Outsourcing: Why It’s Happening and What To Do About It

Internal recruiters face a new challenge ó one that has been growing for more than a decade but seems certain to gain speed. That is the challenge of outsourcing. Many firms have chosen to use agencies or third-party recruiters for most, if not all, of their recruiting needs. A SHRM study reports that more than 42% of employment and recruiting functions have been outsourced. And this trend is right in line with the rest of human resource functions. “Today, 77% of companies outsource some portion of their business for items such as payroll, human resources management, and benefits administration,” says Julie Giera, a senior analyst for Giga Information Group. Smaller firms, startups, and the surviving dot-coms often don’t even start recruiting functions. They hire third-party recruiters right from the start and forge good working relationships. What has led us to this phenomenon? Why is outsourcing so popular today? Of course, part of the answer is that it has become a fad. CEOs and other executives are just trying to do what their peers are doing. But there are better explanations than this, including:

Cost. Most organizations are driven by costs and feel that outsourced services are less expensive than those delivered internally. Right or wrong, many executives feel that it is cheaper to use third parties to deliver a variety of HR, finance, and manufacturing functions. They say that by concentrating on doing a single activity, third-party firms increase their efficiencies, use better technology, and therefore can do things at a lower cost. Many firms are able to negotiate an upfront, fixed cost for recruiting services, something they could never really do internally. They can also commit to single-year contracts, which, for the most part, limit their responsibility and obligations if the economy slows as it has recently.

Speed. By moving to outside providers, organizations are able to negotiate guaranteed service levels. They can extract penalties from the suppliers who cannot meet the negotiated time-to-fill requirements. While service-level agreements have become more common in organizations, only a small percentage of firms actually use them. Those that do have always experienced better customer satisfaction levels, but many recruiters remain reluctant to commit to deadlines or quality levels. Most agencies do this as a matter of course.
Quality. Many organizations believe that third-party recruiters, who often specialize in a particular type of candidate or type of company (for example, only semiconductor or software engineering firms), know more candidates and have better ways to assess them than harried internal recruiters have. In much of my client work, I hear over and over again how the recruiting team cannot find the really high quality candidates. Some of this is caused by misperception, some by lack of communication, and some by recruiters trying to do too much because they do not have resources they need.

These are very hard positions to argue against, and the recruiters who try often find themselves out of job. There are two ways to look at this trend. One is to react with fear and go into denial that it will happen in your organization. People who feel this way usually find all sorts of reasons why outsourcing will not work. They often believe that outsourcing will be too expensive, that hiring managers will never be satisfied, and that the quality of candidates will decline. However, those who have been using third-party recruiters for some time report high levels of satisfaction for the most part, although not all of the hoped-for savings may have been realized. The other reaction is more positive. It faces the change as the outcome of not doing an impressive and high quality job of internal recruiting. These people often find work in other position within their organization, or they move to become third-party recruiters. But if your company hasn’t yet decided to outsource recruiting, what can you do to decrease the likelihood that they will? Here are three steps to help prevent outsourcing. I could list many more, but these are the core things you have to have to even hope to remain inside:

Make sure you have a strategy for your recruiting function. Be sure that you know who you are recruiting and why. Make sure that the hiring managers and other important members of the management team understand the strategy you are pursuing and why. Ideally, they will help you to create the strategy and be a part of its success. Many recruiting functions seem to spend equal time and energy hiring a clerk as they do hiring a key engineer. By not focusing, you lose credibility and are not respected as a business partner.
Communicate and market internally. This is implied by the first step. Trying to explain why you are important to your organization after they have decided to outsource is fruitless. You have to do that kind of explaining every day, all the time, before a decision is even contemplated. You need to make sure that you know yourself what you contribute to your organization that an outside agency would not be able to provide ó or at least not easily. You need to really get at what managers find important about recruiting and then over-deliver on that. Whether it is speedy, cost-effective, or quality hiring, make sure you communicate your successes and get manager involved to the point that they, too, feel part of the success.
Build relationships within the organization and with your hiring managers. Personal and professional relationships are much stronger than dollars. When managers are comfortable with you, feeling that you work hard for them and mostly meet their needs, they will oppose any switch to a third party. I urge the adoption of service-level agreements, negotiated with the hiring managers, that you both have responsibility for fulfilling. This makes recruiting more the team activity it needs to be and builds relationships.

I was recently at a firm where a group of executives and consultants were discussing outsourcing a number of HR functions. During the meeting one of the consultants asked about outsourcing recruiting. A few managers looked at each other, and then one of them said, “No way. These are the people that keep our culture alive and are the first interface a candidate has with us. Besides, they are the only people in HR that talk to us and really know what we are up to.” What a testimonial! Needless to say that recruiting department is alive and well. Some organizations will outsource functions solely on cost. But most take into account the perceived value and contribution of a function and decide if unattached third parties can duplicate it. When they see nothing unique and when no relationships have been forged, they will decide on the dollars every time.