August 9, 2015
Handing over HR functions to a reliable external HR partner enables companies to focus on growing their core business
Human Resources (HR) deals with anything and everything to do with the employment of people in a company. Rapid growth in the business world today frequently brings an increase in HR administration that companies see as a distraction which does nothing to improve sales and profits. The answer may be to outsource some of their HR functions to a third party HR provider so that companies can focus on their core business and ensure they meet their strategic objectives.
Fierce talent wars, rising HR costs and increasingly complex labor regulations are cited as key influencers fuelling the HR outsourcing trend. Behind each strategic decision to outsource HR is a realization that specialist HR input may help companies reduce costs, improve regulatory compliance and, most importantly, improve efficiency. There are other benefits, too. Professional HR outsourcing companies will be up to date on the latest technology and techniques and will know how to adapt them to a company’s specific needs. Companies can be confident that essential HR actions, such as payroll processing, will be done on time and are not dependent on a key internal employee who may leave or fall sick. In addition, HR outsourcing companies have people with significant in-depth expertise which enables them to provide sound advice to their clients’ employees and have a positive influence on the way they are managed, thus helping their clients to have a happier and more effective workforce.
A number of multi-national companies (MNCs) coming to Vietnam have been following the HR outsourcing trend for years and, in fact, MNCs are currently the main drivers of HR outsourcing in the Vietnamese market. In particular, HR outsourcing has become very popular for MNCs in the pharmaceutical industry. These companies are strong financially but, more importantly, they just want to focus on their core businesses while engaging external help to prevent necessary HR support functions from side-tracking their attention.
It is of note that companies in the banking industry also prefer to have their HR functions outsourced as they pay great attention to legal compliance and it takes time and cost to maintain sufficient expertise in HR legislation and regulations in-house.
In Vietnam, HR outsourcing is still a relatively new and unfamiliar concept to the majority of local companies. Following the success of MNCs using HR outsourcing, a small number of Vietnamese companies have recently started to go down this road. However, many have so far found it difficult to justify a decision to outsource on the basis of potential cost savings because administrative labour is still relatively cheap in Vietnam. Moreover, many still cling to the false notion that all HR resources should be kept in-house as they fear a loss of control or information leaks.
It is true that, at first, it may actually cost more to outsource some HR functions than to keep them in-house. However, it should come as no surprise that HR outsourcing both minimizes the hidden costs of the administration involved and reduces risks in the long run. Take, for example, payroll outsourcing, which tops the list of the most frequently outsourced HR functions.
In payroll outsourcing, a company uses the external resources and professional systems to manage their payroll activities, from salary payments and insurance payments to personal income tax payments. According to our recent research, the total cost, including both the staff and management cost, to provide one payroll administrator is 2.5 or 3 times their monthly salary. The cost of outsourcing to the payroll vendor is similar to the salary of this one person, but a company can make huge savings on training, benefits, annual salary increments, and working space from not employing people to provide this service in-house.
It is not surprising, therefore, that payroll outsourcing is on the minds of most newly-established companies all over the world and is particularly attractive and useful given the evolving nature of labor regulation and local practice in different countries and regions. Outsourcing payroll can also protect new companies from the challenges of recruiting sufficiently experienced payroll staff in-house as well as risks such as incorrect salary calculations or being unaware of legal changes. Mistakes of this kind always have to be redressed at a later date, usually with an accompanying increase in costs, not least from the management time required to put things right.
One of our clients, who began experiencing rapid growth with their business, has multiple departments in many locations in Vietnam. Each location had an HR department to manage employees’ timesheets with separate databases and different templates. When the payroll period began, the central HR department had to collect and calculate all the different forms and templates from the location HR departments and synchronize them with each other.
This laborious administrative process not only ate up a lot of time but often resulted in data entry errors and reporting delays. Talentnet addressed all these problems by developing a single template for all the departments and locations. Then we developed an automated timesheet tool that allowed locations to submit their timesheet data with ease. Since the implementation of payroll outsourcing, the payroll period is no longer an HR nightmare for our client.
Companies that outsource HR functions often benefit significantly. But there are some basics to get right. Experienced outsourcers emphasize that HR outsourcing works best when outsourcing providers are in a good partnership with their clients’ internal HR teams. In other words, to get the most value from an HR outsourcing relationship, a company needs to have an internal HR department that is ready to partner with an outside vendor and, most importantly, the company should have very clear policies and workflows to interact effectively with the outsourcing vendor. However, due to the lack of in-house HR expertise and capacity, many Vietnamese companies are not yet ready for such a big change. So, in summary, company size and industry don’t really matter in HR outsourcing. The key issues to address before going down this path are the level of readiness of the internal HR department and the readiness of their HR systems.
The role of an effective HR department in a successful and growing business is, of course, wide-ranging, including strategy, talent development and management, organization design and culture, change management, employee wellbeing and engagement, as well as administrative and operational support. Deciding which HR functions to outsource and which to retain in-house is a ‘must answer’ question for every company, to strike a balance between cost-effectiveness and ensuring that employee engagement levels do not fall. Which functions stay in-house and which are outsourced to an outside vendor depend on the type of company and its strategic priorities. If a company were to hand over all HR functions to an outside vendor, a sense of distance between it and its employees might emerge. This is because vendors that handle outsourced HR functions often do not have sufficiently insightful and personal relationships with clients’ employees and therefore may find it difficult to resolve HR-related issues. To avoid this, companies will usually want to outsource only some of their HR functions and keep in-house their key responsibilities and strong communications with their employees.
So when is HR outsourcing right for a company? If a company considers people are its most important resource and create the company’s competitive edge, its’ HR department will want to focus more time and energy on strategy and vital functions such as talent development, to help the company identify and groom its future talents. It, therefore, makes good sense for the HR department to delegate its administrative HR burden. That’s when a company should consider HR outsourcing.