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A key element of planning HR strategies involves the decision to build internal capabilities vs. outsource those to a partner organization. This decision tends to be based on two primary considerations – the relative complexity/variability of the work and the strategic value of the solutions provided. The lower the strategic value to key business operations and the less variable/better defined the problems are that the capability addresses, the more likely the decision will be to outsource that capability. Other considerations include the option to outsource when in-house skills or capabilities are lacking, or when a targeted activity involves high volumes of a repetitive task.
For example, payroll has a well-understood range of options and involves well-defined and repeatable processes that constitute a “low complexity/variable” capability. Since it is a common process across all companies, it is not considered a strategically differentiating or valuable process and is thus considered a strong candidate for outsourcing. On the other hand, succession management leverages a variety of criteria and decisions related to the designation of future potential leadership replacements and is considered not only a “high complexity/variability” process but is also core to the success of the organization (it thus has a “high strategic value”). As a result, the capability is viewed as one that should remain staffed with in-house professionals. The following framework can simplify the thinking: