by Mark Hodges

The first step to excellent HRO services is to create your own center for excellence.

A question commonly asked by clients evaluating HRO is, “How do I manage my provider once the contract is signed?” My answer is that managing the provider is only half the equation; the other half is managing the internal stakeholders. Concerns about management often lead to concerns about organizational structure: a common solution to both is to establish an HRO Center of Excellence (COE). Creating an HRO COE takes planning, investment, and commitment—otherwise the ability to articulate the value of the HRO relationship will never be achieved. So what are the characteristics of a feasible HRO COE?

Level of Investment: The level of COE investment should be in the range of 4 to 6 percent, or $800,000 to $1.2 million per year for an HRO contract that is worth $140 million over seven years. This investment covers both full-time and part-time people in the COE; management, operational, and administrative processes; and software tools and other enabling technology. The number of personnel for a contract of this size can range from 7 to 15 people. Characteristics that drive the investment towards the 6 percent range (versus 4 percent) include global scope, outsourcing of more than 10 HR processes, significant transformation activities, an HR ERP rollout, or a client that has never outsourced before.

HR Service-Delivery Management: This work is performed by two to four individuals with significant subject-matter expertise in their respective HR domains. An example might be assigning one person to Workforce Management, another to HRIT, and another to Total Rewards. In addition to HR expertise, quality and project-management expertise are also required. The quality of HRO provider performance is focused on monitoring and reporting, breach notification, and problem escalation and resolution, and should be assessed by both the HRO provider and the client’s internal management on a daily, weekly, monthly, and annual basis. Managing an HRO relationship is a much different proposition than managing a purely internal project and is not usually well understood by clients in the HRO world. The bottom line is that a lot of value and money is at stake, and a well-run project-management office is critical to delivering successful projects and reducing value leakage.

Contract Management: This work usually involves two full-time resources: a contract manager and a financial analyst. Their responsibilities include billing and payment, consumption forecasting and tracking, financial compliance relating to the contract, charge-back, benchmarking, internal controls, and third-party contract management. These processes are critical yet often overlooked. When they aren’t given due attention, the result can lead to significant value leakage, which means higher-than-anticipated costs (usually more than 10 percent), and less-than-expected results. A combination of factors is often responsible: ¦ Managing HRO relationships is a new concept—the function is considered overhead and receives little investment in terms of budget and resources. ¦ Historically, there have been limited technologyenabled processes and tools to ensure consistency, compliance, and performance reporting. ¦ Clients are not good at keeping internal demand down—demand for HR services often increases after a contract is signed and catches clients by surprise. ¦ Clients often either micromanage the provider or don’t manage them at all. ¦ Clients cope with losing leverage post-HRO transaction.

HR COE Leadership: The executive in charge of the HR COE must provide overall governance and continuous relationship management—both internally and externally. Responsibilities include a focus on driving current and future value by implementing and maintaining highquality business planning and satisfaction processes. It requires strong interpersonal and negotiating skills, supported by well defined and mutually agreed upon governance protocols, decision rights, issues management, and dispute resolution procedures.

Transition and Transformation: A full-time transition manager is required, usually for 3 to12 months depending on contract complexity, number of HR processes, countries in scope, and other factors. If significant HR transformation is involved, a full-time resource is also required to manage transformation activities.

Risk and Compliance: This manager works closely with corporate risk management and compliance as well as the risk mitigation plan for the HRO contract itself. With regulatory requirements such as SAS 70 and Sarbanes-Oxley, this function has become much more important than in previous years.

A best-practice HRO COE requires full-time resources and budget for people, technology, and processes. Managing multi-hundred-million dollar HRO relationships demands no less.