Getting the most out of outsourcing

When approached strategically, outsourcing can accomplish all of the above while helping to transform HR into a high-performing business partner. However, when outsourcing is viewed as a panacea for eradicating currently broken processes or as a way to merely maintain the status quo but do it faster and cheaper, it can be a disaster.

Identifying the outsourcing partnership

Understanding what can or should be outsourced requires rigorous self-examination, with an operational review of transactional-based services known as ‘as-is’ process mapping (see box).

Diligence around this activity ultimately provides the necessary information for a vendor to price services, as you will have learned where information resides, work flows around ‘following the paper and the money’, transaction volumes, manual interventions and workarounds and data integrity.

Ancillary but perhaps more important benefits are spotting the ‘quick hits’– those areas needing immediate shoring up due to potential fiduciary, audit, or litigation exposure based on a broken or fragmented process. You will understand those procedures that can be eliminated altogether as adding no value or automated because the manual handling is fraught with potential errors or is too labour intensive to make any sense for the business. Ultimately, the operational review identifies those areas that can be better transacted by a competent third party.

Building the business case

Some HR leaders avoid the topic of outsourcing for fear of losing perceived power, influence, or an empire. The enlightened HR organisation will be better served by tackling the possibility and structuring a business case for change before the business case is made for them – a mandate rather than an initiative.

Comparing the cost to insource versus the cost to outsource encompasses costs of labour, compliance, internal expenses (such as printing, postage and fulfilment), and soft dollars for such items as staff time freed up for more valuable, strategic assignments and litigation settlements due to non-compliance or erroneous data handling and reporting. Potential internal technology upgrades or future purchase costs are also important considerations.

Some care needs to be taken in obtaining stakeholder buy-in for outsourcing and managing the organisation’s expectations that outsourcing will always cost less. An analogy can be drawn from comparing eating out to eating in. At home, you do the shopping and the chopping, the preparation, serving and cleaning up. If the meal is overcooked or not to everyone’s liking, the burden is entirely yours. On the other hand, when you dine out, you are seated by professional, liveried wait staff who attend to your every request, you select from a broad array of menu choices, and if you’re not happy with the meal, you can return it to the kitchen until satisfied. However, it is rare that you can dine out for the same cost as dining at home. But clearly, the service delivery model and customer service levels are dramatically different.

Evaluate the impact of change and identify the costs of communicating the transformation from paternalistic to self-service. The impact on the HR organisation should not be underestimated either. HR is moving from an administrative environment to one of strategy and vendor management. The skill-sets for selecting and managing HR service partners include: communication; negotiation; project management; performance measurement; contract management and financial awareness.

Many people who are comfortable performing redundant and duplicative tasks may never be able to perform effectively in the new environment. Costs of separation packages or outplacement services, ‘stay pay’ bonuses to retain needed talent during the transition and perhaps hiring costs to acquire the new skills necessary to support the transformed HR also need to be factored in.

Often employers retain consultants to assist in building the business case and for benchmarking against high-performing, world-class organisations. Consultants can be helpful due to their knowledge of the vendor market as well as their benchmarking databases.

Evaluating the vendor marketplace

Create a multi-disciplinary team for the evaluation process. This approach provides broad skills and selection experience as well as broad buy-in for outsourcing throughout the organisation. Since you have already forged a rigorous process map of the ‘as-is’environment, you clearly understand the processes to be outsourced as well as the impact on the organisation. So determining the vendor selection criteria should be a relatively simple task. You understand the needs of the new, transformed HR. So now you must prioritise such selection criteria as strategic compatibility, cost, technical capabilities, reporting capabilities, customer services/client service levels and sensitivity, communication capabilities and presence/stature in the marketplace.

The RFI

The request for information (RFI) is optional and is used to better understand what the marketplace offers, to qualify vendors, and narrow the list of those who will receive your RFP.

Since you have done your due diligence earlier around what the business expects to gain or improve from outsourcing, you can craft explicit RFI questions. An RFI can be six to twelve questions intended to establish your company’s expectations around such items as:

• Experience with organisations of similar size and make up (such as unions, centralised/decentralised).

• Length of time in the business.

• Flexibility in accommodating multiple constituent messages.

• Technology investment, vision and scalability (especially if you are in a growth mode; the vendor’s approach to divestitures would be an important criteria if you are downsizing).

• Ability to accommodate diverse ethnic needs.

• Future plans for international/global expansion.

• Estimated costs based on a ‘straw model’ of services and volumes intended to establish a comparative baseline.

Alternately, the RFI can be an abbreviated version of the request for proposal (RFP). This is a usable approach, but does not put as fine a line around the vendors that will clearly meet your specific needs.

The RFP

The RFP is a formal invitation to provide firm costs and service caveats. It becomes a reference document and a legally binding part of the final contract. The key to a successful RFP process is maintaining comparability among vendors for evaluation purposes. Therefore, limiting open-ended narrative responses and eliminating boilerplate language is essential. Create as many lists and matrices requiring yes/no answers or included/not included in quoted fees check boxes. This makes spread sheeting and comparison effective and accurate.

Other points to consider are establishing ‘rules of engagement’ and no contact rules to avoid vendor end-running and relationship leveraging. Custom proposal preparation is a time-consuming and expensive proposition. Therefore, your selection committee must be fair and impartial.

Also make it clear that if the vendor intends to ‘buy the business’ for any reason, (competitive reasons, existing relationships, etc) state such a fact clearly so you know that they have not misunderstood the scope of work.

Also consider signing a confidentiality agreement: many employers will not release the RFP (or the RFI) to a vendor without a signed non-disclosure.

Find out difference between a confidentiality agreement vs an NDA in this article.

The site visit

The on-site visit is vital to validating the representations made in the RFP response against the reality of the operation. Be sure that you get out of the large conference room during a site visit and ask to see documentation such as training tools, quality committee meeting notes and customer satisfaction survey results. Be alert for telltale signs during site visits like post-it-notes around computer screens or paper files and hard-copy administrative manuals on processors’desks. This could indicate the absence of online tools or a lack of confidence on the part of the processors in the completeness or effectiveness of the tools.

Scoring tools

Create clear assessment tools for judging the bidders. Whenever possible, use a weighted point system or numerical scoring protocols based on the prioritised business objectives. Consistent site visit scoring sheets and reference checking matrices are critical rating tools as well.

Documenting the process

Document your decision. Describe the bidding approach and evaluation protocols. Identify the key goals and priorities, such as the business case for outsourcing. Outline the criteria established in the assessment steps. Describe the consensus reached by the selection committee in the decision or the aggregate voting that established the winning bidder. Show where the bids received their points, validating the selection process as unbiased and business-centric. This precludes last minute vendor end-running or relationship leveraging that has been known to derail a well-intentioned selection process.

Next issue: Part two of Getting the most from outsourcing, which looks at defining the outsourcing partnership through contracts, services, performance standards, fees and more.

Karen Roberts is senior vice president, Aon Consulting based in San Francisco’s office. Email: [email protected].