Sponsored by
HR Goes Offshore
American and European organizations have gotten used to the idea of outsourcing. The person doing your accounting calculations doesn't necessarily need to be an employee or even live in your country. The offshoring of certain kinds of work to India, Poland or the Philippines is no longer problematic. However, when it comes to offshoring the staff that provides employees with HR support, there is a certain degree of discomfort.
Let's be clear about terms: Outsourcing generally refers to passing over an intact business process — like payroll — to a third party, while offshoring refers to having work done in another country. The two are not interchangeable; many outsourcers provide offshored services, while some are locally based. Thus, not all outsourcers are offshore. Companies can and sometimes do set up their own HR support centers offshore, in which case they are typically called shared-service centers. In this article, the focus is on outsourced offshoring, but many of the lessons can apply to shared-service centers.
The Challenges
Having to call overseas for HR support is potentially problematic.
"Even offshore support staff that is completely fluent in English will have different accents and a slightly different vocabulary," says Ian Hunter, a partner at the London-based consultancy Orion Partners. "This may not matter if an employee is just asking about an account balance, but if she is discussing benefits changes due to a divorce, then any discomfort with the language may be an issue."
According to Hunter, even within the U.K., companies worry about accent differences — for example, when having staff in southern England respond to queries from Scotland.
It’s not easy for the outsourcing provider either, since it needs to hire a capable staff that is willing to work the graveyard shift.
"When you walk into a support center in Bangalore at 9 a.m., you'll be walking around with the cleaning staff, whereas at midnight things will be hopping," Hunter says.
"The key lesson is that offshoring HR support is different from offshoring finance or IT," explains Stephen Joyce, the practice leader for advisory firm The Hackett Group. "For HR support, you need to negotiate a different sort of service level agreement than for finance. You need different measures of quality."
Back-Office Offshoring Not So Easy Either
Some may think that offshoring back-office work, such as telephone support service departments, is easy.
However, according to Hunter, many issues can arise when transferring data overseas. A big one is privacy legislation. In some cases you have to get each individual to sign off before you can send his or her data offshore. Employees may also be concerned if they find their banking information is being sent to a country with a history of poor controls, corruption or criminality. Data offshoring is easier than voice offshoring, but that doesn't mean it's simple.
The Cost Paradox
Why would an American company have its HR support center in Bulgaria rather than Boise? The obvious reason is cost. Salaries in the developing world can be a fraction of those in America or Western Europe. Moving jobs where labor costs are lowest — a practice referred to as wage arbitrage — seems to make sense.
But the cost savings promised by offshoring are mitigated by two issues. One is that companies that focus mainly on cost savings often have unhappy experiences with outsourcing. The other issue is that the cost advantages are steadily disappearing.
"If the purpose at the front end is only to reduce costs, then you are bound to run into stresses between the outsourcer or shared-service center and the employee," Joyce says.
A company can reduce costs by having its outsourcer reduce service levels. If a finance or procurement professional is leading the negotiations, then reduced service levels may not be a problem. However, should employees find they can't get the support services to which they are accustomed, expect to hear an outcry. At the same time, they are likely to approach their local HR department demanding assistance. HR may end up providing the service that the outsourcer won’t, which effectively negates any cost savings.
Offshoring purely for reasons of cost savings faces a second problem: Salaries in the developing world are rapidly increasing, undermining the wage arbitrage.
"In central Europe over the last ten years, we've seen how quickly the labor costs catch up. Annual salary inflation (formerly) was 15% to 20% for experienced team leaders," Hunter says. "We saw the salaries of Polish production managers quickly approach that of an expatriate."
"The key lesson is that offshoring HR support is different from offshoring finance or IT. For HR support, you need to negotiate a different sort of service level agreement than for finance.
You need different measures of quality."
Stephen Joyce, Practice Leader, The Hackett Group
Outsourcers are continually looking for the next frontier in cheap wages. Indian outsourcers are already sending work to China. But it is natural to wonder if this constant search for a cheaper hourly wage is a sustainable business model.
Offshoring Without Outsourcing
Companies can reap potential cost savings by bypassing an outsourcer and setting up their own offshore shared-services center.
The main advantage of in-house offshoring is that you can tailor the processes to suit your needs and make changes without having to worry about contracts and service level agreements.
A disadvantage is that it may take a long time to ramp up the business before you achieve any savings. Creating a shared-service center requires building your own infrastructure and learning to operate efficiently in the new environment. Outsourcing firms, on the other hand, have the infrastructure in place to quickly move your processes offshore.
Key Lessons
Both Hunter and Joyce argue that quality of service needs to be front and center in the negotiations with an offshore service provider. HR teams need to be part of the negotiations — a step that may seem obvious, but is often not the case when finance or procurement is in charge of making the deal.
In general, there needs to be clarity about why a company is pursuing outsourcing, and about which services will remain the province of the HR team.
Another important lesson is that offshoring is going to have an impact on employees. A change-management program is required to prepare them — something Hunter says cannot start too soon. Employees should be kept abreast of what is happening, why it is happening and how it will affect them.
It also is important to be aware of another limitation: Outsourcers are moving away from the model of providing unique solutions for each client. There is a push toward providing a largely standardized offering. This makes good business sense, but it means companies may have to shift their processes and data structures to match what the outsourcer is providing.
Companies also need to be aware that when transferring overly complicated or poorly understood systems, an outsourcer may feel "like it is trying to pick up spaghetti," Hunter says.
Systems have to be well understood and finely tuned for companies to negotiate a good deal and implement it effectively.
TIME TO CALL MERCER
As a leading global provider of human resource consulting, outsourcing and investment services, Mercer serves more than 25,000 clients, including most of the world's leading companies and governments, and many rapidly growing organizations in some of the world's fastest-growing economies. We are truly a worldwide organization with 60% of our clients located in Europe, Asia Pacific and Latin America.
Mercer also has a strong market presence among midsize companies. These clients benefit from our expertise in working with large multinationals and from our experience with smaller but rapidly growing companies that seek best practices in order to gain a competitive advantage.
Mercer's unmatched global network ensures integrated worldwide solutions for clients who wish to establish global policies and procedures while respecting local cultural, legal and regulatory requirements. Our locally based professionals are also available to address country-specific issues and opportunities.
The Future of Offshoring
None of the challenges that HR offshoring faces appear to be deal breakers.
"I think offshoring will become just as natural as having someone in New York using a service provider in Philadelphia," Hunter says. "And not just for big companies — services are increasingly available for smaller companies, too."
However, although low wages were the market force that initiated offshoring, the future of the industry lies with outsourcers that can provide superior services.
"While labor arbitrage is an immediate benefit that organizations derive by moving to lower-cost geographies, most organizations are looking to transform the way they are doing a process or function. This includes not just doing it cheaply, but also doing it better and differently," says Ritesh Idnani, a vice president with Infosys BPO, an Indian outsourcing firm.
HR offshoring is here to stay. Companies just have to learn how to take full advantage of it.