Outsourcing, Offshoring: Bane or Benefit?

What Is Outsourcing?

Outsourcing is the contracting of an internal business process to a third party organization, says Letke, who is founder and CEO of Integrity HR, Inc., in Louisville, Kentucky. She offered her tips at BLR’s Strategic HR Leadership Summit in Scottsdale, Arizona.

What’s the Difference Between Outsourcing and Offshoring?

The two terms are not mutually exclusive. Outsourcing means having work done by a third party, says Letke, and offshoring means getting work done overseas. So, for example, if you established a customer service call center in India, you would be offshoring but not outsourcing.

Offshoring typically is done primarily for labor cost-saving. Culture, recruiting, and management styles are likely to be bigger challenges with offshoring, Letke adds.

What to Outsource

Commonly outsourced functions include:

• Background/reference checks
• Unemployment and workers’ compensation claims processing
• Retirement plan administration
• Payroll
• Benefits administration
• FMLA administration
• Employee Assistance Program (EAP)
• Expatriate pay and taxes
• Recruiting and staffing
• Paid search
• Training
• Compensation
• Relocation
• Recognition

Why Outsource?

Most employers cite these reasons, says Letke:

• Reduce operating costs.
• Manage legal risk/Improve compliance.
• Streamline HR functions.
• Allow HR to focus on core responsibilities.
• Allow HR to focus on more strategic issues.

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Benefits You May Find

Letke notes that HR managers find a wide variety of benefits from outsourcing. For example:

• Gaining access to external resources in a specialty.
• Providing a greater range and variety of HR services.
• Taking advantage of vendor/partner investments in technology otherwise rarely available internally.
• Reducing litigation risk and liability.
• Upgrading customer service.
• Reducing administrative demands.
• Improving HR metrics.
• Allowing HR to focus on core functions.
• Freeing time for strategy.
• Letting HR be perceived as more of a business partner.
• Giving the HR leader the reputation of being a “business” person.

Factors to Consider

There are two track records to consider, says Letke. First of all, there is the internal track record. How successful have you been at managing the function that you might outsource? If the function has been problematic, do you understand the reasons enough that you can be sure the outsourcing company can overcome them?

And, of course, what is the track record of the organization to which you would outsource?

• What flexibility is there with the contract?
• What recommendations from others do you have?
• What specialized expertise does the company have? (Make them prove it, Letke says.)
• What guaranteed level of service can you expect? (How often will they be on your site? How easy/effective is their customer service by phone or online?)

Obstacles and Risks

Outsourcing isn’t for everyone, says Letke, and it won’t solve all problems. Some of the challenges she’s encountered are:

• Fears of poor customer service to employees
• Loss of control/trust
• Fears of job loss
• Employee/HR/Management resistance or unreadiness
• Nonperformance of a key function
• Cost
• Difficulty managing vendor relationship
• Change in provider’s business or financial stability
• Lack of fit with company culture
• Overdependency on outsourcing company
• Spillover (when outsourcing one thing impacts another thing)

Poor Reasons to Outsource

Many times, companies outsource for the wrong reasons, says Letke. For example:

• Frustration
• Unsure of what to do
• Lack of business purpose or case

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Making Outsourcing Work

Preparation for outsourcing happens internally and externally, says Letke.

First of all, within HR, be sure to:

• Develop and communicate the HR strategy.
• Define roles and responsibilities.
• Restructure the HR department as needed.
• Fill skill gaps.
• Provide training for employees in new roles.

Then, for the whole organization:

• Show how the HR strategy aligns with the overall organization strategy.
• Explain roles, goals, and rationale for outsourcing.
• Communicate the plan.

In tomorrow’s Advisor, how to select your outsourcing vendor, plus an introduction to Employee Compensation in [Your State], the trusted guide that gives you federal and state compliance guidance.