Contributors

Beyond a Cost-cutting Exercise

Tuning into the other benefits of outsourcing to truly understand the value of embracing HRO, the savvy executive will realize the additional values of outsourcing.

by Scott Golas

Even as businesses rely more on sophisticated technology, the costs of internal administration have increased. Not only do they have to buy and maintain these assets and highly paid professionals to use them, organizations must also deal with the added expense of complying with regulations such as Sarbanes-Oxley and the Health Insurance Portability and Accountability Act (HIPAA).

Attracting, retaining, and developing a workforce and keeping current with the latest technology are a costly challenges for many organizations. It has become increasingly important for these organizations to hire a provider with the knowledge, tools, and expertise to remove the burden of administrative and transactional activities so that HR and finance executives can focus on core processes and strategic initiatives.

Knowledgeable executives at leading organizations have recognized the enormous potential business benefits of outsourcing since they understand that physical assets today only minimally represent the market value of most companies; indeed, many corporations want to decrease the assets on their books. CEOs and CFOs realize that the true differentiator in the marketplace is human capital, and so the ability to maximize workforce performance to achieve business objectives is paramount.

How much is human capital worth to your organization? Many experts, including HR professionals and financial and market analysts, agree that as much as 80 percent of a company’s worth is tied to its workforce. Highly successful companies understand this critical differentiator and take the necessary steps to make the most of their human assets. Strategic recruiting, hiring, training, and retaining programs focus on bringing the best people into the organization and, giving them the tools to ensure optimal performance.

According to some financial experts, while share performance is often linked more closely to broader issues of market confidence, interest rates, industry performance, and accounting practices than the business fundamentals of an organization, it is in the long-term operational interests of all businesses to trim cost structures and enhance workforce performance.

From a financial perspective, money spent on back-office functions such as HR and finance is an expense that affects the organization’s bottom line immediately. This is in contrast to hard asset investments such as property, equipment, or technical systems that can be expensed over time, resulting in a weaker, short-term effect.

Executives in tune to the value of outsourcing realize that the opportunity to better manage their resources can be had by focusing more strongly on workforce costs. FASB and other professional organizations are working to improve the accounting of human assets, and several leading companies currently report on human capital in their annual reports. These are emerging trends now well underway and will continue to gain momentum in the coming year. The most strategic and successful finance professionals will come to focus on this more carefully and lead their organizations in this direction, ahead of their competitors.

In an overall restricted corporate spending environment, CFOs and other senior finance executives expect managers to demonstrate a measurable return on investment (ROI) for all major corporate initiatives, including outsourcing. While cost reduction is a large part of the ROI equation, it should not be the only measure. When an organization is examining the returns from outsourcing, it is critical that the benefits are broader than cost savings alone. These organizations should identify strategic objectives and then determine whether outsourcing can help achieve those objectives by freeing up resources, improving service internally, and converting much of the fixed costs associated with in-house delivery into the variable characteristics that many outsourcing initiatives deliver, and which many organizations crave.

While many early outsourcing agreements were based solely on the projected cost savings for the client, today’s outsourcing contracts should be based on the strategic value of the outsourcing relationship. The first step should involve a sourcing diagnostic, which is an evaluation of the current state of HR and /or finance in the organization.

The strategic value of outsourcing continues to grow as more organizations hire outside experts to take over these functions. Clearly, outsourcing has moved beyond the point of simply being a cost-cutting exercise; for an increasing number of organizations, outsourcing is a key strategic tool for realizing the true potential of its workforce.

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