Know the market, be clear about your motives, and use third-party advisors strategically. The stronger you begin the relationship, the more satisfied you’ll be along the way.
As the HRO industry grows, there is now a fund of experience on what needs to happen to ensure a successful, long-term deal. However, those embarking on a potential deal are often faced with conflicting views on what they should do and how they should proceed. Building on my seven years in the HRO industry, here are six priorities that every organization should heed.
• Know what you want to bring to the market. Negotiation with the market starts the moment the market is engaged. Therefore, no organization should consider engaging the HRO market unless they have decided on which HR processes and sub-processes they wish to outsource, and have calculated their internal, third-party, and system/software costs. There has to be a justifiable “base” business case for HR outsourcing, which is couched not only in cost terms but also in service-quality uplifts and provides a comparison with the internal solution. Further, they need to recognize that there is a strong likelihood that the original plan will change as they learn what particular vendors can offer, but without the “cornerstone” of the base case, they will struggle to manage the engagement process.
• Never “throw things over the wall.” The base business case needs to recognize the impact of HRO on the retained HR organization because it must be transformed simultaneously. Failure to do this will result in sub-optimal performance, both in cost and quality terms. In some early deals, the temptation was to throw the basic transactional HR processes and activities “over the wall” and forget about them, ignoring that HR process delivery is an integrated system.
Unfortunately, throwing transactional HR processes over the wall will result in the maintenance of already sub-optimal processes and importantly, the creation of shadow processes and systems in the retained organization, which negate the cost savings and result in tension and dissatisfaction for both client and vendor.
• Understand the HRO market. Understanding the providers, their capabilities, strengths, and weaknesses can save significant time and effort in the HRO process. Key third-party evaluators all have a strong understanding of the market. Their insights, experience, and research capability allow clients to avoid errors and traps and help them circumvent a lengthy and tedious RFI process. Upfront clarity and agreement on vendor-selection criteria saves time, effort, and cost in the down-selection process.
• Understand how vendors operate. Vendors are in the HRO market to make money, a fact that some potential clients choose to ignore when pressuring vendors into unrealistic deals that eventually deteriorate. The objective must be to reach a deal that represents a “win-win” and where the vendor is able to deliver agreed service levels, build in continuous improvements, and still make a reasonable margin over the period of the contract. This seems obvious, yet many clients, sometimes abetted by third-party advisors (TPAs), seek to push the envelope to the extreme. Delivering a contract worth hundreds of millions of dollars over seven years or more is not, and never will be, a standard relationship.
• Build a relationship. Part of delivering a “win-win” relationship is to go beyond the left-brain issues of the business case to address the desired relationship between the client and vendor. Relationship building starts the moment a potential HRO client engages the market and is crucial to the ultimate success of the deal. Mutually beneficial relationship building does not preclude tough and difficult negotiations but requires an underlying willingness to understand bargaining positions of a joint commitment to the end result. Contracts in which one side feels it has been bullied into a deal don’t last.
• Use third-party advisors. Reference has already been made to the positive contribution that TPAs can make to a successful deal. In general, objective TPAs representing the client will deliver significant cost benefits, but the organization considering outsourcing should be clear about the TPA’s role and specific capabilities at particular phases of market engagement. Some advisors have upstream capability and can help with the overall HR transformation strategy and retained organization issues, whereas others have stronger capability in the deal-making phase.
The HR outsourcing process is like all processes, what goes wrong at the beginning creates a tidal surge of future problems. Therefore, clients should think very carefully about their approach and be clear about their motives for outsourcing. Minding these six priorities won’t guarantee a great deal but will help to overcome problems and issues experienced by others who have gone before them.