Vetting, Carefully

During tough times, exercising continuous due diligence on technology vendors can protect your organization if they fail.

By Bill Roberts May 1, 2009
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In this troubled economy, HR executives are wrestling with budget cuts, delaying new programs and managing layoffs while trying to boost the morale of the employees who remain. In this once-in-a-career maelstrom, they could be forgiven for not paying attention to their HR software vendors—but they do so at their own peril.

"The time we look most aggressively at our vendors is when we are getting a new one," says Eric Wilson, SPHR, a consultant and sole proprietor of HR Integrated Solutions LLC, in Portland, Ore., who helps clients make HR software purchasing decisions. Yet, "In today’s environment, complacency toward your current vendors could be your downfall."

Like others, HR technology vendors are at risk of failing. From the HR executive’s perspective, the sudden loss of a crucial application, whether licensed software running on company servers or an application hosted by the vendor—the software-as-a-service (SAAS) model—could be detrimental to the HR mission and the welfare of the organization.

While the recession continues, an HR organization needs to conduct ongoing due diligence—competitive intelligence, one HRconsultant calls it—to give early warning if a technology vendor is at high risk for financial trouble, including liquidation; it also needs a backup plan for any mission-critical HR application provided by a high-risk vendor.

"Every place I’ve worked, we’ve done an annual review with each vendor," says Susan Washington, PHR, a benefits analyst who manages Arlington (Va.) County Government’s 4,000-person retirement system. Washington, a member of the Society for Human Resource Management’s Technology and HR Management Special Expertise Panel, agrees that now it would be prudent to conduct these reviews more frequently and that they should include scrutiny of finances and other indicators of vendors’ health. "But I don’t think most HR departments in general understand this," she adds.

What’s the Risk?

Analysts and consultants say some, and perhaps many, HR technology vendors will not survive this recession. The most vulnerable are new SAAS vendors offering hosted applications in what were growth markets until recently—areas such as learning management, performance review, recruitment and talent management.

"There are a fair number of HR software and outsourcing vendors who won’t make it through 2009," predicts Naomi Bloom, a strategic HR technology consultant and managing director of Bloom & Wallace in Fort Myers, Fla. She does not expect all failing vendors to find acquirers: "When these vendors can’t make it, there won’t always be buyers, but shutdowns."

Mature software developers who sell licenses for databases and applications will lay off workers, cut costs and post ugly financials while they hunker down to survive, but survive they will. "The smartest of them—and there are many great vendors—understood that bad things were happening; were early to conserve cash; did layoffs; and cut once, deep and fast," Bloom says.

Especially at risk are startups funded by venture capitalists now identifying which companies they will continue to back and which they will cut loose, Bloom explains.

There are too many startups, even for a solid economy, according to Jason Averbook, CEO of Knowledge Infusion LLC, a Minneapolis-based consulting service for HR, talent management and technology, adding, "There will be companies that flat run out of cash over the next year."

Vendors are not likely to start disappearing until the third quarter or later, says Jacqueline Kuhn, president of Kuhn Consulting Group in Barrington, Ill., and past chair of the International Association for Human Resource Information Management. That’s becausethe HR software market had a good year in 2008. Vendors are likely to be OK for the first part of 2009—until they need to renew subscriptions or licenses. Corporate information technology budgets have rarely been tighter: Few companies plan to purchase much technology this year.

"The new buying isn’t occurring as it was," Kuhn says. "If sales don’t pick up as the year goes on, we might start to see the impact by the third quarter [of] this year or even as late as the first quarter of next year."

Kuhn and the others suspect most HR executives don’t pay enough attention to the health of their technology vendors, and many may not even be up to the task. "Ninety-nine percent of HR technology departments don’t have the ability to do this," Averbook says. "They are so busy with day-to-day stuff that they are not paying attention to the vendor’s announcements. Vendor relationship management is not a strength of HR."

So, many HR executives must find help. After that, they must select the mission-critical HR applications; determine the risk levels of the vendors of the critical applications; understand what protections exist in contracts; and, finally, develop backup plans to cover worst cases—when the vendor of one or more critical HR applications goes out of business.

Find Help, Establish Priorities

Consultants can help, but they cost money. A clever HR executive might look no further than her own finance department, procurement operation or IT staff for help conducting ongoing due diligence of HR software vendors.

Steve Joyce, HR practice leader for The Hackett Group Inc., a strategic advisory firm in Atlanta, says, "If I were the HR executive, my first question would be: ‘Who can educate me on the options companies [vendors] have for going out of business, and how do these options affect our company?’ "

Kuhn suggests HR executives tap people from procurement, purchasing, legal counsel and IT to help review contracts. IT people also understand governance models that set practices for continual review of vendor relations, she adds.

But it is not necessary to conduct ongoing due diligence with every HR vendor. Determine those that would be devastating to lose. Payroll, benefits administration and the employee database come to mind, but priorities vary. Prioritize the vendors who need to be watched closely, and assess the risks for each.

Governance for Tough Times

Shaw Group Inc. of Baton Rouge, La., a global engineering and construction company with 26,000 employees, recently launched talent management applications—including talent acquisition, learning management, compensation management and succession planning—from two vendors with the software-as-a-service model.

The talent management governance committee applies the same criteria in ongoing due diligence that it applied before engaging these vendors, according to Lacy A. Kiser, SPHR, executive director of HR, Fossil Division of the Power Group, and project director for the talent management initiative. The committee tracks risks such as a vendor’s financial stability, risks of merger or acquisition, and levels of research and development pending.

"The committee’s direction," Kiser says, "is to have a contingency plan in place that ensures Shaw does not have a disruption of services if the vendor was forced out of business or acquired." He says the process is similar to one used by Shaw’s operating units to make sure they have viable suppliers and subcontractors.

Nov Omana, a consultant and sole proprietor of Collective HR Solutions LLC, in San Mateo, Calif., says more HR organizations need to use governance models to track the health of technology vendors.

"Have standards for service in the contract," Omana says. "You should monitor that. And have a governance model. There should be a point of responsibility that looks at all HR systems."

—Bill Roberts

Sizing Up Vendors

Dig up financial information on priority vendors, find less-formal sources of information about them to monitor and understand their problems. First, Averbook advises, understand the business models: What are the sources of the vendors’ revenue? Some reap continuing revenue from annual software licenses. Others get most of their money when they sell a product. Vendors "have to answer that question," he says.

Publicly held vendors must report quarterly financials. But these are historical data and may not reflect the current situation.

Privately held vendors’ historical data are rarely available. Averbook and others advise pressing for information—on a nondisclosure basis—from privately held vendors such as startups. Ask for revenue, profits and losses, research and development (R&D) spending, cash-flow forecasts for the next 12 or 18 months, size of the customer base and how it has changed, and other details. A customer has every right to ask. In this environment, a vendor ought to share some of this. If the vendor balks, be wary.

Use Google and other online tools to mine information about each vendor. Don’t freak out over layoffs—who isn’t doing layoffs? Find out what positions have been subject to layoffs, as this can suggest the depth of trouble. In this recession, layoffs in sales and marketing are not uncommon, even for healthy companies. If the layoffs are in R&D or support—the staff members you interact with—this could indicate more-serious difficulties.

Pay close attention to contractual service levels, and call vendors if levels slip. During a recession, a slippage, especially combined with layoffs, could be a sign of big trouble.

Many vendors have user groups as listening posts for trouble. And customers of many vendors sponsor independent web sites to air issues and gripes. These could provide early warning.

If you worked with implementation partners when you rolled out the product, stay plugged into these consultants; they’re likely to know if the vendor is in trouble. Also pay attention to delays in products or upgrades, canceled user conferences and the loss of large customers.

Any single piece of information is not by itself cause for concern, but paying attention to various sources can help an HR team size up trouble and take action.

If you are concerned, be proactive, Joyce says. "Talk with your vendor and see if it can provide any indications that they are having deeper problems—or assurances that they’re not. If there are problems, don’t wait for them to go into bankruptcy. Start developing a backup strategy."

Plan ‘B’

In the current environment, contract reviews for high-risk vendors become imperative, and HR professionals need to involve people from finance, procurement, legal counsel and IT. In many companies, the right people are not reviewing HR software contracts, Kuhn says. "Especially with hosted applications, too often HR enters into an agreement without involving others."

Among the issues:

  • What happens if the vendor goes out of business? Who owns the data? It should be the customer.
  • Who can get the application source code? Often, it’s not clear.
  • How do data get transferred to the customer? It’s rarely clear.
  • Who pays for the transfer? Ditto.
  • What warning does the customer get of impending liquidation? Often, it’s not clear.

If contract reviews show gaps, the customer has a right to renegotiate the contract and add stipulations, Kuhn says. "If you don’t have a clause regarding insolvency, ask the vendor to get one in there. It should cover means of getting your data from the vendor and a reasonable notice period so that it is not a 24-hour notice. I would want 60 to 90 days."

When the software is licensed, hosted and maintained by the customer, failure of a vendor’s business will not have as immediate an impact as the loss of a vendor-hosted application. Eventually, the HR organization will need to replace the software or perhaps find third-party support. Regulatory upgrades, especially for payroll systems, can be a key problem even in the short run, however.

HR organizations can find real trouble with a vendor-hosted application, especially with no contractual arrangement for transferring the data and getting the source code so the customer can run the application if it chooses. HR executives, however, opt for SAAS models because they don’t want to get involved in operations, so even if they can get the code, this may not be a viable solution, even in the short term.

If the hosted system is the core human resource management system, then the problem is even bigger, Kuhn says. "That is truly the source of the core people and jobs data. If the hosted system is only doing performance management or learning, it will be painful, but you still have your employee information in-house."

If it isn’t already clear, for mission-critical applications that have high risk involved with their loss, an HR department needs a backup plan. In the worst case, when a vendor goes out of business, how do you get the job done?

"HR executives need to be more proactive," Joyce insists. "They need a plan of action."


The author is contributing editor for technology at HR Magazine. 

Web Extras

SHRM article: How to Break Up With Your HR Tech Vendor (HR Magazine)

SHRM article: Tips for Hiring a Tech Vendor, or Not (SHRM Online Technology Focus Area)

SHRM article: SaaS (SHRM Online Technology Focus Area)

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