The choice between ‘making or buying’ is not necessarily a zero-sum decision.
By Rosemary Collins
As the HRO market has shifted from end-to-end outsourcing of all HR functions with a single provider to the best-of-breed/multi-sourcing approach, one aspect has held firm. The shared services delivery model has proven extremely effective for solving the basic challenges—reducing data entry redundancy and improving data quality; reducing financial and compliance risks; improving the consistency and quality of HR policy implementation; managing costs; and reducing the administrative workload of the HR generalist/business partner.
The shared services model has remained a successful constant throughout the evolution of HR service delivery because it provides a consistent customer experience supported by common enabling technologies across business lines, supports data and process integration across functions, and can be managed under a single governance organization. Importantly, it provides a solid platform for transforming HR into a strategic human capital management organization.
Once a commitment is made to deliver HR services through shared services, the next decision is whether to make or buy. As is the case with multi-process HRO providers, internal shared services organizations find it difficult to be the best at all aspects of delivery, so hybrid models are emerging. HR sourcing strategists must evaluate which services should be developed and delivered internally and which outsourced.
TPI suggests five key areas to consider when establishing an internal framework to guide shared services organizations in balancing insourcing and outsourcing.
Internal alignment on core competencies. Across business lines and functional areas, there must be alignment on what core competencies are to be retained and invested in, versus those that should be outsourced. For example, does a manufacturing organization want to develop call center infrastructure or HR technology as a core competency? To answer these types of questions, the organization should first consider whether the competency directly supports its business strategy. If it does, then it should consider whether it currently has the resources and capabilities to deliver at a best-in-class level. Finally, it should evaluate the cost/value trade-offs between sourcing the required capabilities internally or externally. (These can be difficult decisions, which should move from strategic to tactical, versus looking at the players you have and deciding what game you should play.)
Market knowledge. Some HR outsourcing markets are very mature (e.g., benefits administration and payroll), others are ripening, (e.g., workforce administration and recruitment) and others are emerging (e.g., talent management). More mature services will have less risk, better-defined deliverables, and stabler pricing. For less mature services, organizations must weigh increased risks from lack of experience and stability against the solution’s potential to meet emerging needs. Understanding the maturity of services available and strategically engaging outsourced solutions to deliver services within the shared services model can provide “quick wins” to gain process and cost efficiencies or new enabling functionality.
Establishing a sourcing strategy. Often the decision for selecting providers remains within the functional domain, leaving the shared services organization to figure out how to integrate both process and data with the provider. This results in a tactical, reactionary approach to shared services that yields less-than-optimal results. The shared services organization should take the lead in understanding the outsourcing market, developing delivery service sourcing strategy, and educating HR functions in the value proposition of alternatives.
Governance. In most shared services scenarios, the business “outsources” HR service delivery to the shared services center, which in turn may outsource some level of service delivery to external providers. Establishing holistic governance that seamlessly manages internally delivered services and outsourced services is key to managing the center as a business.
Integration versus functionality. In designing a hybrid delivery model, constantly evaluate the trade-offs between integrated data and processes and best-of-breed functionality. The more components added (systems or partners), the more integration of data, processes, and governance will be needed. Guiding principles should be established to resolve functionality versus integration decisions—determining whether the functionality is critical or “nice to have,” prioritizing the need for data and process integration between functional areas (e.g., it is critical that learning and performance management be integrated, but less important to tie these to benefits administration), and cost/value analyses.
Developing a well-informed, balanced shared services sourcing strategy is critical to achieving the time-tested promise of shared services to provide high quality service at the lowest possible costs to the organization. Today, organizations have more choices than ever before for sourcing HR delivery capabilities. Making the right decisions involves taking an enterprise view and aligning with your business strategy, balancing the risks and rewards of the maturity and integration of market solutions through a holistic governance structure that drives sourcing strategy and management of results.
Rosemary Collins is TPI’s partner and managing director of CHRO services North America. She may be reached at rosemary. firstname.lastname@example.org.