The theory behind business process outsourcing has been one of the biggest no-brainers of the last decade: farm out your back-office functions to a centralised service and benefit from its leading edge technology and huge economies of scale.

Why then, according to research, do 65 per cent of all outsourcing contracts worth more than £20m collapse before they’ve run their full-term? Analysis by Compass Management Consulting, which conducted a study earlier this year, attributed it to vendors increasing their charges in the final years of a contract in an attempt to recover costs. Typically, contracts are ‘front-loaded’ to show immediate savings of up to 18 per cent on the in-house operation the service replaces on day one, only to rise to more than 36 per cent above comparable in-house rates by year three.

Historically, payroll and HR administration have been high on the list of functions to be outsourced. And if you take the view long espoused by one of the business world’s leading educators, Professor Dave Ulrich of the University of Michigan, it’s easy to see why. Increasingly, roles are being split into two types of work: the transactional (meaning routine, standardised work such as HR administration) and more strategic or ‘transformational’ work. It makes sense to centralise and standardise the transactional tasks, in order to free up HR to focus on the transformational side of the role and reap the cost-saving benefits.

In Ulrich’s latest work, The next evolution in HR organisation, he argues that organisations such as BP, Prudential and Bank of America, which have pioneered the outsourcing of transactions, have achieved cost-savings in the region of 20-25 per cent. Ulrich acknowledges, though, that it is too new for results to be “definitive” and concurs that many outsourcing projects do fail – often because of a lack of change management planning.

“Knowing what to do and doing it are two different things. Sometimes the technical solutions that may be promised through outsourcing don’t materialise because firms – buyers and vendors – lack a set of change disciplines,” he says. “The biggest challenge of change is turning what we know into what we do.”

In the recent study – which is co-written with Jon Younger, partner at the RBL Group (a consulting firm where Ulrich is also a partner) and Wayne Brockbank, professor at the University of Michigan and another RBL Group partner – he goes on to say that the changeover from internal to external vendors is often time-consuming and prone to errors. That, inevitably, can be upsetting to employers, line managers and HR professionals. He argues that HR professionals must be the agents of this change and ensure that the change management programme allows for every eventuality – and that employees, line managers and others affected by the switch are fully engaged with the process.

Selecting the right vendor sounds obvious, but it’s often easier said than done. Organisations often overlook basics such as making sure the partner’s processes are easy to understand and use, and that it can adapt a system to the client’s needs. Ulrich offers several other key questions to ask: “Are they responsive – do they react to my unique concerns or questions? Do they measure results – are they accountable for my performance? Do they have good people – are the people I will work with easy to do business with? And are they consistent with my culture – will they enhance my firm’s brand?”

What role HR should play after outsourcing is often hotly debated. While it’s up to HR to ensure it can add value, board-level input is also necessary to help define its new role. If not, all too often, those that are left simply ‘try to do old work, the old way’, says Ulrich, instead of learning the competencies they require to be successful in adding value. “We have found that many HR professionals can learn new skills, if they know what is expected of them.”

One of HR’s key new roles is to ensure that using an outsourcing vendor doesn’t weaken the organisation’s relationship with its employees. As Ulrich points out, HR isn’t like the retail banking world, where customers happily manage their transactions by ATM and neither need nor want a real relationship with the bank. It’s more akin to investment banking, he argues, where relationships still offer the best long-term approach to building customer share. Central to this premise is using “relationship HR” to build loyalty and demonstrate that the organisation still cares. HR must build an employee value proposition by making sure it knows what employees both want and need.

“Many of the employee needs can be served through investments in staff, training, communicating, compensation and HR systems,” he explains. “Creating an employee value proposition also means identifying employees who are doing a good job (giving value) and then making sure that those employees get value back from the company.”

He concludes: “Despite these risks, we believe large firms will continue to outsource bundles of HR transactions to increasingly viable vendors. Smaller firms will probably outsource discrete HR practices. Both types of organisation reflect the kind of collaborative work across boundaries [which] will characterize the organisations of the future.”