I often talk with people about the advantages and disadvantages of hiring an external data scientist to take care of HR data analyses. I am not a salesperson so I am usually too honest: Hiring external expertise offers opportunities but also has drawbacks. As this is a recurring topic, I would like to share the most important pros and cons with you.
A few articles have already been published on this topic. The best known are an article on the iNostix blog and a short article by Scott Mondore. However, these writings seem to miss an important point: this article will offer an objective framework that will help you decide whether you should outsource specific HR analytics activities or not.
When a company wants to do a novel analysis (e.g. it wants to do a job classification analysis, reduce turnover or use analytics to hire better performers) it faces a strategic decision to develop the capabilities to do this analysis themselves, or to let someone else do it for them. In management theory, this consideration is referred to as a so-called ‘make, buy & ally decision’. Let me explain how this decision works using the figure below.
|Long term strategic importance of HR analytics||High||Ally||Make|
|HR analytics competence compared to best in industry|
(based on Child, Faulkner & Tallman, 2005)
Strategic importance of activity
Your first consideration in a make, buy & ally decision is the strategic importance of the analytical activities.
Many people probably think, “Doesn’t good HR analytics always have strategic importance?” The answer is: yes, it should. However, the question’s main consideration is about how important the specific analysis is for the long-term strategy of the company.
When a medium-sized service firm is looking for analytical expertise to, for example, increase innovation within the firm, the strategic importance is different from when a large company such as Shell considers ways to reduce workplace accidents using HR analytics.
For a company like Shell, work takes place in a more hazardous environment and workplace accidents have a big impact on the continuation of the business. The specific analysis would have big long-term strategic importance for Shell as the analysis offers great advantages in the continuity of their primary process (i.e. less accidents = less delays).
The long-term strategic importance of analyzing innovative for the service firm is smaller, as it does not offer the same advantages. This does not mean that HR analytics in general would be of lesser strategic importance. However, for the service firm hiring top performers would add more value to its primary process, and therefore be of more long term strategic importance.
When the strategic importance of an analysis is low, the framework advised the company not to develop this analytics expertise themselves as the cost of developing this expertise is high and the firm does not benefit from these new capabilities in the long run.
We see this often when we are approached by firms who look for a one time analysis on an urgent business problem. HR analytics does not (yet) play a key strategic role in these businesses. Developing internal HR analytics capabilities involves tremendous time and energy in, for example, hiring and retaining qualified data scientists and attracting talents with the necessary skills needed to practice HR analytics.
In this case, buying expertise from a third party is much more cost-efficient and guarantees a certain quality of execution that these organizations cannot (yet) realize themselves.
Competence compared to best in industry
A second consideration an organization should make when thinking about outsourcing specific HR analytics capabilities, is their own HR analytics competence compared to the best in industry as a company with well developed HR analytics capabilities will have a different consideration than a company which hasn’t developed these capabilities yet.
For example, when a leader in the field of HR analytics wants to expand his company’s capabilities by, for example, applying job classification analytics, they can choose to develop this themselves or work together with an external party to do this analysis.
An HR analytics leader probably already has strong internal capabilities. Expanding current capabilities is much easier for this leader. Because of their position, these leaders do not gain much efficiency and quality benefits by outsourcing these activities to specialized third parties. Especially when these analyses are of high long-term strategic importance (and therefore likely to be repeated over time) it is best to develop them internally.
However, when a leader is involved in an analysis which is important now but offers low long-term strategic value, they should not focus on developing these capabilities themselves (as this is costly and time consuming). Instead, they are better off buying them from a third party, which provides them with a faster and high-quality analysis.
However, when an organization has a low competence compared to the best in industry, it is better off buying the expertise or partnering with the expertise provider. This will help them gain the HR analytical expertise needed for their analysis.
Especially when competency is low but strategic importance is high, partnering is often a great solution. We saw this a few years ago when ABN AMRO started applying analytics. ABN AMRO knew analytics would be of high long-term strategic importance for the bank, so it decided to partner up with iNostix (an expert in providing HR analytics). Together, ABN AMRO and iNostix developed their people analytics capabilities, resulting in a win-win scenario. Both parties are now leading firms in the field of HR analytics.
In other words: partnering up enables a company to start with analytics in a cost-efficient way, while maximizing learning and capability creation.
Many different considerations can be applied to the choice of hiring an external data scientist team like quality of the analysis, speed, organizational learning, visualization of results, and cost considerations. All these factors play an important part in the decision to work together with a third party.
However, the key considerations should be how the analysis fits within the company’s long-term strategic plan and what the current competency levels within the company are. If the strategic relevance is low, a company should focus on the analyses that really add value to their primary process – and thus make them more competitive. The framework we discussed in this article offers an effective way to guide the management decision of hiring external parties for HR data analysis.