Contributors

The Flexibility Quotient

An in-house solution isn’t always as cost-effective as it first appears.
 
 
By Paul Davies
 
 
The typical, every day HRO buyer expects to move from a purchased-time to a purchased-service arrangement, and in doing so, is moving from a highly flexible to a fairly rigid delivery model. Making sure that the purchased service responds flexibly to client needs is perhaps the Holy Grail for some of these buyers.
 
 
In the in-house HR department, agreed working hours are purchased from the employee in the form of a salary, and the HR manager more or less decides how the hours are occupied. Therefore, short notice times, changes of priorities, new tasks, higher or lower work volume, new reports, changes to procedures, etc., are handled without much trouble. In theory, whole jobs can be changed with no impact on salary cost. So an employee might be administering payroll on Friday and start providing a training administration service on Monday—with no change control application, no contract renegotiation, and no change in cost.
 
 
The HRO model is usually founded upon an agreement of what work will be done. The supplier estimates the time and costs involved, and quotes a fixed price on the assumption that the price buys the agreed work. Actually, it’s not so much an assumption; it’s a contractual agreement to supply the exact specified work in return for the exact specified payment.
 
 
If the work ends up taking longer and costing the supplier more than estimated, this is no concern of the buyer; the price is fixed. Heaven help a supplier account manager who asks for a price increase because the work is more costly than expected. Well, the same applies to the services. If different work is required, the provider is entitled to renegotiate the deal; more pertinently, the provider may raise the price.
 
 
On the face of it, the in-house model wins hands down—to the point that a prospective buyer needs to ask how on earth it is possible to get the same level of flexibility from an HRO arrangement.
 
 
Of course, in the first instance, omni-flexible employees have too often been more of a dream than the reality. Certainly, in the past, particularly in European and unionized environments, employees have expected to be paid extra for using a keyboard instead of a pencil, or be promoted for changing the desk that they sit at. Any complete change of role requires training, any change affecting systems involves programming costs, extra hours must be paid in overtime, and so on. Moreover, the costs are often based on inflated salaries.
 
 
So, the point is that in-house flexibility isn’t always as cost-effective as it first appears. Nevertheless, in the 21st century, outside of unionized, European or industrial environments, it often is—which brings us back to the question of how you can get the same out of suppliers.
 
 
Without doubt, provider staff are as flexible as it is possible for staff to be. The only restriction will be the boundaries created by the provider to keep costs and quality under control. Such boundaries include the deliberate division of labor, strict adherence to procedures, and the commoditizing of knowledge. It also includes the experience and training of staff, and the latitude given to them to apply their experience.
 
 
Potential buyers and providers need to talk openly about these issues and the price, quality, and SLA implications. Buyers who want flexibility can’t afford to go along with a black box, service-commodity solution. They must design the solution alongside the provider, understanding the various cost levers in the contract. At the same time, the requirement for flexibility must be consistent throughout the sourcing process to ensure that the playing field is level.
 
 
A cost-plus pricing model should not be ruled out in appropriate circumstances, but it should not be first choice. With the right level of trust and preparation, fixed price contracts can cater for flexibility. Typically, a band of volume variation or new geographic scope additions are the easiest to accommodate, and, of course, a statement of work should recognize flexible service. Practical matters such as the suspension of commercial penalties during change periods might be considered along with the client’s role in assisting change and providing adequate notice.
 
 
Ultimately, however, thought has to be given to whether price will change. This requires a change control policy, open book accounting, labor reports, and audit. The existence of a joint continuous improvement activity can also inform the process. Last, in case of disagreement, escalation or even arbitration should be prescribed.
 
 
However, whatever preparations are made, success will come down to clear communication, agreed expectations, reasonableness, and trust, just as with any commercial arrangement.  

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