Delivering Through a Crisis

When cost savings are a priority in these times, can you afford to go with the lowest-cost provider?
By Jeff Miller
 
 
As businesses cope with the challenges and uncertainty of a global economic downturn, so must their outsourcing partners. In a very real sense, outsourcers act as extensions of the companies they serve, and those companies are leaning more and more on outsourcers to provide dependable, long-term solutions.
 
Yet outsourcing itself is an industry under pressure as clients increase their demands and intense competition imposes greater pricing pressure. While that may sound good for clients, it’s not good if a critical outsourcer’s business model fails. As such, it’s important for clients to understand just how these providers are striking the balance between delivering high-quality client service, investing for the future, and delivering on their own profitability requirements.
 
The history of the outsourcing industry is rife with examples of underpricing, over-promising and, ultimately, service disappointments. Five or six years ago the over-promising was around HRO, where enormous promises were made. In fact, some very large competitors in that space were required to renegotiate contracts with clients because the efficiency assumptions made in their pricing models never came to fruition.
 
There’s a tone of desperation in today’s environment, with some outsourcers again making questionable assumptions in determining pricing. In an industry where most credible providers have a similar cost base, a buyer ought to understand the assumptions that lead to the price they are quoted. If an outsourcing provider is taking on long-term commitment based on an assumption that costs will reduce over time, the buyer needs to know how those costs will reduce.
 
One such lever is future investments and technology upgrades. The industry is notorious for delaying investments in platform improvements in times of contraction. Outsourcers may be focusing on managing their own expenses, but they can’t stop investing in areas of their business that will enhance their product offerings and further improve operational efficiencies.
 
New entrants in the complicated and crowded outsourcing market are understandably going to emphasize the price factor, arguing that they can provide service at a lower cost per employee because they aren’t burdened with the infrastructure and associated overhead of more established players in the global outsourcing market. There’s a persuasive case to be made for “lean and mean” providers, especially in today’s hyper-cost-conscious climate, but any organization considering an outsourcing partnership with a venture capital-backed or small provider needs to focus on the risks. Some fundamental risk management questions are:
 
Financial Risk. How strong is this provider? With small companies it’s critical and appropriate to request audited financial statements from the provider to understand if the company is profitable and to determine its financial strength. Learn about the capital structure of the provider. How many rounds of capital have been raised? Who owns the company? How has management’s ownership been affected by each round? This could have a substantial impact on the ability of the company to deliver services.
 
Operational Risk. You can always ask a provider for a Statement on Accounting Standards (SAS) No. 70, a widely recognized auditing standard developed by the American Institute of Certified Public Accountants. SAS 70 represents that a service organization has been through an in-depth audit of its control objectives and control activities, including information technology and related processes. SAS 70 Type II is critical because it includes an auditor’s opinion on whether the specific controls were operating effectively during the period under review.
 
Business Continuity and Disaster Recovery. Does the provider have business continuity and disaster recovery plans? What are the outsourcer’s plans in the event a hurricane, power outage, or snow storm prevents employees from working? These situations happen with surprising frequency, and have direct impact on clients. Are its IT systems and processes sufficiently protected in the event of some disaster? Assuming there are such documented plans, buyers should demand to see the plans and the periodic test results.
 
Implementation Risk. Is an influx of new business going to hinder yours? This risk is easily overlooked by organizations that may be drawn to a low-cost solution, but it only makes sense to assume that a sudden influx of new clients at a time of economic uncertainty can place a strain on provider resources that may result in performance problems and hinder efficiency.
 
Ultimately, organizations with strategic vision and long-term focus are not only concerned with reducing costs but also with managing risk and having a clear line of sight. More and more, plan sponsors want to know exactly what they’re getting in exchange for the plan investment and record-keeping fees they are paying.
 
Jeff Miller is president of Mercer’s outsourcing business. He may be reached at jeff.miller @mercer.com.