Throwing the Switch

Take precautionary steps before switching outsourcing vendors so you don't get derailed.

By Susan Ladika Mar 1, 2007
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HR Magazine, March 2007

When it comes to switching outsourcing vendors, nothing drives an HR department’s decision more than pain. If the pain is like “a nagging toothache,” the client will wait for the contract to expire before switching providers. But if it’s a pain “like a broken leg,” the client will do whatever it takes to ease the ache. Even a contentious transition phase or hefty financial penalties are a small price to pay for a remedy, says Jim Sowers, national HR practice leader for Buck Consultants.

Sowers cites the example of a major San Francisco Bay area retailer that outsourced health and welfare and defined benefits to a major provider, and just months later was preparing to jump ship. The systems weren’t up and running properly, retirees were seeing mistakes in their benefits statements, and employees were complaining. “Essentially everything was going wrong. They’re desperate for a solution,” says Sowers, who is based in Houston.

When any company switches outsourcing vendors, “there’s a great deal of pain because both sides are invested in a business relationship,” Sowers says. But the pain can become overwhelming if service levels are so bad that they impact employee relations, costs soar, or the technology doesn’t function.

Indeed, the leading reason for making the switch is frustration over service levels, says Daniel Vander Hey, senior consultant and West Coast practice leader for Watson Wyatt, based in Los Angeles. In such cases, what is actually achieved falls short of the HR professionals’ expectations. “There’s frustration that compels them to say it didn’t work out.”

In some cases, changes in business models, mergers and acquisitions, or divestitures can leave companies searching for new outsourcing providers. Regardless of the reason, when a company reaches the point of no return with a vendor, HR can make a smooth transition to a new provider, if it takes some preparatory steps.

Seeking Satisfaction

Towers Perrin, which conducts an annual study of HR outsourcing, has found that respondents are generally pleased with the cost savings derived from outsourcing but are often dissatisfied with the quality of service they receive, prompting the company to switch vendors.

Glenn Nevill, a principal with Towers Perrin who is based in Dallas, says satisfaction is generally quite high and switchover low in areas with longer histories of outsourcing, such as payroll and benefits. In those areas, clients and vendors are both well-versed in the processes and practices. But in more recent additions to the field of outsourcing, such as recruiting, compensation and training, satisfaction drops.

But, because of the difficulty involved in switching vendors, “unless there is another driver, they are not going to switch,” Nevill says. Other such drivers could be when two companies merge, or an HR department requires a broader range of services than the current vendor provides.

A 2006 survey by Empagio, a mid-market human resource outsourcing firm based in Atlanta, found that of the 209 HR and financial executives surveyed about payroll and tax issues, more than half outsourced at least one payroll process, and nearly one-quarter of those said it was likely they would switch outsourcing providers.

Although the survey didn’t specifically ask why executives planned to switch providers, 74 percent of respondents said they had some concerns about outsourcing. Most frequently cited were lack of responsiveness, at 43 percent, and lack of customer service, at 35 percent.

If a company has a contract with a vendor to handle multiple functions, as is often the case these days, it is not uncommon for an HR department to switch one or two functions to another vendor and leave the other functions where they are. It might be that a particular area is not a strength of the primary vendor, so the client looks elsewhere to fill that niche, Nevill says.

Learn from the Past

If an HR department decides it’s time to switch vendors, particularly if the first relationship turned sour, it’s crucial “to look to the past before looking to the future” and analyze what went wrong, says Steve Garrett, senior vice president of sales and business development at Empagio.

Otherwise, clients may very well make the same mistakes or have the same issues that cropped up the first time through. It’s important to take the time to document all that is expected from the provider so problems aren’t repeated, Vander Hey says.

And although it’s easy to blame past problems on the previous vendor, that may not be the case. In some instances, the HR department itself may be to blame. If the HR department is struggling in-house with poor data, weak communication or leadership changes, those problems need to be addressed before assuming a search for a new vendor. Certain organizations “have reputations such that vendors know as well what is going on,” Vander Hey says.

At the same time, vendors can’t hide their track records either. The HR world is small enough that most organizations know who worked with whom, he says. “It’s impossible for vendors to escape the legacy of their success or failure.”

Finding a New Partner

When selecting a new vendor, it’s imperative to examine the cultural fit between the two organizations, especially if culture played a role in the demise of the former relationship. Garrett urges HR professionals to ask: “Is the vendor a partner or are they a vendor?”

On some occasions, Empagio has turned down potential clients because of their style differences. Garrett cites one organization that was inflexible about setting meetings and dates even at the beginning of the process, so Empagio walked away from the deal. “We’re not going to set ourselves up to fail,” he says.

An acquisition prompted Andrea Singer, director of human resources for Excel Polymers, a Solon, Ohio-based provider of customized, high-performance elastomer materials and additives, to look for a new provider.

In 2004, Lion Chemical Capital LLC and ACI Capital Co. Inc. purchased the PolyOne Elastomer and Performance Additives Group and created Excel Polymers, which has about 1,100 employees.

Singer seized the chance to find a vendor that could provide better service.

Before the acquisition, an outsourcing firm handled benefits, and HR information was managed by a complex enterprise resource planning system. But there was no electronic interface between the company and employees, and no means to enroll the employees in benefits programs online, Singer says.

So Excel Polymers opted to contract with Employease, which could combine the two functions, and could also handle employees who work extended hours and speak other languages at its call center. In two months, Employease was able to develop a system that met Excel Polymers’ needs and “did so seamlessly,” Singer says.

Employease was selected at the recommendation of Excel Polymers’ consultant, who had a partnership agreement with the provider. With a longer time frame to get the new system up and running, Singer admits the company would have done greater due diligence in selecting an outsourcing provider. Fortunately, she has been happy with the decision so far.

Generally, though, doing thorough due diligence when selecting a new vendor is crucial, experts say. This could include issuing a request for proposals and hiring a third-party consultant to help vet prospective outsourcing providers. An HR manager also might want to visit the vendor to get a firsthand look at its corporate culture to try to determine how it might mesh with the company’s.

Sharlyn Lauby, SPHR, president of ITM Group Inc., an HR consulting firm based in Fort Lauderdale, Fla., recommends networking to find others who have used that particular vendor, and not relying only on the references the outsourcing provider gives you. “Let’s face it: All of our references say we walk on water.”

HR managers may also want to look at the vendor’s current customers, as well as those who have left, and talk to those whose businesses are similar to their own. So a manufacturer could look for providers who serve other blue-collar customers, and a bank could look for those with white-collar customers in their client base, Nevill says.

HR professionals also should take their time when making the decision to go with a new provider, he says. Often the decision is driven by a date on the calendar of the end of a budget period. With a seven- to 10-year relationship in the balance, spending an extra few months making a decision “will pay huge dividends on the back end,” says Nevill.

He also says large organizations should start thinking about the switch up to two years before the contract’s expiration, while smaller organizations should start 12 to 15 months in advance. The larger the company, the more complicated the transition, Nevill explains.

The Transition

While selecting a new vendor may be a major effort, it’s only the start of the process. It can be even more time-consuming and emotionally taxing to switch over to another vendor. There are no guarantees that the old vendor will play nicely with the new one, or with you.

“You’re not the first call they return,” says Scott Lever, a managing consultant at PA Consulting Group, based in Boston. The old vendor may be unavailable, delay meetings or threaten legal action against the client for a breach of intellectual property. While attorneys counsel clients to write language into contracts that addresses this type of behavior, nothing really prevents it, Lever says. Instead, the client may offer financial incentives or promise the vendor other business to smooth the transition. Another incentive might be the promise of a good reference from the client who is making the switch.

During the transition period, the old provider is likely to move resources to other remaining clients, while the new vendor may insist it can’t guarantee service levels during the transition. So Lever says it’s imperative that a company “be very clear about who is delivering service at what level at each moment.”

Two of the biggest stumbling blocks are usually technology and intellectual property, says David Lewis, president of OperationsInc., an HR consulting and outsourcing firm based in Stamford, Conn. The contract with a vendor might include forms, documents and databases that the service provider actually owns, meaning the HR department “might have to rebuild a lot of what they thought was theirs.”

In some cases, a company might hang onto a “lousy vendor” because the thought of having to deal with the data issues is “an absolute nightmare,” Lewis says. The way data are housed often is proprietary, rather than off-the-shelf. If the vendor has done a good job with the software, “it has become part of your culture, part of your process.” Instead, he recommends that an HR department purchase its own technology and have the outsourcing provider manage it. Of course, hindsight is 20/20, so keep in mind that technology may impede the transition process if the vendor controls it.

Vander Hey says conversion fees can be quite costly to get data back into a form an organization can use, running from hundreds of thousands to millions of dollars. He cites one organization with 30,000 employees that was asked to pay $2 million in conversion fees. The organization refused, and eventually the fees were negotiated down to $500,000.

A typical contract guarantees a vendor a certain amount of money for the first three years of the agreement, regardless of whether the client bows out, he adds.

Paul Rubenstein, a principal in human capital advisory services for Mercer, based in San Francisco, cautions HR professionals: “Don’t vilify the outgoing vendor. Avoid it becoming an emotional decision. Three or four years from now, if business changes, you might be going back to them.”

It might also occur as consolidation takes place in the industry. Sowers says that for large firms with more than 50,000 employees, there are only about a half-dozen choices when it comes to outsourcing providers, giving the vendors more leverage and clout.

Getting the Word Out

Before the switch comes, it’s imperative to convey the changes to your employees. They need to know what to expect during the transition phase, as well as afterward.

Singer says that before Excel Polymers switched outsourcing providers, employees were briefed on who the new vendor would be, and what they could expect. They also received training on how to use the new online system to enroll in the benefits program.

Lauby recommends holding detailed meetings with groups of employees about why the change is being made, the benefits it will bring, and how the changes will occur. By having groups of employees plugged in, they become your “on-floor cheerleaders.”

Having employee buy-in is key. “Employees are very wary. They are painfully aware of issues that existed with the previous vendor,” Vander Hey says.

If questions arise, workers may not turn to the HR department for information, but may be more willing to ask employees who have already been briefed. Those “cheerleaders” can counter any misinformation that might exist, Lauby says. “This is one of those moments in time when you can utilize informal networks within the organization to a tremendous advantage.”

Susan Ladika has been a journalist for more than 20 years, working in both the United States and Europe. Now based in Tampa, Fla., her freelance work has appeared in such publications as The Wall Street Journal-Europe and The Economist.

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