HR and Outsourcing
PASSPORT is starting a series on business practices in Russia. In this first article, we take a look at outsourcing HR.
John Harrison, photos Alina Ganenko
Outsourcing staffing and personnel may sound like an expensive option for a developing business, in fact for any business. So why are companies here taking up this option in increasing numbers? Because outsourcing HR needs is based on a business model well suited to the Russian market; basically it works. If you have, say, a call centre of about 100 staff who you pay a monthly salary to, you pay all the payroll costs, carry out all the banking procedures, and take care of all the tax issues. Fine, but these procedures are not straightforward here in Russia. There are six taxes and contributions to be paid for each employee, for example contributions to the social fund, income tax payment and pension fund payments. The accountant has to handle all of these issues, and tax regulations here are extremely complex; a situation found in many countries which inherited the Soviet Union’s administrative system. The chief accountant in a Russian company sometimes enjoys a very superior status, as his or her interpretation of the law, or laws can have a very serious effect on operations. Russian companies and the people who manage them have grown up with the system, they know how to handle it, somehow, and they get by one way or the other. We, foreigners don’t, and in many cases don’t want to do things in that way.
So how does the outsourcing company do it? It’s all in the contract that they write with employees. That’s what they do, they find solutions that allow the client to have the flexibility that they need with their human resources, and they make sure that the employee is hired on those terms. The advantages are not just on the employer’s side. The outsourcer, especially if it is a big company like Work Service can offer that merchandiser, sales representative, engineer, warehouse worker or forklift driver another job somewhere else, for another client, when the contract with one particular client ends. The employee can even move into other positions, get more responsibility, get promoted earn service bonuses, and so on.
So what other reasons are there for outsourcing your HR requirements? Business, any business is an unpredictable animal that responds, or should respond, rapidly to changes in the market. Changes can sometimes happen very rapidly. You win a new contract, great! You know that contract means hiring another twenty people. No problem—there are so many people unemployed now, aren’t there? Yes, but it’s not that easy. The costs involved can be staggering, particularly when you make a mistake.
There are advertising costs, the time it takes you to find the right people, interview them, train them, background checks, security checks, and then when the contract ends or a downturn occurs you are faced with the problem of letting those people go, and before that, dismissing people who just didn’t work out. Sacking is a dirty word here, it is expensive and difficult to do. As in other countries the employee quite rightly has rights too, and you can be sued for what is considered to be unfair or wrongful dismissal. Russians who sue foreign companies for “unfair work practices” win more times than lose. Downsizing can be just as expensive, if not more expensive than hiring, and things can happen at the wrong moment in terms of cash flow. Then there is the cyclical nature of demand to take into account. A soft drinks manufacturer for example, will need more packers in the summer than the winter. A promotional campaign may need temporary staff, a manufacturer may need to balance his risk on employing people as the company grows or he may open a new facility in a new region.
So, in steps an outsourcing company like Work Service, which says OK, we can take over all your payroll work. We will take over all your staff, they will work for us, and then we will invoice you. We will employ your staff on a variety of different contracts depending on your internal cultural requirements, the labour code and other relevant legislation. We will also look at productivity schemes, bonus schemes, key performance indicators and other critical business parameters as part of the solution, which may reduce rather than increase your costs.
Is it legal? There is no legislation which currently prohibits outsourcing. Some within the Duma are looking to clarify and strengthen legislation with regards to agency employment which the outsourcing industry broadly welcomes. The responsibility for operating correctly under the law falls on the outsourcing or out staffing service providers. Such practices are already becoming quite widespread in Russia. Work Service, for example, provides staffing solutions to key retailers, manufacturers, logistic operators, banks, call centres and software companies. The next time you go into one of Russia’s largest DIY retailers, you will find that some of the staff are working for Work Service and not the retailer! The Work Service staff provide key merchandising services, they are an integral part of the store teams from Moscow to Siberia and the south. Work Service pays their wages every month, takes care of all the tax issues, takes responsibility for the staff, for their uniforms, training and recruitment and invoices the retailer in one standard format invoice as a standard service.
How much does it cost? Charges obviously depend on the complexity of services offered. Different outsourcers are strongest in different sections of the market. Outsourcing for manual labour is different from outsourcing a company’s requirements for qualified and experienced staff. But the basic principles and the advantages for client companies remain the same. Basically, if the cost of employing a management team, which includes accountants and HR specialists, and the budget that they need to operate, is cheaper than getting an outside company to do the job, then you don’t need to outsource. But if it is more expensive, and the outsourcing company can simply do a better job, because that is what they do all the time, then outsourcing does make sense.
At the end of the day, it is worth talking to a good outsourcing company to find out if they can, in fact, save you money, and a whole load of headaches.