The Alternative Investment Management Association

Alternative Investment Management Association Representing the global hedge fund industry

How Outsourcing can Reduce Risk and Cost

James Palmer

Red Sky Capital Solutions

Q4 2008

The cost of failing to meet your Human Resource obligations can be severe. Outsourcing is an increasingly popular way of managing Human Resources (HR) and can significantly reduce a Company’s costs and exposure to risk.

The risks

Whether you have five employees or five hundred, you have a duty to comply with an ever increasing raft of employment legislation and practices. Coupled with the need to attract and retain the best people for the job, the need to have an effective HR support function has never been more critical.

The cost of failing to comply with your legal requirements can be significant. For example, claims for discrimination are uncapped and can run into hundreds of thousands of pound. Claims for unfair dismissal can be as much as £70,000. Then, you are still faced with the additional costs of lawyers’ fees and management time, which can easily run into tens of thousands of pounds. Add to this the fact that it does not cost the disgruntled employee anything to bring a claim (except where it is completely frivolous) the risks for the Employer are potentially huge.

There are also ever-increasing compliance risks for businesses that are regulated. Background and reference checks have taken a new significance and the need to employ “fit and proper” people is paramount.

Having an effective HR support function will ensure that all these risks are minimised, so is it best to recruit internally or outsource?

Recruit internally or outsource?

The first reaction of most employers is to recruit internally because they are unaware of the fact that that outsourcing their HR is a viable alternative. This has certainly been the case until relatively recently, when it has generally only been the very larger businesses that have outsourced and then with some mixed results.

However, the situation is changing. The advent of new software and technology means that all administration can be managed by the external service provider on a remote basis. It is not generally appreciated that a very large element of the workload in an HR department is administrative and can be as much as 75 percent.

Furthermore, there is often a preconception that an HR presence is needed on-site because of the nature of the job. However, this is not always the case because, as with the administration, work such as defining strategy, offering advice on the law and best practice, managing training needs and designing processes such as appraisals, can just as easily be done off-site.

There may also be concerns about potential loss of control and issues about the quality of the service from the provider. However, if you go through the right selection process at the start and are in complete understanding with each other about responsibilities and timescales, this will not be a problem.

The benefits of outsourcing

There are significant benefits to outsourcing to the right business partner.
• Cost-effectiveness. You only pay for resources as and when you need them, so you do not have the fixed cost of staff when they are not needed. Furthermore, it is not uncommon for savings of up to 30 percent to be achieved.
• Access to a team of professionals. Rather than employing a generalist, outsourcing will give you access to a wide team of professionals to call on when their particular skills are required.
• Better systems. You can get access to HR systems that can significantly reduce administration and which would not normally be viable to purchase on grounds of cost. For example, many systems have an integrated HR and payroll function that significantly reduces duplication of input and reduces the risk of error.
• Managing peaks and troughs. Outsourcing allows you to pick up, or put down, resources to meet the varying needs of the business cycle.
• Continuous cover. You no longer have to worry about covering for holidays, sickness or maternity, together with the time and cost this involves.

Who should outsource?

• Business start-ups. New businesses need to be flexible and must react quickly to new opportunities or changing circumstances. They often do not have the time or are reluctant to create formal structures and fixed overheads. Outsourcing offers a viable solution at a critical stage of the business cycle.

• Business experience growth. Businesses growing rapidly can be restrained through a lack of resource or expertise. Outsourcing can provide a rapid resource whenever it is needed.

• Businesses experiencing a downturn or cost squeeze. The current economic outlook is forcing businesses to consolidate, re-assess cost and even downsize. Outsourcing your HR, even if you already have the resource in-house, will allow you to reduce your fixed overhead without increasing risk.

• International expansion. Setting up in a foreign country is a challenge in itself without having to worry about the different employment legislation and practices. Outsourcing to HR specialists who have strong connections with local experts can solve this problem. Furthermore, they can continue to keep the necessary processes going and field an on-site presence when necessary.

Choosing the right business Partner

Critical to any outsourcing arrangement is choosing the right business partner, but how can you be sure that you pick the one best suited to your particular business? The following is a guide.

• Any potential partner must demonstrate that they will manage all the processes professionally, effectively, on time and without causing you additional or unforeseen work. Make sure that they clearly set out all their responsibilities and the agreed timescales, on a process map that shows each individual process.
• Where possible, consider trialling the service provider on part of your processing to ensure you are happy with the quality before handing over everything else.
• Whilst you may be committed to taking the outsourcing service for a minimum period (which could run into a number of years), ensure that you build in a trail period at the start, during which you can withdraw if not completely satisfied.
• Ensure that you are satisfied with the level of security and confidentiality over the records that you are handing over to the service provider. Are they registered as a Data Controller and do they comply with the Data Protection Act?
• Will the service provider manage all your HR processes or do they have exclusions, such as not managing the record keeping?
• Will you get a dedicated team that knows you and your business?
• What experience does the service provider have of your particular industry? Ask for several references.
• Does the service provider’s HR software allow you remote, secure, access to the electronic records held on your employees?

How does outsourcing work in practice?

There are three main elements of an HR function, which are:
• Providing high level support on strategy, policy and employment law and best practice.
• Providing direct support on staff issues, such as terminations, redundancies, disciplinaries, grievances and staff queries etc.
• Managing the administration, such as maintenance of personnel records, absence management, managing appraisals etc.
The first two elements will be provided by the service provider’s HR professionals and the extent to which this work is done on or off site will be down to each business’s particular requirements and culture. In reality, much of the advice can be provided over the telephone but matters such as attending disciplinaries and managing redundancies, will need to be on-site.
Administration can be provided off-site and free up valuable office space. The service provider will ideally have a modern HR database on which the client’s employees’ records are stored. These will be updated by administrators from information fed from the client, such as details of leavers, joiners and absences. With modern systems, the client will also have secure, remote access to that database, so that they can view the records themselves.

Outsource in full or in part?

Many businesses, particularly larger ones, will have an existing HR department that consists, typically, of an HR manager and team of HR Administrators. However, there may be reluctance to remove the HR presence completely because staff would see this in an adverse way.

An increasingly common option, therefore, is to outsource all the HR administrative work but keep the managerial presence in-house.


Outsourcing is increasingly becoming a popular and effective way for businesses, particularly those in the small and medium-sized sector, to manage their HR. Its flexibility, cost-effectiveness and ability to manage risk are strong driving factors.

Furthermore, businesses managers who have seen the benefits of outsourcing other back-office functions, such as IT and payroll, will find outsourcing their HR a natural step.

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