The future of HR outsourcing

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1 The future of HR outsourcing Outsourcing defined and accepted by many is the process by which a company will allocate various supporting and auxiliary activities via contract to another company or to sub-contractors, specializing in the relevant activity. What that means in every-day life? Outsourcing is such a well-known concept that we would be able to write many pages concerning this subject. But let us focus on people outsourcing as most outsourcing services include the human element. Companies are mostly using outsourcing services for less qualified jobs, such as cashiers in supermarkets, warehouse workers, drivers, etc. Typically, employers are outsourcing to have better control over utilization by human resources and are using more than a single agency for the service in order to have better control over quality of delivery and cost. Is it the same story in the field of technology? Let's look at of outsourcing of people in this area from several angles. In the early nineties, this process had not been wide-spread on the market, as it is today. The main turning point came in , when the crisis forced managers to seek additional reserves through cost savings. One opportunity was to use outsourcing for more and more services, particularly in the area of operations. It should be noted that the expected benefits of these changes were in many cases higher than the final result, but more on that later. As outsourcing services are performed by people, it was necessary to begin to address this aspect more closely. Body shopping (another frequently used term for people outsourcing ) was in the nineties very profitable business that generated multiplications of the initial cost of the service.

2 This situation naturally attracted new competitors and pushed the margins lower. Offering of these services is profitable only to those providers who are very cost effective, and mainly flexible in reaction to immediate customer needs. Providers of body shopping face also additional risk as they lose their best people for completely pragmatic reasons; for example, they are not able to constantly increasing their wages. In the field of information technology one the biggest projects was to takeover the entire IT operations, where people outsourcing is of course an integral part of the project. Let us mention the most famous projects in this field for last 5-6 years: Nearly simultaneously, Vodafone outsourced IT operations to IBM and T-Mobile to their sister company T-Systems. How this move affected employees involved in this change? Internal staff was standing at cross-roads a crucial decision: leave the company or become an employee of new a company, but to perform a similar activity in less attractive terms. Unfortunately, some of the employees were offered and did not have the opportunity to switch to the outsourcing company. There were others who didn t understand the reasons for such changes and their managers were often unable to keep them in the company mainly due to the inability to communicate in detail why the company opted for people outsourcing. Among other things, there was an interesting phenomenon nobody originally predicted; internal people started to feel superior to the outsourced colleagues. Internal and external staff spends much of their time together which means external suppliers see the benefits internal employees have. Therefore external people naturally feel they are employees of a lower category and are motivated to get a full time job within the organization. Another example of people outsourcing is to outsource customer care service. Telecommunications, utility or financial services companies usually outsource in this field, first line support that can be easily covered by less trained and naturally cheaper people. Aspects of a potential conflict between internal and external staff in this capacity is also much smaller, as a whole, as first line support is usually outsourced to other premises, so internal and external people usually do not meet at all.

3 Many managers are asking the fundamental question, is it worth introducing the outsourcing of human resources within the company? Expected benefits are particularly noticeable in the following areas: Reduction of total cost of employee Increase of the quality of work Higher labour productivity Greater flexibility and faster response time to the clients needs Innovative approach Internal competition Generally speaking, people outsourcing brought to many IT companies, an undeniable cost savings and in most cases, higher quality for lower prices of these services and as the client gained a single point of contact, the control of quality of the service as well as response time is much more effective. Let s compare outsourcing of human resources in CEE to Western Europe Companies in Western Europe are far more conservative comparing to those in the Czech & Slovak Republics, Poland and other countries of the region in regards to outsourcing. People outsourcing is on the rise in most of the countries in the CEE region, we experience rather the opposite trend in the western countries. Managers in Western Europe often tend to either move outsourcing of their services to countries with less expensive but still a high quality workforce (an example might be establishing of shared service centres in the Czech Republic or the Slovak Republic) or to switch back to the insourcing of the people. What leads companies in Western Europe to a more conservative view on people outsourcing? This question is also partly answered in the graph below, reported in 2012 by Tholons, a company operating primarily in the areas of strategic consulting and market research.

4 We will likely see a continuation of this trend in Western Europe in the coming years and more services that can be outsources will be moved to Eastern Europe or to Asia. That will result into stagnation of human resources outsourcing in Western Europe On the other hand, the outsourcing services including people outsourcing will further accelerate in Eastern Europe, which will result in CEE being on the same level in these services as countries such as Germany, Great Britain, Ireland and Sweden. The perception of outsourcing services by contracting authorities should bring higher knowledge from managers, which will help to further improve the outsourcing services. The more highly educated client of the outsourcing agent will be more effective in negotiating for better prices, higher quality of the service and greater flexibility of the service provider. As a result we can expect only the outsourcing providers with the highest quality, creativity, and cost effectiveness to survive on the market.

5 About the Author: David Hruska is a Principal at Pedersen & Partners. Prior to joining the firm, Mr. Hruska has held various senior positions in the Technology industry, among others as a Sales Director in Telekom Austria and in KAPSCH and most recently as a Server Business Group Lead at Microsoft, where he was focused on Cloud Computing. Mr. Hruska graduated from the Charles University in Prague in Engineering Geology. In addition to his native Czech, he speaks fluent English and Russian.