Rotterdam, the Netherlands and London aren’t far apart, but for two global companies with headquarters in these cities, their disparate approaches to HRO represent divergent philosophies. Whether you prefer best-of-breed or integrated service delivery, outsourcing has all the bases covered.
Managing the health and welfare benefits for pharmaceutical giant AstraZeneca’s 12,500 U.S.-based employees was made easier, less costly, and more efficient a few years ago when the processes were outsourced to three separate HRO service providers. While a decided improvement, the company recently integrated the processes and outsourced them to a single HRO provider.
Why the about face? Part of the decision was based on the acquisition of one of the service providers by another provider. “We subsequently saw a serious decline in service from this vendor,” explained George Murphy, executive director of compensation and benefits at London-based AstraZeneca PLC, maker of the purple Nexium pill to alleviate acid reflux. “We also were driving to get our costs down and increase efficiency. Employees who were retiring would walk in here and say, `Why do I have to call three different vendors?’ It got to be too much.”
AstraZeneca changed course and consolidated its service platform into one vendor to provide a spectrum of health and welfare processing services to its U.S. workers. The remainder of the company’s HR functions is serviced internally, although Murphy said were it to examine outsourcing recruitment or payroll, for instance, it would likely seek the best service provider in that arena.
A slightly different outsourcing decision was reached by Unilever. The manufacturer of consumer products with $70 billion in annual revenues recently finalized terms with Accenture to provide a broad range of HR processing services, from recruitment to payroll processing and performance management in approximately 100 countries. The landmark agreement fits squarely with the company’s “One Unilever” strategy.
Unilever and AstraZeneca exemplify companies who have taken different philosophies in their outsourcing approach. They face a difficult decision-making process in their efforts to leverage the cost and efficiency of HR outsourcing. And the process is hinged on one fundamental question: go with a best-of-breed solution for a particular set of functions or buy a comprehensive solution in one integrated package. Making this determination is a Solomon-like task.
“There are pros and cons inherent in each strategy that are critical to know fully in order to make the proper decision,” said Mark Hodges, chairman of EquaTerra Inc., a Houston-based global advisory firm assisting companies to make the right choice.
According to Hodges, there are 23 identifiable HR processes that can be serviced by third-party outsourcing providers. The task is to figure out if it is best to have different vendors service a couple here and there or rely on a single provider to take on the entire assignment, like Unilever and Accenture.
“One of the major challenges our clients have when outsourcing is does it make sense for them to give most or all those HR processes to one vendor or to multiple vendors,” said Hodges. “There are so many factors that go into the decision-making, including cost, service capabilities, accountability, technology, efficiency, governance, and on and on. We’ve advised some clients to go one way and others to go the other way. Picking the right way is imperative.”
With AstraZeneca, which employs some 55,000 around the world, its decision to go with best-of-breed in health and welfare actually jibes with the decision reached by Unilever to choose the integrated option across the range of HR functions.
“When I came here two years ago, one of the mandates was to analyze the experience of our segmented delivery model,” Murphy said, pointing out that the company decided to consolidate all benefits services with Mercer HR Services. “There were three service areas: defined contribution plans, defined benefit plans, and everything left in health and welfare. Each was outsourced to a vendor that focused on service in this area.”
Under Murphy, the benefits department examined the advantages of a best-of-breed delivery model. The significant service decline from the acquired vendor was a factor, as was the inefficiency of interacting with three different providers. “We decided to put all the H&W business up for bid to a single provider that would provide an integrated solution,” Murphy explains.
EquaTerra assisted the company through the RFP process. “They were invaluable, in the sense that they had tremendous market intelligence, knowing things like the pricing models and performance conditions to evaluate proposals and negotiate the best contract,” Murphy said. “They also played the role of intermediary. If a vendor did a bad job in their presentation, they’d say that wasn’t customary. They’d then go to that company and tell them they needed to get back on a plane and give it another try.”
At Unilever, the deal with Accenture covers the HR needs of its 200,000 employees. In determining the company’s HRO strategy, Reg Bull, senior vice president for HR transformation, did not exclude best-of-breed players. Instead, he sought RFPs from a wide range of vendors providing both comprehensive and more segmented outsourcing services.
“We looked for solutions in most corners of HR service delivery, asking for service improvements and something that wouldn’t break the bank,” he recalled.
“We wanted to improve service and cost, so we went to the market and asked a series of service providers to make a case why their solution was indeed best and whether or not it could be collated into our ERP environment.”
A goal in Unilever’s evaluative process was finding a vendor that would leverage its investment in PeopleSoft 8.7, its enterprise resource planning (ERP) technology platform, he explained.
“Reg evaluated best-in-class versus comprehensive vendors, looking at things like one vendor does this best and another does that best, but this one is Europe focused while that one is Asia-Pacific focused,” said Hodges, which also assisted Unilever in the decision-making process. “Ultimately, he concluded that it was better to go to one provider on a global basis.”
Bull also noted that EquaTerra was pivotal in determining its eventual course. “They played the caveat emptor role and were impartial,” he explained.
“They’d revisit the RFP and say ‘Are you sure this is what you want, and do you understand the implications of this financially.’ It was the basic ‘if’ and ‘what’ questions.
“They’d also counsel things like, ‘From a market point of view, other clients used that vendor or service and weren’t satisfied from a technical standpoint.’ They’re knowledge workers, and we bought their insight.”
Of course, many companies on their own can sift through the morass of factors going into the comprehensive versus best-of-breed decision, a fact Hodges acknowledges, with some caveats. “To do it, they’d have to have a culture of operational excellence like Six Sigma and have exercised their skills of evaluation before,” he said. “On the other hand, even these companies may seek the assistance of an advisory firm because of its knowledge of the vendor marketplace and pricing.”
Figuring Out What’s Right
There are definable benefits and drawbacks to both comprehensive and best-of-breed solutions that get the ball rolling as far as determining the appropriate strategy. “With best-of-breed, the obvious advantage is that you’re usually picking the vendor with the highest quality and expertise, whereas with a more broad-based solution few, if any, of the vendors will be No. 1 in all 10 or 15 areas,” Hodges said. “Another benefit with best-of-class is that it is easier to switch vendors.”
Best-of-class also allows internal process owners in a company to select the vendor they want to do business with, he added. “The vice president of training gets to outsource to the company that he or she feels will best provide service,” Hodges said. “This can be important for relationship reasons. In a comprehensive outsourcing environment, the training VP may feel forced to work with the second or third pick.”
While not typically the optimum provider of service in all categories, comprehensive HRO solutions cost less because of its ability to bundle together many services under one vendor. Also, the larger contract size will play a role during negotiations to entice lower pricing.
“Comprehensive solutions also offer a single point of accountability,” said Hodges. “Even if the vendor is using subcontractors who say a problem isn’t their fault, you go to the vendor and say ‘The buck stops with you.’ With best-of-breed, you may go to the benefits provider and they’ll say it’s the payroll provider’s fault when something goes awry or not according to plan.”
Another perceived advantage of the comprehensive option, Hodges commented, is that it typically can be rolled out globally to more countries than with best-of-class alternatives, which tends to be regional. “Usually, the vendor will have its whole business model designed to be U.S.-centric or U.K.-centric only,” he explained.
Other benefits include cheaper cost of governance, i.e., the internal expenses associated with managing one vendor is less than managing several vendors.
Additionally, the functional integration of various services provided is considered superior to tacking together a thicket of other solutions. “A single provider must ensure that payroll data feeds benefits, or a job promotion or employee retirement triggers succession planning, benefits, training, payroll, and so on,” Hodges said.
The Building Blocks
To assess the best HRO model for it, a company must have knowledge of its end-to-end, HR service-delivery costs. “The annual HR budget does not equal the end-to-end service delivery cost,” Hodges said. “There are always situations where HR functions are performed in field locations where business units are not involved that alter the equation. Look at temporary staffing—not all temp staffing contracts are in control of the HR department. It is a very time-consuming data collection effort to figure out your true costs but a necessary one.”
Why is an understanding of actual cost important? “Because if you think you’re only spending $50 million as opposed to actually spending more, it could drive you to the wrong HRO alternative,” Hodges pointed out. “If you think payroll costs $15 million when it really costs $20 million and a provider offers to take it off your hands for $10 million, when the numbers are crunched at the end of the year this vendor is going to say you undercounted and need more money.”
He added that a good rule of thumb is “that whatever your annual HR operating budget is, your true end-to-end HR service-delivery cost is twice the amount.”
Another factor in deciding comprehensive versus best-of-breed HRO is an understanding of actual versus perceived service levels. “Whether you have 20 business units or two, you need to measure how much you currently deliver internally in terms of, for example, payroll services,” Hodges said. “How else can you determine if you’re delivering too much or too little and if a third party will therefore deliver more?”
Volumetrics—gauging transaction volume—is the third building block in making the best HRO decision. “You need to know how many payroll checks are being written or how many people are being hired,” Hodges said. “You also need to get down to a detailed level of what the work is to decide to move it offshore, redesign it, or outsource it.”
Once a company knows its true HR costs, service levels, transactional volume, and a detailed scope of the work being done, it can measure these factors against the proposals offered by vendors.
The irony in the best-of-breed versus comprehensive delivery models is that both are excellent choices. Said Bull: “It’s interesting that we signed this comprehensive HR outsourcing contract with Accenture because in many ways I like to think we are best-of-breed in that each of the services provided to me suits exactly what we wanted.”
He advises an alternate term to describe what he means—fit for purpose. The point is well taken. It’s not the decision to choose comprehensive or best-of-breed that is important—it’s the fit.