Offshoring payroll and benefits admin

The offshoring of business services has been dominated by payroll and call centre operations, but benefits administration could soon follow, says Edmund Tirbutt

Case Study: Prudential

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Larger employers are increasingly seeking to cut costs by offshoring heavily-scripted transactional elements of the HR function which require little judgement or expertise. Most are outsourcing to third parties, although some have set up wholly-owned subsidiaries abroad.

To date the bulk of offshoring has concerned administration for payroll, learning and development, and recruitment, but it is considered likely that employee benefits will soon follow. Indeed, Hewitt Associates is unusual in reporting that it has already been involved with the outsourcing of flexible benefits administration.

India and Eastern Europe have so far proved the most popular locations. But the Far East is also starting to attract serious attention from organisations.

Tom Hughes, senior manager at global HR services provider Convergys, says: “There is no reason why the data entry or transactional activities behind employee benefits shouldn’t follow elements of HR administration offshore, especially for large organisations that can achieve economies of scale in cheaper locations.

“There is definitely an opportunity to offshore elements of both HR and employee benefits, particularly if companies are deploying multi-lingual teams that have a good understanding of local policies, practices and regulations. The key is assimilating teams into the culture of the organisation they are serving.”

Staff recruited locally by offshore outsourcers and subsidiaries are usually subjected to intensive introductory training schemes. These typically last six to 10 weeks and cover everything from voice and accent training, and English culture to corporate practices and brand values.

Members of the offshore team may visit the UK, and UK trainers may travel regularly to the offshore territory concerned. A mixture of both approaches can also be used.

Brett Walsh, European lead partner for human capital at Deloitte, says: “When you create a shared service centre, regardless of whether it’s offshore or in your own backyard, you need to ensure that the administrators have a detailed knowledge of your organisation. Some vendors will undoubtedly just recruit from local markets and not address the issue but it can be very frustrating to deal with someone who has no idea of their company’s structure, history or policy reviews.”

If the offshore base has little in the way of employment protection legislation, it is vital to impose minimum standards to avoid being accused of exploitation. It is also important to spell out to employees what the implications of offshoring are likely to be for the rest of the workforce. For example, can employees be redeployed elsewhere or will redundancies have to be made?

Recognised trade unions or employee representatives must be consulted on ways in which redundancies can be avoided or their effects mitigated and, if redundancies are inevitable, the relevant employees must be consulted. Particular attention must be given to the Transfer of Undertakings (Protection of Employment) (Tupe) regulations, which transfer the contract of employment from the original business to the outsourcing service provider and prohibit the latter from making any changes to terms and conditions of transferring staff.

Data security is also a key issue, and has assumed particular PR significance since last June when a journalist working for The Sun obtained confidential financial information about 1,000 Britons from a New Delhi computer expert for as little as £3 a head.

Martyn Hart, chairman of the National Outsourcing Association, says: “It is difficult to check peoples’ backgrounds in India and a lot of employees are just brought on board by their families, so you need the right business processes and security checks in the system. But I would hazard a guess that around 95% of major offshore call centres are now moving towards using some methods to stop sensitive data stealing. They can’t afford to get another Sun article.”

HR data clearly has fewer attractions than bank account details to those with criminal inclinations, but competitor information on bonuses and other benefit levels that get into the wrong hands could have a potential sell-on value. And the handling of sensitive personal data on issues such as health, race, religion and trade union affiliation is subject to strict legal obligations.

Margaret Harvey, head of the outsourcing group at Addleshaw Goddard, says: “If you are transporting data outside the EU you must ensure that your contract with the service provider processing the data has an appropriate regime that mirrors the requirements of the UK’s Data Protection Act. If there are multiple regulatory regimes involved, it may also be necessary to map where data is coming from, where it is held and whether it needs to go through other jurisdictions.

“You end up with a map showing you all data flows and then construct the way to handle them. A lot of analysis and due diligence can be needed up front and, although it doesn’t have to be that costly if you have very good records, collecting the necessary information can be an expensive exercise if you are doing it for the first time.”

Careful thought must also be given to ensuring that any administrative processes put in place in service centres complies with local laws, although in practice many organisations use higher standards than they need to across-the-board for the purposes of standardisation. This is because offshoring elements of HR and benefits is only likely to be attractive to those who achieve significant economies of scale. And to do so requires the use of standard software platforms.

The offshoring industry continues to grow at a rate of around 20% a year and there is general agreement that HR, and eventually also benefits, are unlikely to buck the general trend. But there is far less agreement about whether either is likely to offshore front-office activities.

For the time being, even the most innovative outsourcing consultants are maintaining the human contact element onshore, but it is not impossible that advances in technological and language capabilities could bring about a change of attitudes within only a couple of years.

Does Tupe apply?

There is a general legal debate as to whether the Transfer of Undertakings (Protection of Employment) Regulations 1981 (Tupe) should apply when work is moving overseas.

Legal experts emphasise that, while these may apply in theory, it doesn’t generally make a huge amount of difference in practice whether they do or not.

Monica Kurnatowska, partner in the employment department for law firm Baker & McKenzie, says: “Tupe requires you to inform and consult employee representatives and states that dismissals will automatically be considered unfair unless they are for economic, technical or organisational reasons. But most redundancy situations would normally qualify under one of these three reasons and they would normally also require employers to consult employee reps.”

Under Tupe, liability for dismissals will also transfer to the offshore company. “But there will be no liability if staff have been paid well and have signed a total severance agreement unless [the employers] have failed to consult employee reps as unions are particularly concerned about UK job losses.”.

Case study: Prudential

The importance of ensuring that staff manning an offshore arm are assimilated into the culture and practices of the UK operation remains the same whether firms are outsourcing or establishing their own offshore subsidiary. Prudential, which has managed its own operation in Mumbai in India since March 2003, has recruited 1,000 local employees locally, including 10 members of its HR team.

All have to attend a six-week induction course, covering everything from English culture to the company’s brand values. Mark Nobbs, learning and development operations manager at Prudential, says: “It’s a dream to work with such enthusiastic people.”

Most offshore HR employees have also visited the UK for training and to observe UK colleagues, and several members of the UK HR team regularly visit Mumbai.