BenefitsEmployee Engagement

Transformation or Transactional?

Try adopting the reverse RFP to strike a more appropriate HRO deal. Look to sourcing advisors as your guide in the decision-making process.

by Scott Golas

HR is at an interesting juncture. Like most corporate functions, it has come under intense scrutiny as organizations look for ways to cut costs and improve operational efficiencies.

Still, as businesses rely on more sophisticated computer systems and software to perform standard HR functions, the cost of HR administration has increased.

In addition to buying and maintaining these assets, organizations must employ highly skilled systems administrators. Don’t forget the expense of complying with regulations such as Sarbanes-Oxley and the Health Insurance Portability and Accountability Act (HIPAA).

But there is the alternative of HRO, and for enlightened organizations aware of different levels of engagement and positioned to take full advantage of each, this is an opportunity to leverage HR.

Transactional HRO involves the outsourcing of purely administrative duties, allowing the organization to focus on meeting business objectives.

Transformational HRO is designed to maximize productivity from workforce investments, dramatically increasing strategic and sustainable competitive advantage. Transformational HRO includes performance measurement and improvement services, hiring and training expertise, leadership, learning and HR best practices, and strategic consulting.

Executives will appreciate that while transactional HRO addresses only costs directly related to administrative tasks, transformational HRO can save an organization between 5 and 15 percent of overall workforce-related costs. These savings stem from a variety of sources such as decreased capital spending on technical systems and reduced payroll.

The numbers are impressive, but they are only the beginning. As many organizations are discovering, transformational HRO delivers strategic value by transforming HR departments from cost centers to corporate resources equipped to facilitate growth and increase shareholder value.

Therefore, while outsourcing can save significant HR costs, its real long-term advantage lies in improving workforce performance by developing the skills employees need to sell more products or service clients more efficiently, for instance. Because the HR function maintains and manages nearly all of an organization’s employee data, including job functions, expertise, backgrounds, skills, preferences, and compensation, it is best equipped to understand what drives employee productivity.

Though maximization is undoubtedly high-value to organizations, it remains difficult to justify on a purely financial basis. In contrast to hard-asset investments, money spent on HR is an expense and has an immediate impact on an organization’s bottom line.

The Financial Accounting Standards Board (FASB) and others are working to improve the accounting of human assets, and several leading companies currently report on human capital in their annual reports. The most strategic finance professionals are moving in a direction that will eventually support investments in the workforce and lead some ahead of competitors.

CFOs and other senior finance executives often expect managers to demonstrate measurable ROI for all major corporate initiatives, including outsourcing.

Because cost reduction is only one part the ROI equation—albeit a large part—it shouldn’t be the only measure. However, absent explicit accounting benefits, an organization pursuing transformational HRO may depend to some degree on whether its executives are in tune to its true, complete value.

Once the decision to explore the potential benefits of HRO has been made, the traditional means of evaluating HRO providers is the request for proposal (RFP).

Companies conduct an internal assessment to tightly define operational and transactional needs, describe these in an RFP, and then submit them to a large number of providers. Once a provider is chosen and due diligence is completed, contract negotiations begin.

However, beginning with an RFP automatically imposes limits on providers and restricts problem-solving capability. This predefinition can actually eliminate options that may best serve the customer.

A more effective process for non-commodity sourcing such as HRO is the reverse RFP. Here, organizations identify a much smaller subset of vendors than would typically be included in a mass RFP. The organization specifies the problem it is trying to solve rather than a predetermined solution and invites vendors to propose answers. The role of the sourcing advisor, central to an effective reverse RFP, is to proactively seek out opportunities within an organization to streamline business processes and optimize workforce value and then craft a proposal.

Tags: Benefits, Engaged Workforce, HRO Today Global

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