The Seams Matter in HRO

To complete our review of HRO’s total cost of ownership (TCO), I want to expand on the factors that can either ramp-up or create a drag maximizing savings. The ADP studies on TCO do more than show the savings that real customers are achieving; the research also looks at why.

First, we need to understand what goes into TCO, which can help create a base case for outsourcing and in tracking the results. Included in the ADP TCO research are:

• Systems cost for initial implementation, upgrades (both amortized over three years), and system maintenance
• Direct fully loaded labor costs for associated administrative and IT employees
• Non-direct labor cost for overheads like facilities and corporate overheads
• Supplier or outsourcing costs.

Some of the costs are hidden in budgets other than HR’s, including IT, finance, or corporate. Remember that some of the employee costs are also hidden out in the field. We call them the shadow staff—people who support HR processes part-time. It’s important to understand the full cost of providing pre-outsourced services to be able to determine the difference in operating expenses after outsourcing.

There are also costs that result from the “seams.” Seams create gaps and can be found between technologies, processes, and people. These costs are seldom apparent or included in base cases, but they are real and can make the difference in 8-10% savings versus 20-30% savings.

Why does using a single vendor for multiple integrated processes create additional savings? With more services on one vendor integrated platform there are fewer interfaces to maintain, which costs less. When using various separate technologies and vendors, more complexity is in the system, and that generates an increased need to ensure that interfaces are maintained and addressed every time a change is introduced; it also increases the need for customizations and workarounds. When a payroll change was made, I could not understand why it took so long. It was because payroll data touches so many other HR processes that every calculation and interface needs to be addressed, tested, and ensured, many of which touch other suppliers and outsourcers, which adds even more time and cost.

Fewer systems, fewer non-integrated interfaces, and fewer vendors reduce complexity and can further reduce cost. The same concept is true for processes and people. Changing and standardizing internal processes and behaviors across the enterprise is hard. Persistence over time can make the difference in achieving 20% savings and 40% or greater savings.

The good news is that you do not have to do this all alone. Understand what you can expect from your primary HRO vendor(s) and what is included in standard pricing and what additional services are available at additional cost. HRO vendors like ADP, IBM, and Infosys, while specializing in various areas of HRO services, understand the importance of ongoing HRO governance, relationship management, change management, and step-by-step maturity along the way to maximizing the TCO benefits of HRO.

Linda Merritt, Research Analyst, HRO, NelsonHall

Interested in reading the latest HRO news from NelsonHall? Subscribe to our newsletter by emailing amy.gurchensky@nelson-hall.com with “HRO Insight” as the subject.

HRO Reduces TCO!

Buyers, how much will you save by implementing HRO services? Will it be 8% or over 50%?

ADP recently published the results of its latest total cost of ownership (TCO) study, The Hidden Benefits of Human Resources Business Process Outsourcing. The company has sponsored several PwC TCO studies since 2003 comparing the TCO of companies maintaining HR services in-house to those using ADP HR BPO. The 2012 study was completed by Sourcing Analytics and digs even deeper into the patterns established in the earlier PwC studies.

I touched on this topic last year, but it is well worth a second look because the research supports common HRO advice and counsel.

The good news remains: HRO of services including payroll, time and attendance, workforce administration, and health & welfare reduce TCO over in-house services.

The bad news is that HRO is not a quick financial fix and first year savings are usually modest. It takes time and hard work to transform HR operations and service delivery, but there are companies that have reduced TCO by 50% with 20-30% being possible for most over time.

Often, one or more HR services are outsourced with the focus mostly on the technology and transactions and may include more than one service provider. While there should be many benefits in new service features and functions and improved processing, the TCO impact is likely to be low, perhaps only 8%. To get both full value and full savings, more is needed.

Here are some of the building blocks that can be used to further increase your HRO TCO:

Technology and process

• Use one vendor for integrated payroll and time and attendance to bump up savings a bit
• Move to SaaS-based technology platforms to reduce technology costs the most
• Make it real BPO, include contact center services
• Multi-process HRO (MPHRO) saves more than best-of-breed services managed in-house, can significantly ramp up savings.

Process and people

• Support initial transition, adoption, and utilization
• Adopt standardized and centralized best practice processes across the entire enterprise
• Follow through and reduce or re-deploy the retained organization
• Keep working on it together; it may take up to five years to achieve maximum TCO savings as maturity is attained and more and more of the building blocks are added.

How much a particular client will save depends on a number of choices and options that are largely within the control of the client. In addition to great HRO performance, top-notch providers will be able to support each client in their journey to attain the most savings possible.

Next week, we will take a look at some of the factors and actions that shape the HRO journey.

Linda Merritt, Research Analyst, HRO, NelsonHall

Interested in reading the latest HRO news from NelsonHall? Subscribe to our newsletter by emailing amy.gurchensky@nelson-hall.com with “HRO Insight” as the subject.

HRO Proof Points

There is always a need for evidence of HRO success. Proof points are needed for new sales and for the expansion of existing services. Many HR clients need assistance with developing business cases for new deals and ROI or cost/benefit analyses for new projects and investments, as well as to set realistic expectations for ongoing effectiveness and business outcomes.

I support HRO vendors showing industry leadership and expertise in every form and fashion available, including research, blogs, newsletters, white papers, etc.  Tout that you know, share what you know, and then use what you know.

Therefore, I often reference HR studies and illustrate the relationship to HRO. Last week it was the ADP sponsored study: PwC’s 2011 Total Cost of Ownership (TCO) Study.  To learn more, I called ADP and had a conversation with Terrence McCrossan, Division Vice President of Marketing – National Account Services, and members of his team including Chris Schmidt. Here are some of my takeaways.

ADP does not just sponsor research. It uses the results internally. ADP worked with its Client Advisory Board to offer the study to its U.S.-based Comprehensive Outsourcing Services (COS) clients with two or more services. The results were then compared to the overall TCO study results and in-house models.

In review of its own clients, ADP found account maturity is also a factor in attaining maximum savings and benefits. Clients continued to reduce TCO over the five year period reviewed. The good news is that the predicted savings of roughly 20% to 30% can be achieved or even exceeded. The bad news is that it takes time and a lot of hard work to get there.

Especially intriguing was data comparing the top 20% in TCO reduction to the bottom 20%. How do the TCO leaders save ~25% more than the lagging group when the costs were the same to both and both have access to the same structured ADP services and processes?  The answer is where a good portion of the time and hard work comes in – change on the client side.

ADP builds in the cost of basic change management support into its base pricing. Clients are assessed pre and post implementation and periodically throughout the life of the relationship to see how improvements can be made and how well the client’s internal TCO reductions are going.

Service providers like ADP understand the challenge is across the full span of the contract, not just during implementation, and the more they help the client, the more successful the client is likely to be in achieving its goals.

Moving from opinion research to assessment of actual costs is a stronger HRO proof point. Being able to directly see where you are as a client to the real costs of others is even more powerful. Do you have your HRO proof points?

Linda Merritt, Research Analyst, HRO, NelsonHall