Why Outsource, Why Now? A spotlight on payroll and HR outsourcing IN PARTNERSHIP WITH

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1 Why Outsource, Why Now? Executive Brief A spotlight on payroll and HR outsourcing IN PARTNERSHIP WITH

2 Executive Brief Why Outsource, Why Now? In today s uncertain business climate, executives and organizations need to be financially stronger, more adaptable, and more efficient to respond to shifting market conditions. The Economist Intelligence Unit found that nearly 90% of executives believe that organizational agility is critical for business success, but more than a quarter of respondents feel they are at a competitive disadvantage because they are not agile enough to adapt to market changes. To be able to adapt to change, organizations need to free up resources and become more responsive to changing market conditions. Companies that do this the right way are likely to be more productive and have stronger operational processes in place to rebound faster from economic downturns. Outsourcing is one way for organizations to build agility into their operations by providing the flexibility needed to navigate changing business climates, be it entering an upturn, downturn, or indeed times of stability. When an organization is able to focus its attention on its core business, and away from tasks that could be better outsourced to specialist providers, McKinsey & Company among others, argue that outsourcing has the potential to deliver up to 50 per cent improvement in business processes. So the question is, if an organization is not already outsourcing some of its business processes, then why not and why not now? The arguments for outsourcing are strong, and its success rests on the maximization of three key focus areas: Resources, People, and Processes. The business response to a global economic slowdown The global economic crisis that began in the US subprime mortgage market in 2007 still shows no signs of ending. Even the economies of Brazil, Russia, India and, above all China which in recent years have accounted for the bulk of world GDP growth, are now slowing down. As a result, banks are still risk adverse, making access to credit more difficult, customers are spending less, inflation is pushing up prices, all of which are having a drastic impact on cash flow and profitability. Many companies have been responding to this uncertain business environment by implementing quick fixes such as reducing stock and making substantial reductions in headcount. However, some reactionary responses may inhibit the ability to recover from the recession and expose companies to greater risk. The bleak economic backdrop gives new urgency to the perennial search for business efficiency, according to Jesper Lillelund, co-founder of CorporateLeaders, the independent network for business executives. While there s not much scope for growth in the current business environment, organizations can survive and even increase their profitability by cutting costs, improving efficiency and streamlining business processes, he says. Outsourcing can enable companies to do those things, which is why they should be considering this now, given the state of the global economy. Leveraging outsourcing to meet executive needs Organizations opt to outsource HR activities for a whole host of reasons. Context is king and the size, sector, strategic objectives, and available skills of the organization will all influence the outsourcing decision. That said, companies typically outsource in the first place by the need to reduce costs. An uninformed reaction is to simply reduce headcount (as it was done in the US circa ), which can be catastrophic 2

3 for businesses, leading to the loss of knowledge, expertise, demoralization of the workforce, and increased exposure to risk. By purchasing outsourced services from an experienced provider who acts in partnership, an organization can instead ensure that costs are reduced while services are actually improved. HR services most commonly considered suitable for outsourcing tend to be transactional processes such as payroll, health and welfare benefits, and pensions administration. By outsourcing these routine transactional processes from daily work, companies not only achieve cost savings, but they are able to free up the HR organization to be more strategic and a better business partner. Small and medium-sized enterprises (SMEs) that lack the capacity to handle all aspects of HR are the most likely to outsource their entire HR functions. By contrast larger organizations are more likely to outsource transactional activities, such as those associated with payroll, employee benefits, recruitment and training. More sensitive areas, including strategic policy-making, leadership development, and change management tend to be kept in-house by large organizations. To cope with these external pressures, many companies are considering or actively planning to increase the scope of their outsourcing contracts. During previous economic slowdowns, says global services analyst firm HfS Research, many companies regarded outsourcing as potentially disruptive to the business, often viewing it as a unique and somewhat risky strategy. However, the leading offshore IT services providers continued to grow their businesses throughout the last downturn. Moreover, many areas of BPO that posed substantial cost-reduction gains were definitely viewed as disruptive last time out, are now proven mainstream offerings. Business drivers for outsourcing: The Three Focus Areas Businesses need to be ready for change and be able to scale up or down depending on the market. This, along with increases in internal productivity and employee engagement as non-essential functions become externalized, are the main business drivers for outsourcing. For outsourcing to be successful, any arrangement must focus on maximizing the following three areas: Resources, People, and Processes. 1. Resources - Maximizing cash flow Outsourcing enables organizations to reduce the size of non-strategic functions and scale operations to meet changing business needs. This ultimately improves gross margins and increases cash flow which allows businesses to make investments that will better position themselves to not only survive the current economic conditions but emerge as leaders when the economic conditions turn in their favor. The ADP White Paper Payroll Outsourcing in Europe estimates the average annual HR costs across Europe to be 1,500 per full-time employee, of which 200 is spent on payroll and 250 on personnel administration. A further ADP study conducted in France showed that companies, who processed their payroll on internal systems, believed the cost per pay slip was 17 per month, whereas the actual costs turned out to be 37 per pay slip per month. That is 240 per employee per year in unexpected costs. Hidden costs like that can be challenging to companies that need to leverage their cash for more strategic activities. Therefore, it s no surprise that 20% of Europe s payroll is already outsourced, a number which continues to grow year after year. SaaS (Software as a Service) and cloud-based outsourcing platforms are providing organizations with a lower cost alternative and the chance to convert fixed HR costs into more flexible variable costs. This frees up operating cash while providing the ability to scale with the business as it changes. SaaS enables organizations to leverage best in class technology and avoid the capital expense needed to implement and manage their own internal systems therefore maximizing cash flow. Larger outsourcing providers are able to exploit economies of scale to deliver stateof-the-art technology solutions that may be out of reach for many organizations, especially SMEs. In addition, outsourcing can help eliminate costly duplication of non-strategic activities. This is often a key benefit for multi-site organizations where traditionally every location would have its own HR team, delivering the same services as all the other teams and incurring the same overheads. Such duplication becomes unnecessary when services are delivered centrally to every part of the organization by a single external partner. 3

4 Executive Brief Why Outsource, Why Now? 2. People maximizing productivity Even before the current economic crisis struck, it was clear that HR professionals needed to create added value by taking on a more strategic role and collaborating more closely with business managers. Yet many people continue to spend their working lives on tasks that could easily be automated and handed over to external providers. Regardless of the employment rates, companies are becoming increasingly aware that they need to focus on retaining their top talent and not doing this is costly and has a negative impact on employee productivity. A study commissioned by ADP, HR Outsourcing Redefined: Options for Workforce Management, found that HR teams of mid-sized companies spent nearly half their time (45%) on a combination of payroll-related activities (18%), HR administration (14%) and benefits administration (13%). HR teams that devote so much time to administrative tasks are clearly not going to play a strategic role in leading their organization forward focussing on activities that help the organization achieve its core business objectives. In the early days, outsourcing was perceived to have a potential negative impact on employee engagement. Now that outsourcing is much more understood, there is actually a positive impact. When people are freed from the administrative burden of their roles, they are then able to apply their skills and experiences to the more knowledgeintensive parts of their job. They become more engaged, more productive, and are more likely to remain with the organization. Gallup, the researchbased performance-management consulting company, has run extensive studies to show how employee engagement relates to business results. They found the most engaged workplaces were 27% more likely to report higher profitability, 50% more likely to have lower staff turnover and 38% more likely to have above average productivity. On average a company loses $1 million for every 10 professional employees who leave according to PWC Saratoga, publishers of HCM intelligence. Disengaged employees will leave the organization or, even worse, sit and radiate negativity until everyone around them is also disengaged. How employee engagement relates to business results Source: Gallup 27% of organizations are more likely to report higher profitability 50% of organizations are more likely to have lower staff turnover 38% of organizations are more likely to have above average productivity Companies that seize these opportunities and become leaner and more focused on core business activities are likely not only to ride out the storm but will have a more productive and engaged workforce, enabling them to take advantage of the recovery quicker than their competitors. 4

5 3. Process Standardization and compliance Companies that have strong internal processes are more flexible and can take advantage of competitive opportunities more easily. Current market conditions may both present opportunities as well as force companies to change their business models to adapt. Companies that are forced to react in the short term to economic conditions often reduce or reallocate headcount responsible for managing internal employment related processes. This can have an enormous impact on engagement, productivity, and expose the company to greater risks. Partnering with external providers can therefore offer automated processes and higher levels of specialist knowledge and expertise that organizations may not have or choose to maintain internally. Again, this is an aspect of outsourcing that is especially likely to appeal to SMEs. While they may lack know-how in relation to HR activities that they carry out only occasionally, for an outsourcing company this know-how is a core competency. In France alone, there were 58 payroll related legislative reforms from July 2011 to July 2012 that businesses had to implement. Regardless whether an organization is growing, decreasing, or maintaining stability, business continuity has never been more important. Changes in key HR personnel can plunge an organization into crisis. Outsourcing some or all HR activities goes a long way towards mitigating this risk by shifting the onus of hiring and training to the service provider, and so ensuring service continuity. A hidden danger is that these same economic conditions that offer opportunities, also often trigger greater employment compliance requirements and legislative changes which companies find difficult to keep up with. In France alone, there were 58 payroll related legislative reforms from July 2011 to July 2012 that businesses had to implement. Outsourcing helps keep organizational processes ahead of such changes rather than reacting, which can be costly. Outsourcing transfers risk from the purchasing organization to the vendor an important consideration in times of uncertainty. The current BPO market According to the research firm Global Industry Analysts, the HR Outsourcing market will reach $162 billion by This includes both large enterprises looking at BPO for multinational operations, and small to medium-sized businesses increasingly attracted by the advances in outsourcing technology and decreased prices. According to IDC, a global research firm, outsourcing Human Resources functions has grown by close to 70% over the past six years. In Western Europe, where the outsourcing business model has existed for years, research firm Gartner in their 18th June 2012 report Magic Quadrant: Payroll BPO Services estimates that at least 50% of companies already outsource payroll. However, continues the report, we believe the general global recession and the acute Eurozone crisis are leading many more companies to adopt outsourcing as a way to cut costs than they did when the recession began in The emerging business markets of China and India have produced environments in which companies have become outsourcing consumers rather than only providers, as they have traditionally been viewed. Also, Latin America, the Middle East, Southeast Asia and (to a lesser extent) Africa show similar signs of growing adoption of payroll outsourcing. The outsourcing industry research firm Everest recently reported that the global multi-process HR outsourcing market would grow to an estimated annual contract value of $3.3 billion during 2012, with emerging markets, particularly in Asia Pacific and Latin America driving this growth. The practice of contracting out activities in such areas as HR, IT, finance and marketing to external providers is widespread in developed economies and, increasingly, in the BRIC countries and other emerging markets. 5

6 Executive Brief Why Outsource, Why Now? Summary Businesses need to make the best decisions today to position themselves for the company they want to be once the economy recovers. Therefore it is essential for companies to be ready for change and be able to adapt quickly depending on market conditions. Companies cannot save their way into prosperity by cutting costs and reducing headcount as this removes vital knowledge and expertise from their businesses. When the market enters an upturn these companies will have to go through the costly exercise of rehiring people, limiting their ability to take advantage of the recovery while still having the same issues. Good costs are spent to grow the business and bad costs, such as inefficient processes, are expunged. Outsourcing enables companies to be flexible while ensuring that they continue to provide essential internal services necessary to run their business. Outsourcing allows companies to maximize three essential areas that are essential to success. Resources, People, and Processes: 1) Outsourcing enables organizations to improve Resources such as increasing gross margins, freeing up cash flow for mission critical objectives, reducing costs, and providing scalability; 2) The outsourcing of routine, administrative tasks allows People to take up more strategic work, increases productivity, and engages the workforce; 3) Outsourcing providers can deliver Processes more quickly, efficiently and, therefore, more cost-effectively than internal functions. The demand for outsourcing is growing fast among multinationals and small to medium-sized businesses alike, increasingly attracted by the advances in outsourcing technology and decreased prices. According to Gartner research, the payroll BPO service market alone grew 5.2% in With the World Bank recently advising countries to prepare for a long period of volatility in the global economy, many companies have been actively planning to increase the scope of their outsourcing contracts. Doing things the wrong way, however, can do more damage than not outsourcing inefficient processes in the first place. 6

7 Tips for outsourcing success Be clear about your objectives Potential outsourcing providers need to understand what you are hoping to achieve in order to present you with realistic proposals. So provide them with as much accurate information as possible about the work you plan to outsource, the level of service you expect, and what your scheduling requirements will be. Look at the provider s record Examine the provider s past performance record by talking to other clients. Make sure the provider is financially stable and has the experience of working with broadly similar organizations in both type and size as your own. A provider that has previously dealt only with small companies, for example, may not have the capacity to provide a good quality service to a company with several thousand employees. Above all, don t be afraid to ask searching questions. The provider must also take the time to understand your business: a key difference between simply being a vendor and being a true business partner. Consider the cultural fit Visit the provider s premises and talk to employees to make sure that there is a good cultural fit between the two organizations. Discuss your own organization s culture and employer brand with the provider. Agree on the right price While it s never a good idea to select a provider on the basis of price alone, the price of the deal will obviously be of critical importance to your organization. Ensure that the contract you sign links payments to the achievement of clearly defined performance targets so that you know exactly what you are paying for. When considering the total price of the deal, remember to factor in any investment you will need to make in developing your own organization s vendor relationship management skills. Build in flexibility With outsourcing partnerships increasingly likely to last many years, the contract also needs to set out dates for reviewing the arrangement. This will allow you to adjust the relationship as needs change in either in your own organization or in the wider business environment. Manage the relationship As a client, you should expect your provider to invest in the skills and techniques needed to provide quality service. But, your own organization also needs to invest in developing the capacity to manage the outsourcing relationship. As CorporateLeaders Partner Jesper Lillelund puts it: Any transition from in-house to outsourced provision of HR services represents a major change for the purchasing organization and needs to be managed as such. But if it s handled correctly, HR outsourcing can play a key role in helping organizations survive through the current economic turbulence and prepare for whatever the future holds in store. 7

8 About Automatic Data Processing, Inc. (NASDAQ: ADP), with about $10 billion in revenues and approximately 570,000 clients, is one of the world s largest providers of business outsourcing solutions. Leveraging over 60 years of experience, ADP offers a wide range of human resource, payroll, tax and benefits administration solutions from a single source. ADP s easy-to-use solutions for employers provide superior value to companies of all types and sizes. ADP is also a leading provider of integrated computing solutions to auto, truck, motorcycle, marine, recreational vehicle, and heavy equipment dealers throughout the world. CorporateLeaders is an exclusive independent network that inspires business and leadership by providing a trusted forum for executives to network, exchange ideas, share lessons learned and drive business forward in an ever-changing environment. We focus on providing exclusive membership services, intimate and content rich networking events, research, thought leadership and advice on business transformation with the executive needs and experiences at its core. About the Magic Quadrant Gartner does not endorse any vendor, product or service depicted in its research publications, and does not advise technology users to select only those vendors with the highest ratings. Gartner research publications consist of the opinions of Gartner s research organization and should not be construed as statements of fact. Gartner disclaims all warranties, expressed or implied, with respect to this research, including any warranties of merchantability or fitness for a particular purpose.