Human capital risk arises from the risk that an enterprise’s investment in human resources might lose value due to the departure of individuals or groups necessary to the future success of the enterprise. Human capital has its greatest value at the level of senior management, but as executives they can only achieve the enterprise’s mission through others.
When choosing business models and solutions to the Sourcing Dilemma, executives and managers need to evaluate the human capital risk and develop plans for contingencies. Contingency planning should include the possibility of morphing the current or future sourcing solutions into new models that involve human capital. Thus, planning and implementing outsourcing requires careful attention on human capital management during and after the term of any outsourcing agreement.
In the field of business process management (“BPM”), human capital represents the cumulative value of investments by an enterprise in the hiring, training, promotion, integration and team development of all employees performing a given business function. This investment is the sum total of all historic efforts of acquiring personnel, adapting technology and processes to their skill sets, designing their fit within the organization, administering the policies and procedures, compliance, reporting, insurance, incentives, benefits plans and other transactions that are necessary to administer human resources in an enterprise.
Risks of Loss for the Enterprise Customer
Greenfield Outsourcing
In a “greenfield” outsourcing, the particular process to be outsourced was not previously done in-house. As a result, the enterprise will not lose any human capital when it hires the service provider to perform the outsourcing. However, upon expiration or termination of the outsourcing, the service provider’s knowledge of the outsourced services will remain with the service provider, unless otherwise provided in the outsourcing contract.
“Transfers” or “Transitions” of In-Scope Employees
In contracts, outsourcing that involves the transfer of skilled employees with a knowledge base of enterprise customer’s operations can result in a loss of human capital. Appropriate planning is required to retain essential kernels of process knowledge, translate implicit knowledge into defined written procedures and otherwise retain controls over the relevant knowledge base. Further, for political and morale reasons, the enterprise customer may wish to negotiate protections for the transitioned “in-scope” employees, though such protections may not be suitable under certain legal regimes or may simply increase the price.
Risks of Loss for the Service Provider
To a large extent, service providers stay in business by designing and implementing more cost-effective, focused HR strategies and procedures than their enterprise customers. Reflecting the quintessential mandate for rapid scalability in outsourcing, for greenfield outsourcing, they must be able to execute a plan that permits rapid hiring and deployment of BPO service employees, often on short notice. For “transfers” or “transitions” of employees, they must be able to accept large-scale transfers of large numbers of employees from enterprise customers in a short time.
- In this context, the service provider needs to develop and maintain its human capital in various ways. It must:
- design business processes for stability, predictability, security and simplicity;
- train and supervise personnel in the disciplines of delivering world-quality service in an outsourcing environment;
establish procedures, policies and technologies for reception and implementation of enterprise customer methodologies (if effective) or people (if effective) and to integrate its own processes (and people) into the scope of service agreed in the outsourcing contract.