As HR outsourcing approaches its next significant phase, historical elements of earlier relationships and greater accumulated supplier and buyer knowledge are likely to impact future relationships, according to two members of the HRO Buyers Advisory Board.
Mark Azzarello, Director of Human Resources Operations for International Paper and chair of the group, and Linda Merritt, Director of Outsourcing, Human Resources at AT&T, will be part of a five-person panel discussion the first day of the April HRO Conference and Exposition in New York. The group will address issues the board views as critical to buyers of outsourced HR services.
Recently, the two visited with The Outsourcing Journal to share their views on the changing face of HRO from the buyer perspective.
OJ: Why was the HRO Buyers Advisory Board established and what is its mission?
Mark Azzarello: Towers Perrin established the Board in late 2003 as an ‘interest group’ to help shape its HR BPO effectiveness research and provide a network for discussing and addressing buyer issues. Original membership included companies with significant BPO relationships. It has since grown and evolved to become an independent voice for companies with large-scale HR outsourcing arrangements-‘the voice of the buyer.’ Members include American Express, AT&T, Bank of America, Best Buy, Circuit City, Cigna, The Chubb Group, General Motors, and Goldman Sachs.
Linda Merritt: We embrace members engaged in a relationship who outsource six or more HR processes to a single supplier.
OJ: How does HRO affect a buying culture?
LM: Both parties must manage expectations, and some staff roles and end-user relationships within those organizations are changing. Buyers must understand how critical some of these changes are and learn how to cushion these changes to their organization. Good providers help them do that.
MA: The existing culture of the buying organization, the initial point of reference, can be a clue to how these changes transpire. For example, the culture at AT&T, as a technology and communications company, is more accustomed to change while ours (International Paper), as traditional manufacturing, is a bit more conventional. Yet we’re both able to successfully incorporate HR/BPO into our respective cultures. Even if the ways that came about are different, we’ve both experienced successful cultural adjustments.
OJ: How has the evolution of HRO made it a more sophisticated buying experience?
MA: The marketplace is different now than when companies signed those first HRO deals. There are more providers, and customers have more choices. But the past few years have seen more consolidation among providers to the point where now many not only fulfill services, but advise, such as Accenture, Hewitt, et al.
And, as buyers, we’ve become just as sophisticated in understanding our needs and have greater appreciation for when it’s time to review and renew service level agreements (SLAs). We better appreciate the future of our outsourcing relationships and understand the value of being flexible in assessing, then meeting our future needs.
LM: I hope that continued growth and maturity in the supplier community will produce a fuller spectrum of offerings. Each buyer has unique needs. A wider range of HRO supplier offerings, from basic to fully customized services at corresponding price points, allows more companies to benefit from outsourcing.
OJ: Where is the “buyer traction” now?
MA: More sophisticated metrics and their impact to a buying organization. Today it’s more common for a buyer to break them down into sets and subsets during the diligence phase and then factor which have the most value in a given situation.
For example, let’s say a value metric for outsourcing an HR administration activity will be reducing the time the buyer spends on those activities by half. Buyers are looking at that time dividend to determine what they’ll do with it. Will they move some people into other areas? Will they reduce head count? Today, more understand that progression of thinking.
LM: Both providers and buyers are getting better at negotiating their SLAs and producing better contracts to the benefit of both parties. This can generate more variable pricing models that reflect actual value of the individual relationship.
OJ: In what ways are the HRO buyers becoming more adept?
MA: With better lines of communication, buyers can generally benefit from accumulated provider knowledge and leverage it sooner in their diligence phases. One of the benefits of the Buyers Advisory Board is that providers share much of what’s going on in their world with us and often use us as a sounding board. In some ways we help them influence the evolution of their value to the marketplace.
This, combined with greater buyer access to marketplace intelligence, leads to more realistic service offerings. Providers by their nature want standardization. And buyers naturally want more innovation. The value proposition for both sides is somewhere in the middle but still unique to each relationship.
LM: Also noteworthy in this buyer learning curve is the emergence of the neutral third-party advisor’s tremendous impact in all areas of outsourcing. They keep up on the trends and separate the ‘signal from the noise.’ They can also inspire providers to blend the standardization they want with the innovation the buyers want more quickly. Advisory caution is also useful to not drive the supplier community to only the lowest cost, most vanilla services. One size rarely fits all.
MA: With this greater number of third parties, there are enough resources for buyers to begin their outsourcing paths with eyes wide open. This creates a change dynamic in HR/BPO since the early days. As relationships mature, sometimes providers will shift their ‘A talent’ to more innovative services, often accessed by newer clients, and replace them with ‘B talent,’ sometimes exposing provider deficiencies. Buyers are beginning to understand this, even though the root cause is as much about gaps in the overall talent pool than a specific relationship.
OJ: Past cost savings, what else do buyers look for (or should look for) when outsourcing HRO processes?
LM: They want to see the full benefits offered in the sales process become fruitful over the years. If I am to continue a relationship with a multi-client supplier, I must know I’ll get not only promised cost savings, but benefit from the provider’s accumulated knowledge and evolution of its best practices.
MA: We look for higher provider expertise. If this is BPO, there’s more than just cost savings – providers have to also become process owners. They should offer improvements to enable us to do better tomorrow, what we’re doing today. Also, as a buyer I want ongoing access to the provider’s ‘A talent.’
LM: Buyers need to temper expectations within the terms of the deal. We want to have our cake and eat it too. But if we drive a hard bargain on the cost reduction side, shouldn’t we modify our service expectations? Both sides must be realistic on this point so the relationship is built on a strong enough foundation to deliver sustainable service and benefits across the years.
Another new area surrounds compliance activities that weren’t as prominent in the early deals. Whether it’s HIPAA in healthcare or Sarbanes-Oxley in finance and payroll, we expect our suppliers to partner with us to assure compliance and offer a depth of expertise better than our own.
“Risk management is another consideration. If I release some of my talent performing the functions I now outsource, I won’t have the full savings if I still have to be in the driver’s seat and maintain staff to cover what my supplier should be doing on these issues.”
OJ: Some outsourced relationships don’t deliver. What should buyers do when this happens?
MA: In about half the relationships I’ve seen, sometime in the second year, the client and provider have a “clear the air” meeting. Whether client expectations change or provider performance drops, something happens. There must be a shared and objective understanding as to how things got this way.
LM: The honeymoon period is over and reality sets in! Maybe the client isn’t getting enough ‘A team’ attention, the supplier is failing to meet timelines or service levels, or the contract terms in real life don’t fulfill the needs of the business. Or perhaps the client began the relationship with unrealistic expectations. The buyer typically initiates the meeting. The good news is these meetings tend to produce stronger relationships. I know examples where the parties saved the relationship; some produced an early renewal or extension.
Sometimes both sides decide to move on, but it doesn’t happen often. Both sides can come through this period of adjustment stronger, if they face the issues together.
MA: The few times that I’m aware, rather than radically change or end the relationship, the client would just take a specific ‘pain point’ process back in-house, but maintain the outsourced partnership in productive areas.
OJ: What are some of the traditional “land mines” that throw an outsourcing relationship off the track?
MA: Proper governance: if it’s not in place, buyers risk running off track. Second is the ability to manage internal expectations and maintain some process discipline. Buyers must be confident their people understand the differences between a long-term outsourcing relationship and a one-year supplier contract. Some organizations still enter an outsourcing relationship not fully understanding their internal cost structure vis-‡-vis individual components of the deal. Appreciating all these factors is a buyer diligence issue, along with accepting whether its reason for outsourcing is based on strategy or is a tactical response.
LM: If the buyer focuses on its strategy first, what it wants to achieve, then builds a path in the contract terms and develops an operational path to these objectives, fewer problems arise. Let’s say the key driver is cost control. You have to have an operational way to know if the supplier is meeting the goal from the beginning.
Appropriate tracking and reporting is important, as is internal cost control processes and approvals. Combine these with clear understanding of what services are integrated and when ‘batteries are not included,’ and the buyer can reasonably expect to realize fuller benefit and value of its outsourcing decision.
Lessons from the Outsourcing Journal:
- Regardless of buyer industry, any culture can embrace outsourcing with diligence and reasonable expectations.
- Greater availability of useful accumulated intelligence from many sources empowers HRO buyers to develop realistic relationships with providers.
- HRO buyers expect their providers to assume ownership of the processes they are outsourcing. This includes innovation and, where appropriate, legal compliance.
- More suppliers means more and better choices for buyers.