Contributors

Exclusively Yours

The pros and cons of making the big commitment.

by William B. Bierce

Exclusivity is a mixed blessing that needs attention in the design and governance of HRO relationships. Exclusivity affects the four Ss scalability, standardization, specialization, and structure of pricing.

 

 Exclusivity with an enterprise customer supports both scalability and actual increases in scale. Aggregating individual companies and industries demands for services influences the scale that drives HROlarge scale can drive down per-unit pricing, a prime reason for outsourcing. In turn, exclusivity and scale affect roles. Enterprise customers should carefully balance the advantages and risks of sole-source or the lock-in effect of full-service scope for which the provider will be a service aggregator, general contractor, team builder, and/or auditor.

 

Scalability also impacts regulatory compliance and the consequences of a breach. HR officers are focusing on ways to gain control over processes under their aegis (for Sarbanes-Oxley) as well as greater speed in service delivery, ease of use of HR control systems for greater compliance and transparency, and economies of scale.

 

Standardization drives scalability. Software developers such as SAP, PeopleSoft (now Oracle), and others have developed uniform platforms in which HR is only one component for managing a global enterprise. The HROA and others have been pushing for standardization in XML. Ordinarily, management can rely upon standardization for some compliance, but standardization does not liberate the customer from making decisions that deal with regulatory compliance and the structure of its core business. In the exceptional situation, standardization may not detect or deter fraud, but it may help identify it.

 

In the regulatory context, exclusivity may therefore make sense if the standard processes meet the Sarbanes- Oxley control tests and the general test of legal compliance. Exclusivity might not make sense at the level of highly differentiated, unique analytical tasks that must take into account the customers complex attributes. Exclusivity drives specialization of functions and roles in an HRO relationship. In allocating roles and responsibilities, customers should understand what services the provider will actually perform and what services it will supervise without actual responsibility. In all events, the provider will need to report on the in-scope HR processes.

 

Exclusivity also enables capitated pricing and volume purchase discounts. Capitated pricing gives visibility into per-employee costs for the HR administrative and management function. Capitation can permit customers to mix and match, seeking an optimal price for end-to-end process management. Internal assessment in preparation for possible outsourcing will examine activity-based costs, facilitating comparisons between insourcing and outsourcing. Failure to include a full scope of ones HR needs in a contract can increase costs. This impact can be minimalized when providers effectively automate their inscope HRO processes, or customers demands for services that dont experience significant surges or declines. Similarly, failure to include full scope could increase volatility in customer demand. Exclusivity might create a base for absorbing significant volatility to accommodate surges or major changes. A larger provider can absorb such volatility; with effective planning; a smaller one might be able to do so without excessive delays or costs.

 

Exclusivity also poses risks that, in a well-designed HRO relationship, are addressed and mitigated. Operational risks should be considered by comparing in-house control with outsourced control. Putting all the HR eggs in one providers basket might be a good risk if the provider can do a good job at all tasks. Exclusivity also enables the customer to make one provider responsible in case of service deficiency. Where there are multiple providers of interdependent and interfacing processes, this accountability benefit may get lost in a finger-pointing exercise between service providers.

 

The degree of exclusivity generally does not impact operating risk where all processes, from on-boarding to payroll to retirement, are at least as visible in outsourcing as under internal operations. This responds to control and audit management duties under Sarbanes-Oxley.

 

In an exclusive service, the customer has a higher cost of termination unless partial termination is permitted. In pricing for commodity-type services, granting one provider an exclusive right to perform all in-scope processes prevents the customer from shopping for a better price. The lock-in effect could result in higher average costs if the prices of commodity-type services are declining.

 

Both parties can benefit if all of the HRO providers customers agree to exclusivity, but only where the other provisions of the contract justify it. Deciding whether and how to grant exclusivity is similar to the philosophic prisoners dilemma, where cooperation among all can be a benefit but among only one or several can be a drawback.  

 

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