Employee EngagementEnabling TechnologyPayroll & Compensation

Robust Governance a Key To Outsourcing Success

The work is only half done post implementation. Now the retained organization must coordinate internal stakeholders to ensure customer satisfaction.
by Cynthia DeFidelto
When done optimally, HRO can be a critical component of HR transformation—the road out of the “administrivia” of overseeing day-to-day operations and into providing managers with more time to focus their attention on higher-impact strategic issues. But HRO is just one stop along the way. Companies are finding that they cannot transform their HR function simply by taking work out of the organization and passing it on to someone else. Transforming HR requires a variety of integrated initiatives, involving people, process, structural, technology, and governance changes—all supported by well-designed change management processes and all focused on the retained HR organization and the “customers” of HR.

In this and successive articles, we’ll review the first 10 years of large corporate HRO, with an emphasis on what it means to the retained HR organization. Armed with a decade’s worth of firsthand experience from some of the industry’s early “pioneers,” we’ll examine best practices and lessons learned along the way and discuss recent research findings that are causing companies to change the way they’re likely to approach not just the next generation of outsourcing arrangements but the HR function overall.

Satisfaction Levels Lag

Historically, companies’ overall satisfaction with HRO deals tends to be high during the earliest phases of their deal, during what we have come to refer to as the “honeymoon period.” The prospect of near-term cost reductions, standardized processes, and access to the latest and greatest technology—the high profile, attention-grabbing goals of outsourcing—result in inflated client expectations.

But satisfaction levels start to decline during implementation, as the honeymoon phase gives way to the practical realities of making the deal work and then dip sharply again during years one and two as companies work to achieve organization-wide acceptance of the new business model, and as clients and the vendors together struggle to smooth out the bumpy spots in their relationship that inevitably affect every arrangement (Figure 1).
 Satisfaction Lags in Multiprocess HRO
HRO satisfaction patterns 2004, 2006, and 2008 would seem to indicate that the same types of dissatisfaction experienced by earlier outsourcers still persist. Clearly, change is needed. And here’s why.

HRO is a Seismic Culture Shift.
Whether you are a small company using the latest advances in employee self-service technology to empower your employees and managers or a Fortune 1000 company outsourcing several dozen HR services, HRO represents a major shift for everyone in the organization. Expect it. Companies that don’t address it as such are far less successful than those that prepare internally for what everyone agrees is a seismic culture shift.

Invariably, the difference between success and disappointment in HRO is less about process improvement and technology upgrades than it is about people, culture, and governance. Yet, despite 10 years of firsthand client experience, companies continue to underestimate the extent of the transformation that’s going to hit their organization and the new internal and external change management programs—especially vendor management, internal communications, and HR employee restructuring and retraining—that will be needed. Instead, these critical issues remain relegated to the later stages of an outsourcing deal, while companies focus the bulk of their initial efforts and attention on establishing the business justification for outsourcing, deciding which services will be outsourced, identifying possible vendors, and negotiating the actual deal.

Focus on Governance to Enhance Arrangement.
We knew from some of our earliest HRO Buyers Group1 discussions and research that those companies that focus heavily on program governance and oversight are more satisfied with their outsourcing arrangement in general and with their client-vendor partnership in particular. But until now, we didn’t realize just how important early and thorough governance discussions and ground rules can be to the success of outsourcing arrangements.

Companies need to set reasonable expectations and guidelines upfront for all affected employees, including internal business clients and the retained HR organization, as well as with their vendor. Equally important, HR needs to establish realistic expectations among senior managers who will be tracking results against goals. For that reason, program governance needs to be addressed not at the tail end of deal negotiations, as it usually is, but at the front of the HRO process, and be embodied as part of the model. In fact, contrary to current HRO convention, we strongly suggest that until and unless governance issues can be resolved internally, and a good workable governance model can be established among those lines of business that will be impacted by the shift to HRO, organizations should not proceed with an HRO strategy.

The Failure of the Utility Model.
There are a number of outsourcing issues that fall under the umbrella category of “failure of the utility model.” At the top of the list is the lack of standards around HRO processes, the perpetuation of the one-to-one operating model for each client process. The promise of outsourcing has always hinged on the success of the “utility model,” the ability of the outsourcer to spread processing costs as well as the cost of service improvements—especially developing the latest technology—across multiple clients, thereby reducing unit costs. But the inability or unwillingness thus far of companies and their respective lines of business to agree on common standards has kept vendors from achieving service improvements and cost savings, much to the detriment of clients and vendors alike.

A lot of the problem has its roots in the organizational and cultural changes that take place within a company as it transitions from insourced HR processes to an HRO business model. When companies outsource, they create the need to coordinate activities in new ways and create interdependencies that did not exist before. For example, before outsourcing, the various lines of business in mid-size and large organizations manage their HR needs “locally” themselves. In effect, they control and, in many cases, own the resources to make changes happen.

After outsourcing, the lines of business no longer operate under this “command-and-control” model. Instead, they face the prospect of having to go to the outsourcer, who normally avoids having multiple contacts and requests coming from numerous other businesses within the same organization. Thus, the vendor’s “single point of contact” change request process forces the retained organization to approve, prioritize, and coordinate all change requests going to the vendor. And this new piece of procedural governance represents both a major cultural and organizational change for the business leader. It also represents a change for how the retained HR function interacts with its business partners in the organization.

A “New Confederacy”
When HR introduces new outsourcing pro­cesses within the organization, it needs to

simultaneously replace the former command- and-control business model with an entirely new governance structure, one that can oversee and help manage new organizational alignments (Figure 2). Working together, the HR governing council and the lines of business governing council coordinate both the prioritization of HRO projects and day-to-day outsourcer contacts. That’s because HR by itself cannot adjudicate and prioritize the competing demands of multiple lines of business.

Businesses need their own separate governing council where they can deliberate the merits of their and other businesses’ requests for HR support, and where they are free to “horse trade” projects with their peers. For outsourcing to succeed, business leaders need to know that this council is a body that they can trust, where they know they’ll be fairly represented.

In this new confederacy, things are no longer done in isolation. Rather, business leaders are surrendering a certain degree of autonomy and authority to a larger body. When they want to get things done in the future, they’re going to have to make a case for those changes⎯ and compete with other lines of business looking to make their own changes. And at the end of the day, there’s a very good chance that some business units may not be able to proceed the way they had planned.

The key to the ultimate success of this operating model is to ensure that all of the impacted lines of business are aligned and in agreement—in advance of executing a contract agreement with an outsourcer—that they can work together to make this new confederacy and single point of outside contact work.

There is no one “best model” of governance strategy. It depends on the company, its strategic business goals, and the outsourcer selected. And governance needs to be flexible enough to keep pace with periodic changes in overall business and HR service delivery strategies.

If we’ve learned nothing else over the past 10 years of tracking HRO deals, it’s that the impact on the retained HR organization of dealing with this single player—the outsourcer—is much more significant than most companies realize. Senior HR executives need to understand this and then get various internal governance issues sorted out before embarking on an outsourcing arrangement. And if they are at all unsure they can accomplish this, they need to pause and seriously consider whether HR outsourcing is the best way for their organization to go.
1The HRO Buyers Group is an invitation-only group of organizations involved in large-scale HRO relationships. Its members meet to study outsourcing effectiveness, and informally advocate improvements across all aspects of HRO.

Cynthia DeFidelto is a principal in Towers Perrin’s HR Function Effectiveness practice. She leads HR transformation engagments for global organizations, and is the leader of Towers Perrin’s regular study of HR outsourcing effectiveness.

Tags: Employee Engagement, Enabling Technology, Payroll & Compensation

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