Although less complex than end-to-end enterprise HRO deals, contracting a point solution provider still requires due diligence, structured governance, and a clear understanding of the need to outsource.
The outsourcing of HR services runs the gamut, from end-to-end, comprehensive solutions that can replace an entire HR department to finely honed point solutions that address a specific
shortcoming within any organization. Most often, the solution buyers choose is somewhere in between—a package of one or two services such as payroll and
benefits administration, or a broad spectrum of services that leaves but a few strategic functions such as recruitment or succession planning in the hands of internal staffers.
But no matter the solution, all HRO buyers undergo an important first step—vetting and selecting the appropriate service provider—and it’s a step that can have a profound effect on the employer’s experience with outsourcing. In this first of a two-part series, we examine how to effectively determine the best provider for an HRO buyer’s needs when shopping for a point solution. In the second part, we will turn our attention to selecting a vendor for comprehensive, end-to-end outsourcing.
While buyers are continuing to flock toward engaging in single-process, point-solution deals as a result of myriad factors, the pre-selection due diligence must be undertaken with careful analysis and vigor. This starts by having razor-sharp clarity on their current goals, needs, and expectations as well as a solid vision of where they want their business to be tomorrow. Then, they must be able to articulate to potential suitors their key requirements.
Selecting the right point solution provider can result in great success for both the buyer and the provider. Selecting the wrong one can result in dismal failure for both organizations and their employees.
The starting point for all buyers in the provider selection process—be it point solutions or multiprocess engagements—is determination of the initial key criteria for outsourcing. While every organization has its own unique set of requirements, strategies, and quirks, the following represent some of the key selection criteria for higher- and very high-touch point solutions.
- Partnerships. The relationship between an outsourcing buyer and service provider has been likened to that of a marriage, and as the HRO industry has matured—accompanied by that of the buyer and provider—this analogy has become increasingly apt.
According to Rita Ennis, senior vice president of HR at PHH Arval, North America’s second-largest provider of commercial fleet management services (and a wholly owned subsidiary of NYSE-listed PHH Corporation), “Making a true outsourced partnership to work, just like a marriage, requires constant nurturing and refreshing.”
Ennis should know, having been intimately involved in the company’s outsourcing of a wide range of point processes including employee assistance programs, outplacement, employee reference checking, payroll-related services, and many health and life insurance and voluntary benefits programs. But as a seasoned veteran who has incurred her share of outsourcing bruises and scrapes, she knows the vendor selection process is an ongoing effort.
“I think that to focus on selection as a process that happens only at the beginning is wrong. Selection is a vital, continuing process throughout the relationship,” she added.
Ennis is not alone in her views. Laura Domchick, director of global HR business process optimization at Veyance Technologies, which spun off from Goodyear in August of 2007, expanded on the marriage theme: “It’s not an us and them…it has to be an US. They have to be an extension of who we are,” she noted.
Domchick, in the process of selecting providers for global relocation and ex-pat services, is in the unique position of creating Veyance’s own standalone HR environment after operating under Goodyear’s back offices for years. One of her key requirements these days is partnerships with suppliers that are willing and fully able to provide best services for employees and help the company push the envelope to create more efficient processes. With one of Veyance’s goals to double in size in the next three to five years, it needs outsourcing service providers capable of growing and scaling with them.
- Specialized Expertise. A provider’s time- and reference-proven expertise as a best-of-breed provider is, understandably, one of the top selection considerations, especially in high-touch functions such as relocation and ex-pat services, in the complex benefits world of healthcare plan selection and medical savings accounts, or the intricacies associated with learning and training content development and technologies. Sub-sets of the specialist expertise requirement include experience working with clients in the same industry of approximately the same size and in the same regions in which the potential buyer operates.
- Cultural Fit. This is also an exceptionally critical key criterion when selecting a point solution provider. Culture represents the DNA of the company, encompassing corporate personality, pace, demands, schedules, operating methodologies, innovation proclivity, flexibility, etc. And although it would seem that cultural fit is much more a requisite in high-touch processes such as recruiting, ex-pat, or relocation services, Lowell Williams, executive director of HR advisory services at sourcing advisory firm EquaTerra, cited it is also important in more transactional processes such as payroll. Consider the buyer company whose executive team mandates viewing payroll data in a variety of methods. While a provider may agree to generate those reports, an unfortunate fact today is that some providers now require their IT groups to serve as profit centers. If a provider is going to charge the high-use buyer for “everything that moves,” it won’t be a good cultural fit.
- Technology. Although technology doesn’t really come into play when selecting a provider for extremely personalized, high-touch processes such as ex-pat or relocation services, technology is a highly important criterion in virtually all other outsourced processes. Point solution buyers are highly reliant on outsourced technology and much less willing to accept a proprietary system that won’t properly port back into their own enterprise systems.
For some point processes such as outsourced learning, the availability of a SaaS offering is critical, said Jim Morris, senior vice president of sales at Element K. That’s because being able to offer the entire workforce 24/7 access to self-service tools has become invaluable.
- Cost and Economy of Scale. Cost does come into play in point solution provider selection, but with the exception of perhaps the most transactional processes, it isn’t one of the most important criteria. And while some outsourced processes lend themselves to providing economies of scale for the buyer, others do not. PHH’s Ennis cautioned that in her experience, outsourcing doesn’t always produce cost savings.
Best Practices Data
There is a wealth of sources of data available to buyers investigating and conducting their due diligence on point solution providers. A good starting point, suggests Lisa Rowan, program director of HR and talent management services at IDC, is gaining insights from associations such as the Society of Human Resource Management (SHRM) and the International Association for Human Resources Information (IHRIM), as well as World at Work for benefits providers and the HROA’s RPO Special Interest Group.
Reports from industry analyst firms, and insights from sourcing advisory firms well-versed in all HR processes, as well as specialized advisors such as those in insurance and benefits also offer great early-stage information and can provide a broader view of best practices and a neutral read on the market.
Input from existing or past business partners can also be extremely valuable and a huge time-saver for buyer organizations. For example, spin-off Veyance hired Ernst & Young come to review its ex-pat services and provide a comprehensive list of providers servicing the space, including those that offer the same services as E&Y. But Veyance’s Domchick also conducted her own best practices-based research by attending a recent SHRM global conference and holding in-depth, drill-down discussions with providers about their capabilities and like clients it may already serve.
Similarly, PHH Arval is leveraging the knowledge of a highly specialized advisor—a health and welfare benefits broker it has worked with for years—for its prescription drug benefits program. The broker recently presented to PHH Arval a list of nearly 17 providers it had comprehensively screened. Based on the ratings and the broker’s presentation, PHH Arval is now armed with the information it needs to qualitatively assess the top three providers (of which its existing prescription drug benefits program provider is one). Although the company doesn’t typically use advisors to source providers for other point solutions, in this case it proved to be highly valuable in terms of identifying fit capabilities and time.
Client reference checks are strongly advocated by Domchick, and they give the prospective buyer so much insight into lessons learned, especially how the provider handled “bumps.” Ennis is also a huge proponent of checking client references and is adamant they are a critical component of the provider selection process. But she continues to be amazed at how few buyer companies use references, and even when they do, how few bother to structure the conversation and data or know how to effectively use them.
To RFI or to RFP?
Due to the breadth and depth of accessible data (much of it free, some fee-based), RFIs are rare in the point solution provider selection process. While they might be used for a highly complex program in which many vendors are being considered (either as single-source providers or as specialists who will work together to form a comprehensive solution) or as a method for determining which providers are interested in bidding on a given outsourcing deal, most buyers move directly to the RFP process.
But for an RFP to add value to the down-select process, it must clearly describe and delineate the buyer’s requirements and priorities. For example, with a payroll deal, the RFP should cover factors including how many employees and contractors are covered, their location, the payroll system currently used, whether they should remain on that system, and whether the technology platform should remain neutral. The goal of the RFP is to force the provider to articulate its solution in direct response to the buyer’s specific needs. Some organizations generate their RFPs internally while others—those with at least 5,000 employees or new to outsourcing and need scoping support—engage external third-party advisors to assist in the RFP process.
Once the initial due diligence has been completed and RFPs are gathered from a short list of providers, it’s time for the down-select. The following are some key criteria in making the final decision:
- Continuity. An all-too common occurrence in HRO is the disconnect and lack of proper hand-off among the sales, implementation, and ongoing service delivery teams. Veyance’s Domchick learned from experience that a huge number of gaps can exist, and so she not only addresses the continuity question of providers upfront but also writes the “A-team” requirement into the contract.
- Price and Service Levels. Although this article noted earlier that cost wasn’t one of the most important selection criteria, price plus service levels in the down-select is critical.
“Going into a sourcing relationship without well-defined, penalty-bearing service levels is like buying a car without looking at the motor,” said EquaTerra’s Williams. “You really have no way of knowing if the car will transport you and your passengers at your desired speed. And for rational reasons, price plays a disproportionately large role in point solutions, especially commodity solutions. So it’s always price and service levels. You need the work done well, but you also need the right price.”
- Provider Bandwidth. Domchick also brought up the question of how much work the provider can actually take on. And provider bandwidth is important even for buyer organizations that have internal resources and expertise; if outsourcing is the selected course of action, in-house staff should oversee, not do.
- Data-driven Comparison Matrices. Some organizations utilize a somewhat data-centric approach to evaluating their short list of providers. For example, they may create a grid consisting of key functionality or capabilities in one column, provider response ratings (e.g., on a scale from 1 to 5) in another, and then conduct an overall weighting of the responses in terms of importance. Many feel this helps take the emotion out of the decision-making process while providing a simple way to discern the best solution for the business.
But PHH Arval’s Ennis said while she has used a comparison matrix in the past, she has never made a decision based on its results. Rather, the matrices have served to validate the gut instincts she already had, or to point out differences or similarities between the top two providers. She said she feels uncomfortable with leaving the well-being of the workforce simply to a formula.
- Site Visits. Nearly all buyers, providers, and advisors advocate site visits as a component of the down-select process. Marc Moschetto, director of product marketing, OBA Solutions at provider Workscape, said: “One of the best ways to get a read on the DNA of a company is simply to visit their offices and meet with their executive team. This will also help you gain a deeper understanding of the structure of the teams who will be supporting you from both a technical and business perspective.”
Point solution provider site visits are not usually conducted until contract award time. Best practices recommend that the person responsible for managing the sourcing initiative and perhaps a few other knowledgeable co-workers visit the service center for a day or two. They should observe not only how work will be handled but also take careful note of how they handle problem cases such as overtime missing from a paycheck or an off-spec defined benefit (DB) pension plan.
Ennis said she has always found it valuable to include professionals outside the HR function in site tours. These staff members are not as near-sighted about the process and can be more objective as a user/consumer. This also allows HR and other staff members to resolve any potential problems before a contract is signed.
So while point solution outsourcing is less complex than comprehensive, end-to-end deals, it still requires diligent vetting of providers, clarity on the reasons for outsourcing, and making sure that the proper governance model is installed.
In the next issue, we will examine how companies should approach selecting an enterprise HRO provider.
