Enabling TechnologyMulti-process HRSourcing

HRO Economics 101

Can HRO deliver real savings to your organization? Not without adjustments in expectations and practices. An effort to bring more standards into the game is afoot with some of the industry’s largest providers.

by Gianni Giacomelli

It is becoming increasingly apparent that the old “lift-and-shift” approach to HRO is a perilous game. While many people might intuitively understand that “your mess for less” is difficult for providers, few seem to have understood how to solve the problem.

One option is to let much of the HRO market die. This would certainly find its supporters, but it would also be disappointing for management as a science—and it is unlikely to kill HRO forever anyway. The HR director, CFO, and ultimately the board of directors need HR to become leaner and meaner. Outsourcing is just a means to get there.

When we assume that HR BPO is a useful management practice, then a good start toward solving its illnesses is to look at the business core of the problem—which is NOT how to negotiate BPO contracts. It is about being able to run excellent HR operations.

First, a very simple fact: a BPO relationship is not sustainable unless the provider makes, and the client saves, enough money. Yes, sustainability is about the cost structure of the provider’s operations, the cost of the customer’s retained organization, and the cost of governance. And, as shocking as it may sound, for a BPO provider to deliver a 20-percent savings to the customer, he must run the outsourced HR functions up to 50 percent cheaper than the customer.

Now, to cut the cost of a large organization’s HR in half—even only the administrative part of it—is not easy. Some estimates for payroll, for example, show that a provider must be able to “lift” from the efficiency (i.e., ratio of HR staff per 1,000 employees) of a 1,000-employee organization to that of an organization at least 10 times larger. And for organizations larger than that, to reach 50-percent savings is even more difficult as the efficiency evens out when the scale is already very large. In other words, the gains from scale between a 15,000-employee operation and a 20,000-employee operation are smaller than between 10,000- and 15,000- employee operations, as Fig. 1 illustrates.

This means that the provider must leverage economies of scale and process optimization ruthlessly to hit its targets—an approach that payroll giant ADP has taken from the start with its GlobalView platform. Economies of scale (i.e., doing more things with proportionally less people) come from things like pooling training and resources (service agents in Tier-1 call centers) so that there is no underutilization, leveraging purchasing power with HR vendors, and better asset (e.g., buildings) utilization.

In larger organizations, you typically need fewer Tier-1 clerks to respond to queries, compared with smaller ones, and the same is valid for higher-touch operations. Additionally, you can spread the cost of automation over a larger base, to drive the total cost down even further.

Process optimization (i.e., “doing things smarter” through automation of repetitive tasks, better use of self-services, centers of operational and IT excellence, and attracting better people) is pie-in-the-sky unless either the client is in really bad shape or the provider is able to reuse best practices from previous projects. Yes, it is unrealistic to expect that a provider can do things much better than the client unless either he spends a fortune in ad-hoc reengineering (which would sink the business case anyway) or replicates some of its pre-existing blueprint. This includes people, processes, and technology.

Can we send part of it to India and give it to staff who are half as expensive? Yes, but the savings only apply to the manpower that we actually offshore—which is typically only a minority portion of the total staff. For example, if we manage to offshore 25 percent of our HR workforce and cut that cost by about 50 percent, the impact on the total cost is less than 13 percent.

And can’t the provider compress those technology costs with good ol’ IT outsourcing methods? Yes, but over a typical 5- to 7-year contract, IT only
represents about 20 percent of the total cost of HR operations, and therefore even squeezing 30 percent out of it only gives you six percent of saving.

It’s something, but not enough. And possibly, this could mean cutting corners on the very assets that enable economies of scale and process optimization.

To summarize: unless the provider is allowed to fully use its experience and critical mass, the numbers do not add up. We have seen this movie before—in those internal shared-services projects that under-delivered. The catch is that few customers want providers to try and do what they did not manage to enforce internally.

There are sometimes good reasons to forgo the logic described above: the internal cost and pain of modifying some processes (e.g., compensation policies) is at times simply too big. No wonder in a recent EquaTerra survey, HR decision-makers of large U.S. and European companies indicated that the key to a successful BPO is “a good contract” and a “good provider.” Standardization of operations did not score very high, just like other operations-related items. This, however, indeed spells doom for HRO, unless clients, their advisors, providers, and software vendors do something about it. And while the incentives lacked in the past few years—some providers “drugged” the market with price points that did not reflect their cost structure—the winds have now changed.

Indeed, it is helpful to look at what the mature IT outsourcing market—and the hundreds of billions of dollars that clients spent on it—means to us. After all, IT is a process (from problem ticket handling to keeping hardware running to building applications) and follows some of the same logic as the rest of BPO.

What happened in this segment? ITO providers scaled up, many pushed standardization and process optimization relentlessly, and some offshored anything they could. Compared with HRO, ITO is in many respects an easier market where a lot happens behind the curtains (i.e., the end users are not so intimately touched), and the pace of change here is so fast that only the best IT organizations are able to follow with internal resources. This made CFOs more pushy, CIOs less reluctant, and clients bolder to take on hard decisions. Well, HRO is harder and requires even more discipline.

There are options, though, and we should leverage them. First, the discussions about standardization around best practices are still too black and white and can be improved. Not enough outsourcing advisors and their clients have hit the nail on the head and ranked the HR sub-functions (e.g., onboarding, statutory filing for payroll, etc.) based on their ability to be standardized.

This involves qualifying each service based on how much it costs today, how much it would gain from standardization, and how much pain would that standardization entail. The lower the pain to standardize, the larger the cost, the better the potential savings, the more these processes should be standardized, automated, and run in a replicable model by the provider.

The example above is a potentially gruesome analytical process that probes into the operations of BPO providers and customers. It should be brokered by internal and/or external consultants and requires the technology experts to be really knowledgeable and approachable on the business benefits of their toys. Today, the HRO industry is not sufficiently good at that, but identifying the shortcomings starts the healing.

There are other avenues: better identification and description of quality and risk improvement and better decision-making on technology.

• Quality and Risk. Many organizations can benefit from state-of-the-art HR processes and tools as long as they exactly match HR improvement objectives. Access to better and more timely information by managers and employees can certainly raise the profile of the HR functions.

Additionally, HRO is a good way of handling volume fluctuations and ensuring that sub-scale country staff can still operate safely. Many providers and advisors can learn—in response to these challenges—to better explain the impact of quality and risk to all client’s constituents, not only to the project team. Lacking this, a lot of client stakeholders are left dissatisfied with the cost—mainly proposition of many HRO projects. To them, a few thousands dollars saved may not be worth the pain.

• Technology Decisions. Most software vendors in the past did a poor job at clarifying the impact of technology choices on both the client and provider. This was a problem as it allowed clients to make mistakes that they later regretted. SAP indeed started on this path more than three years ago. To dispel doubts, having clients involved in better technology choices does not mean they are meddling in the process optimization and scale of the provider: it means that the clients understand the implications for them and for the provider, so that there are no surprises and the deal is more sustainable.

All of the above can be achieved, and the joint work of Accenture, ARINSO and SAP, in conjunction with outsourcing advisor EquaTerra, has led to a promising first step with the creation of the OpenDoorHRO knowledge base. However, let’s be frank: operational excellence is unfortunately not the forte of many HR organizations. The great ideas that many, very talented HR practitioners have are often not implemented in a non-anecdotal and cost-effective way. Being trapped in this operational deficiency is the best way to kill BPO.

While the content of this article reflects the view of the authors, we’d like to acknowledge the input from the providers participating in the BPO Powered by SAP program. In particular, we have been fortunate to have been involved in the standardization workshops that Accenture, ARINSO, and outsourcing advisor EquaTerra initiated, resulting in the OpenDoorHRO knowledge base

Gianni Giacomelli is director of global strategy and marketing for SAP’s BPO business unit.

Tags: Enabling Technology, Multi-process HR, Sourcing

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