Contributors

Harnessing the Horses

Deciding on who will manage software solutions and how it will be integrated.

by William B. Bierce

HR executives and their professional advisors face a choice between “buying” software licenses and buying managed services that include an integrated software solution. This article considers some scenarios and implications.

DEGREES OF INTERGRATION
In one scenario (license/in-house management), the enterprise customer might decide to license software and manage the solution in-house. One step beyond the home-grown, a manual process using a home-grown spreadsheet enables the enterprise to automate the processes, but it remains responsible for acquiring, maintaining, and upgrading the IT infrastructure and for training and providing administrative, real estate, and management support for the in-house HR specialists using the software. The license/in-house management model is typically adopted by large, mature organizations that want control for reasons such as privacy, security, close personnel relationships with employees, or inertia.     

In a second scenario (license/external management), management of third-party software is outsourced, but the license remains with the enterprise customer. The license/external management model shifts management to the service provider without shifting license ownership. Traditionally, this has generated “toll fees” by some software vendors, but prudent licensing management practices can avoid this risk.

In a third scenario (bundled third-party software/external management), the service provider bundles third-party software with its own management services. Under some contract structures, the enterprise has no software management risks and transfers the back-end relationship management and subcontracting risks and liabilities to the service provider. Under other contract structures, the external solutions provider has little or no control over the software developer, resulting in risks assumed by the enterprise customer or the service provider.

In a fourth scenario (integrated HRO), the provider bundles its own proprietary software with management solutions for the particular HR processes. This solution has the advantages of simplicity (one throat to choke) and alignment of the solutions provider’s interests with the software team. But the risk is that the solutions provider won’t be able to keep its software a best-of-breed. Some have concluded that integrated HRO needs appropriate tools to ensure ongoing technological evolution to keep pace with the marketplace.

RISK TO ENTERPRISE
Enterprises moving up the integration path to external management need to assess a number of software-related risks before selecting a model. Here are some considerations:

  • High-Tech vs. High-Touch. For processes easily automated, such as payroll, enrollment, and administration of certain benefits, an insourced license/internal management solution or an ASP-based web portal model for self-service offers controls, familiarity, and transaction flow. For high-touch services, either bundled third-party software/external management or integrated HRO solves the problems of volatility.
  • Transitioning between Sourcing Models. Enterprise customers need to preserve their unique configurations and any customization of third-party software when they move from an insourced to an outsourced model or between a bundled third-party software/external management model and an integrated HRO model.  
  • Lack of Privity. The enterprise customer relies on the solutions provider to be its advocate to the software developer. Such reliance might be well placed if the service provider has a strong relationship with the software developer.

Service providers need to develop a coherent go-to-market strategy in the bundled third-party software/ external management model. Without it, the service provider could chance material gaps in risks, liabilities, capital at risk, and erosion of customer relationship due to failings of the software provider.

Enterprise customers need to evaluate software and service offerings based on the risks, responsibilities, and costs allocated under different levels of integration. Due diligence in selecting a harnessed team of third-party software developers and a “solutions integrator” should include appropriate analysis of the historical and current relationship between the two, the exit, and transformation scenarios and alternatives to the proposed bundling. Service providers anticipating such due diligence will be ready to answer these hard questions.

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