Outsourcing Talent Acquisition? Maybe You Should Think Twice

As organizations respond to the tough financial environment and a lessened (albeit temporary) demand for talent, many are considering outsourcing their recruiting entirely to third-party agencies. On the surface this is a hard strategy to attack. After all, it removes a large amount of money out of overhead, makes the costs of recruiting variable with volume, and still seems to provide the same kinds of people to the organization. With lots of people seeking work, management often thinks, recruiting can’t be very difficult. Many HR functions have been outsourced over the past five years. Some firms have outsourced payroll, benefits administration, service centers, travel, training and development, and even employee relations in a few cases. There has been a general transfer of the transactional side of HR to outsourcing firms or to automated systems. And, while outsourcing may in the end cost as much as having the function inside, it allows the organization to focus on its core value generation side and not get sidetracked by HR or administrative details. But, like so many pendulum swings, they often swing too far. I am a supporter of automating or outsourcing all transactional activities: these are the kinds of things that do not generate income and that tend to be administrative and routine in nature. For example, writing paychecks is not a job that generates revenue for the firm or in any way contributes to the bottom line. Yet, it has to be done and can be a tedious and time-consuming job. By outsourcing this to a third party, such as a bank, ADP, or Paychex, an organization can save the overhead of paying and supporting a payroll staff and keep costs down by negotiating cost-effective service agreements with the providers. The providers, on their side, are motivated to be as efficient and automated as possible to maximize their profits. So does it work for recruiting? My answer is that is can work for certain types of recruiting, but to treat all of recruiting as transactional and, therefore, non-value added, is a huge mistake. I predict that any organization that has fully outsourced its recruiting efforts will begin to pull some of it back inside within the year. If you look at the composition of your workforce, it is easy to see that employees fall into four major categories (see Figure 1): those of low value to the firm in terms of directly creating or producing revenue, products, or services, and who are relatively easy to recruit; those who are of high value to the firm and are relatively easy to find; those who are very valuable and very hard to replace or find; and those who have very unique skills or are of low value but very hard to find. Each of these groups should be treated with different tactics when it comes to recruiting.

Group I: The easy to find, but less valuable. This is the group that can be easily outsourced. Many of these people can be hired as temporary employees or can be part-timers. They are not strategic, and any recruiting organization that spends much time or money recruiting this level is wasting corporate resources. I have been at firms where as much as 70% of the time and budget for recruiting was devoted to recruiting this group simply because of high turnover. This is common at banks and at call centers. Group II: The easy to find, but valuable. Use your own internal recruiters for this group. These are the people who will soon be making a competitive difference for your firm. They are the inventors, engineers, star salespeople, and those who differentiate your organization from the others. To let a third party learn who these people are takes away any edge you might have. Because a third party placed them, the third party can lure them away some day when they have moved to the Group IV level. Using external recruiters here – unless you have great trust in human nature – is like letting the fox check out the hen house. Some firms do have strong strategic partnerships, with enforceable clauses regarding future hiring of these people, with third parties. Just be aware of what you are doing and do it with care and caution. Group III: The hard to find, but less valuable. This is a problematic group, because they have unique skills that are important to your firm and are very scarce. A good example of a person in this category would be a patent attorney or a top-notch management consultant. These are people who do not directly contribute to your organization’s products or services, but who can augment and supplement those products and services in unique ways. I feel that this is a group that is best hired as consultants or on a contract, rather than as employees. These are the kind of people you sign a retainer with and use as needed. There is no need to dedicate resources to recruiting these people, but you do need to know who is the best in the field. Group IV: The hard to find, and the very valuable. These are your gems, stars, “hipos” or whatever else you may want to call them. These are the people who, if they left, would significantly affect the bottom line of your firm. There may only be a few of these people – in fact, I would argue that in any company there are rarely more than a few dozen people who fit this category. Carefully chosen senior internal recruiters should recruit these people – always. It may be a perfectly sound strategy to use an executive search firm for some of these, but the smartest firms will look hard themselves before going outside. To simply outsource the recruiting function without thinking through these issues is folly.