BenefitsEngaged Workforce

A Meaningful Approach to Using HRO Benchmarking

Figuring out why you want to benchmark will provide a clearer direction on how to use the data.

by Debora Card

Bench·mark: defined in Webster’s dictionary as “something that serves as a standard by which others may be measured or judged.”

Benchmarking can be a confusing and often frustrating endeavor. Determining what metrics are useful for decision-making, how to measure these consistently, and where to find appropriate comparatives are a few of the challenges awaiting those who venture to use these tools. Equally important is understanding what can be done with the results.

This article helps establish realistic expectations for HRO benchmarking and discusses the types of measures that answer the questions most frequently asked by HRO buyers, the keys to ensuring that the resulting metrics are valid, and some guidance for using the results.

What to Expect

First of all, let’s clarify what HRO benchmarking is and is not. It is a data-based comparison or measurement of a given company’s HR administration services with those offered by the market. It is not an efficiency or quality review. In fact, it will tell you little or nothing about HR operations that are not administrative in nature. It will also not tell you how your overall HR efficiency compares with other internally administered companies or how big your HR department should be. However, it will tell you what your range of savings opportunity would be if you were to outsource and how your outsourced services compared with others. If HRO is the strategy you wish to evaluate, then this is exactly the information you need.

In our experience with HRO buyers at all stages of their outsourcing journey, the top questions are almost always the same:

  • Are our costs/fees competitive?
  • How do our service levels compare with others?
  • Are the terms and conditions in our contract consistent with the market?
  • How does the breadth and depth of services that we’ve outsourced compare with our peers?

HRO is complex, and so are the answers to these vital questions.

Once the right metrics have been established, the next question is often, “Where can I find this kind of data for companies like mine?”  Again, we need to remember that the HRO industry is still young and relatively small with only about 100 multi-process relationships. While the market for single processes such as benefits outsourcing is much broader and more established, similar challenges exist for ensuring that a valid comparison is made.
To judge whether a benchmark is qualified to provide you meaningful analysis, you should ask the following:

  • How many companies are represented in the database for the services we’re looking to benchmark? How many of these are of similar size to my company?
  • Do you have data specific to the geographies I’m looking to compare?
  • How much detail do you collect and maintain on the scope of services included for each process? How are variations normalized for comparison purposes?
  • What other information do you use to ensure an accurate comparison?

This should include things such as key transaction volumes, percent of automation, and other complexity indicators.

How to use the Answers

HRO benchmarking generates different types of value. For those investigating HRO as a potential strategy, benchmarking provides a view of potential costs and savings against your internal business case. For those in the midst of selecting or contracting with an HRO service provider, benchmarking provides market guidance around fees, service levels, and other terms and conditions.

Many companies choose to benchmark mid-contract to compare their existing contract with current market norms. A good HRO contract will provide multiple ways in which a client can use benchmarking results to initiate a market alignment discussion with its provider. Benchmarking is not intended to be a weapon for inflicting pain on the provider; rather it is a diagnostic to create a healthier partnership.

Finally, benchmarking 18 to 24 months in advance of contract expiration provides invaluable information to the client for defining its renewal or re-bid strategy. In this way, benchmarking can be used to reasonably model the potential outcome of “going to market” without the cost or effort.

HRO benchmarking is a useful tool for comparing your options for delivering HR administrative services, diagnosing the health of a current HRO relationship or modeling market options. However, the evolving nature of the HRO marketplace does not lend itself to precise results that can be automatically applied, so HRO buyers should expect to use this information as only one tool in their sourcing strategy tool box.

Tags: Benefits, Engaged Workforce

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