Human resource outsourcing

HR Management talks with Robert Zahler of global law firm Pillsbury Winthrop Shaw Pittman LLP.

HRM. Why is human resource outsourcing (HRO) becoming more popular, and which areas can benefit from choosing to outsource HR functions?
RZ. First, the provider market has matured. The companies that supply HRO services have now invested sufficiently so that they can offer well-defined services at competitive prices. In addition, the number of entities capable of making such services available has also increased substantially, providing buyers of such services with more choices in more locations.

Second, the purchasers of such services have realized, based on the results from early adopters, that significant cost savings can be achieved through outsourcing HR functions while at the same time increasing the quality of service. There is also a realization that the HR function can be delegated to a third party without incurring an unreasonable level of risk.

HRM. What are the main challenges currently facing HRO and how are these being overcome?
RZ. The main challenge facing HRO is to avoid becoming a commoditized business offering only standard, point-source solutions (like payroll processing) without any significant infusion of transformation, business process reengineering or automation.

Many transactions being executed today are little more than the customer purchasing a standard, commodity-type service for a relatively narrow set of HR functions. For HRO to be successful in the long term, providers need to continually identify, develop and offer new approaches for accomplishing old tasks. This requires transactions structured to deliver valuable transformation activities that reduce demand for high-cost manual processes, improve worker efficiency, deliver more accurate and timely outputs, and generally reduce costs in ways that provide long-term value to the clients.

HRM. How can customers receive best strategic value from their HRO transactions?
RZ. Customers need to go to the market seeking relationships that transform how they deliver HR functions and services to their companies. Merely asking a provider to do exactly what the customer did before for a lower price is a failed strategy.

To get best value from an HRO transaction, customers should first ask what their objectives are; outsourcing should be considered only to the extent that it furthers those objectives. Next, the customer should identify which HR functions should be delegated to best achieve its objectives. The customer is then in a position to make enquiries about how potential providers would deliver these functions and how that mode of delivery would assist in achieving the previously identified objectives.

The customer should challenge providers to offer their best solution for meeting the client’s objectives. So, rather than proscribing the solution, the customer requests competing thoughts about how best to structure the solution. Phrasing the request in this manner is the single best tool for obtaining truly transformational services that will deliver long-term, sustainable value to the customer.

HRM. What capabilities and experience should customers be looking for from their HRO suppliers? How can both parties ensure they continually get the best ROI from the relationship past the initial agreement?
RZ. Our experience indicates that corporate experience and capabilities are less directly related to success than are the experience and capabilities of the delivery team responsible for the work. Customers should ask to meet those delivery people early in the outsourcing process and such people should be part of the provider’s negotiating team. They should be directly involved in developing the provider’s solution and they should actively participate in the structuring and final negotiation of the outsourcing contract. A provider may resist doing this, but customers should insist.

Ensuring success after contract execution is heavily dependent on structuring the right relationship at the beginning. Typically, neither customer nor provider spends adequate time before signing the contract reviewing the specifics of the planned solution, how the solution will be rolled-out to the customer, what changes the end-user of HR services will see, and how all this is to be communicated to the end-user community. All these activities are important to assure maximum value from the relationship.

HRM. Security and compliance are primary concerns when outsourcing. What are suppliers doing to reassure customers their business is in safe hands and that regulatory issues are successfully managed?
RZ. Security and compliance is one area where corporate experience and capabilities do have value. All the major HRO providers understand the importance of both security and regulatory compliance, and the potential impact on their business if the marketplace believed they were less vigilant than others in addressing such concerns.

Customers should be clear in specifying what their security and regulatory compliance requirements are. The providers should be expressly asked for the details of how they will achieve the security and regulatory requirements identified by the customer.

In addressing these requirements, providers often identify the automated capabilities of their systems; such capabilities are necessary, but customers should probe beyond this and ask questions about the manual procedures supporting those automated capabilities. Customers should compare and contrast different solutions with respect to the manual aspects of the process, and seek specific responses from provider references as to the actual quality and timeliness of these different approaches to the manual processes.