OUTSOURCING - RESHAPING AMERICAN BUSINESSES

In the race to become flexible, dynamic and highly adaptive in an ever changing global marketplace, and simultaneously become the most efficient producer in their market, companies are outsourcing at a record rate. Roger Nagel, deputy director of the Iacocca Institute at Lehigh University, has observed that an increasing larger percentage of U.S. corporations are using outsourcing as a pivotal mechanism for achieving their business goals of growth, profitability, quality, and value. Cost pressures on businesses are forcing them to contain or reduce infrastructure and overhead spending, at the same time that major new initiatives, processes and projects are being introduced. The net impact is a substantial strain on the resources that remain in the overhead functions and a distraction of focusing resources on core business activities.

This strategic use of resources outside the firm including strategic partnerships, better known as outsourcing, is rapidly becoming one of the major management tools used fundamentally in restructuring and redefining America's business. American business is emphasized because in many ways outsourcing is simply an American version of Kaisha. Kaisha is an extended Japanese corporation composed of hundreds of companies woven together in a strategic alliance focused on dominating their collective marketplace. Kaisha has been credited with the success of Japanese corporations whose results other nations are scampering to emulate. Its secret is fundamentally built on an extraordinary reliance on marketing, financial and human resource strategy as opposed to management style which drive many U. S. corporations.

Outsourcing is a major human resource strategy that benefits a company by enabling it to primarily focus its energy and resources on its core business and competencies. The advantage not only makes it unique, but also contributes to creating competitive advantage. By assigning non-core functions and work to outside contractors, companies gain access to specialists with greater expertise, advanced technology and have a more efficient and reduced cost structure.

Outsourcing is changing the way America does business. Companies like Kodak, Dell Computer, McDonnell Douglas, Nike and thousands of medium and smaller organizations are using outside providers for almost every aspect of their company's non-core or routine operations. Sales, marketing, administration, manufacturing, sales, service, information technology, transportation, distribution and human resources are some examples of the types of functions that are actively being outsourced. It appears that this is an idea whose time has truly come.

The strategic movement to outsourcing in human resources has gained momentum for several important reasons. First, the time spent on human resource issues has grown geometrically and has reached a point where there is a tremendous drain on the 'entrepreneurs' of firms and key individuals charged with core business responsibility. Training, recruiting, cost containment of employee benefits, complying with government regulations, payroll management, managing disability costs, etc. are just a few of the issues demanding valuable time. Time that competes with product development or marketing into a new market and other core operational aspects of the business. Traditionally, the way of solving this problem was to hire HR staff with the experience and skills to do the necessary work. The problem with this approach is that as HR issues increasing get more complex, staff resources are required to stay current which requires a substantial investments in training, time, and material. This investment, in turn, drives overhead cost upward. Add to this the fully loaded cost which include items like facility space, telephone expenses, benefits, travel, administrative costs, time spent in meetings, time off (vacation, holidays, FMLA, leaves of absence, travel time, etc. and the overhead cost start to become burdensome. The bottom line is that your profits maybe be sleepwalking out the door.

Outsourcing the human resources function, in part or completely, to an organization whose core work is human resources makes sound business sense because these services generally offer higher quality work, faster responsiveness and usually are less costly than maintaining an in-house function. One approach is essentially a replacement strategy because external resources are contracted to perform the work that was formerly done by internal employees. The other approach is to use external resources to extend internal resources. In many situations, it is desirable for management to redeploy internal resources from lower-level functions (e.g. answering benefit questions, input personnel data, etc.) to higher level functions (e.g. developing and coaching managers on how to empower employees). In some cases this latter strategy is used simply to allow the internal resources to fulfill their jobs at the desired service levels. For example, responding to applicants sending in resumes can be outsourced so that internal recruiters can focus on value added work such as developing sources and interviewing candidates.

The second key reason for outsourcing gaining greater acceptance is specialized expertise. Professional human resource outsourcing firms are staffed by professionals with substantial years of experience in the field, cross industry experience which has exposed them to many different ways of doing things, and multiple human resource discipline experience, e.g., employment, compensation, training, diversity, HRIS, etc. Remember this type organization has as it's core work to provide human resource expertise which means you get not only the most current information, but also the best advice and counsel there is to offer. Their livelihood is dependent on being highly trained and skilled in the human resource field, and knowing how to solve issues that arise in companies, whether the organization is growing or downsizing.

The third reason outsourcing is becoming such a viable option for businesses is because of the reality of effectively managing the cost of operations. Many businesses have reduced human resource personnel as part of their downsizing and cost reduction efforts which has created a dilemma of how to manage the human resource issues that remain. Outsourcing is a very viable solution for this dilemma since it offers the option of getting the work done without the 'fully loaded' expenses of full time staff, and with the flexibility of only paying for services when needed. Some companies choose to maintain a very lean HR permanent staff and supplement with the support of a professional 'just in time' human resource firm. Using this strategy as growth occurs the firm is able to control cost at this critical stage in development. Others opt to eliminate their Human Resource function and completely outsource this functionality to a firm that will meet all their needs on a 'just in time' basis. Both approaches has proven to be substantially less costly and more effective than maintaining a full internal human resource staff.

This cost benefit occurs because internal staff, generally :

· have high amounts of slack and/or waiting time,

· spend lots of times away from doing their work in meetings, training, vacation, etc.

· lack the full range of competencies required to accomplish the full range of work,

· often times get entangled in the organization's politics, and/or are maneuvering for promotions, status, recognition, etc.

· lack the credibility or clout to make things happen, and

· are subject to the same swings in morale as the rest of the workforce, especially during times of downsizing.

A point worth making here is that a professional full service human resource firm will have in depth expertise in all disciplines, thus client corporations need not experience declines in expertise as their needs fluctuate from one discipline to another, e.g., recruitment to training to compensation, etc.

The professional full service human resource firm is less costly for yet another reason, they are faster, more responsive to your needs and are accessible when you need them. These firms are paid based on 'solving the business problem' and ultimately the client decides if they are effective and will get paid (note the top notch firms offer a full guarantee of satisfaction with their work or "no pay" clauses). Internally, the human resource personnel get paid every week regardless of whether their solutions meet your needs, and in many cases, their goals are not aligned with the business operations goals so they are marching to the beat of a different drummer. In addition, as independent business operations providing professional services, the top notch HR firms recognize that customer service is core to their business success and survival. Thus, customers are put on center stage and are recognized as the sole means of the firm succeeding. Meeting customer needs becomes the means for staying in business and growing. Is this your experience with internal human resource departments?

A fourth reason for the increase in outsourcing is the flexibility that it offers to companies. A small growing and emerging company cannot invest a lot of capital into overhead expenses although they may have very high training, recruiting, information, etc. needs in the human resource area. With 'just in time' human resource services, companies can meet their needs and avoid a drain on much needed capital funds to feed into the business. Again, this is possible because they need only pay for services when required and not the maintenance of staff to be there just in case they are needed. Another example is with large companies who have large human resource functions which over time start to perpetuate themselves and create programs to justify their own existence. Training programs are run based on yesterday's needs assessment and justified on the basis that they are popular and well attended as opposed to focusing on desired outcome and needs of the business. Outdated compensation practices are maintained as the gospel, to maintain the large compensation staff that supports the old practices, versus pursuing contemporary compensation solutions that are not only aligned with business goals and strategic direction, but require a smaller staff to maintain. A professional outsourcing firm is in business to solve your business problems when you need them solved, and not in the business of building programs for the sake of it (they would go out of business if they did).

Additionally, a professional full service human resource firm will provide you with temporary staff to fill unexpected or intermittent needs, help avoid the proliferation of permanent overhead staff, as well as provide strategic support to help you plan for the future. An added benefit of a conscious thought out temporary or contract staff strategy versus a permanent one is avoiding having to experience the pain, frustration and morale decline associated with layoffs. Staff assigned to your organization accept and know they are not permanent, and also know that they will be reassigned or refocused. A typical strategic resource would be an individual who has vice president level experience, has worked in multiple industries and companies, has corporate, sales and operational experience, has international experience and has experience across all or most of the human resource disciplines. Is this the profile of the person you have counseling you regarding your strategic human resource business issues today?

The fifth reason that outsourcing is growing in use is that it provides a continuous flow of objective, new and non political ideas flowing into a company without the need to keep hiring new people to get this fresh input. This is particularly important in keeping an organization current and poised for changes which will invariably impact all business operations.

As the marketplace of outsourcing providers grows and continues to flourish, one of the trends that is likely to emerge given the complexity and business risk issues involved, is a move away from 'multi-sourcing' or 'selective outsourcing' to a 'one stop shopping' approach. The basic idea being that the phenomenal growth of outsourcing providers has been and is currently based on firms with a narrow specialized focus in areas such as recruiting or training or compensation or diversity, etc. I expect this will give way to a supermarket concept where providers will be capable of providing the full realm of services the client needs, and may, in fact, be simply a prime contractor that manages the interface and integration of a series of subcontract service providers on behalf of the company. In essence, as the outsourcing market matures it is expected that firms 'who do it all' will gain considerable competitive advantage because they will not only be able to meet the full needs of the client, but reduce the number interfaces the client has to manage.

Outsourcing is an idea whose time has come. It's benefits are precisely what is needed in these times of constant change and restructuring.

Benefits

· time to focus on core business issues and operations

· focused resources with highly specialized expertise allowing the client organization to either replace or extend internal resources

· cost effective management of firms assets and expenses

· increased flexibility in staffing

· fast and responsive service

· continuous flow of objective, non partisan and new creative ideas

As the struggle to dominate markets or simply to survive continues, outsourcing has proven it is a powerful strategy that can help company's create or maintain a competitive advantage. In the 21st century it will become the norm for how businesses of all sizes operate.