BenefitsEmployee Engagement

Keep the Honeymoon Going

Surveys show mixed results when it comes to deal satisfaction in HRO. Here are some findings from Towers Perrin and suggestions of how to keep everyone happy.

by Peggy Cope

The outsourcing honeymoon, in terms of deal satisfaction, is over—at least according to the findings of the “2006/2007 Towers Perrin HR Outsourcing Effectiveness Survey” on the state of outsourcing and HR transformation. As in any marriage that’s made it past the first couple of years, buyers and providers of HRO are simply expecting more from the relationship as the market achieves maturity. And the growing pains are turning up insome of the newer additions to outsourcing relationships.

The annual survey, now in its third year, examined the experiences of 38 of the 70 Fortune 1000 companies in the midst of large-scale HRO deals—defined in the study as including more than six processes outsourced to the same vendor. And the picture in 2006 is one of mild to moderate frustration.
The images emerging from this research show that HR business partners and outsourcers are increasingly frustrated with deals that haven’t produced desirable outcomes, according to Glenn Nevill, a Dallas-based principal of Towers Perrin. Some key results include:

  • Buyers increasingly focus on “getting it right” and are less tolerant of poor quality than they used to be;
  • HR departments are not realizing the cost and time savings they seek from outsourcing major HR functions;
  • In an outsourcing world that’s all about quality, companies can make key interventions to help ensure satisfaction before the deal, when it’s signed, in mid-process, and beyond; and
  • As experience levels rise, expectations are changing among buyers and sellers.

“We really are seeing a lot of variation between satisfaction and dissatisfaction, and it’s not necessarily related to what point they are at in the deal process or how much they outsourced,” said Nevill. “What that tells us is that it’s becoming a high priority to define quality as quickly as possible. Users are less tolerant of poor performance or of correcting ongoing issues for very long.”

According to the study, organizations outsourcing major HR functions view quality delivery as a priority—and in many cases they’re not getting it. Very few
suppliers deliver consistent quality. Among the most telling results were:

  • Sixty-seven percent of those surveyed noted that the vendor’s ability to continuously improve service quality of contracted services has become more important since deal inception;
  • Organizations that invest more in governance of the outsourcing arrangement tend to be more satisfied with their results;
  • Twenty-four percent spend five to six percent of annual outsourcing costs on governance;
  • Buyers’ satisfaction levels with “next-generation processes” such as staffing and training administration are considerably lower than their satisfaction with the delivery of first-generation processes;
  • Fifty-seven percent were “very” to “somewhat dissatisfied” with staffing/recruitment outsourced processes;
  • Thirty percent were “very” to “somewhat dissatisfied” with learning/training administration outsourced processes;
  • Satisfaction is low overall. Buyers report that they are spending more time than anticipated on managingthe HRO deal, and they report that the time they allocate in many areas of HR has not changed significantly post-outsourcing;
  • On a scale of 1 (strongly disagree) to 5 (strongly agree), those surveyed averaged a 4.06 when asked if they focused a significant amount of time on the HRO project, and averaged 3.97 when asked if they invested significant time and other resources on the change management efforts to support the HRO deal;
  • Most respondents believe client retained organizations will require new competencies to get the most value from the outsourced HR model; and
  • Fifty percent indicated they need to add new competencies to a “great” or “very great” extent to leverage the full value of the outsourced HR model.

Nevill acknowledged that among key findings was the fact that mature outsourced processes produced stable and high levels of satisfaction. “If you look at three-year trends of satisfaction levels such as benefits administration, payroll, defined contribution and such, those have stayed fairly even,” he said. The highest levels of dissatisfaction are seen in newer areas of outsourcing such as recruiting and training.

“When you look at those areas, a lot of the frustration is around the fact that it is immature as an offering,” he said. “But a lot is also around clients not understanding their current operations, plus the fact that a vendor may not be ready to take on everything within its scope. There’s still some rightsizing in those areas to be done to get to where a sourcing arrangement makes the most sense on both sides. Those newer areas of outsourcing will evolve to where there’s a good understanding as to what makes the most sense to outsource.”

But for now, the state of HRO is not quite where industry leaders had expected, and both buyers and sellers have learned many lessons during the past three years.

“We can’t put up with poor quality any longer,” Nevill said. “Buyers need to define what they mean by quality as fast as possible in the process. If it’s pre-deal, define it. If it’s post-deal, you have to redefine.”

Steps can be taken on both sides to improve quality. “From the buyers’ side, it’s about having a common set of objectives that vendors agree with and buy into. It’s about aligning business objectives, understanding how we define quality,” said Nevill. “If they can get on the same page in those areas, a lot of the problems that are being experienced will correct over time. When HR in an organization isn’t seeing the time and cost savings they expected, that’s a big gap. The good news is there are things they can do regardless of where they are in process.”

For example, Nevill pointed out, Towers Perrin recently worked with a client that had focused so much time and energy on deciding what to move to the outsourcer that it failed to focus on the retained organization and the skills and competencies it needed. As a result, the lines of responsibility weren’t being drawn well, and redundant work was being performed.

“We went in, identified the issues, defined who was going to do what, and how to interact with the vendor,” said Nevill. And while this example points only to the post-deal side of an outsourcing transaction, realignment can occur at any point.

Towers Perrin highlighted interventions and processes organizations can implement to achieve the value buyers seek. Among them are:

  • Organizations need to consistently focus on the role of the retained HR function and the skills and competencies of the people within it;
  • There is value in completing either some or a significant amount of HR transformation (foundational) work prior to outsourcing. (That said, there is a concept of diminishing returns at the mid-point, according to Towers Perrin.);
  • In terms of the work an organization does prior to outsourcing, HRO can take it to a new level of effectiveness in how HR spends its time;
  • Before signing the contract, know your own situation in terms of current quality levels, volume, and the level of transaction quality fundamental to your organization;
  • Build quality into the contract through improvement clauses and metrics. Do not give quality a backseat to financial measures; and
  • Develop and execute a quality plan in stages; tackle critical areas first and move forward incrementally. Consider a quality council as part of governance to ensure the quality process is followed.

Towers Perrin advises its clients to understand their business operations thoroughly. “If you outsource a certain function such as recruiting or payroll or whatever, know how you operate today, what the key drivers are, what are the customers’ expectations, the costs, and the historic service levels,” Nevill advised. “Understand the business environment very well before sourcing someone else to do it. Get a clear understanding of what’s happening and what the expectations are, so that when you start to transition, you know what you are transitioning over, and you have a better expectation set based on how you operate today.”

Just what do the frustrations add up to over the long haul for the marriage between buyers and suppliers? Most likely, as companies learn to manage the more recent additions to the outsourcing domain, difficulties will sort themselves out, just as a married couple determines who will wash the dishes and whether it’s better to squeeze the toothpaste from the bottom or the middle.

There’s no doubt that HRO can add significant value in terms of cost and time savings to an organization. Although buyers are less than perfectly happy with the quality they have seen so far, the industry has reached a point where it can identify and act on many opportunities for improvement. The immediate future of outsourcing is about making minor modifications and defining expectations to achieve professionally distant, but transparent, relationships. Those will be the key elements of success. Outsourcing might be a marriage of convenience, but it can still be a great partnership.

Tags: Benefits, Engaged Workforce, HRO Today Global

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