insurance (http://en.wikipedia.org/wiki/Human_resource_management_systems).
How can an HR sourcing strategy add value to organizational performance? This is a relevant question that arises not only in minds of HR leaders, but also in minds of CEOs as they want their investments for the development of HR departments be fully covered and effectiveness of HR work totally correspond to company’s short-term and long-term business goals and expectations. CEOs in general want to see highly professional staff that strives to raise company’s income and goodwill, and that is why they tightly cooperate with HR leaders positioning them as business executives next to them. To this extent, successful HR managers are equally building company’s investment attractiveness, address corporate governance and impact to the company’s strategic performance.
2. Strategic view
Good outsourcing can provide strategic support to all company units by proper task implementation.
It is top management task to provide HR department with clear goals and define future priorities. There are four key dimensions for successful HR activity- business strategy, human capital strategy, HR function strategy and HR operating model. There are all interconnected, and if all adequately followed at the end they all bring maximum contribution to company’s business performance. Let me discuss those four dimensions in details. First comes business strategy, in other words company’s overall goal and aim of company’s existence. Then comes human capital strategy that touches such aspects, as securing, managing and motivating workforce for better performance. HR function strategy relates to what efficiency and effectiveness goals should be achieved during defined period of time for delivering business performance. And the last dimension is finally HR operating model that has three sub-dimensions: sourcing (about what activities should we do with our company’s staff and which of them we can delegate on others), infrastructure (what do we need to fulfill HR strategy: technologies, process, talent, organization), governance (about managing related investments). Performing all stated dimensions consequently at the end can lead to the following results: spending more time for strategic planning and not for administrative tasks, reaching more effectiveness in technological issues, achieving expected return on investments (Armstrong, 2006).
Technological developments and direct technology investments makes emphasis on driving decision-making process of the organization. So, sourcing strategy or in other words “make versus buy” provides HR department with an opportunity to create a perfect ratio of inside talented HR resources and attracted HR force from outside for overall better performance of the organization and can add value to business outcome at lower level of expenses (Gilly, 2002).
Companies usually before starting implementing sourcing strategy by their HR departments ask themselves several questions about increasing their revenue without increasing number of employees, and can they create the environment for productivity and effectiveness improvements and whether they will be able reach efficiencies using more self-servicing technologies. All these questions can be cleared up with the implementation of effective and well-planned sourcing strategy. As when inside HR management team can be released from performing of routine administrative tasks, it will have an opportunity to be more focused upon adding value to strategic business objectives, such as management of the organization performance, recruitment and of course reward strategies, which enable support the whole business and grow revenues. But it is very important not to use this strategy very intensively aiming to save more time and more money, as your organization can lose such things as control, information and value ( available at www.mercerHR.com)
HR should determine an optimal sourcing solution taking into consideration organization’s structure, its business goals and the type of business it is in. HR leaders should also understand what are company’s internal needs and wants. Then Hr should make an analysis of resources and processes that will be necessary for provision of stated services. And only after performing of all necessary tasks, HR leaders can choose optimal sourcing solution for the benefit of the enterprise’s performance, rising quality of its products and services and lowering expense for implementation and service delivery. In such case, sourcing strategy will bring the following results:
1. Increase ROI on internal resources involved by concentrating their major part on the spheres of key importance and of highest strategic relevance of the company.
2. It can let employees use in the fullest manner advantages, innovations and special capabilities from outside.
3. Vary cost structure with simultaneous meeting of organizational needs (Ulrich, 1996).
But it is very rare occasion when organization applied deep business analysis for making their sourcing decisions. They were just signing expensive outsourcing contracts for several years, taking into consideration only what that other companies are doing, what are current market trends and benchmarking. Stated factors are important, but not enough for the best sourcing decision to make. Each enterprise needs not only thoroughly consider its own specific HR values and goals, but also try to estimate sourcing variants for technological, operational, human capital functions. It can use insourcing, which is development and maintenance internally, cosourcing, which relates to partner relations for sharing responsibility issues, and outsourcing, which is direct contracting with discussed terms and responsibilities (Smith, 2006).
We can follow that sourcing strategies had developed from simple outsourcing of particular administrative tasks to the implementation of combination of different types of sourcing.
4. Decision-making process
There is decision-making matrix, which can appear to be very helpful while choosing the best sourcing option. It assists in creating of the global view of the company by positioning each HR activity within the context of its strategic importance.
With constant implementation of this matrix, HR leaders can perform analysis of strategic relevance of each company’s activity as well as enterprise’s capability to deliver each service.
5. Outsourcing best practices
According to Conference Boarder survey of big companies with annual revenue more than 1 billion of USD, it was identified that the most popular and frequently used outsourcing activities are: medical services, software, pension benefits, relocation, stock administration, development and training, payroll, call centers, recruiting services.
For recent several years, vendor capabilities and developing technologies made the range of sourcing alternatives more wide.
Outsourcing best practices can be defined as following:
1. Vision of the final result
2. Taking into consideration people differences and making employees aware of changes
3. Supporting flexibility
4. Interconnecting activities of such departments, as IT and finance
5. Establishment of expectations in order to avoid misunderstanding and unexpected results
6. Planning adequate governance and building control
7. Paying attention to constant trainings (available at www.mercerhr.com)
Now, let me go deeper in each point in order avoid misunderstandings.
Vision of the final result. As I have already mentioned it is important to have a vision of “endgame” and understand what your organization and top management expect from the chosen sourcing solution. Vision should be constructed in details including investment plan with demonstration of how investment will be returned.
Taking into consideration people differences and making employees aware of changes. It is essential that HR department understand that outsourcing has an impact on the employees, including emotional issues, and it should communicate with them during the whole period of implementation.
Supporting flexibility. This refers to the fact that company should have a flexible platform in order to ready to accept future changes. And sourcing party should also be ready to accept enterprise’s internal policies, strategies, rules and regulations.
Interconnecting activities. Constant control of HR initiatives, establishing realistic goals, involving finance and It departments in decision-making process, understanding changes cost- are key elements of this point.
Establishment of expectations. It relates to the points that should be covered in sourcing contract. They are the following: outsourcing goals, terms and conditions, fee structure, roles and tasks of each party, managing changes, customer satisfaction.
Planning adequate governance. When thoroughly planned outsourcing decisions fail or bring unexpected results, the primary reason is usually should be viewed in overall governance. Governance is another role of HR department, which should be properly delivered.
Paying attention to constant trainings. Proper investments should be made in evaluation of contracted partners and current staff and their constant training, as it is important that management saw visible results (available at www.mercerHR.com)
6. Risks and problems
HR delivery service can contain problems when HR function is not centralized. In front offices things can go well, but in divisions and subdivisions, offices in other time zones and with different cultural backgrounds can suffer from conflicting ways of basic services delivery. All these can be the reason for difficult relations among employees and increasing risks of inefficient tasks implementation. This can lead to extra expenses and become a real problem for a company.
The greatest problem is that in many companies most HR processes are paper based. There are no centralized service centers for managers where they would be able to solve their interpersonal and routine disputes. There appears a lack of real-tome information upon employee relations, as it is impossible to follow that entire staff using paper as means of communication. It becomes impossible to evaluate and follow employees’ personal qualities and identify their strong and weak sides. And immediately arises the question about how the problem can be solved. It is important to choose right business process that can be outsourced. It this case creation of standard labor-policy database can be very helpful. Good outsourcing partner in this case can help enterprise to clarify inefficiencies.
7. HR outsourcing
When making the decision to outsource, it is necessary to define which activities would be better implemented outside an organization. Chosen effective HR strategy helps HR department be more concentrated upon global strategic issues, but it can also provide with information and analytical data to start new wave of decision-making process in the sphere of changing conditions and continuing supporting performance. In general, moving of some activities outside of an organization will bring profit and positive influence on the bottom line (Armstrong, 2006).
To optimize work of overall HR department, a company should move from form-intensive and paper-based organization to the company that is technologically equipped and has service specialization. It can also restructure the staffing structure in order to define strong and weak sides and make it more effective from the point of view of cost-effectiveness.
For example, Mercer HR Outsourcing had developed wide self-service strategy that is based upon organizations’ business goals. They have determined the components of their design that can utilize HRIS architecture and their adapted technologies that can be involved. Their approach not only made innovations more available, but also simplified access and understanding of legacy system. They made an analysis of HR department activities and identified key points of new activities and processes that are needed to be addressed. Finally, they created an operating scheme with servicing structure with several tiers that can be supportive as at the level of basic administrative tasks and as well as at the higher level while making decision for cutting costs. The scheme starts with strategy experts on the top (tier 3), then contact center specialists (tier 2), contact center generalist (tier 1), health and welfare, absence management, pension administration, workplace administration, compensation management, workforce acquisition and effectiveness (tier 0) and finally date management and reporting. This structure is interconnected with three more elements that are cost savings, decision support and customer satisfaction. So, we obtain the total variant of option that we must take into consideration while making sourcing decisions.
Mercer HR Outsourcing also proposed to develop knowledge base within each company intranet, so that employees could solve the major part of their HR question and problems without contacting HR managers. Then, they propose to create a call-center that would respond to lower-level questions and add some value by creating personalizes service and special department that would involve higher level issues (available at www.mercerhr.com)
8. Reaching of expenses decrease
Employees, managers and HR department involve investments for the best satisfaction of both sides. Transformed roles help to decrease level of HR expenditures per employee per year. Those roles are: employees are more concentrated on self-service, they get access to information in a quick, consistent and frequent manner and their relationships with managers are enhanced; managers reduce their dependency on HR and build strategic relations with HR department concerning needs in labor force; human resources are planning labor force needs around talent acquisition, employee retention, leadership development, improvement of satisfaction, planning of compensation, management of the performance and employee communications.
Implementation of all stated parameters can bring up to 40% of cost reduction (Armstrong, 2006).
In the paper I tried to fully cover HR sourcing strategy issues, including stages starting from thinking about the reasons, advantages and disadvantages to outsource and ending with evaluation of the process and further development of cooperation. I am sure that each company that strives for best performance in each sphere of its activity should evaluate this opportunity and decide the most effective sourcing solution that would correspond to all internal peculiarities of the enterprise. Each company should maintain strict control over the process in order not to transform advantages of the opportunity, including cost reduction, to the disadvantages.
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