Seeking Sage HRO Advice

 When buyers are confronted with tough questions and need the counsel of experienced experts, the industry’s sourcing advisors help light the way.
 
By Andy Teng
 
If industry maturation were a journey rather than an endpoint, you might think of HRO sourcing advisors as the map (or the GPS, in today’s vernacular) guiding buyers and providers along the way. As trusted confidant to buyers and sometimes providers, these consultants have played an instrumental role in getting deals made more quickly, pointing stakeholders toward common goals, and refereeing disputes when relationships go south. Like high-price marriage counselors, they keep HR organizations and their HRO partners talking and out of divorce court.
 
But in these austere times, when cost savings are the driving factor behind HR’s decision to outsource, can organizations justify the added costs of employing advisors as part of their programs? With many companies increasingly leveraging their procurement departments for help in making decisions, are sourcing advisors really necessary? And considering that some first-generation, multi-process enterprise deals that have executed badly were advised by sourcing advisors, do they really provide valuable insight into deal making or are they simply being used as a scapegoat should a deal fail?
 
To be sure, many HRO contracts have been executed successfully without the guidance of sourcing advisors; others have been unmitigated failures. Similarly, some buyers lament not employing these firms sooner in their programs, which could have alleviated them from protracted implementations and service delivery letdowns. Even those who are pleased with their outsourcing engagements say they might have received more favorable terms had they leveraged advisors’ knowledge of pricing, service level agreements, remediation, and others. So should HRO practitioners—whether they outsource a single service or full-service engagements—invest in sourcing advisory services as they go to market? According to industry observers, the answer varies.
 
Why Advisory Services?
For those who are uninitiated with the advisory world, the obvious question when considering a firm is: What can it do for me? HRO advisors and some clients interviewed by HRO Today say they offer a gamut of services designed to help employers better understand the outsourcing process. From comprehensive program design and implementation to discrete, knowledge support, their solutions are aimed at large- and mid-market HR organizations in need of domain expertise. Although few single-process deals have traditionally involved advisors, more of these are starting to include advisory involvement—an indication that even when total contract values are relatively small, some buyers feel more comfortable with their decisions when supported by a consultant.
 
“We don’t use advisors for everything. We look for expertise on what’s happening in the marketplace. What are the trends, and what are other companies doing? How do they manage the process?” recalled Stephen Cerrone, executive vice president of global HR and communications at baked goods giant Sara Lee in Chicago, which split administration of its benefits to three vendors with the help of an advisor. “In this case, we had never done an RFP with this set of processes.”
 
Cerrone hired advisory firm TPI when his company decided to realign its benefits administration. After vetting a number of providers including its original vendor, the company concluded that an integrated total benefits outsourcing (TBO) solution would not have produced the type of savings and service excellence it sought. Instead, it now employs three separate administration firms instead of one and also expanded the scope of its program. So even though Cerrone’s decision ran counter to the broader outsourcing trend—many buyers are bundling their benefits services under one vendor when outsourcing—Sara Lee has been able to reduce costs and gain better service.
 
“If we had managed it internally, we would have stayed status quo [with the incumbent provider]. Having TPI helped us over the edge in making a radical change,” he said.
What TPI and others consultants bring to the table first and foremost is in-depth knowledge of relevant vendors in the industry. Partnership is a shopworn catchphrase in the HRO industry, but choosing the wrong provider that fails to behave like a partner is easily the biggest mistake any buyer can make in its outsourcing program. Ending up with a vendor that lacks domain expertise and the necessary infrastructure or is simply a cultural mismatch can make the relationship feel drawn out and adversarial, so ensuring a good fit is paramount in any contract.
 
Lowell Williams, executive director of global HR services at advisory firm EquaTerra, noted that when HR organizations lack comprehensive market knowledge, they often invite a few wrong vendors to participate in the selection process. As a result, some request for proposals (RFPs) often contain scope of work that doesn’t exactly meet the client’s needs; rather, it might contain services that bring the most profits to the vendor. A competent advisor, he noted, should be well aware of the appropriate vendors and make suggestions accordingly.
 
When chemical products giant DuPont signed its landmark $1.1 billion contract with Convergys in 2005, it had already engaged two sourcing advisory firms to help shape the deal. Ernie Lareau, director of shared services at the global company and the chairman of the HRO Association, said he felt it was critical that DuPont had the insights of the advisory community. Because of the size of the deal and complexity, the company needed validation of market trends and practices as well as the advisors’ knowledge of vendors. Although today he is much more educated about HRO, Lareau said he still values the advisors.
 
“I would always go with an advisor because I don’t believe the buying community has the breadth of knowledge these guys have,” he said.
 
While most enterprise, multi-process HRO outsourcers now understand their core competencies following years of exploration during the industry’s early days, emerging domains such as recruitment process outsourcing continue to draw new entrants into the sector—many of whom are seeking marquis clients on which they hope to build new business. Buyers unfamiliar with the marketplace may end up selecting an inexperienced provider without the counsel of an advisor.
 
But sourcing is just one of many facets that advisors offer to HR organizations. Companies that have outsourced in the past or have staff members with prior experience probably are better equipped to take on future engagements, even if those are broader in scope. However, organizations lacking experience can easily stray from their intended goals, or at least fail to clearly express them in the statement of work. Even before they start the process of choosing the right provider, buyers need to clearly document their desired scope of work and communicate to potential suitors. This is the foundation upon which the contract is built, and if ambiguities are not addressed within the contract, disputes are bound to occur.
 
Another reason for engaging sourcing advisors is their access to market data. Firms such as TPI and EquaTerra conduct regular studies on various HRO domains as well as on multi-process enterprise deals. As a result, over the years they’ve compiled critical industry-wide information on best practices, pricing, service levels, and more. They’ve also been able to offer insight from multiple perspectives because advisors at these firms have worked as HR leaders, provider executives, and industry analysts.
 
A recent incentive leading buyers to seek out advisory service is vendor pull-back from the marketplace. During the past three years, providers, especially big-box, multi-process ones, have grown selective of engagements they take on. This is the result of money-losing deals they took on during the industry’s early, formative years. Having been burned badly on some of these deals and having lost millions of dollars as a result, many vendors no longer leap at invitations to participate in requests for proposals—which can cost vendors significant money and time. Some providers say they take prospects more seriously if they are utilizing advisors firms—an indication that potential clients are beyond simple exploration of concept and have committed resources.
 
Worth the Price?
There are myriad reasons for using a sourcing consultant on an HRO deal, but with high-price fees, is the value they bring to any engagement worth the cost? Criticism of the sourcing community for delaying outsourcing contracts simply to run up billable hours has been raised from time to time. So why wouldn’t prospective buyers view the sourcing community with a skeptical eye?
 
John Haworth, a consulting principal of the global sourcing operations at law firm Pillsbury Winthrop Shaw Pittman, conceded that advisory firms do charge high rates but said they are justified because the fees return many fold in value to clients. He added that just like any other business, there are honest practices and shady counterparts. Clients should perform the same level of due diligence on an advisor as they would with a provider.
 
“Our hourly rates are high, but we don’t want to bill a single minute that we’re not adding value,” he said. “Running up the hours is absolutely unconscionable. That will turn around and bite you in the end because you will get a reputation.”
 
Haworth also refuted the notion that engaging a sourcing advisor is a big expenditure, noting that there are various ways to best leverage the services that he and competitors offer. Often, his firm is called on for only a few hours of advice; these typically revolve around specific questions or issues. Even when a company is engaging in outsourcing for the first time, it doesn’t necessarily need close hand holding from the advisory community. Firms such as Pillsbury Winthrop have developed kits that provide best practices but don’t require many hours from its advisors. Similarly, EquaTerra offers a governance software called EquaSiis that allows buyers to set up their own governance programs with little assistance.
 
Value, of course, is in the eye of the beholder, and what sourcing advisors bring to any outsourcing deal will vary according to the organization. DuPont’s Lareau likened the use of advisors to those of providers; there needs to be adequate governance, and buyers can’t simply turn over all of their responsibilities to an outside firm; they need to use advisors accordingly—in a consultative role.
 
With the industry much more knowledgeable about HRO best practices, is there less of a need for sourcing services? That question can be best answered by considering another sector and its use of advisors. Decades after IT began outsourcing services, the use of external advisory firms remains prolific around the world—for the same reasons that HR leaders engage them: for market knowledge, strategic program development, and process excellence. So it seems clear that while there will continue to be debate over the necessity of advisory services, the industry will likely continue to turn to them.