In building out greater functionality, HRO providers themselves may outsource application development to better serve end-user clients. Here’s an overview of how their interaction may affect the buyer.
by Alexandra Quintero-Arbelaez
It’s no secret that many organizations are struggling in this down economy, but what is the secret to staying afloat? How can organizations cut costs without cutting productivity or employee morale?
A growing number of employers are looking to HRO providers for help because outsourcing is a cost-effective way to transition internal resources from time-consuming tasks into activities that help businesses, especially in a difficult economic climate. Specifically, HR has proven to be one area that lends itself well to outsourcing with measurable results. In fact, technology research and advisory organization Gartner predicts that by 2010, the worldwide HRO market will grow by 8.9 percent.
Accompanying the economy’s decreasing health are clients’ growing needs. But who is providing the means to satisfy virtually all those demands? A number of HRO providers are looking to third-party software or content providers delivering under a Software as a Service (SaaS) model. Such applications include HRIS, payroll, and workforce management suites, while content and services may include skills assessments, background checks, online training, benefits enrollment, and voluntary insurance programs.
Realistically, no single HRO provider is expected to both deliver and develop these applications internally, so leveraging a SaaS vendor for a best-of-breed solution can be an effective alternative. To understand how such a partnership can affect buyers and providers, consider these three critical areas: business, content, and service.
The Business Level
Just as HRO provider-client relationships require teamwork, ongoing collaboration, and clearly defined business objectives, so do SaaS vendor partnerships. The first order of business for an HRO provider is to protect its organization and ensure the most profitable partnership possible at the business level. Who owns the client? Who owns the data? Who is collecting revenue? The answers to these questions will depend on the type of partnership entered into.
One type of partnership is the referral arrangement. This is essentially co-branding, marketing, and reselling a SaaS vendor’s application. In this scenario, once an end-user client begins utilizing a specific application, they’re effectively passed back to the SaaS vendor. Although partnership agreements vary, it’s likely that revenues would be tied directly from the end-user client to the SaaS vendor. Similarly, since support is typically linked to the organization collecting the fees, the SaaS vendor would provide technical support as well. While this partnership may require the least amount of resources upfront and to maintain, HRO providers capture a smaller portion of the revenue stream, and SaaS vendors maintain a direct relationship with the end-user client.
A licensing agreement, on the other hand, enables HRO providers to collect revenues at higher percentages and may offer more branding opportunities because of the possibility of a private label model, in which a specific SaaS solution is offered under the provider’s name as part of a bundled service.
Typically, with most licensing agreements in which the HRO provider pays the SaaS vendor for rights to access the application, the provider determines the pricing structure to sell to clients and, in turn, collects fees directly. Under this scenario, the application usage fee is typically significantly more than a referral arrangement.
Because the HRO provider collects the fees, it will likely obtain and handle most support issues as well. SaaS vendors commonly train HRO providers in the application being licensed so they can provide tier-one support to clients directly. This is not an absolute, however, because ultimately the two factors that determine which organization will deal with a particular issue are whether the issue is a technical one and the level of complexity.
Who Owns Data?
One of the more challenging hurdles when it comes to either arrangement that an HRO provider has with a SaaS vendor is data protection and ownership. The party responsible for safeguarding data may very well be a different party from the one that owns the data. In most cases, end-user clients own the data. The item in question is whether the provider and/or the SaaS vendor will have access to anonymized data. Anonymized data relates to the value of aggregated data without personal information being revealed, so the identity of the source is kept confidential.
Normally, data storage and protection are not left up to the end-user client. To minimize risk and ensure data is properly safeguarded, an HRO provider should ensure its SaaS vendor stores it in a SysTrust- and SAS-70 compliant environment. After assuring data safety, HRO providers should confirm what clients are going to be able to do with that data. It should be stored in such a way that it can be used by other external systems in an industry-accepted format.
As garnished information is used for various purposes, some of which are legal, it is necessary to find out what type of data—raw or calculated—is being stored. Raw data would be actual numbers as opposed to calculated, which has already been processed to some degree. If data is calculated, HRO providers should consider what complications might exist down the road in the event a change in SaaS vendors is required. For auditing purposes, some labor-specific information such as employee in-and-out punches are required to be stored as raw data; other data might not be under compliance restrictions.
Considering not only the importance of data security but also availability of an application and the underlying information being stored, HRO providers should keep in mind how well its SaaS vendor documents what’s required in provisioning servers and associated third-party software—commonly referred to as a technology stack. In most cases, having just source code alone isn’t enough to get an application up and running and re-establishing access to archived data. Updated versions of object code (a compiled version of source code) should be kept in escrow along with source code to help ensure an application can be easily ported to another data center in the event of discontinuation of service due to a natural disaster, the commercial failure of the SaaS vendor, or other potential problems.
After confirming data ownership, additional consideration needs to be given to limiting overall business risk and liability. Many emerging SaaS vendors have a great product or service offering but haven’t been in the market for long. Without having a well-established reputation on which HRO providers can base their partnering decision, they can at least position contract negotiations around business continuity as an alternative. HRO providers should request certain representations and warranties to be included in the referral or license agreement. Together, these contractual stipulations should address past, present, and future concerns and define further assurances the SaaS vendor must make regarding business continuity. Such “reps and warranties,” coupled with properly documented errors and omissions coverage (as well as general business liability insurance, etc.), should be spelled out and included as an exhibit to the agreement.
By simply making these requests, HRO providers can better assess the soundness of the SaaS vendor. Specific conveyances, such as the SaaS vendor never having been involved in litigation and doesn’t face any pending threats of litigation, can raise confidence levels. The same holds true regarding any insurance policies that may have been the subject of a dispute. Incorporating these items upfront can set the stage for a long and trouble-free partnership. Even in the event of an end-user client dispute, clients may be assured that proper due diligence was performed prior to the HRO provider engaging in the SaaS vendors’ services.
Application availability, as well as data security, should also be well documented. Depending on the partnership in place, the organization that assumes responsibility for accuracy of data will most likely also be responsible for ensuring that the application is available, undergoes regularly scheduled maintenance, and is subject to other housekeeping tasks. Regardless, both during active usage and after any transition away from a specific SaaS vendor, HRO providers must confirm access to historical data. This is essential for auditing purposes.
The Content Level
Most HRO providers look for growth by offering a wide range of the best, all-inclusive HR solutions at an attractive price. To do so, robust applications and a reliable technology platform are required. If those applications are coming from multiple SaaS vendors, they should be able to integrate and work together. Equally important as integration are the overall breadth and depth of the applications end-user clients are using and the experience they have while using them. Although the HR suite offered to buyers may be comprised of applications from multiple SaaS vendors, on the surface clients should experience them virtually as one.
Integration happens at the user interface (or presentation) layer. The applications integrate data and/or functionality through the use of mashups, whereby widgets (smaller subsets of data or functionality) are incorporated into a single screen. Rather than having multiple logins for multiple applications, HRO providers can offer a single login to access all applications based on authentication of user credentials. As long as the other applications are web-based and have an open architecture, and the technology vendors are willing to invest help, automation is readily achievable with a centralized web portal.
Transparency and portability of data also impact the degree of integration and ease at which applications can speak to one another. Because comprehensive HRO might not be appropriate for all clients, the HRO provider-SaaS vendor partnership must accommodate a mix environment of on-premise technology and outsourced software. This can be accomplished if the SaaS vendor sets tools in place to access data from existing on-premise applications. Many SaaS vendors refer to similar data exchange tools as middleware or appliances.
In addition to grabbing information, tools should exist to export data. HRO providers are responsible for confirming that data is stored in a way that can be recognized by other applications and whose field values will be possible to access or export. SaaS vendors should also supply multiple vehicles with which data can be communicated or exported. This will allow end-user clients to export data as well as an Excel, PDF, or CSV file and possibly HTML or XML if web services are preferred. These tools are all necessary for reporting purposes, offsite data storage, and application integration.
The tool should also include some type of alert mechanisms that will contribute to the accuracy of data exchange and ensure end-user clients and providers are getting the most out of application integration. More than simply confirming that this tool is in place, providers must confirm which data elements can be passed, how they are passed, and which exceptions can be flagged. Once this information is acquired, the HRO provider must decide how alerts are generated. For instance, flags can be raised for missing data, misformatted data, or an application or service that is not available.
Another aspect to consider at the content level is the challenge in delivering reliable and secure application performance in an isolated yet logically independent client interaction. Part of the solution is anonymizing data. Not only does this process protect sensitive client data, but it also offers an outlet to garnish valuable, standardized information.
An example could be a SaaS vendor providing workforce management solutions that easily integrate with payroll applications. If the headcount of end-user organizations consuming that software is large and dispersed throughout North America, the SaaS vendor can gather data to draw a correlation to salaries per geographic region and pay grade. Because the data is anonymized, acquiring salary and attendance information can be achieved without personal information such as individual names, social security numbers, addresses, etc. Data can then be published and distributed without concern for privacy issues, increasing the value of a true HRIS system—the core of most successful HRO providers.
The Service Level
We’ve touched upon the business aspects of a SaaS vendor-HRO provider partnership and its impact when it comes to integration; the final area to consider remains the service level. Certain embedded tools exist that afford accuracy and thorough tracking of support issues. At the service level, it’s the tools SaaS vendors offer that allow for timely responses for both HRO providers and their clients.
As HRO providers’ suite of product offerings and client base expand, customer support becomes increasingly more difficult. The major challenge in providing support is the ability to manage and prioritize calls and/or emails. Call volume is ever changing and difficult to predict and can therefore be the major factor holding an organization back. A common solution to this problem is to implement back-office tools such as issue tracking or a feedback ticketing system. Not only will such a system help reduce calls and streamline support, the information and communication strings can help establish a self-help knowledge base over time with proper culling of data. Because most feedback ticketing systems are available at the time an issue surfaces and are accessible from within the application itself rather than through an external system, there is a higher probability of receiving feedback. Through the system, HRO providers would be better equipped to assign tickets for completion while tracking the status of inquiries through resolution.
For an HRO provider considering partnering with a SaaS vendor, it should take a closer look at the three levels of a business partnership and ask whether such an agreement will ultimately help accomplish its business goals as well as better serve the end-user client. Whereas organizations seek to invest in areas that help produce more out of existing resources during good times, they’re now turning to their HRO providers for alternative ways to produce a similar amount of output with fewer resources. In today’s economic climate in which HR professionals are being pushed to allocate resources toward strategic initiatives, numerous HR duties are being outsourced. For HRO providers equipped to capitalize on this trend, a wealth of opportunity exists.
