A spotlight on payroll and Hr outsourcing - ADP

Why Outsource, Why Now?

Executive Brief

A spotlight on payroll and HR outsourcing

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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.

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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 2008-2009), which can be catastrophic

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.

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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

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

Source: Gallup 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.

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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 2015. 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 2008. 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.

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