Was HRO a good choice over insourcing? Will some buyers eventually achieve the strategic goals they first envisioned? These and many more questions remain unanswered for numerous organizations.
Mike Marinaro is champing at the bit to provide more strategic value to C-level decision-makers at the Chubb Group of Insurance Companies, something he had expected would be in place by now, considering that the Warren, NJ-based insurer began outsourcing HR processes to service provider ACS in January 2005. While the senior vice president of HR and head of the insurer’s HR governance effort remains bullish on HRO, he’s chagrined that the transition has taken longer than both parties expected. “It’s slowed down our ability to focus on strategy,” says Marinaro.
Peter Au-Yang knows exactly what Marinaro is saying. The senior vice president of HR at Mount Laurel, NJ-based PHH Mortgage , a mortgage outsourcing firm, also has been stymied by an HRO implementation that “hasn’t been as smooth as everyone wanted,” he said. “In the first year, we spent a tremendous amount of time and energy making sure the relationship (with provider Ceridian) was stable. Unfortunately, translating a set of requirements written on a piece of paper to getting a paycheck processed flawlessly was more difficult than we expected. It will probably take us a bit more time before there’s smooth sailing.”
Welcome to the mismatched HRO world of client expectations and provider delivery. While HRO offers proven benefits—including cost savings, scalability, avoidance of large capital expenditures on technology and shared services centers, and a variable cost model— making the transition from internal HR to an outsourced model is proving tough for many companies. According to data compiled by sourcing advisory firm TPI, most outsourcing agreements undergo a significant restructuring of the scope of the engagement.
“Roughly 70 to 80 percent of outsourcing agreements will require some restructuring during their terms,” says Scott Gildner, TPI managing partner of business transformation solutions at TPI’s Scottsdale, AZ office. “HRO is an emerging industry. While providers had good intentions, many weren’t able to build capabilities as quickly as their commitments required.”
TPI’s study further indicated that 5 to 10 percent of companies that outsource do a turnabout and make the decision to insource the functions, while 12 percent terminate their contracts with providers.
Statistics compiled by Houston-based sourcing advisory firm EquaTerra provide additional evidence of a misalignment. The firm’s annual pulse survey of HR executives indicates that fewer than 35 percent expect to renew their contracts with current HRO providers, with 10 percent looking to terminate the engagements and bring the work back in-house.
“There is some disappointment relative to buyers getting the innovation and transformation they’d expected from their outsourcing efforts,” acknowledged Stan Lepeak, EquaTerra’s managing director of research. “While companies indicated they had modest success in reducing costs, it’s a mixed bag as far as other expectations….HRO is an immature market.”
Neither Chubb nor PHH Mortgage has any reservations about the decision to outsource HR. Nor do most other companies that have outsourced, even though their best-laid plans, in some cases, have laid an egg.
“The industry is struggling,” Gildner says. “We’re going through this period in the marketplace where we’ve just completed the phase of exuberance represented by the early adopters and are now in a phase of mismatched expectations. On the bright side, we’re still seeing strong demand for HRO; it’s just not the hockey stick of accelerating demand we’d expected.”
The experience of Au-Yang and Marinaro indicates that companies mulling HRO need to take a step back from the hoopla that greeted the strategy when it first surfaced less than a decade ago. Back then, many providers relied on their first clients to man their staff and provide the technology platform upon which to erect their own systems. The HRO transition went smoothly for the most part because the changeover was minimal. For the next generation of HRO adopters and those jumping on the bandwagon today, change management has become critical.
“We’ve learned that clients must invest more time and attention to internal change management, preparing the organization for the ramifications of this delivery model and the challenge of working in different ways,” Gildner asserted.
PHH Mortgage had inklings that the switchover to HRO was not going to be as simple as a flip of a switch. The company had been wholly owned by Cendant Corporation, was divested, and then given three months to find an HRO vendor. It then scrambled with provider Ceridian to roll out a bunch of HR services under very tight deadlines. With no help from a sourcing advisor or any prior outsourcing experience, the changeover for HR and the company’s 7,500 employees a year and a half ago was nerve-wracking and stomach-churning.
Today, stomachs and nerves have settled, but the company is still struggling to get up to speed on its HRO implementation. PHH Mortgage is outsourcing a variety of processes to Ceridian, among them payroll, tax filing, benefits administration, applicant tracking, call center, and employee assistance program.
“One of the key things we’ve learned is that while we can outsource the processes, technology and, in some cases, the people, we cannot outsource the fiduciary duties of HR,” Au-Yang said. “In payroll, for example, even though we depend on the vendor to tie into our general ledger and accounting system flawlessly, the ultimate responsibility resides internally. The worrying and caring we have for our employees cannot be outsourced, even though we think of the vendor as our partner. We’re still learning a lot about each other.”
While PHH Mortgage has achieved the cost savings it anticipated when it signed the contract with Ceridian, it has not yet captured the strategic benefits it had hoped for at the time. In particular, Au-Yang said he wished his time were freed up more to assist senior management decisions regarding strategic objectives such as entering new markets. Instead, he remains focused on managing the HRO relationship through its “birthing pains,” he said.
“You would get a mixed response here regarding the success of the HRO engagement so far,” Au-Yang added. “Someone whose paycheck is affected would find extreme dissatisfaction. We used to be a very high-touch HR organization, sitting in the same building as employees. People used to come down the hall and talk to HR, but that handholding has now been reduced. Others are very happy because we’ve given them the tools and resources for self-service, getting answers quickly online, or from Ceridian’s service reps at the call center.”
It will take through the end of this year before employees and managers “are 100 percent comfortable getting the same level of service they used to get,” he said. “We’re dealing with very sensitive matters. Even one mistake in pay or in a benefits transaction can destroy credibility for a long time. Trust is an issue. HR must build in a certain level of expectation that managing the implementation will be part of their overall scope of responsibility for at least two years, depending on the sophistication of the implementation and cultural factors. You cannot expect that when you sign the contract that everything that took your time before will suddenly go away.”
Marinaro voiced a similar outlook. “The three things we had hoped to get out of outsourcing were cost savings; technology so we wouldn’t need to upgrade our existing HR-IS system; and, finally, focus on strategic components, as opposed to day-to-day HR generalists,” Marinaro explained. “The only objective we’ve realized so far is the first.”
Ironically, difficulties achieving the second goal affected the realization of the third.
“The technology implementation has gone slower than we and our partner vendor expected,” he said. “We’re still in the process of building out the transition from our old system to our new one. Basically, it was much more complex than either side had thought when we signed the deal. We had a very aggressive schedule for converting over to PeopleSoft, and in reality, it did not go well.”
The migration to PeopleSoft was predicated on giving Chubb a more efficient self-service delivery model for its managers and employees of HR services. Chubb outsources payroll, shared services, ex-pat services, recruiting, call-center operations, and HR information services and technology, including learning, compensation, and talent management, to ACS . The delay in the implementation, however, has curtailed its ability to deliver on its self-service plans.
Consequently, some of the metrics and data HR had hoped to assemble on workforce and staffing, for instance, have not been culled, affecting the department’s plans to produce analytical reports meeting strategic needs.
“We’re not operating very efficiently right now because we’re still doing things manually,” Marinaro said. “We’re meeting business needs and all the demands put upon us, but we’re just not where we would like to be as an HR department yet. We expected more of ourselves. Once we turn the corner, I’m certain we’ll finally have that ‘Aha!’ moment.”
As for when that moment will arrive, he predicted early next year “at the latest.” The revised expectations have resulted in a revised contract with ACS.
“We originally had it in the contract that the technology would be implemented by January 2006. Six to nine months into the project, we jointly came together and said ‘What were we thinking?’” Marinaro recalled. “We’ve now moved the date out.”
The cautionary tale? “This process takes a lot longer than anyone realizes,” he said. “It is much more difficult and complex. You find you need more of your resources to get things done correctly than you imagined. You cannot make mistakes in areas such as payroll and employee workforce systems and have to be extremely rigorous in terms of quality control. Fortunately, we’re not unique—there are a lot of companies going through the same thing. This is still an immature industry, and at the time we signed the contract, we had unrealistic expectations given our limited experience.”
IN THE EARLY GOING
Many early HRO adopters have nothing but good stories to relate about the transformation. Take the case of AT&T’s HRO engagement with Aon Human Capital Services.
“Our implementation went incredibly smoothly,” said Linda Merritt, AT&T HR director. She attributed the success to two factors—lots of planning early on to make the transition seamless, and teamwork with the provider to start the transition process even before the contract was signed.
“While I hammered out contract negotiations with one team, we had another team working on the transition,” she explained.
The main difference between Merritt’s experience and those at PHH Mortgage and Chubb was timing. AT&T was an early HRO adopter, able to avail itself of the so-called “lift-and-shift” model, which involved moving its people and technology over to the provider. Like other early adopters, its HR infrastructure assisted vendors in creating their outsourcing solutions.
“By lifting and shifting our technology, people, and processes, much of it in a single day, we avoided the quantum level of complexity that newer adopters encounter,” Merritt said. “It was an easier transition for us because the vendor took over our existing technology and services. When we did introduce changes, they came after the transition had been stabilized.”
Newer HRO engagements no longer are of the lift-and-shift type. “Nowadays, if you’re bringing in new technology, new user interfaces, going global, no solid record of processes, and putting things online that used to be paper and people, it can be problematic,” Merritt said. “If you’re not sending over your experienced people to the vendor, there’s a lot of training that needs to be done. If you are establishing all these new connections and feeds and dealing with all these subtle knowledge management points, there is little wonder why things don’t go as planned. There’s a whole new level of change and transformation going on.”
This escalation in complexity is partly due to higher expectations of new HRO adopters. Said Lepeak, “The early adopters had very basic ambitions; the second generation of buyers have more lofty goals.”
Merritt holds a similar view, although she believes some providers have overstated their capabilities. “Vendors want to make this all look seamless and easy, but it would be to their benefit in the long run to get the deals as close to realistic as the clients are expecting, insofar as the transition effort and change management required,” she cautioned.
Her opinion was echoed by Gildner. “Providers are trying to offer a broad set of services across a broad set of geographies, which involve a lot of transformational efforts related to new systems implementations,” he explained. “As they try to meet their commitments, they’re running into difficulty, situations where promises have been made to bring up large-scale technology systems in unrealistic timeframes. Clients bought into thinking the providers had capabilities that many didn’t have—not that they aren’t developing them. Providers had good intentions, but weren’t able to build capability as quickly as their commitments required. Hence, some 25 percent of deals are in remediation now, with clients deferring expectations.”
Dogging some HRO deals are the cross-purposes of buyers. “On the one hand, clients want cost savings, and on the other they want process improvements,” Lepeak said. “These can be mutually exclusive, as the latter may cost money at a time when you’re trying to drive cost out of the operation. Providers are hard pressed to provide both.”
The lesson for companies contemplating HRO is to be wary of what providers promise. Fortunately, HRO is a seller’s market right now, “which is good for buyers in that if a provider doesn’t believe its services match up with what the buyer needs or its value proposition, they’re likely to drop out of the (bidding) process,” Lepeak said. “Overall, what we’re seeing is healthy for the industry. There will be a much better alignment of client expectations with provider capability.”
He further advised buyers to be more explicit in their contracting about what they want and expect to get out of the outsourcing engagement. “It’s important they determine upfront what’s going to be measured and how it will be measured to assure outcomes are closer to what they wanted,” he said. “I don’t mean to imply they need a complicated list of service level agreements, but three or four things they specifically want from a strategic perspective and how this will be measured.”
Another caveat for interested parties is to separate long-term strategy from short-term accomplishments. “It’s perfectly okay to remediate the original HRO plan,” Gildner said. “Some clients feel if they take ex-pat management or recruiting in house, they have somehow undermined the overall strategy. Instead, clients must look at HRO as an ongoing strategy for service delivery. As part of this strategy, there may be reduced scope or delayed expectations.”
Merritt from AT&T said new buyers of HRO need to learn from other adopters’ experience, particularly the need to retain more organizational staff than they hoped for, given the desire to trim costs.
“Survey after survey shows that change management and governance are undermanned and underestimated by clients, who think the vendor will be doing everything,” she said. “Buyers fail to understand just how much they will still need to do, in terms of overseeing and managing change during the transformation. Part of the negotiating, pricing, and contracting should be about who is going to bring what to the table, and who is going to do this and who is going to do that. There needs to be more of a solid understanding of each partner’s role.”
Gildner said HRO is a journey and not a trip. “It’s not like you get on a plane and get off in four hours. The key is to stay the course and be flexible, be actively engaged in internal change management and transformation, rather than entrust it to what are essentially nascent and immature providers.”