Part 1 in a 3-part series on developing acceptable HRO standards.
Establishing operating standards for business processes is the foundation for a successful HR outsourcing industry. In HRO, buyers and suppliers are now coming to grips with the need to develop standard operating practices in their relationships. As HRO suppliers acquire their fourth or fifth client, they begin to think about how to scale operations and where to make investments to drive operating leverage.
This first of three articles about HRO standards addresses the historic parallel between industries before outsourcing, and why outsourcing, by its nature, tends to lead to the establishment of a set of acceptable operating standards for outsourced business models.
Out of necessity, HR developed as a support function within many companies. There was no compelling reason to drive operating standards across firms since they were based primarily on the internal needs and cultures of each company. But the environment is changing due to the availability of new business models and corresponding new options from a still-emerging supplier community.
There has been significant precedent from more mature outsourcing industry segments on this issue. In the early days of IT outsourcing, the world was full of custom-built tools and processes. As outsourcing took off, economic reality forced buyers to make decisions about which security system, which scheduling system, and which database system to utilize, along with restrictions surrounding what versions they would support. There is every indication the HRO industry will follow a similar path during the next two to four years.
Since the ERP system is often a focusing agent for process standardization, the buyers lack of appropriate technology to facilitate HRO is often the starting point in the design deliberationsdetermining where it is, relative to its needs. Accepting that processes are truly not all that different and recognizing that economics can help drive decisions about where to invest money are factors that drive standards. In the IT example above, a supplier would sell you anything you wanted, but it also would demand significant additional dollars for utilizing non-standard systems or processes. When executives are presented with hard-dollar alternatives, tough decisions emerge to identify what really needs to be unique.
Ultimately, this produces an environment that can lead to a set of standards between buyers and HRO suppliers that produces the following objectives:
Reduced costs (through optimal standardization)
Movement to acceptable practices that reduce both legal and regulatory risk
Reduced risk of collateral change, once the relationship passes the introductory phase
Leverage of future technology investments across a broader spectrum of the buyers industry
Improved service, both 24×7 and enhanced global delivery
Acceptance of a need for standards, coupled with an understanding of the buyers culture produces, by definition, a series of self-fulfilling acceptable practices, which establish an environment for HRO to flourish.
So what HR functional areas would benefit from better operating standards? As documented in the chart, we asked the top HRO executives at each of the leading suppliers the same question, and they were virtually unanimous in suggesting that regulatory and compliance were key opportunity areas. Another area, which they suggested would continue to be more company specific, was compensation, something many firms believe is a key differentiator and critical element in producing the right business results.
But like any journey, knowing where you are and where you want to be are two pieces of the puzzle. The roadmap to the desired destination is found with a discussion about different types of standards, which will be addressed in the next installment.