Lessons From ITO Contracts

by Thomas C. Greble, Julian Millstein

HR Outsourcing clients can avoid repeating the mistakes of information technology outsourcing.

Compared to Information Technology (IT) Outsourcing (ITO), HR Outsourcing (HRO) is a relatively new phenomenon. What lessons have we learned in the past 15 years of drafting and negotiating IT outsourcing agreements that can be applied to HR? The answer requires a review of the maturation of the ITO contract during the past decade.

Historically, a large number of IT outsourcing agreements failed to provide the benefits that either the customer or provider sought. We all have learned a lot about outsourcing contract negotiations from these unsuccessful transactions. For example, these transactions showed that a lack of good information at the negotiating table resulted in arrangements in which the sides had failed to really reach agreement on a workable deal-there was a flaw in pricing, scope, or service that did not become evident until after the ink was dry. So, nowadays both sides in an ITO agreement insist on more diligence resulting in more openness in negotiations. Parties learned to share more information about the customer's baseline costs, people, processes, and tools, as well as the provider's lead personnel and solution, and even its potential margins. When the transaction was done, there were fewer surprises-and this meant more success.

ITO customers also learned that although they asked for everything, they could not necessarily get it. Unless the provider made a business case using transformational IT, the deal was considered "like for like for less"-the only added value was cost savings. Customers wanted cost savings and increased scope and better performance-and they soon realized they could be getting some of this themselves, given typical IT productivity increases. Providers could only do so much-and those that "bought market share" by promising too much learned to regret the deals-dragging many into renegotiation, some within months of signing.

Simply because HRO is relatively new, the HRO customer does not need to repeat the problems of the past. The HRO customer will understand that it can benefit by applying best contracting processes such as these:

  • Keep key objectives front and center throughout the negotiation. Negotiations can bog down over issues that are relatively important. Identify and keep key objectives front and center. For example, if improved service is a major objective, then getting a better price is not a good idea if it comes at the expense of improved service.
  • Retained organization should own policy and strategic direction. In drawing the lines around the process to be outsourced, retain the right to set policy and strategic direction. ITO deals suffered when high-level architecture was outsourced.
  • Understand baseline costs before contracting. ITO customers routinely failed to understand real costs-often failing to identify costs outside of the business unit directly performing the service. These failures routinely extended the time to close the deal.
  • Develop meaningful service-level agreements (SLAs) that encourage positive behavior. Service levels must be related to objectives. In old ITO deals, customers used to demand measurements of too many items. Over time, savvy customers recognized that 7 to 10 key measures are more preferable to 30. And metrics that are based on legacy processes do not necessarily provide value.
  • Understand the connection between cost savings, improved service, and increased scope. What was the use of beating the provider into submission on pricing, if it resulted in a "partner" who was not making money and was dissatisfied?
  • Provide and follow relationship management structures. Ten years into ITO, the industry awoke to the importance of relationship management. The contract must provide a structure-responsible managers, meetings, and timely escalation and resolution of disputes.
  • Adopt a "master contract" form that allows growth with minimal renegotiations. Change, change, change. The HRO relationship will not be static-it will change. The contract needs to provide methods of change management and control. And the parties need to follow them! One contracting lesson from the ITO world is that more effort should be made around defining processes for change and less about nailing down innumerable details on existing or even transformed processes as if they will go on forever. Another good idea is to conduct relationship and contract audits on a regular basis.

Getting advice from experienced consultants and outsourcing counsel can shorten the contracting process and increase the probability of a mutually beneficial-and therefore successful-transaction.