Cost reduction. The cost benefits fall into three categories—direct costs, future investment, and the hidden costs of existing service inefficiencies.

• HRO reduces the direct costs of HR service provision, with an organization typically saving around 20 percent of its existing cost base when it outsources HR transactional services. This level of savings builds up over the first two years of the deal and is generally guaranteed by the supplier—which will also offer the customer the option of negotiating either a flat savings profile across the life of the deal or a front-loaded profile. Greater cost savings can be gained if the organization is prepared to extend the contract to 10 years, accept a highly automated ‘vanilla’ service suite, and/or allow some off-shoring to a low-cost geography.

• HRO removes the burden of future investment in HR systems and infrastructure. This can save a large organization tens of millions of dollars—basically the cost of creating a professional HR services platform complete with telephone call center services and case management system, HR tools for training and for recruiting, a self-service portal and an HRIS such as ‘SAP.’ The vendor will usually supply an HR platform consisting of these elements automatically under the agreement.

• HRO reduces the hidden costs of current HR service inefficiencies. This benefit is delivered by:

  • Process harmonization and automation.

  • Better forecasting of demand.

  • Elimination of errors through “Six Sigma” quality initiatives.

  • Savings on third-party spend, like recruitment agency fees or car fleet costs. Most large organizations have hundreds of vendors and suppliers providing services via the HR department. The ability to rationalize and reduce that number is a prime goal of HR outsourcing. Vendors typically estimate additional savings of around 10 percent from this area.

Improved infrastructure. HRO brings the organization access to new technologies and usually a vastly superior HR services platform. Self-service functionality—in the form of an HR portal backed up by a shared service center, providing the workforce with a single point of contact for HR administration—is an attractive proposition, especially for organizations facing an uphill struggle to secure the investment to build this internally, or struggling to find the skills and capabilities to implement it. Outsourcing providers bring to bear cutting-edge technology and an integrated delivery of HR services based on the employee work/life cycle, rather than “stove pipe” processes. Added bonuses include improved reporting and analytics to measure performance and return on investment.

New HR operational model. When designing a new HR operational model either for in-house implementation or HRO, the key to maximizing efficiency lies in radically reshaping HR’s service delivery around an HR shared services center (SSC). Experience shows that the impact of a successful HR SSC can be dramatic. Barclays Bank’s in-house HR SSC, implemented in 2000, achieved its targets of HR service transformation and a near-50 percent cost saving by the start of 2003. BAEO Systems’ outsourced solution delivered a guaranteed reduction in HR transaction costs of 10 percent in the first year and 15 percent in the second, with expected savings of 50 percent within five years. So the choice facing organizations is clear: should we build and own this shared service engine? Or should we rent capacity from a third-party outsourcer?

With an in-house solution, the benefits include the potential for the organization to exercise greater direct control over the continuous improvement of HR processes and service levels, and a closer relationship between HR and the rest of the business. The organization will also own all HR intellectual property and know-how, plus the HR SSC asset. However, these benefits are balanced by a number of potential drawbacks. The cost of ownership will be high, plus will not be offset by the economies of scale that an outsource provider enjoys. Management questions may arise over whether owning—and investing in—an HR SSC is sufficiently core to justify being a wholly owned part of the business. And an in-house HR SSC can give rise to a clash between HR’s role as an efficient factory for HR transactions and its ability to act as a trusted adviser to the business.