October 19 , 2017

The Case Against Outsourcing HR

There are many day-to-day "things" that can go wrong when outsourcing any portion of an organizations processes, let alone a major segment of any function.   It is not the purpose of this article to highlight each of them, but rather to take a step back and look at why, as a basic strategy, the use of outsourcing should be minimized. The four major strategic reasons for minimizing the use of outsourcing include:

  • It provides no competitive advantage to your firm

  • Outsourcing can limit the growth, the image and the capabilities of the HR function

  • Past experiences have shown that in most cases the "promised" cost-savings never materialize and there is little data to prove "it works"

  • Information security and vendor longevity cannot be guaranteed

What is outsourcing?

There are many different definitions of HR outsourcing. True outsourcing occurs when an outside vendor manages an entire HR process from end-to-end that used to be done internally. I do not consider "buying software" such as an applicant tracking system via the ASP model to be true outsourcing.  

The four strategic reasons to minimize outsourcing

 1.      Outsourcing will not provide your firm with a competitive advantage.

Businesses succeed because they produce products or services that are superior to their competitors (although history does present several exceptions to this rule).  The actions of any one firm do not take place in a vacuum; they take place in a competitive market. The size of that market is identical for all competitors, and each must compete to gain a larger share.  The actions of one firm therefore must have either have a positive or negative impact on another.  In HR, the very best departments continually compare their services and practices to those offered by the competition.  Much like marketing departments competing for the best customers, the key to becoming a corporate hero in HR is to attract, develop and retain more superior people than the competitors. Unfortunately outsourcing is inconsistent with the goal of building an HR program that is superior to your competitors because outsourcing relies on vendors whose economic model requires them to sell the same service of product to your direct competitors.  Thus, outsourcing destines you to be "the same" as everyone else. 

In some cases, vendors and consulting firms have been known to develop a solution at one firm (at their expense) and then turn around and immediately sell that newly developed solution to others.  I don't see this practice as unethical; it's just the way business is done.  If you want innovation and competitive advantage, you need to do-it-yourself when it comes to anything that has the potential to differentiate your firm.  If the vendor who doesn't know your company can do a better job than you… then it's time for you to move on!

2.      Outsourcing limits the growth, image and the capabilities of the HR function

A) Developing your HR professionals

If your goal is to have an excellent human resource function it is essential that you provide opportunities for your HR professionals to grow and learn. The best way for them to grow and learn is to provide them with true opportunities to design, manage and improve HR programs.  While some less strategic/value add HR functions and transactions may seem unimportant, they are the ideal training ground to develop and grow your HR professionals.  If you outsource the design and continuous improvement aspects of such programs you limit the opportunity for your professionals to learn through doing and failing. If you want your team to learn how to use tools and to be on the leading edge of HR knowledge it is important for them to design and develop programs on their own.  Outsourcing takes the latest "learning opportunities" and shifts them to the vendor.  Your job is to develop your own HR professionals not those of the vendor. 

B) Building relationships with your customers

Almost everyone agrees that HR is more effective when it builds relationships with managers and employees. Although outsourcing might eliminate many "tactical" transactions, it also eliminates many of the face-to-face communication opportunities between HR and its internal customers.  While transactions have little value by themselves, as contact opportunities they provide you with an opportunity to build relationships, to learn the business, and to gather information about employee issues.

C) It will not improve your internal image

HR professionals are mysteriously bad at marketing themselves and their function. Unfortunately outsourcing experiences have ruined more reputations than they have built. Extensive outsourcing sends a message to your senior management that you can't handle the tasks assigned to you as well as someone outside the organization can. It may also create suspicions that your team is behind the times and that you need outsiders to develop new and innovative solutions.  In HR, we often talk about being strategic, and if the opportunity to be strategic is going to remain on the table, we must demonstrate that not only can we develop strategy, we can execute it internally as well.  

D) It will limit your ability to become a global HR function

If your company is a global organization, or is destined to become one, most current outsourcing solutions will hinder not help your expansion. Let's face facts, most outsource vendors are U.S. only entities.  For most of them their size alone limits their ability to provide global services and in most many cases their knowledge base is exclusively founded on experience in the U.S. 

3.      Actual cost-savings are rarely realized and there is little to no proof that it enhances effectiveness

A) Are there metrics that prove outsourcing works?

Most HR fads sound good on the surface.  However, almost without exception, there's nothing but anecdotal evidence to support the fact that they produce real results.  If outsourcing worked as well as most vendors said it does, there should be an abundance of data available to demonstrate its effectiveness. In fact the opposite is true.  In addition, if vendors were confident that their product could produce measurable results, they would offer reductions in costs or penalties if they didn't meet quality, time and cost promises. 

B) It will not save you money!

If you think outsourcing will cut costs you are likely mistaken. The whole idea that outsourcing is cheaper runs counter to logic.  Remember, just like your business, outsource vendors must earn a profit. It is highly unlikely that using an outsource vendor will cut your costs significantly (unless some significant economies of scale are present). In addition to contributing some profit for the vendor, you have to add in the additional time it will take to manage an external relationship when conducting any form of cost/benefit analysis relating to outsourcing. For example, remember several years ago when all of the ERP and call center vendors promised "significant savings" if you adopted their product.  Did those savings ever materialize?  Things haven't changed, almost all vendors still promise significant savings while providing no hard evidence demonstrating that those savings have actually occurred at other companies or can appear at yours.  

In addition, outsourcing will not ease your administrative "burden" in fact the opposite is true.  Outsourcing adds additional burdens that you might not have anticipated such as the added the cost of managing contracts, due diligence, legal fees, customization and consulting services that can drive up forecasted costs significantly. Many of the savings delivered by outsourcing up front are not "real" savings because in reality you are just shifting money from one type of expense to another to another. 

4.      Maintaining company secrets

If you are in a competitive business is important to remember that you must safeguard your valuable human resource information.  In particular, your applicant database, compensation structure, performance data and workforce planning information must be safeguarded at all costs.  It's almost impossible to guarantee data security without control and outsourcing relinquishes a good amount of that control.  In addition, there are numerous horror stories we're vendors have gone out of business and firms have had to "fight" to recapture such data.  If your firm has an excellent talent base and effective human resource programs justifying outsourcing becomes almost impossible when the economy is down and vendor stability is at an all-time low. If you do choose to take this route make sure that the contract has data protection clauses and that service level guarantees (with penalties for not meeting these guarantees) are included.

5.      Other miscellaneous problems with outsourcing

Unfortunately, the list of things that can go wrong with outsourcing is immense.  Here's a sampling of some of the major problems you're likely to encounter:

  • Once you outsource and eliminate your internal staff… you are at the mercy of your vendor
  • Vendors occasionally under price to get the initial contract and then they dramatically jack up the rates upon renewal (when your choices are limited)
  •  Although vendors will initially treat you well, after the deal is closed many shift focus to new clients and response time increases dramatically
  • During tight budget times, internal funds might not be available for future program updates
  • Vendor software may be incompatible with your existing systems
  • Customization costs are extremely high so you may have to run a "vanilla" system that doesn't meet your managers for employees needs
  • Most vendors are relatively small and can't handle the problems faced by large Fortune 100 firms
  • Most vendors won't work with pay based on performance
  • Vendors don't know who your internal priority customers are, so they must treat them all the same
  • Some company cultures and systems are so complex outsiders can't understand them
  • Occasionally vendors have great salespeople but after the sale the account manager assigned to you may be a rookie.
  • Vendor firms often have a high turnover rate so you may lose your account manager often
  • Many HR professionals think they lose legal liability by using a vendor.  In most cases that is not true and in addition because you lose control when you outsource, you may actually be more likely to run into legal issues

About Dr John Sullivan

Dr John Sullivan is an internationally known HR thought-leader from the Silicon Valley who specializes in providing bold and high business impact; strategic Talent Management solutions to large corporations.