An even finer balance: is the human resources shortage the game changer for the operating models in alternatives?

Insourcing, outsourcing, co-sourcing —what will work best for your organisation? How can you best decide in this current environment and get the right fit-for-purpose operating model? Considering the evolution of the market, the resource facet and also, to a certain extent, the economic outlook, now is a good time to take a fresh look at what outsourcing —managed services— can offer in terms of short- or long-term scalable solutions that give you access to resources and technology on demand.

In an article published in April 2022, entitled “A fine balance: operating models in alternatives”, Alexandre Igel, Accounting and Tax Partner and Vincent Lebrun, Alternatives Leader and Tax Partner at PwC Luxembourg, discussed how choosing the correct operating model is key and that doing so means considering factors such as flexibility, cost optimisation, technology, and digitalisation.

Strategy drives the definition of the Outsourcing Model: insourcing, co-sourcing or outsourcing? 

For any company, an operating model strategy is a plan for how it will design and operate its business processes and systems to achieve its goals. Its key elements can include business objectives, the value proposition, key processes, organisational structure, governance and control, technology and systems, and the culture within a company that keeps people engaged and motivated with a sense of purpose.

With insourcing, functions are performed in-house, resulting in a dependency on dedicated internal resources and experts. This limits the possibility to take advantage of external tech applications, but on the other hand, it can mean improved control and logistics, and you also have intellectual property controls.

Co-sourcing is more effective when looking for gains on time-consuming activities or for specific technical expertise. It fills gaps in internal capacity and experience, and allows internal departments to focus on highly sensitive or acutely critical tasks. By using external technology platforms and experts, the business reduces internal expenditures. A clear governance, clear task allocation, strong communication and monitoring are also usually key success factors.

While co- or outsourcing could be considered as a temporary solution, it often happens that companies who have found good service providers with excellent teams may come to the conclusion that with a managed services solution their operating model is actually improved or should be reconsidered —and this could become a long-term element to their success.

In both of the latter cases, you need to rely on a trusted business partner. But it’s also absolutely necessary that the service providers you choose are experienced and skilled people, and a logical extension of your own team. It’s an oversimplification of course, but, essentially, those are the options.

And this is what we really want to focus on in this blog: the skills and expertise an organisation will need to achieve its business objectives. Or as Jim Collins, author of “Good to Great” puts it, “People are not your most important asset. The right people are.” And to that we would add, at the right time.

From strategy to execution: what are the implications in terms of resources? 

The strategy of an organisation drives (or should drive) the definition of the operating model.

There are usually three areas in which investments have to be made:

1. In technology;
2. In process;
3. In people.

In general, focussing on investment in technology and in process represents more of a mid- and long-term vision, which can ultimately lead to better, more efficient organisations that also reduce overall cost. Short-term thinking is indeed the killer of the drive for the right solutions long term.

However, there are times —such as right now— when investment in technology and process might be more challenging given the outlook. For example, when you take into consideration inflation, the slowdown of economic activity, and the recognised drop in the deals side on alternatives, you might consider that maybe now isn’t the right timing to invest, or think twice before investing with internal costs under pressure. This isn’t to say all is doom and gloom, but one thing we do know is that a lot of organisations are looking at reduced outlooks and budgets —and that can be tough.

But it isn’t impossible for companies to discover that they are doing better with some services managed by trusted business partners in the short-term, meaning they might just have a re-think of their operating model in the mid- to long-term.

This brings us to investment in people, which currently needs to be viewed through the perspective of a global human resources shortage.

What’s key is that not every organisation evolves in the same way, nor would it be recommendable for them to do so. Each player needs to consider the budget, resources, and the time required as well as consider whether the organisation has enough technical skills and resources (human and otherwise), particularly now when talent can be scarce and budgets are tightening.

One must seek the right balance, and quite often the answer comes from outside the organisation. This is where the role of an external service provider brings value.

The war for talent: is it time to rethink your model? 

In PwC’s Global Workforce Hopes and Fears Survey 2022, after talking to 52,000 people on the topic of what they think about work today, one of the main conclusions is that labour is going to continue to be a problem, both in terms of recruitment and retention.

“The upshot for the C-suite? As companies take on ambitious business and societal goals, leaders must remember that employees can be a force multiplier or a detractor. In fact, PwC research has found that the workforce is the number one risk to growth—and also the principal means by which companies can execute growth-driven strategies.”

Eight months ago, US Chair and Senior Partner Tim Ryan went so far as to say in an article in Insider Magazine that the “war for talent’ could last another decade” and that, “he’s never seen a more challenging time for CEOs”.

The costs and challenges of recruitment and retention today 

It has been well documented that COVID-19 compounded the already existing pressure on the global war for talent. A sustainable workforce is essential to an organisation’s prosperous future and that means having an external talent pool to source from and an engaged force within an organisation.

In terms of recruitment, in the aforementioned PwC study, surveying responses across 42,00 territories and a representative sample across all industries, it was discovered that organisations are now taking many actions to try to address skills and labour shortages, which include:

• widening the recruitment net to include more diverse workers (25% of respondents);
• recruiting workers with lower qualifications or less experience (24%);
• outsourcing work to third parties (for instance, consultancies, suppliers) 20%;
• and hiring qualified workers from overseas.

Luxembourg continues to be a versatile labour market, and attracting talent to the region can be challenging. To remain an appealing place to work, holistic sustainable hiring practices and a retention approach are needed to support both employees and the firm.

But recruitment comes at a cost. And that cost is the investment in terms of money and time associated with finding talent, hiring, and onboarding and training new employees, in addition to the cost of advertising the open position, screening and interviewing candidates, and the administrative burden involved.

Not to mention the increased salaries it takes to attract top talent, as well as the salary of your recruitment team and extra team members involved in the recruitment process, the internal commissions or employee referral bonuses set up, online job board costs, and, in many cases, the investment in recruitment software that you use to hire employees.

This challenging recruitment situation is even more applicable to the Luxembourg market, where there is a clear challenge to recruit locally. COVID-19, home-based work and the great resignation have changed the paradigm and made it more complicated for a small country such as Luxembourg, which relies on cross-border workers with specialised profiles. Looking at candidates outside the European Union can be an option as well, however obtaining work permits will bring other types of challenges.

A quick look at the headlines makes what we’ve just described very obvious. Moovijob.com wrote in a blog in February 2022 that “Almost all sectors are now impacted by the labour shortage in Luxembourg”.

The Luxembourg Times wrote an article entitled “Luxembourg’s talent gap” that laid the issue out well: “Angling for top talent is high on any government’s agenda. But for a country as dependent on foreigners as Luxembourg, the stakes are higher than for others. Almost half of the country’s population comes from abroad, but the share of immigrants in the workforce stands at above 70%. Clearly, the country’s high salaries, economic stability, safety, and good public health insurance are attractive. But will it be enough for the future?”

When looking for specific profiles and talents, part of your team can come from a global network. In fact, this is exactly what we do at PwC Luxembourg ourselves. With offices in 152 countries and a large professional services global network part of a resource solution can be drawn from that pool. This is why we can offer scalable solutions, by leveraging our global footprint to extend the size of our teams and get the right skill sets when needed.

No one size fits all 

Again, we want to stress there’s no “one size fits all” when we make such observations, and that companies need to find value in the mix that’s right for them. To get there, they need to look at the pros and cons of the operating models and make sure it fits, also considering the recent evolutions on the labour market.

Our main message in this blog is that when there’s a difficulty or even an impossibility to recruit/retain people, and when faced with a bleak and uncertain general economic outlook, it could delay or even block the execution of your strategy. Even worse, it may damage your capacity to keep your operations running.

In this case, perhaps your operating model should be readjusted, at least temporarily, which may not be a bad thing.

Potential benefits of outsourcing or seeking a managed services solution

Where the fit is right, a managed services solution can help absorb the cost of training, and allay concerns (short or long term) of not having the resources to do the job. It’s exactly during times such as these that managed services can help you expand the size of the team as per your needs, without you having to hire and train employees you may not require later on as well as many other benefits. So, the right people with the right skills at the right time.

In uncertain times, you need your business to stay agile and flexible when it comes to resources. If an ill wind blows, you want to be able to swiftly and adeptly manage change. An in-house team might not be able to respond as efficiently.

Conclusion 

Our original article published in April 2022 was called, “A fine balance: operating models in alternatives”. Almost a year later, we are talking about a “finer balance” because the message is essentially the same, but the human resource issue and the outlook (for now anyway) has become more challenging. That makes it a good time to look at your operating model and see where managed services can make the difference and bring a bit of reassurance in these uncertain times.

Managed services can help to find scalable solutions that offer you as little, or as much, of out- or co-sourcing that you need. It can help you gain access to those currently “oh so precious” human resources along with the technology (and tech skills) your organisation needs —short or long term— on demand.

The choice of a managed services solution is yours, but it will only be successful if your providers act as an extension of your team. No matter what the solution, good people you can trust are what makes the relationship successful.

What we think

Now, amongst a myriad of already existing factors, the human resources shortage is potentially changing the game by imposing that organisations rethink their business model. Leveraging external teams and opting for co-sourcing arrangements with a trusted business partner could be a part of the solution.