Bill Young |
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| Human Capital Management (HCM) |
HCM is the recognition and development of capabilities that enable the organisation to function. It is the only set of assets in
an organisation that increases in value with use and the only one that ensures its future. Everything else expires,
depreciates or is consumed.
Outsourcing is as old as business itself, as firms shift their activities downstream towards their customers in order to increase
their share of a value chain. As they acquire activities in one area, they shed them in another. It forces an organisation to
consider what it does every day, why it is effective, how it can be sustained, and which capabilities need to be nurtured. The
soft, furry edges of people-management suddenly become very hard and distinct – and central to critical decisions.
Outsourcing means the transfer of activities to another organisation. The reasons that an outsource service provider can
perform better than its clients are:
· Dedicated recruitment and career structures for its core activities,.
· Higher utilisation of capital assets and ability to maintain investment in specialist technology.
· Business profile that enables a lower return on investment. A research-based company’s shareholders expect a RoCE
of over 50% to justify the long term investment and business risks whereas a commodity-service based company may accept
less than15%.
There are valid reasons why the long-term, total cost of outsourcing can be less than for an in-house activity: however, many
outsourcing plans miss the two italicised key words. Michael Porter says: 'Many of the companies that think they can cut
costs end up disappointed. What looks like a good deal when the service provider first suggests a price turns out to be a lot
more expensive when the contract comes up for renewal. By that stage, bargaining power has shifted. The companies that
outsourced their services have often lost the ability to do the job themselves.' There are other hidden costs of outsourcing
according to Mr. Porter, including a loss of control over the quality of the work done. According to a survey by PWC, 66
percent of companies are disappointed with outsourcing contracts, only 39 percent said they would renew contracts and 15
percent were thinking of bringing them back in house.
According to Michael Skapinker, writing in the Financial Times, 'The point many companies miss about outsourcing is that it
does not mark the end of managing an activity, but the beginning of managing it in different and more difficult ways. Instead
of ensuring your own employees are doing their jobs properly, you have to ensure someone else’s are. And you have to do
that without the familiar tools of hiring, firing, promoting and rewarding'. He refers to Michael Dell, founder of Dell computers,
who says companies that outsource often turn a problem they cannot manage into one they can manage even less.
Outsourcing can make a lot of sense. As argued by the Value Partnership Ltd, there are companies that can manage the
staff restaurant, accounting or aspects of distribution better than a service user can. But one needs to be careful about what
is outsourced - and why. Does it make sense to outsource aspects of the core business: for nurses to feel they have no
responsibility for cleanliness in wards, for rail companies to outsource track renewal? Some companies seem to abrogate to
others important responsibilities for customer contact or product development, for example. Is this really a robust foundation
for current or future performance?
What is the goal that is being pursued: reduced costs; increased efficiencies; improved service; or a focus on more added-
value activities? Each of these has different implications for the organisation and management of both the ‘outsourced
activity’ and what’s left behind. For instance, are the savings alleged for standardized, central processes dwarfed by the
hidden costs to individual businesses, now stripped of local resource? Are service level agreements encouraging a focus on
“easy-wins” rather than important ones? One must make sure cost reduction includes the word total - and that outsourcing
can be managed in a way that really leads to improved performance.
Hackett, a benchmarking company, divides Finance into the 22 service areas. Others define them differently and may have a
different overall scope, but also settle on 20-30 separate activities.
1. Accounts payable/freight
2. Payroll
3. Travel and expense
4. Benefits administration
5. Fixed assets
6. Budgeting
7. Accounts receivable
8. Forecasting
9. Credit and collections
10. Business performance reporting
11. Customer billing
12. Cash management
13. General accounting
14. Treasury management
15. External reporting
16. Tax planning
17. Cost accounting
18. Internal audit
19. Tax accounting
20. Risk management
21. Tax filing and reporting
22. Finance function management
Finance is also typical of other functions in the number of its discrete and separable activities. Before anything is
outsourced, the organisation must undertake an analysis of the internal staff time consumed by each activity and the external
expenditure needed to support it. Then it should assess its efficiency and efficacy (benchmarked against external
parameters). Finally it must judge how ‘core’ the activity is to the business. Cash management is probably not at the core of
a creative advertising agency but is critical to the media agency that may be under the same roof. If customer service is a
key goal, does it then make sense to consider outsourcing accounts receivable? If the organisation is committed to
developing talent for long-term management succession, does it make sense to outsource Training & Development? What
might be lost if this activity was not under the organisation’s day-to-day control? This stuff is not just for business-school
academics – it is the real world. All outsourcing projects, be they Customer billing, Catering or Car Fleet, will fail if the
organisation has not first achieved a full understanding of the activity.
This is where Human Capital Management comes in. When an organisation has identified the activities that are important
and those that are less important, the next step is to look at the sources of the capabilities to understand if these are unique
skills, or are they generally available. From this a matrix emerges. This exercise, or its equivalent is an important part of
every function management role.
Missing diagram - sorry
The matrix is a first step in Human Capital Management and leads to the identification of models for Recruitment, Reward,
Development and Motivation for the organisation. When outsourcing is planned, a new group of activities emerges, that of
managing the outsourced activities. Although the outsourced activities themselves may not be strategically important,
analysis of the resulting organisation often concludes that management of external suppliers is. Further, managing other
companies’ activities is a very different skill-set from managing them internally and the apparently ‘obvious’ candidates for the
job may not be suitable. A group of activities that appeared in the left of the matrix leads to a critical requirement for an
outsource-management function on the right.
Technology companies and IT functions promote competent technologists with commercial flair to become Project Managers.
You want someone who understands the importance of a deadline, can evaluate a team member’s ability to deliver, monitor
spend, report overall progress to the Board, and manage a crisis caused by externalities. Perhaps you’d do better to poach
the manager of a construction project? This is where some companies look for Project Managers once they have objectively
analysed the requirements of the role and ceased thinking in functional silos. HCM is therefore not for academics; it extends
to the daily activities in every department, not just HR and it is critical to the success of Outsourcing.
Outsourcing will continue to produce failures for those firms that do not take the trouble to research and understand the
processes they are outsourcing. For those that do know the basic elements of their business and can identify what it is that
makes them different, outsourcing will create competitive advantage from their vendor relationships. Others can look for
inspiration in posters of furry animals.
an organisation that increases in value with use and the only one that ensures its future. Everything else expires,
depreciates or is consumed.
Outsourcing is as old as business itself, as firms shift their activities downstream towards their customers in order to increase
their share of a value chain. As they acquire activities in one area, they shed them in another. It forces an organisation to
consider what it does every day, why it is effective, how it can be sustained, and which capabilities need to be nurtured. The
soft, furry edges of people-management suddenly become very hard and distinct – and central to critical decisions.
Outsourcing means the transfer of activities to another organisation. The reasons that an outsource service provider can
perform better than its clients are:
· Dedicated recruitment and career structures for its core activities,.
· Higher utilisation of capital assets and ability to maintain investment in specialist technology.
· Business profile that enables a lower return on investment. A research-based company’s shareholders expect a RoCE
of over 50% to justify the long term investment and business risks whereas a commodity-service based company may accept
less than15%.
There are valid reasons why the long-term, total cost of outsourcing can be less than for an in-house activity: however, many
outsourcing plans miss the two italicised key words. Michael Porter says: 'Many of the companies that think they can cut
costs end up disappointed. What looks like a good deal when the service provider first suggests a price turns out to be a lot
more expensive when the contract comes up for renewal. By that stage, bargaining power has shifted. The companies that
outsourced their services have often lost the ability to do the job themselves.' There are other hidden costs of outsourcing
according to Mr. Porter, including a loss of control over the quality of the work done. According to a survey by PWC, 66
percent of companies are disappointed with outsourcing contracts, only 39 percent said they would renew contracts and 15
percent were thinking of bringing them back in house.
According to Michael Skapinker, writing in the Financial Times, 'The point many companies miss about outsourcing is that it
does not mark the end of managing an activity, but the beginning of managing it in different and more difficult ways. Instead
of ensuring your own employees are doing their jobs properly, you have to ensure someone else’s are. And you have to do
that without the familiar tools of hiring, firing, promoting and rewarding'. He refers to Michael Dell, founder of Dell computers,
who says companies that outsource often turn a problem they cannot manage into one they can manage even less.
Outsourcing can make a lot of sense. As argued by the Value Partnership Ltd, there are companies that can manage the
staff restaurant, accounting or aspects of distribution better than a service user can. But one needs to be careful about what
is outsourced - and why. Does it make sense to outsource aspects of the core business: for nurses to feel they have no
responsibility for cleanliness in wards, for rail companies to outsource track renewal? Some companies seem to abrogate to
others important responsibilities for customer contact or product development, for example. Is this really a robust foundation
for current or future performance?
What is the goal that is being pursued: reduced costs; increased efficiencies; improved service; or a focus on more added-
value activities? Each of these has different implications for the organisation and management of both the ‘outsourced
activity’ and what’s left behind. For instance, are the savings alleged for standardized, central processes dwarfed by the
hidden costs to individual businesses, now stripped of local resource? Are service level agreements encouraging a focus on
“easy-wins” rather than important ones? One must make sure cost reduction includes the word total - and that outsourcing
can be managed in a way that really leads to improved performance.
Hackett, a benchmarking company, divides Finance into the 22 service areas. Others define them differently and may have a
different overall scope, but also settle on 20-30 separate activities.
1. Accounts payable/freight
2. Payroll
3. Travel and expense
4. Benefits administration
5. Fixed assets
6. Budgeting
7. Accounts receivable
8. Forecasting
9. Credit and collections
10. Business performance reporting
11. Customer billing
12. Cash management
13. General accounting
14. Treasury management
15. External reporting
16. Tax planning
17. Cost accounting
18. Internal audit
19. Tax accounting
20. Risk management
21. Tax filing and reporting
22. Finance function management
Finance is also typical of other functions in the number of its discrete and separable activities. Before anything is
outsourced, the organisation must undertake an analysis of the internal staff time consumed by each activity and the external
expenditure needed to support it. Then it should assess its efficiency and efficacy (benchmarked against external
parameters). Finally it must judge how ‘core’ the activity is to the business. Cash management is probably not at the core of
a creative advertising agency but is critical to the media agency that may be under the same roof. If customer service is a
key goal, does it then make sense to consider outsourcing accounts receivable? If the organisation is committed to
developing talent for long-term management succession, does it make sense to outsource Training & Development? What
might be lost if this activity was not under the organisation’s day-to-day control? This stuff is not just for business-school
academics – it is the real world. All outsourcing projects, be they Customer billing, Catering or Car Fleet, will fail if the
organisation has not first achieved a full understanding of the activity.
This is where Human Capital Management comes in. When an organisation has identified the activities that are important
and those that are less important, the next step is to look at the sources of the capabilities to understand if these are unique
skills, or are they generally available. From this a matrix emerges. This exercise, or its equivalent is an important part of
every function management role.
Missing diagram - sorry
The matrix is a first step in Human Capital Management and leads to the identification of models for Recruitment, Reward,
Development and Motivation for the organisation. When outsourcing is planned, a new group of activities emerges, that of
managing the outsourced activities. Although the outsourced activities themselves may not be strategically important,
analysis of the resulting organisation often concludes that management of external suppliers is. Further, managing other
companies’ activities is a very different skill-set from managing them internally and the apparently ‘obvious’ candidates for the
job may not be suitable. A group of activities that appeared in the left of the matrix leads to a critical requirement for an
outsource-management function on the right.
Technology companies and IT functions promote competent technologists with commercial flair to become Project Managers.
You want someone who understands the importance of a deadline, can evaluate a team member’s ability to deliver, monitor
spend, report overall progress to the Board, and manage a crisis caused by externalities. Perhaps you’d do better to poach
the manager of a construction project? This is where some companies look for Project Managers once they have objectively
analysed the requirements of the role and ceased thinking in functional silos. HCM is therefore not for academics; it extends
to the daily activities in every department, not just HR and it is critical to the success of Outsourcing.
Outsourcing will continue to produce failures for those firms that do not take the trouble to research and understand the
processes they are outsourcing. For those that do know the basic elements of their business and can identify what it is that
makes them different, outsourcing will create competitive advantage from their vendor relationships. Others can look for
inspiration in posters of furry animals.