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By Peter Ackerson
Outsourcing of HR functions is not new. Benefits, relocation and other services have been provided by vendors for many years. The process of selecting these providers has been relatively simple as the functions and processes are well defined and can be priced on a transactional basis. In addition, the provider reputations are well known and performance can be verified through calls to colleagues in other firms.
As full service, end-to-end outsourcing becomes an option; the process for selecting a vendor becomes more difficult. Because of the reality of the newness of the business offering, there are more issues to consider, not the least of which is the breadth of the services.
There is the potential of outsourcing all the administrative, transactional and technical functions related to HR. What might only be retained are the strategic, generalist, design, and labor functions. The possibility of moving so many processes to a single provider is daunting to say the least.
It is possible to do it all internally, but there are some things to consider at two stages. In the first stage there are a number of steps.
- First, this is not a simple procurement transaction. These are not commodity operations where requirements are well known and can be put out to bid. No two companies have the same approach to service, benefits, compensation, and payroll. Therefore the requirements must be defined in excruciating detail.
- Second, you must define your current expenses to include many things not normally considered (technology, data/voice, occupancy, leadership, capital, overhead, etc.) as part of the cost of HR.
- Third, current service levels must be defined. If you don't currently have internal service level measures, you will need to create some type of pro-forma measures.
- Fourth, planned changes, international needs, pending acquisitions and transformational needs must be defined.
- Fifth, all the potential providers must be identified.
If you have a fully functional internal shared service operation with SLA's and contracts, you probably have 50+% of the work done. However, you will find much additional work will be needed to match to commercial requirements.
Once all requirements are understood it may be to your advantage to use a consultant to help define your particular needs and why it may or may not be an advantage for your organization to outsource. This should be done before you issue a Request For Information (RFI) or engage a Sourcing Consultancy.
Using an RFI as a "tire-kicking" exercise is not a good idea. RFIs are expensive for your company to prepare and expensive for the responders. Be committed to the concept before you move too far forward in the process. If you don't have the internal resources, consider outside assistance.
If you move to the second stage and decide to request proposals or more information, there are at least three options.
- Internally prepare a RFI or Request for Proposal (RFP). The RFI is less expensive to prepare and also to review when returned. It is a way of getting a high level expression of interest from the provider community and to winnow out those providers who cannot deliver a full range of services. The RFP is far more complex to prepare, respond to, and analyze. If an RFP is issued, you should already have senior consensus that full service outsourcing option is a viable option.
- Use a consultant to assist with the RFI/RFP process. Consultants should have broad knowledge of the process, industry, and contractual requirements. The level of expertise needed is not just pure HR, but HR operations, and HR outsourcing. If you go to contact, then the consultants may assist with change management, process transformation and other issues.
- Use a Sourcing Consultancy (EquaTerra, TPI, and Everest are just a few in the business). Sourcing Consultancies are in the business of matching providers with clients. They have templates designed to clearly identify required services, establish pricing, define SLA's, and provide a basis for comparison across multiple providers. Their fees may be based on hourly rates, gainsharing, or other means. These organizations offer a multitude of options including advisory only, full bid management, and in a relatively new offering, management of the vendor after the deal is complete. Ensure your consultancy understands HR BPO. Most of these firms began in the IT space. Sourcing server space is not the same as sourcing Training and Education. Make sure resources assigned to your project have relevant experience.
All of the options above assume competitive bidding to be the best option. But, is it? There may be some advantages to sole sourcing. Sole Sourcing is negotiating with one vendor usually under a Letter Of Intent (LOI).
The LOI says both parties will solely negotiate, in good faith, for a defined period. Sole sourcing could use external resources to administer the process, but the negotiations are with the single selected provider.
There is a natural assumption that competitive bidding drives the best price and best service. The reality is competition is so intense that virtually no provider can afford to go far from the prevailing rates. If you have a sophisticated definition of your current services and required services, with the underlying costs clearly defined, then sole sourcing will work.
Also required are experienced negotiation teams and legal teams (BPO contracts can run to hundreds of pages). This also works if you trust the potential provider. Surveys have shown trust to be one of the major factors in selecting providers. Having positive experience with the provider is a good indicator of future performance.
What you do gain in a successful sole-sourcing engagement is less expense from external resources. More importantly what you also gain is a more detailed knowledge of and more personal relationship with your provider; one more likely to be a partnership, not a vendor-client arrangement.
RFP's run by external resources tend to separate the client from the potential provider. Indeed they discourage direct contact and rely on written data comparisons to enable decisions. The argument for this is it is consistent and without emotion...and there is truth to that point.
One large BPO provider insists their CEO meet the CEO of the potential client. The intent is to establish a personal relationship, provide a face for good times and bad, and to give personal assurances the firm leadership is personally interested in the success of the engagement.
This type of relationship is less likely to occur in a brokered deal, unless it is after the fact. Depending on the culture of your firm, this may or may not be important.
From a provider's standpoint it is frustrating to not be able to communicate the personal involvement, cultural fit, willingness, and human competencies of your organization.
These things don't necessarily come across in the RFI/RFP process without substantial interpersonal contact. Having said that, there are many deals that work well without this, the relationship developing after the contract is signed.
End-to-end outsourcing is a difficult process in three respects: the decision to outsource, the process of selecting a provider, and managing the relationship to a mutually rewarding conclusion. However, it is a viable option for many firms and requires careful thought, dedicated internal resources, and outside assistance as needed.
Note: Peter Ackerson, SPHR, is in the HR Operations and Technology practice at Deloitte Consulting LLC. He has more than 30 years experience in HR generalist and operations positions at Sears, Roebuck and C., Exult and Deloitte. He is a member of SHRM, IHRIM and SPBOA.
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