Don’t Outsource Recruiting Just Yet: A Checklist of Possible Issues

Outsourcing the recruiting function is one of the hottest fads in staffing right now. Because of the push to reduce headcount within HR functions, most recruiting managers are now being faced with the decision of whether to should shift some or all of the work we do in recruiting to outside vendors. But outsourcing parts of the recruiting function is not a new phenomenon. Many employment functions have outsourced for years, in areas like the hiring of temps, relocation, reference checking, and most executive search, with various degrees of success. This raises the question: Should we outsource more of or all of the recruiting function? There are many excellent reasons to outsource, but there are also many pitfalls. The following is a checklist that you can use to guide your decision on which firm to select, what services to outsource and when it is a bad idea. Remember that vendor quality can vary significantly and that the very best outsource firms have few or any of the potential problems highlighted below. Potential Issues With Outsourcing When you begin the process of determining whether you should outsource or not, it’s important to consider these issues which have occurred during other outsourcing “adventures.”

• Competitive advantage. If your current internal recruiting function provides you with a distinct competitive advantage over a competitor (you find and hire more productive employees) it makes no sense to outsource that function to a company that might have lower standards or weaker recruiting tools. It’s also important to remember that vendors that work for your firm can also provide the same tools and services for a competitor (eliminating any potential competitive advantage).

• Costs. Unless there are large startup costs or operational economies of scale, vendors are generally more expensive because they are required to add their own profit margin to the operational costs. In addition, many HR functions reassign rather than eliminate any potential “surplus headcount” as a result of outsourcing. CFOs are often skeptical of outsourcing if it doesn’t result in a direct and permanent headcount reduction.
• Vendor power. Vendors can get you to buy in to an outsourcing contract with an attractive initial low-cost bid. But once you eliminate your internal staffing function, you might be at their mercy. Because you have eliminated your internal staff you have few other options available to you, so at renewal time, they have an opportunity to dramatically raise their prices (or generally jerk your around).
• Vendor reliability. With the weak economy and frequent dot-com crashes, the viability of vendors (and your data) has become a serious issue. Even strong vendors may be recently started firms that are still undergoing the process of sorting out their own internal management problems. It’s important to know whether they have the stability and the cash flow to survive as a viable business the entire length of your contract period.
• Quality of service. Most people enter into outsourcing assuming that “recruiting services” are interchangeable and that, therefore, price is the only element of the transaction that must be considered. Unfortunately, quality does matter. Without a guaranteed service-level agreement, performance penalties, and measures of quality of hire, the possibility that you will get a low cost but also a corresponding low quality of service increases dramatically. No one would choose the low-cost brain surgery option, so be careful of any unrealistic low-cost service promises made by salespeople that won’t be kept by the service arm of the business after the contract is signed. Select several firms from a prospective vendor’s client list and check to see if any other firms suffered from a service drop-off.
• Learning curve. If you have a highly complex business operation or are working in a industry that is hard to learn, vendors will require a long time to get up to speed and produce quality service. If you are in a unique industry you may find that vendors will apply generic solutions to your unique needs (harming your business). In addition, if your culture is complex, it might take years for your vendor to understand your approach to problem solving.
• Innovation and leadership. Even though vendors can be innovative, most clients want tried and proven solutions. As a result, if you want to be the first to try a new solution you must select a vendor that is on the leading edge of innovation. Also, remember that once they provide the service to you, they are free to provide it simultaneously to others, meaning that you might quickly lose your “first in” edge.
• Control. If you are a control freak, working with vendors can be frustrating. It’s hard to fire a vendor with a long-term contract, and you can’t direct, fire, or perhaps even criticize any of its employees. If your personality or situation demands control, be aware that you lose it during outsourcing.
• Coordination and interdependence. Because recruiting doesn’t exist in isolation, outsourcing only parts of it can be a problem. Vendors might not have existing relationships with or an understanding of the political issues in HR functions like compensation, benefits, relocation, etc. As a result, the overall recruiting process might not work as smoothly or seamlessly as they did when it was done internally.
• Secrets and privacy. If you’re in an industry where business practices or regulations require a great deal of privacy, it’s hard to allow your own data to go outside your firewall. Because you don’t know who might see it, this can be a major issue for CIOs.
• Bad systems must be fixed first. You can’t outsource broken plumbing. Some internal systems are so complex that outsiders can’t even understand them (this is all too common of illogical recruiting systems that have developed over time). The recruiting function must be willing to invest the time and resources required to reengineer its own internal processes before they are outsourced (or before they can interact with any outsourced processes).
• Pay for performance. Most vendors won’t tie their reimbursements to a pay-for-performance contract clause. Great vendors don’t hesitate to backup their promises with dollars.
• Size matters. Many vendors just don’t have sufficient capital or enough employees to handle the volume of recruiting that the largest firms face. Make sure your vendor has successfully managed contracts with similar-sized firms before you enter into an agreement.
• Globalization. Although many vendors say they offer global services, the reality is that most are U.S.-based firms working mostly in highly industrialized countries. If most of your operations are outside the U.S., be cautious about U.S.-based vendors that claim they have a “global reach.”
• It makes insecure HR people more insecure. Even though outsourcing might be a good business idea, it often makes others in HR nervous about their future job security because of additional outsourcing in their job area. As a result, they might resist or even sabotage the recruiting effort in order to protect their future job prospects.
• HR is generally not good at vendor management. Running HR functions are dramatically different than managing vendors, vendor negotiations, and contract administration. Few within HR have the financial and business knowledge that is required to manage large, sophisticated external vendors.
• Outsourcing reduces HR contact with managers and employees.Even though transactions may be tedious, they do require frequent interactions between employees, managers, and HR. Reducing the number of these interactions can eventually lead to less learning about internal customer needs and weaker relationships with managers and employees. This significant reduction in interaction can impact HR effectiveness in non-outsourced areas.
• Many of the things that are outsourced shouldn’t be done at all. If some recruiting functions are identified as “non-mission critical” they are often outsourced. But if they really are non-mission critical, it is important to first assess their effectiveness and whether they need to be done at all.
• Proof of ROI. Most of the talk and the push for outsourcing comes directly from vendors. Although outsourcing has been effective in the IT field, there’s little data to prove its effectiveness or ROI within recruiting. Be skeptical of any vendor that doesn’t have performance and ROI data.
• HR’s internal image. Outsourcing recruiting functions might demonstrate innovativeness, but it can also send a message to the senior business leadership that you “can’t handle” basic processes or transactions. This can lead others to conclude that you are too busy or that your ego is too big to do the basics.
• Centralized services. Most outsourcing services are provided through a centralized office or call center. But if your business requires localized service with numerous variations, then a centralized model won’t work whether it’s outsourced or not.
• Unique laws and regulations. If you live in state like California, with many unique laws and regulations relating to recruiting, you might find that vendors based in other states are unwilling or unable to handle each of these geographic variations.
• Liability. Don’t assume that shifting work to vendors releases you from liability. Discrimination or negligent hiring liability is not reduced just because a vendor handled the recruiting work.
• Not everyone can be strategic. If you outsource most of the administrative work within recruiting, all that is left will be the strategic elements. Unfortunately, past practice has not always shown that recruiters that have traditionally done mostly administration are capable or even interested in shifting into a 100% strategic role.
• Technology is getting easier. Although many firms outsourced initially in order to take advantage of new technology, it is important to realize that technology gets continually easier and cheaper. It used to be quite difficult to set up a web page or do Internet recruiting, but now it’s relatively easy. As a result, where in the past you might have considered outsourcing some technology, you might now decide that technology has become easier to master. Conclusion Before you begin outsourcing remember that there are few “easy answers” in HR. What services you pick, which vendor you select, and how you manage them are all crucial decisions in determining the future success of outsourcing. It’s important to start out by being cynical and demanding proof at every corner. It’s a “buyers beware” market. If you get it wrong, it will likely mean your job.