An increasing number of major companies in Luxembourg, especially in the banking sector, are looking to offshore management of human resources, the so-called HR back office. The decision to move these activities abroad is usually initiated by headquarters and often impacts several offices in different countries, which are tasked with reorganising their activities so HR administration processes can be merged, optimised and carried out from a single hub. While there are many good reasons to make this change, it presents significant challenges and complexity in the Luxembourg context.
HR offshoring model: HR administration tasks become centralised in a new ‘hub’
Why do companies outsource their HR administration?
Companies planning to outsource their HR management processes are seeking most or all of the following benefits:
- Increase efficiency: HR administration is centralised and operated by a single specialist team, freeing up local HR teams for other tasks.
- Optimise processes: The outsourcing model requires straightforward processes that can be deployed in multiple countries and that are easy to measure and control.
- Achieve economies of scale: The offshore team works for several offices across the EU.
- Reduce permanent headcount: Either by using an external service provider for the offshored HR administration, or through the economies of scale that the model enables.
- Reduce dependency on critical employees: The work is spread among several people within the offshore team and the volume of work, because several countries are covered, allows for back-up staff.
- Cost reduction: The one-for-one cost of the offshore team (or of an external service provider should this model be chosen) is likely to be less than the cost of retaining HR employees in multiple countries.
WHERE TO START? GET THE PREPARATION RIGHT
Choose the right country and the right model
Depending on strategy and the scope of offshoring requirements, some companies choose to appoint an external service provider while others opt for establishing their own subsidiary. The selection of an external provider requires attention to critical details, including the availability of experienced employees, robust processes, trained back-up staff, and strong data protection policies and GDPR compliance.
When selecting the location, many factors should be taken into consideration. Obviously it is essential to assess the political stability and overall legal framework of the jurisdiction, as well as consider geographic proximity and time zone compatibility: it is essential that the offshore team can interact in real time with employees and HR teams located in the countries they support. The availability of national or EU subsidies for investors is also worth exploring.
AT Kearney publishes a regular ranking of the most attractive countries for outsourcing:
Other key aspects to consider are the availability of talent, language proficiency, labour costs, cultural similarities and accessibility.
In an article published in September 2016, Rodrigo Amaral interviewed Sarah Burnett, vice-president for research at Everest Group, about ‘nearshoring’ in central and eastern Europe. She said:
“Nearshore locations in Europe are the best choice for some types of back-office work dealing with sensitive customer data within EU data protection laws.”
“To make their markets more attractive, governments in countries such as Poland and Romania have implemented tax incentives for companies to set up shop in their territories.”
“Closer time zones allow teams located in different countries to work at the same time and the ability to make an instant travel decision to head a workshop or check how things are going at the outsource partners constitute further advantages of nearshoring.”
Choose the right activity to outsource, and time it right
Prerequisites include a good human resources information system for real-time information-sharing, robust HR processes and procedures, strong internal communication channels, and employees who are able to manage change and who are engaged in the transformation – a not insignificant challenge.
Many companies report that some activities can be outsourced better than others, and businesses that have been successful started slowly with a few well-defined HR processes before offshoring more activities.
Activities that are best suited to offshoring include:
- Processes that are well defined, documented and independent from other processes.
- Processes where the information required to operate them is available via the information system.
- Recurring processes, with low dependency on country-specific regulatory or administrative changes.
Implement strong governance
While the success of any offshoring strategy will be grounded in solid collaboration and communication between various stakeholders, it is essential to back this up with strong governance. A detailed service level agreement, for example, will help frame the expectations of an external supplier.
Regardless of the form the offshoring takes, supervision and overall control remains with the company’s headquarters. The effectiveness of the offshoring model needs to be reviewed on a regular basis and its numerous challenges discussed and managed by the senior leadership team. Adherence to the company’s policies, data privacy and protection rules need to be carefully reviewed and key performance indicators assessed regularly.
Engage teams on both sides
The existing HR team will play a key role in making the new model successful. Offshoring HR administration is a big step that requires additional effort from local teams to document processes, train the offshore team and help solve teething problems. This is sometimes performed in a context of job transition or elimination affecting the existing team. Therefore a strong management culture can make a big difference.
Communication between the company’s HR team and the offshore team is also very important. The offshore team will need to be trained, its performance assessed, and it will need to be managed - either directly in the case of a subsidiary, or indirectly in the case of an external service provider. A strong service agreement (for a service provider) or performance indicators (for direct management) must be in place.
The greater the offshore team’s understanding of company culture, identity and processes, the smoother the transition will be and the better the experience for employees.
Addressing culture gaps is also important. All stakeholders will benefit from training about cultural differences to help manage misunderstandings and resulting frustration on both sides.
In most cases, employees and managers are on the receiving end of the offshored HR services, and may therefore be directly affected by changes in practices, processes, communication channels and contact people. For this experience to be positive, it will take significant communication, education and change management efforts to overcome possible resistance.
ALREADY STARTED? NOW THE REAL CHALLENGE BEGINS !
Based on our experience and conversations with key players in the Luxembourg market, these are the most common challenges companies face once HR administration has been offshored:
- High turnover in the offshore team: Staff turnover can exceed 20% in some Eastern European countries amid a competitive and evolving labour market in which young people attracted by this type of job are eager to advance their careers rapidly.
- Training and retraining: It takes significant time and effort to train staff abroad on company-specific processes and systems. Coupled with high staff turnover in the offshore team, this leads to ongoing training and retraining requirements, often resulting in an additional workload for the established in-house team.
- Salary and career progression expectations: Offshore employees often expect high salaries relative to the local market and rapid career progression. This should be considered in remuneration policies and other HR policies such as competency management and promotion.
- Workload of local teams: Additional efforts will likely be required from local in-house teams before the offshored HR administration operates smoothly with minimal intervention.
- Cultural differences: Different practices and work habits can present unexpected challenges.
These challenges apply to companies in any country offshoring their HR activities, but for Luxembourg-based firms there are additional complexities:
- Luxembourg-specific requirements: Rules governing issues such as cross-border commuters, salary indexation, tax cards, reporting requirements to local authorities, and the application of domestic collective bargaining agreements are difficult for foreign staff to understand and stay up to date with, even with training. As a result, it is not possible to apply the same HR administration processes for Luxembourg as for other countries that the offshoring team may serve.
- Speaking the same language: French (spoken and written) is required to interact with most Luxembourg state administrations and to understand official communications. Even if your initial offshore team has some French-speakers, it may be difficult to recruit additional French-speakers to keep pace with high staff turnover rates.
THE END RESULT? NOT ALWAYS A POSITIVE OUTCOME…
Given these challenges, frustration on both sides is a significant risk. The Luxembourg-based HR team will face the burden of having to supervise the offshored team to prevent mistakes and correct errors when they occur, while the offshore team will struggle to understand the complexity of Luxembourg-specific requirements and stay up to date with frequent regulatory changes.
The time the Luxembourg team may have to spend on training and retraining offshore staff and checking, controlling and correcting their work may in many cases make the offshoring model financially questionable. At the same time, the satisfaction, experience and productivity of managers and employees may be impacted by the lack of a local HR administrative team that they can contact easily, especially while adjusting to new communication channels and HR practices and procedures.
Offshoring HR administration is a long and difficult journey. It can take years to get offshore teams and processes in place and the end result is often very different from the initial vision. In many cases, the cost savings of an offshore HR administrative team are offset by the extra cost of supervision, correcting mistakes, increased inefficiency and travel, as well as the direct and indirect costs of staff turnover and training.
It is not surprising that some companies in Luxembourg are reconsidering their offshoring strategy: reducing offshored processes and staff to a bare minimum, or abandoning the model altogether and reverting to recruiting HR staff locally in Luxembourg.
THE ALTERNATIVE? LUXEMBOURG-BASED OUTSOURCING
Another model is emerging from the accumulated experience of Luxembourg-based companies with offshoring HR in recent years: outsourcing HR administration to a service provider based in the Grand Duchy, employing local professionals.
This approach solves many problems. It enables compliance with local regulations and administrative requirements, and provides local expertise and resources, including back-up staff to ensure the company is not dependent on a single person for HR administration. It also supports the strategy of managing HR externally, while providing most of the benefits of offshoring with few of the risks.
In light of this – and especially given the worldwide disruption caused by the Covid-19 pandemic – now is an opportune time for companies to rethink their HR offshoring models and consider a less high-risk strategy instead.
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