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PointofViewCompensationManagementCo-sourcing:ANewWaytoAchieveStrategicCompensationSuccessAcaseforchangeHRleadersworldwideareunderintensepressuretoaligntheiractionsandinvestmentswithbusinessstrategiesandtodemonstrateameaningfulreturnontheseinvestments.ThisongoingdrivetoreshapeHRintoavaluedbusinesspartnerhasledmanyHRprofessionalstoexploretheoutsourcingofvariousHRfunctions–frompayrolltoemployeebenefits–asawaytobettermanagecosts,streamlineadminis-tration,freeuptimeformorestrategicactivities,andprovideenhancedservicetoHR’sinternalcustomers.Butforthecompensationfunction,ithasbeenadifferentstory.Althoughorganizationsincreasinglyviewcompensationasoneofthemostpromisingnewfrontiersinbusinessprocesstransformation,theyhavebeenreluctanttooutsourcethisactivity.Infact,arecentMercersurveyofmorethan300largeUSemployersrevealedthatonly4percentoftherespondentsoutsourcedtheircompensationadministration–thelowestlevelofoutsourcingreportedfor12commonHRactivities(seeExhibit1).Thefiguresaresimilarinmostothergeographiesaroundtheworld.Forexample,just3percentofemployersinCanada,5percentinLatinAmerica,7percentinAsia,and8percentinAustraliacurrentlyoutsourcetheircompensationadministration,accordingtoMercerresearch.Whythereluctance?First,compensationtraditionallyhasbeenseenasacorporatefunction–lesstransac-tionalandmorestrategicthanfunctionstypicallyassociatedwithoutsourcing.Second,compensationfunctionsservemanagersratherthanthebroaderemployeepopulation(aswithbenefitsadministrationoutsourcing,forexample).Companieshavebeenmorehesitanttoturnthesehigher-levelinteractionsovertoanoutsourcingvendor.Third,thediverse,specializedskillsetneededforcompensationworkdoesnotfiteasilyintothetypicaloutsourcingmodel.Andfinally,untilrecently,thetechnologicalcapabilityforthissortof“co-processing”withanoutsidevendorwascost-prohibitive.CompensationManagementCo-sourcingANewWaytoAchieveStrategicCompensationSuccess1Exhibit1PrevalenceofoutsourcingatUSfirmsExecutivecompensationRecruitmentandassessmentHRISCompensationadministration13%12%17%4%Managementdevelopment23%Payroll25%Nontechnicaltraining29%Technicaltraining33%Definedbenefitplanadministration36%Relocation40%Healthandwelfarebenefitplanadministration46%Definedcontributionplanadministration60%2flexiblyacrossthefullspectrumofthecompensationfunction’sresponsibilities–fromtechnologyandtransactionstoanalysisandstrategicdesign.Ithelpsorganizationsachievetherightbalanceofcontrolanddelegationinthisimportantfunction.Co-sourcingfocusesongettingthemostfromavailable–andsometimeslimited–resources.Anditcanhelpcompensationprofessionalsplayamorecentralandstrategicroleincriticalpeopleissueswhilecontributingmoreappreciablytotheorganization’soverallsuccess.Co-sourcingincontextCompensationmanagementco-sourcingmustbeunderstoodinthecontextofanorganization’soverallbusinessstrategy(Whatbusinessareweinandhowcanwecompeteeffectivelyinthisbusiness?)andhumancapitalstrategy(Howcanwesecure,manage,andmotivatetheworkforceweneedtoexecuteourbusinessstrategy?).AsExhibit2shows,thecompensationfunctionstrategy(whichdefineswhatThepromiseofco-sourcingToday,apromisingnewalternativeisemerging–compensationmanagementco-sourcing.Co-sourcingdiffersfundamentallyfromoutsourcing.Without-sourcing,employersshiftdiscrete,straightforwardtransactionalandadministrativetasksfromHR’sto-dolisttoanoutsidevendorabletoaccomplishthosetasksmoreefficiently.Outsourcinggoalsaresimple:tosavemoney,tosavetime,andtoimproveservice.Co-sourcing’sgoalismoreambitious:tocreateamorerobustandefficientcompensationfunction–withinasinglecountry,regionally,oracrosstheglobe–bypartneringwithaserviceproviderabletoaugmentinternalresourcesinwhateverwayisneeded.Companiesthatformco-sourcingpartnershipscanrelyontheirpartners’expertiseandresourcesasasupplement,complement,orreplacementforinternalstaff.Unlikeoutsourcing,whichwouldsimplymoveataskorprocessoutoftheorganization,co-sourcingbringsinadditionalresourcesthatcanbeappliedExhibit2BusinessandenvironmentalcontextCompensationoperatingmodelScopeofservicesWhatservicesmustbeprovidedtodelivervalueandcontribute?SourcingWhatactivitiesshouldbedoneinternally/externally?GovernanceHowwillweleadthefunctionandmanagerelatedinvestments?OngoingbusinessalignmentCompensationfunctionstrategyWhatoverarchingeffectivenessandefficiencyobjectivesmustbemet–andwithinwhattimeperiod–tosupporttherequiredbusinessperformance?HumancapitalstrategyHowwillwesecure,manage,andmotivateaworkforcethatcanexecutethebusinessstrategy?InfrastructureWhatcapabilitiesareneededtofulfillthefunctionalstrategy?TechnologyProcessPeopleOrganizationBusinessstrategy3thefunctionbroadlyneedstodoandbywhen)flowsfromtheanswerstothesequestions.Itthendeterminesthespecificoperationsofthefunction,withemphasisonfourkeyareas:Scopeofservices–Whatservicesmustbeprovidedtodelivervalueandcontribute?Sourcing–Whatactivitiesshouldbedoneinternally/externally?Infrastructure–Whatcapabilitiesareneeded(intermsofprocesses,talent,technology,andorganization)tofulfillthefunctionalstrategy?Governance–Howwillweleadthefunctionandmanag