Outsourcing of payroll and HR recordkeeping is one of the easiest ways to increase the efficiency of small and mid-sized businesses. By offloading non-core business activities, companies can specialize and focus on the processes that they do best – their core business.
Creating a new company
Many budding entrepreneurs underestimate the time needed for organizational problems at their business as well as the seriousness of what can go wrong in this regard. Even a company of five employees has to perform functions that, at large companies, are the responsibility of entire teams. Every company, no matter its size, has to do accounting, monitor security, engage in legal dealings, and manage staff. Companies regulary cannot afford to hire separate employees for each type of work, unless they have 300% profit margins!
Most Western companies are in a similar situation when opening local offices on the Russian market: their managers start business in Moscow with little knowledge of how business processes are done in Russia. Their response is simple: instead of recruiting people for a plethora of non-core functions, they outsource these tasks to outside providers. This was the choice made by CNN when opening its Russian office in the 1980s.
“We have been working with our service provider for more than 16 years now,” says Elena Berezovskaya, manager for the international broadcaster’s Moscow office. “Over the years we have become not just partners but good friends too. The reason for outsourcing was simple: we are focusing only on what our company does best and leaving the rest to professionals.”
Payroll was one of these processes – for this whole time, the CNN office has turned to one outsourcer for its payroll needs: the UCMS Group. The longevity of collaboration between CNN and the UCMS Group is unique for the Russian outsourcing market for small and mid-sized companies (while CNN itself is a large company, its Russian office is not).
Make headaches go away
At CNN, employees think that the main advantage of outsourcing is not just the economic benefits, but the smoothness of the processes that have been outsourced. For Berezovskaya, a problem-free business is the biggest plus of outsourcing.
“When I tell our colleagues at other companies about how outsourcing has gone for us, they are often asking me about the difficulties I have had working with the provider,” Berezovskaya says. “But the question isn’t quite right, since the whole reason for outsourcing is to not think about problems! When we started working with the UCMS Group, our main requirements were the quality and timeliness of work, as well as the ability to reallocate our resources for important tasks. So outsourcing with the UCMS Group spares us from having to spend even a minute away from our real business.”
Of course, for Western companies it’s often easier to use outsourcing since they usually have respectably sized budgets for growth. Russian startups have to watch every last ruble: sometimes a new company simply cannot allocate any budget for outsourcing although usually only a few thousand rubles per month are required. But by performing non-core processes in-house, time is spent inefficiently, which generally costs more than outsourcing does. Companies generally need more time for this than a professional outsourcer, since in 90% of cases the company person is specialized in a completely different area.
Which kind of outsourcing?
Once the decision to outsource has been made, another question arises: who can be trusted to do the work? There are two main options: large professional outsourcing companies and independent freelancers. In theory, the first option is more expensive and the second option more risky.
“In the West, specialists are accredited by special institutes in their fields: accountants receive special certification that confirms their qualifications, for example,” says Andrei Shabanov, CEO of UCMS Group CIS. “In Russia, accounting and payroll services are not subject to licensing, meaning that outsourcing processes to an outside freelancer carries a lot of risks. The person hired may be in over their head and the client will find out only when an audit is underway. And a freelancer can simply get sick, disappear, or refuse to make good on their commitments.”
There has long been another problem with professional outsourcing providers for small business: supply has been insufficient, causing high prices. But with the growing Russian market for outsourcing services, the situation is improving. “Previously, providers were aiming mainly at mid-sized businesses of 200 to 1,000 people. But now we are seeing more options available for small companies,” Shabanov states. “As we see it, this is the segment that requires our support the most.”
Which type of outsourcing is more expensive, when all is said and done? There is no one answer to this. Rates from professional companies are predictable and set: for payroll, prices range from approximately 250 to 300 rubles per employee per month. Freelancers and independent specialists can ask for practically any amount, without this guaranteeing good quality of services.
Space to grow
As companies grow, their challenges change. When a company has only a few dozen employees, outsourcing of non-core processes is unavoidable. But when there are hundreds of employees? The situation is different, and businesses are prepared to hire their own specialists in non-core areas even though outsourcing may still be better for them.
Usually at this stage freelancers are no longer considered, since a sufficiently sized company cannot take such great risks. These companies either contract with professional service providers or perform business processes themselves.
How is outsourcing beneficial? Providers’ marketing slogans say that outsourcing is better since, as a professional provider, they can perform the same process for many clients, reducing the price through economy of scale. There is some truth to this, but the situation may be rather different in practice. If a company has already built out an effective business process at low cost, outsourcing may be an expensive luxury that will pay for itself in ten years, at best.
Moving to outsourcing makes the most sense for companies that are having difficulties with routine non-core processes or spending too much money on them. Another common occurrence is that current processes are modified, requiring additional investment from the company. This is exactly what happened at the Russian office of L’Oréal.
Free access to state-of-the-art technologies
The Russian office of L’Oréal can be considered a mid-sized business. L’Oréal has always outsourced business processes, but until 2009 only payroll was handled by a contractor. Other HR recordkeeping and management tasks were performed in-house.
“In the beginning of 2009, our payroll provider offered us an interesting service: pay-as-you-go use of a specialized HR system on a SaaS basis,” says Irina Yashchenko, Compensation and Benefits Manager at L’Oréal. “This was extremely interesting for us, since previously these functions were scattered in non-specialized applications that often lacked the features we needed. By outsourcing this, we handed off non-core processes to our provider and also get dramatically improved quality.”
Could the specialists at L’Oréal have been able to implement this themselves? It would have been possible, of course. But the company would have needed to invest in IT infrastructure and purchase and install a professional system, without any guarantee of results. By selecting the SaaS (Software as a Service) model, the company could perform real-world testing of the product for practically free, constantly tweaking it to meet the company’s business requirements.
Many similar examples can be found in practice. Any company can use outsourcing to instantly modernize its call center or get access to state-of-the-art IT infrastructure. And since outsourcing is paid on a per-service basis, companies do not need to make capital investments.