Vol. 49, No. 7
Like any marriage, for successful vendor relationships, you need to choose the righ partner, work out the kinks and seek help when necessary.
Human resource outsourcing has exploded over the years in response to the need for cost-cutting and streamlined efficiencies. But, along the way, many companies have discovered that the expected savings from outsourcing haven’t materialized. In parceling out various HR functions to separate vendors, companies quickly learn they must devote substantial HR time and resources to simply managing and overseeing those multiple-vendor relationships.
To reduce the frustrations of multiple vendor management, some companies have turned to full-service HR business process outsourcing (BPO), which involves end-to-end outsourcing of at least five HR functions.
At least 35 companies have inked long-term contracts with single BPO providers, and the numbers are expected to rise. The hope is that a single provider can reach economies of scale, reduce the cost of services and improve their quality. It also stands to reason that dealing with one vendor would be less of a drain on HR’s time and resources than managing many—further saving money and streamlining the organization. But even this relatively new, onestop- shopping version of HR outsourcing requires a high degree of HR oversight. Regardless of whether you have one vendor or five, you have to manage the relationship.
Still, “the trend is toward more fullservice or end-to-end outsourcing,” says Diane Shelgren, chief operating officer for Accenture HR Services, North America, an outsourcing provider.
In a recent study of 122 large companies by The Conference Board, a New York-based global business research organization, and Accenture HR Services, 11 percent of the firms surveyed reported that they plan to consolidate their outsourcing under one provider over the next three years, up from just 2 percent in 2002.
Meanwhile, management consulting firm Towers Perrin has been studying some of the companies that have signed BPO “mega deals” with single vendors. The study, Human Resource Business Process Outsourcing: Is It Meeting Its Promise?, looked at 32 such ventures and contains plenty of lessons for companies embarking on the BPO path, says David Rhodes, a principal of Towers Perrin and the company’s thought leader for HR effectiveness in Stamford, Conn.
The Towers Perrin research confirms what many industry experts have maintained— namely that by “bundling” HR functions and outsourcing them to a single vendor, companies can leverage cost savings and greater efficiencies. “The data would suggest that you’re going to be happier with larger bundles and fewer vendors,” says Rhodes. “Economies of scale come from bundling, and it’s going to be increasingly hard for companies not to bundle.”
But the findings also indicate that much work remains to be done, says Rhodes. While companies and vendors have become proficient at using the discourse of partnership to describe their new relationships, the challenge is in building a relationship that’s close enough to communicate, yet still open to criticism.
“People in the deals are asking: ‘How can we have a more effective and professionally distant relationship?’ ” says Rhodes. “They’re saying: ‘We want a partnership, but we want to keep our eyes open, too.’ They want a sense of equilibrium.”
Whether companies ultimately opt to go with a single vendor or to outsource their HR functions across multiple specialty providers, the key, say industry experts, is to know what you want out of the deal. Linda Merritt, manager for HR strategic planning at AT&T in Bedminster, N.J., says the decision should come down to what’s right for the company in the long run, rather than what’s right for the moment. “You have to make a thorough assessment of where you are now and what your trajectory is,” she says. “That should determine your outsourcing needs.” Choosing Your Mate In 2002, AT&T made news when it announced that a seven-year BPO agreement with Chicago-based Aon Corp. fit its outsourcing needs. Under the deal, Aon Human Capital Services, a subsidiary of Aon Corp., agreed to provide the telecommunications giant with endto- end human resource, administrative, transaction and payroll services. It was a major step for AT&T, notes Merritt, and it was not undertaken lightly. “We decided to think about BPO because we were looking for added efficiencies and cost savings. But before we even thought about a vendor, we came up with a list of criteria of what success would look like for us,” says Merritt. “We had a small set of HR leaders who thought through the strategy. We asked ourselves, ‘What do we want to do?’ and ‘How do we achieve those goals?’ ” (For more information on the benefits of using multiple vendors, see “Playing the Field” on page 90.) In the end, notes Merritt, the choice of a particular vendor turned out to be less important than understanding why HR was being outsourced in the first place. “We had an eye on what a partner would bring to the table. Because we knew what we wanted, we could look for a vendor out there who could not only give us a cost advantage but really partner with us.” That sense of partnership between a company and its BPO vendor is absolutely key, experts say. What makes for an effective partnership are the same ingredients that make for a good marriage, or any other long-term relationship for that matter, says Keith Strodtman, general manager of HR outsourcing for Ceridian in Minneapolis. “You need open and honest communication. You have to be able to understand each other’s goals and desired outcomes.” Choosing Your Team Picking the right partner also refers to the company side: You need to determine who are the best people to work with the vendor. The composition of people who oversee outsourcing vendors has evolved into a multidisciplinary governance team made up mostly of HR and IT representatives. The Conference Board/Accenture study, HR Outsourcing: Benefits, Challenges and Trends, found that 60 percent of respondents indicated they have either created or are in the process of creating a core competency team for overseeing outsourcing providers (see “Team Members,” below). That’s the approach AT&T took. “Part of what we did is consciously staff the governance team with lots of different kinds of people,” says Merritt. “Some of them come from a business background or from finance, some come from pure HR. It’s a blend of what’s right for governance. That expertise helps us to understand and articulate what’s needed.
“Some people wear two hats—overseeing the vendor for AT&T, and working as operational leads [vendor employees who work on-site],” Merritt explains. She also notes that the governance team needs to know when not to get involved. “We don’t wear the operational hat. We want those people are responsible for delivering services to work together. We have to ask: ‘Is this a service issue or a contract issue?’ The point is not to second-guess what the operational side is doing.”
Strodtman agrees: “You need to make sure that you have clear roles and responsibilities for members of your governance team, clear escalation or conflict-resolution processes in place, a regular schedule of when meetings will occur, and what will be discussed.”
By spelling out the terms of the relationship in advance, Strodtman notes, customers and vendors can strengthen the foundation that any true partnership requires: trust. “As both parties continue to build those trusted relationships, vendors are going to become more knowledgeable about customer needs. Their role is going to be more like that of a trusted adviser, diagnosing problems, identifying trends and building value.”
Because HR outsourcing contracts tend to be long—five years or more—it is hard to forecast how the company/vendor relationship may change and how the business needs may evolve. You can’t anticipate and write every conceivable change in the contract. What you can do is make sure the people overseeing the contract have the skills needed to manage the evolving relationship.
“You need to be certain that all of the internal parties involved are fluent in complex vendor relationships and related management, as opposed to shortterm relationships or more transactional engagements,” says David Carpe, founder of Clew LLC, a management consulting firm based in Boston that specializes in competitive intelligence for strategic HR.
“There is a difference here, and dropping the ball when rounding up internal leadership could cloud management objectives. For example, are the HR people sophisticated enough when it comes to managing milestones and metrics for overall evaluation? Will they know how to respond when an HR BPO provider comes back with a revision or surcharge for unforeseen efforts or modifications?”
The Conference Board/Accenture study found that companies understand they need to improve their in-house expertise on managing vendors, although most were not doing so in any systematic way. More than half of the firms surveyed boosted HR’s skill sets through “trial and error,” with only 15 percent using formal training (see “Learning on the Job,” below).
AT&T’s solution is to have the contract managed by people who are familiar with how the work was done previously. “There’s a tendency to lose historical knowledge over time,” says Merritt. “As companies get leaner and meaner, things start getting missed.”
To ensure that AT&T realizes the full value of the outsourcing deal, Merritt relies on a living, breathing contract.
“Some people don’t use their contract; we use ours all the time,” she says. “Our outsourcing contract is the foundation of all discussions on the services to be provided and pricing—it is the content. Between the content and the intent of the deal, we have been able to jointly resolve issues ranging from pricing to addressing provision of services not specifically spelled out in the agreement.”
John Jones, director of HR strategic services and staffing at Comerica, a financial services company in Detroit, says companies have to be hands-on when managing the vendor relationship. Comerica signed a multiyear deal with Ceridian in 2003 to provide outsourced benefits administration and HR information services.
“Companies will always need to make sure that they’re holding their vendors accountable,” he says. “We make sure that someone is looking over the vendor’s shoulders—that can’t be a lunch and a phone call; that has to mean minute details—and having people at the organization that purchased the service who understand those details.” Bob Crow, a senior consultant for Watson Wyatt’s technology solutions practice in San Francisco, adds, “The more you manage, the better your benefits will be. The lack of management costs you more. Rigor and discipline never cancel out the benefits of outsourcing.”
It’s also important to have realistic expectations about HR outsourcing outcomes. “Be prepared to sit and wait for time to pass before realizing major cost savings,” says Carpe. “And remember that these realized advantages might not be in tune with the original promises and expectations.”
If the relationship really does fail, says Carpe, the question becomes: “What’s your backup plan? If things don’t go as planned, e.g., if delayed delivery of realized savings puts off top management, and there is a pullback on spending or associated plans, how might the entire relationship be sliced up or otherwise restructured? Or if you elect to switch teams and go with another vendor at some future point, what provisions are being made today to facilitate an unmuddled transfer of knowledge and practice both internal to your firm and through the current or selected provider?”
As companies grapple with an expanding array of outsourcing options, some are turning to expert advisers—thirdparty consultants that can help them formulate an outsourcing strategy, choose one or more vendors, and even manage the vendors they select.
Crow argues that because outsourcing involves so many decisions, hiring a third party to define or validate those decisions is common sense. “Companies are considering questions of cost, service, efficiency and manpower. They want to know what their options are, and a third party can help.”
Crow notes that as more companies and vendors choose to embark on longterm relationships, the third-party consultant increasingly has another role to play. “Consider us marriage counselors,” he says, that can work through the bumps on the long road.
The most effective consultants get involved early, helping the client and the vendor articulate a structured, defined program in which there are mutually accepted standards. “The marriage counselor also needs to come in and do a periodic evaluation and make sure that everything is being delivered,” says Crow.
If it’s clear that expectations aren’t being met, it may be time for an intervention, he says. “Bringing problems to light and working through them is really the goal. We’re not trying to eliminate the vendor, but to help them to develop a plan and milestones. It’s a frustrating period,” says Crow, “but at the end of the day, we can salvage a relationship. That’s the value added from a third party.”
For companies that have no choice but to rely on multiple vendors for their outsourcing needs, hiring a third-party consultant may also be a way to reduce costs. Hospitals and other health care providers, for example, often rely on many different vendors to meet their staffing needs, which range from registered nurses and allied health professionals to medical office personnel.
Just two years ago, Hoag Hospital in Newport Beach, Calif., was using 95 different staffing vendors. To streamline its operation and control costs, Hoag turned to a third party to manage the hospital’s staffing vendors. “Now they deal with just one,” says Brad Turkin, executive vice president of Comforce, the staffing and contract consulting services company that Hoag ultimately hired. The decision to hire a third party, notes Turkin, resulted in immediate cost savings for the hospital. “They saw $2 million in hard savings over 18 months, and some of the HR people who used to focus on all those different vendors could be redeployed elsewhere in the hospital.”
Experts say that the growing complexity of HR outsourcing is likely to make third-party hiring increasingly common. “I’m seeing an increase in the number of providers and the demand,” says Crow. “Third parties have their thumb on the pulse of the industry. They know the market, and they have that expertise.”
Jennifer C. Berkshire is a Boston-based freelance journalist, specializing in business and labor issues, and an adjunct professor of labor and the media at the University of Massachusetts, Amherst.