Understanding the technology risks you are taking when selecting an outsourcing supplier.
Today, successful HR executives are expected to be strategic contributors to their organizations. Overseeing the myriad of HR payroll and benefits transactions is no longer the road map to future promotions or a seat on the governing committee. HR executives are currently facing a perplexing decision on the technology front.
Since transactions remain the heart and soul of the HR function, HR technology is very important because it drives multiple leverage points. Given that many HR systems are outdated, unfixable, or just not capable of doing work the way Internet-savvy employees expect, HR executives are exploring alternative technology options. Many executives decide they dont want to make additional capital investments in HR technology systems and select to outsource.
Actually, deciding to outsource is the easy decision. Whats far more difficult is selecting the best supplier for the companys needs. At the moment, HR suppliers can be divided into three distinct arenas, each which employs a different model to reach the same end-point. We have found HR buyers understand the different platforms but are less clear about the underlying risks. A key ingredient in a successful outsourcing transaction is the HR buyers understanding of the risks and implications inherent in each option so that an informed decision can be made.
The accompanying chart delineates the three models and explains their strengths and potential risks. (See Figure 1)
The good news is there is no right or wrong answer. In order for a buyer to make an informed decision, they must first understand their own business requirements:
- What in the HRO function is truly unique, and what can be accomplished with emerging industry standards?
- Do you anticipate dramatic changes in the business or the way that HR supports the rest of the organization?
- What prior investments have been made in technologies and process improvements?
The second consideration in supplier selection is solution differentiation. Once a buyer can answer the basic questions above, they should begin to look at the supplier landscape, the supplier offerings, and how they differ from one another. Most of the supplier solutions available can be force-fitted to any situation but at what cost? What types of risk will your company assume? Understanding the risks of the supplier models better prepares your organization to make an educated decision surrounding a potential HRO supplier. Like any long-term relationship, the best fit will occur among parties that are both well educated and understand the dynamics that underlie each others business models.
The market continues to quickly evolve. Most suppliers have moved from an anything goes model during their early transactions, to an adoption of an industry-standard ERP platform. Today, most suppliers seem to be migrating towards creating their own proprietary technology platforms.
While, there is very sound logic for the movement to proprietary technologies–as suppliers look to build leverage and profitability into their business models–this movement is not without significant risk. Like a game of poker, there is little doubt that the stakes go up significantly when suppliers opt to build their own platform. In fact, the risk is so high, that it is reasonable to assume that a failure to execute by one of the suppliers could eventually lead to their exit from this industry segment.
Lastly, when selecting a supplier, it is always our recommendation that there be strong consideration for the cultural fit between the buyer and supplier. No matter how strong the buyer need and how effective the supplier technology, cultural incompatibility will ensure a less than optimal relationship for both parties.