You wouldn’t want to drive in a major city without traffic lights, so why take on outsourcing without a robust governance model? Remember, dedicating the right resources to managing the contract can help minimize problems later on.
Imagine planning a city such as New York or Chicago without traffic lights. The resulting disarray is what you might get if you signed a global, comprehensive HRO deal without first considering governance. In either instance, you can expect lots of confusion, dissatisfaction, and contention.
While no city planner would draw up a master plan without considering traffic controls, some HRO buyers still fail to adequately address governance issues, which according to sourcing advisory firm TPI are responsible for 80 percent of contract failures. For a host of reasons, many HR organizations that outsource end-to-end services as well as point solutions only embrace governance as an afterthought, after they’ve negotiated pricing, come to agreement on service levels, and carved out contract scope. However, governance is what ensures both parties stick to these accords, and it’s the central process that helps buyers and providers see eye to eye. For some HR organizations, governance only becomes visible after a service problem arises.
“The average buyer still struggles to perform outsourcing governance well. There are several contributing factors,” said Stan Lepeak, managing director of research at sourcing advisory firm EquaTerra.
According to Lepeak, governance is not a skill that’s common among HR professionals, even in senior leaders of the department. That’s because until HR buyers began taking today’s extensive, formalized approach to outsourcing, the managing of vendors was really handled in an informal way. Even when there were problems in the pre-HRO days, they tended to be isolated and did not widely affect HR services and, therefore, did not require more regimented attention.
He noted that because many organizations try to use retained personnel—whether they are qualified or not—to take charge of governance for the HRO contract, several problems can occur. First of all, many HR departments don’t charge a specific staff member with overseeing governance; in many cases, an ad hoc committee whose members may have other full-time responsibilities now have additional chores to tend to. This approach is fraught with dangers because the staffers may be skilled at governance but stretched too thin to adequately maintain the program.
Moreover, HR leaders typically don’t assign their top performers to governance roles, Lepeak said. Placing this responsibility in the hands of lower-performing team members could create a competency gap in governance management. In other instances, HR professionals asked to oversee programs rather than focus on more strategic HR services—the intent of the outsourcing initiative to begin with—may balk and end up leaving the organization.
“The work they do may not be the most important because quite often they are around administrative services” such as service-level monitoring, invoice verification, and other chores, he noted.
An Overlooked Item
Unquestionably, governance is one of the areas that buyers tend to examine when service issues escalate, but should they be concerned when the provider is meeting expectations? Paul Kerre, the vice president of HR at International Paper, didn’t think he needed to be concerned with governance because the company enjoys excellent service from enterprise provider Hewitt through a 10-year deal. Having experienced very few major HRO problems, he thought his company was being well served by its governance program—until it hired a third-party consulting firm to examine the state of its outsourcing engagement.
“I’m very pleased with where we are today with the relationship and service, but there is always room for improvement,” he said. “We haven’t done a good job with governance, but we haven’t had any issues. That’s lulled us into this false sense of security. We engaged a third party and looked at the original terms and conditions. They told us: ‘You have some governance language, but you haven’t put a lot of rigor into governance.’”
Kerre, echoing the sentiments of a number of industry observers, said managing governance may be difficult in a troubled marriage, but it can be ignored when the outsourcing relationship is healthy. Despite having outsourced services since 2001, International Paper simply never needed to invest a lot into its HRO governance program because few issues ever came up. He noted that early on in the contract, senior HR leaders might have needed to resolve problems a few times a year. “Knock on wood, in the past eight months, none of us have gotten calls,” he added.
According to Shawn McCray, a partner at sourcing advisory firm TPI, buyers tend to make one of two mistakes in their programs: underestimate what’s required in monitoring the contract or over-allocate resources to the point of redundancy. As a general rule, companies should invest two to three percent of the contract cost to governance.
“For people who are just doing outsourcing for the first time, they go in one of two directions. They say, ‘The provider will do everything for us, and we don’t need any people,’ so they don’t invest enough in governance. Or they say, ‘This is scary, and I should keep all of the people I have and staff up even more.’ They end up doing the [outsourced] work or have too many people to manage,” he pointed out.
One complaint echoed by many HRO buyers is that they fail to realize the time or cost savings they thought they could achieve from outsourcing. It’s a chronic complaint heard throughout the industry—that buyers end up spending more time managing the relationship than they had envisioned. As a result, the strategic initiatives they had hoped to take on are shelved until the contract enters a steady state. McCray said many buyers simply are unable to strike a middle ground in which the organization remains watchful without being overly vigilant.
TPI also found many outsourcing companies unprepared for their governance duties. According to its Governance Benchmark database, findings included:
- 60 percent of staff assigned to the governance organization have no prior outsourcing experience;
- 40 percent of clients in the benchmark did not provide any initial training for the governance team assigned to manage the agreement; and
- Only 20 percent of clients feel like they provide enough ongoing training for their governance team.
What happens when organizations fail to be vigilant? The results can range from minor offenses to HR career-ending escalations. It’s all a matter of how far-reaching the service breakdowns are and how quickly buyers mitigate the fallout. Among first-generation HRO enterprise deals, especially those signed in the first half of this decade, buyers expressed a high level of dissatisfaction with their deals, in part because they failed to put an adequate governance model in place. As a result, they not only struggled with issues such as SLA credits but change management as well.
The data EquaTerra has gathered over the years showed that as much as 10 percent of the invoices submitted by an outsourcing provider could be inaccurate, and in most of those cases they favor—you guessed it—the vendor.
Moreover, a weak governance model can also exaggerate problems with the service providers, especially when issue resolution is poorly structured or documented. The results can be unnecessary sore feelings on both sides when some of the problems can be resolved before they spin out of control.
So how can buying organizations ensure they are spending the appropriate amount of resources on governance and that they engage in best practices?
McCray said TPI preaches the Three S’s of good governance: strategy, structure, and skills. Under strategy, buyers should consider what they want to govern.
With respect to structure, companies determine the process for monitoring, the decision makers in charge, and the tools used. Concerning skills, the retained organization must determine the roles its governance leaders will play and the skills they must have, whether that’s operational, financial, or otherwise.
“Governance is a habit. If you start out with a bad habit, it’s hard to turn that around. If you haven’t managed before and you start out with bad governance habits, you will tend to do the same things over,” he added.
Some companies look externally to help them build a robust governance model. In fact, firms such as TPI and EquaTerra have been instrumental in helping clients identify and patch gaps in their programs, although both Lepeak and McCray warned that buyers cannot outsource the responsibility of governance; rather, they can seek third-party support in their efforts. Ultimately, buyers are responsible themselves.
Still, third-party firms have increasingly raised awareness about governance. EquaTerra recommends 27 steps of governance. (See www.governanceworkplaceå.com.)
“It’s complicated, but it’s a set of definable activities. You can see how you can automate where possible because a huge amount of the governance team’s work is manual tasks,” Lepeak added.
Still, if HRO is a partnership, what responsibility do service providers bear in helping their customers do a better job of governance? Industry observers say where possible, providers need to offer clients benchmarking and performance data, which aids the automation of some governance work. Furthermore, if additional vendors are involved—and many deals are multi-sourced—they need to collaborate more closely to make the buyer happy. Beyond that, open communication will help sustain the relationship.
Although governance is still not top-of-mind for many companies today, the industry has grown more mature in recognizing its importance. When buyers in the past didn’t realize that their programs were inadequate until after problems began surfacing, these troubled relationships had the effect of a red light on the HRO industry’s growth. But as buyers and providers grow more sophisticated, the market is finally getting the green light to go full speed ahead.