Guide to OutsourcingEssential HR & payroll

Introduction

This guide is designed to offer a clear and upfront introduction to the principles of HR and payroll outsourcing:

• What are the real benefits of outsourcing?

• How might outsourcing impact your overall business strategy?

• Do you really understand what outsourcing involves?

• What do the buzz words mean and are they here to stay?

• Are you clear on what you want to achieve?

• Where do you start?

For many organisations outsourcing is now “business as usual” (Gartner), providing a strategic enabler which has become more of an imperative than an alternative. Most organisations are already gaining competitive advantage and reaping the rewards from outsourcing elements of their HR and payroll function. Others remain clouded by false concepts of the perceived cost, effort and risk involved in outsourcing. These critics remain stuck in the “lift and shift” era where outsourcing largely existed as an “all or nothing” option with inflexible and punitive exit strategies to match.

In times of economic change organisations need to base strategic direction on facts and figures, but such decisions must not compromise the quality of services, as organisational growth and efficiency is paramount. Flexibility in HR and payroll outsourcing solutions is vital, allowing organisations to scale up and down as their requirements fluctuate and they adapt to remain competitive in an unstable economy. Outsourcing with the right provider will provide multiple benefits, but the decision involved in choosing a suitable outsourcing partner must not be taken lightly.

The rise of outsourcing has brought with it a number of common buzzwords and phrases which have become established terminology within the industry: Business process outsourcing (BPO), HR outsourcing (HRO), recruitment process outsourcing (RPO), multi-process outsourcing (MPO), benefits administration outsourcing (BAO), technology-led outsourcing, cloud-based solutions, shared service centres and so on. Service level agreements (SLA) and key performance indicators (KPI) also form key elements of modern outsourcing contracts, ensuring a partnership of understanding and balanced expectations from day one. So what does this all mean and is outsourcing right for your business?

As organisations drive for increased efficiency, flexibility and service quality, outsourcing is considered an effective part of HR strategy. Experts are predicting a significant growth in the outsourcing of back office services such as HR and payroll over the coming years, but with a new direction and a change in focus which we at MidlandHR are already starting to see…

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“As organisations drive for increased efficiency, flexibility and service quality, outsourcing is considered an effective part of HR strategy.”

The changing nature of outsourcing

Outsourcing thenTwenty years ago, the business world took advantage of new economies and a cheap labour force to make a step change towards return on investment (ROI) and the term “lift and shift” came to prominence. While this provided immediate efficiencies and ROI, it failed to address the critical aspect of the relationship and certainly did not address the requirements of long term strategic goal support, continuous improvement and driving change. In fact, it would prove the end of an era in which providers convinced clients that they could have it any colour, as long as it was black.

Outsourcing nowOutsourcing today has changed the face of HR and payroll, providing a strategic enabler which continues to make up the largest component of the BPO market, with an 18.5 per cent share (Gartner). The need for in-depth expertise has become a vital prerequisite of the outsourcing provider, and the move from “lift and shift” to unique layered solutions has become the focus of the market.

Technology-led outsourcing is a common part of a typical outsourcing partnership, with leading providers able to offer customers access to the underlying technology. This is vital in ensuring all data is maintained on one single platform, whether processes are undertaken through your internal teams or outsourced to the provider.

As the value of HR and payroll outsourcing is realised beyond the realms of cost-saving and budgeting, market drivers and requirements are becoming increasingly sophisticated and commonly rest on the following:

Market Drivers for HR & payroll outsourcing

• Access to in-depth HR and payroll expertise

• Ensure risk management and compliance

• Reduce operating costs

• Improve service quality and flexibility

• Access to new technology

• Relieve internal HR resource pressure

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Access to in-depth HR and payroll expertise

Many organisations currently outsourcing their HR and payroll operations to specialist providers explain that the core factor in justifying this move is to focus on core business activities. A recent CIPD survey also reported that the large majority of organisations outsourcing aspects of HR and payroll found it to be a strategic enabler for the internal HR function.

Organisations, like people, should play to their strengths and focus on core business. By refocusing time and attention towards overall business and people strategy, your organisation will be in prime position to maintain competitive advantage across your marketplace.

Organisations should also appreciate the extent to which outsourcing can benefit the business. For example, payroll outsourcing not only removes responsibility for payroll administration, but also the cost of maintaining and upgrading in-house technology, whilst providing access to in-depth domain expertise and ensuring legislative compliance. At the outset of any outsourcing project, it is worth considering the wider impact of the decision to outsource and the real transformation that can be gained in order to strengthen the business case.

Outsourcing to a specialist provider supports the HR and payroll department in delivering the highest levels of measurable value and in aligning the function directly to your organisation’s strategic objectives. Established providers in the industry will have years of experience in implementing and managing modern best practice HR and payroll functions. As such, they will be best placed to work with you to define the most appropriate course of action for your organisation whilst presenting an appropriate cultural fit.

Do not take your choice of provider lightly. When creating your shortlist remember that access to in-depth HR and payroll expertise should be given considerably more value than broad outsourcing expertise. Take advantage of the supplier’s expertise and book a scoping study. They will be able to identify key areas for improvement and set reasonable objectives where significant cost savings and efficiencies can be made. This is the ideal opportunity to review your overall HR and payroll operations and decide which parts of the function could be outsourced and what parameters should be established for this.

Experienced consultants will have worked with many organisations similar to your own, so take advantage of this experience and look at previous successes in order to define realistic objectives for your own project.

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Building the business case

Define the scope of your projectMost importantly, you need to truly understand why you would consider outsourcing in the first instance. Do you need to change the way that your HR and payroll function operates and which areas do you feel need the most attention? How would outsourcing part or all of your process help your organisation and how can you justify this decision and build a strong business case for change?

Before embarking on any form of outsourcing project, have you defined the scope of the project? Are you simply looking for a payroll bureau service? Are you looking for a partially outsourced HR and payroll service with access to the underlying technology? Are you looking for a comprehensive HR and payroll outsourcing service? Are you looking to define a blended solution which would combine software, outsourcing and consultancy? Or perhaps a simple BACS transmission with the provision of e-payslips?

If you work for a larger organisation, valuable data and metrics may already be available to help identify which processes are running least efficiently and choose which processes to outsource first. Smaller organisations however, may consider bringing a specialist provider in at an early stage to define these measurements and to make informed judgements on which areas can offer the greatest improvement and ROI through outsourcing.

Top tips: Never outsource a problem - in assessingyour existing processes it is important to remember that you should never ‘outsource a problem’ as it will merely load increased risk onto the project. Outsourcing is not designed to fix a process that is ineffective to begin with, and although most providers will be happy to help you, it will work out more expensive than ironing out the problems ahead of embarking on the outsourcing project.

Collaborative working is vital - It is importantto remember that you still own the process that you are outsourcing and you should never aim to completely wash your hands of it. A successful outsourcing partnership is based on continual involvement and co-operation between both parties and a responsible, experienced provider will ensure that this happens.

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Things to consider when building your business caseA strong business case should consider the following factors which will result from a successful, collaborative partnership with a specialist HR and payroll supplier :

• Access to in-depth HR and payroll expertise This should be valued more highly than generic outsourcing expertise and should be an essential element of any modern HR or payroll outsourcing arrangement. An emphasis on services delivered by CIPD and CIPP qualified teams is essential in achieving this level of specialist knowledge which will provide great benefit to your organisation.

• Risk management and compliance Dedicating sufficient resources to manage compliance and risk in the highly regulated and changeable area of HR and payroll is vital, but is often difficult to facilitate to the correct level internally. With the onset of fundamental legislative changes such as RTI and pensions reform on top of existing laws and regulations, pressure is building upon internal teams to understand and prepare for the transition to ensure on-going compliance. These changes will significantly alter existing HR and payroll processes and in itself are increasing the demand for specialist outsourcing as organisations look to minimise risks.

Expert resource allocated by HR and payroll outsourcing specialists to guarantee compliance for their customers is enormous in comparison to in-house teams, providing a massive bonus for your organisation. Liability for governance, risk and compliance lies with the outsourcing provider. This responsibility should never be taken lightly; in fact your provider should be at the forefront of change through proactive engagement with regulatory and professional bodies.

• Reduce operating costs Reduced operating costs are most commonly enabled through improved operational efficiencies, seamless integration with the customer organisation and best-practice standardisation of processes. However, the move away from the “lift and shift” mentality based solely on ROI has brought vital transformation, with outsourcing now recognised as a whole lot more than a fast and simple route to cost saving. It’s about access to an enriched pool of continually developing people, skills and technology that will deliver on-going efficiencies which should increase as the partnership matures.

Yet cost saving cannot be ignored, as it comes as a natural consequence of selecting the right provider to manage the required elements of your HR process and remains a key driver for over a third of organisations looking to outsource. Alongside the obvious savings made through access to a cloud-based solution, savings are also made through the redistribution of internal resource that is often spent on administrative processes, and reapplying this resource to focus on core competencies.

Cost savings are particularly apparent and easily achievable in payroll outsourcing, where your outsourcing provider will take complete or part responsibility for your payroll data and processing. Outsourcing providers will already be running the payroll for numerous companies so should easily be able to prove their pedigree through PQP accreditation, level of CIPP and CIPD qualified teams, service awards, customer references, years of experience and evidence of return on investment.

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• Improve service quality Improving and transforming service and process quality is only possible through in-depth HR expertise and proven best practice processing on the part of the provider. It is vital that new and improved HR processes are suitable to your organisation and present an appropriate cultural fit. This involves close collaboration between the provider and the customer throughout the decision making process and beyond, offering choice and flexible but targeted SLAs, based on those things that are important to you.

Close collaboration ensures absolute synergy and understanding. The provider must get under the skin of your organisation in order to streamline operations, with a greater focus on quality, efficiency and unique HR outputs designed to suit the way in which your business operates. Working closely with your supplier will most likely uncover greater efficiencies beyond the realms of HR and payroll, modernising existing internal procedures based on more efficient process chains, workflows and communications. The impact of appropriate best-practice processes can be significant and is a vital consideration when preparing your business case.

• Access to new technology By selecting the right HR and payroll outsourcing provider, you can benefit greatly through access to the underpinning technology which should bring your workforce together onto a single platform and provide a strategic toolset for managing your people. With growing recognition of the importance of technology in an outsourcing decision, technology-led outsourcing deals are becoming commonplace. Suitable vendor selection is therefore critical to ensure utilisation of the system and alignment with the outsourcing service.

The quality of the technology applied during the outsourcing of HR and payroll has a fundamental, long-term impact on the service level and quality that can be expected from an outsourced arrangement. Technology can also offer the flexibility to adopt a blended solution, giving you the freedom to pick and mix services by selecting which processes to manage in-house through direct access to manager and employee self-service.

By selecting a provider that focuses not just on quality and a commitment to best-practice development of the underpinning technology, but also offers support for the continual improvement of business processes as a whole, the decision to outsource will continue to deliver increased value as the relationship evolves.

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• Relieve internal HR resource pressure Outsourcing transactional HR processes, supplemented through access to the underlying HR technology, enables and supports an internal focus on strategic HR priorities. Transactional HR, defined by the CIPD as high frequency, high labour cost and low strategic impact HR process and administration, takes up a significant amount of time within HR departments. With flexible HRO services, workforce system access through manager and employee self-service and access to the underlying strategic toolset, internal teams are empowered and able to add strategic value to their organisation, rather than getting bogged down in administration.

As previously mentioned, imminent legislative changes, such as the introduction of RTI and pensions reform, will fundamentally change and impact existing processes. Understanding, preparing data and processes, and implementing changes will put huge amounts of additional pressure on internal HR and payroll teams to remain compliant. This is a prime example of how flexible outsourcing services can benefit your organisation when teamed up with the right supplier - providing the option to build service layers in order to relieve internal pressure, reduce risks, ensure compliance, and gain vital access to in-depth specialist HR knowledge and best-practice supporting technology.

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Top tip:When writing your business case don’t forget to reinforce the concept of human capital management (HCM). The HR department can and should be offering strategic value to an organisation and making a significant impact on the bottom line. Outsourcing should provide the key enabler for this to happen, both through the technology and through reduced administrative pressure.

The HR department should no longer be regarded as a cost to your organisation, but as a value adding entity enabling your business to focus on achieving optimum competitive advantage.

The checklistThis checklist reiterates what you should include in your business case offering more specific advice on what to incorporate.

✓ Access to in-depth HR and payroll expertise - This will minimise risks and ensure the most effective and efficient best practice processes, both for your HR and payroll operations and wider organisational processes. How might you benefit from having this additional expert knowledge?

✓ Risk management and compliance - How do you keep up to date with ever changing HR and payroll legislation? Is there anything that you are particularly concerned about now and in the future? Do you feel able to manage the risks associated with this? Would you prefer to leave this long winded task to the experts?

✓ Reduce operating costs - Include measurements on how much time and effort is spent on repetitive tasks. How much time is wasted? What areas do you think require the most improvement? And how might best practice services and technology help to increase efficiencies and generate short and long term sustainable value?

✓ Improve service quality - What effect might the transformation of service quality have on your employees and the wider organisation? Perhaps increased employee engagement and empowerment?

✓ Access to new technology - How does your current HR and/or payroll system operate? Would you benefit from having one single platform, single database solution? Would you benefit from having best practice templates within the system for the processes that you choose to keep in-house? Would you benefit from the visibility of personnel information needed to inform strategic workforce decisions such as those involved in talent and performance management? Do you have any current IT challenges? Would you benefit from painless upgrades, extended web access and continuous system maintenance?

✓ Relieve internal HR resource pressure - How much time and resource does your current HR and payroll workload consume? Could you benefit from freeing up valuable resource to focus on strategic HR priorities?

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Give and take: theflexible appoach

With the market reluctant to over-outsource (Gartner) smart organisations exhibit certain attributes when setting out with a new outsourcing strategy. In order to mitigate risks and to take an informed and strategic view, take advantage of the flexible opportunities that are available, in particular the combined or blended solutions. By outsourcing smaller business processes at first, with the ability to layer additional services and scale up and down as required, your project will be given the best chance of success. As your partnership evolves you might make the decision to build up your service layers and outsource further elements of your HR and payroll process to your chosen supplier. Many organisations decide to outsource their payroll function initially, with a view to adding HR service elements at a later stage.

Organisations evolve over time and the requirements at the outset of any BPO agreement are unlikely to remain consistent throughout. As your organisation grows or changes shape, it is important that you have a flexible strategy in place, enabling you to modify the levels of service. As Gartner identifies, in fast changing business environments, an outsourcing solution designed today may not be suitable tomorrow.

Simply retaining functions in-house or going for wholesale outsourcing does not always meet the organisation’s requirements. There is no “one size fits all” solution. The outsourcing provider should offer varying degrees of outsourcing, allowing you to retain certain procedures in-house through access to the underpinning technology, whilst outsourcing others.

Questions to askAsk your potential outsourcing partner which other organisations they work with. Does this suggest that they are flexible enough to meet the demands of different organisational requirements? For example: do they work with companies with a range of employee numbers? How have they coped with customers who have changed the structure of their organisation? How long has it taken to get the new service and system up and running? Ask for specific examples of how the outsourcing provider has supported customers’ business changes.

If organisational change is something that you see in your future business strategy, the flexibility of the supplier will be vital.

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Selecting your outsourcing partner

When choosing the supplier you might consider a range of issues including organisational culture, HR and payroll industry experience, financial performance, trading stability and existing customer relationships. Think about how these can be measured and ask the providers to do the legwork by researching this for you.

Find out how many customers they support, what their market share is, which customers they work with in your sector, their financial records for recent years and their trading stability. Most providers will already hold this information in the form of analyst reports so this information should be relatively easy to come by.

Considerations for the selection processThroughout the selection process, there should be several key questions on your mind:

• Does the service provider have a good track record?

• Will my organisation be important to this company?

• Is HR and payroll the provider’s core focus?

• Does the supplier provide a modern best practice HR and payroll solution?

• Can the supplier provide proof of the strength of its services and the underpinning technology?

• Can they provide evidence of ROI and value in use?

• Will the provider understand my organisation and its objectives?

• Is the company financially stable?

• Does it have an established reputation in the industry and does this suggest that the company will continue to provide good quality service in the long term?

• Is there a detailed and signed off service level agreement (SLA)?

• What about disaster recovery?

Collaboration and partnership with your provider is essential and you should consider whether you will be able to build a beneficial working relationship. Find out about user groups, development meetings, customer panels, customer conferences and customer communications.

There are many sources of information at your fingertips, so you can start to explore the marketplace straight away. Most information will be available on company websites, so this is the easiest place to start. Also check out the HR and payroll trade press including the directory listings at the back. Remember not to confine your search to one source as you may miss out on key players in the market.

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The outsourcing contract

Drawing up the contractual agreement is an essential aspect of any outsourcing arrangement and will involve negotiations between your organisation and your preferred supplier. The contract will detail the scope of the project and define the roles, responsibilities, priorities and guarantees in place.

You should already have a clear idea of the scope of the project, which might be as narrow as payslip printing or as broad as the complete outsourcing of your HR and payroll processes. Ensure that this is clearly defined within the contract in order to guarantee clear communication and understanding with your service provider.

The service level agreement (SLA)There should also be an SLA in place which will provide a formal statement of performance requirements, including the nature and level of services to be provided. The SLA will also define key performance indicators (KPIs) which should be monitored to ensure consistent service quality.

The SLA provides an essential tool which can be used to mitigate the risks of outsourcing, detailing clear benchmarks for service levels and ensuring the right level of collaboration. Before signing the contract it is essential that there is a thorough understanding of roles and responsibilities of each party.

The SLA should include the following:

• What service is included and at what cost. By clearly defining service and costs the SLA should mitigate the risk of hidden charges by ensuring pricing is transparent. But it should also offer some room for flexibility at certain points, such as the number of employees on the payroll. This will ensure that you can expand or contract your service without fear of additional costs – you might have a seasonal workforce for example?

• Allocation of task responsibility

• Level of service and KPIs

• Procedure for monitoring and review

• Dispute/complaint management

• Procedure for reviewing, revising and renewing agreement

• Sanction or service credit agreement whereby the compensation is laid out should the provider fail to perform against any of your set criteria.

The purpose of any written agreement surrounding this type of partnership is to define the responsibilities of the two parties and the obligations associated with each. Consider what you are capable of managing and make sure that the agreement is based on the appropriate level of service and degree of outsourcing. It is also worth questioning whether there is any flexibility within the contract to alter the KPIs or to re-define responsibilities. Might you want to outsource further elements of your HR and payroll function? How flexible is your provider willing to be?

Remember that any conflict which may potentially occur in the outsourcing partnership may eventually be resolved by referencing the terms of contract, so make sure that you fully understand what you are agreeing to before signing on the dotted line!

Guide to OutsourcingEssential HR & payrollGuide to selecting a new solutionEssential HR & payroll

Other guides in this series:

Essential HR and Payroll, Guide to selecting a new solution

MidlandHR

As customer requirements and drivers for outsourcing become increasingly broad and sophisticated, providers with unequal strengths will find themselves in a bad place – with some suppliers having extensive outsourcing expertise but no in-depth HR knowledge, and others having a long and established history of HR and payroll outsourcing but offer poor or no supporting technology.

At MidlandHR we benefit from a specialist, exclusive focus on HR, payroll, talent management and workforce planning. We find ourselves in the rare position of providing expert outsourcing services from the UK, authoring our own cohesive underpinning technology stack, and having full ownership of our private cloud data centre, so service flexibility is key. Vital in the current marketplace, this enables MidlandHR to offer a single workforce solution to suit customer needs through blended outsourcing, software and consultancy services.

Our success in winning the CIPP’s Service Provider of the Year award twice in the past three years is evidence that, with these unique criteria along with targeted SLAs, a move away from “lift and shift” mentalities, and an emphasis on expert services delivered by CIPD and CIPP qualified teams, MidlandHR is well placed to deliver HR and payroll outsourcing excellence.

MidlandHR is a total workforce solution provider, partnering with some of the largest and most successful organisations in the UK, supporting their needs through blended outsourcing, software, and consultancy services. Specialists in HR, payroll talent management and workforce planning, MidlandHR provides award winning, best practice solutions to UK organisations equating to almost 10% of the total workforce.

MidlandHR’s customers include:Interserve Construction Limited, T.M.Lewin, Severn Trent Water, Chesterfield NHS, QVC, Loughborough University, Oxfam, The Salvation Army, Brighton & Hove City Council, Oxford City Council, East Kent Shared Service, TK Maxx, Humberside Police, Law Officers Departments, Laing O’Rourke, Skanska, Ofgem and more.

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Talk to ust +44 (0) 115 945 6000e info@midlandhr.co.uk

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Midland Software Limited. Registered office: Peterbridge House, 3 The Lakes, Northampton NN4 7HB.© 2012. No part of this literature may be reproduced without the written permission of MidlandHR.