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

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The Forgotten HRO Capabilities

It is no longer enough to just talk about HRO lowering administrative costs and burdens.  The lead focus is now on how HRO and a particular vendor’s services will help make the buyer’s business better and HR more effective.

As soon as a business grows in size, it grows in complexity. And HR services are, in and of themselves, unexpectedly complex and dynamic – a lesson learned the hard and costly way by many a client and HRO provider. Thus, in addition to defining the service solutions and holding the pricing discussions, it is important to bring to light both the provider’s and the buyer’s capabilities to manage complexity. These deeper capabilities can make or break long-term results achievements, and make the partnership a binding one or a bonding one.

Most HR organizations are networks of services, some that cross internal support services organizational lines and others that involve multiple suppliers and start and end in the business units. Even with a new multi-process HR outsourcing (MPHRO) engagement, it is unlikely that all existing suppliers and technologies will be displaced. And a best-of-breed approach can actually enlarge the network, requiring the client to manage the services integration and vendors, or separately pay one provider for the integration and vendor management.

Complexity management capabilities such as governance, program management, project management, change management and supply chain management become critical enablers. No matter how latest and greatest the technology, or how compelling the pricing, it must all work in the ever changing world of HR and for businesses still facing uncertainty.

Let’s focus on one of the sometimes forgotten HRP capabilities – supply chain management. Vendor management is often listed somewhere in the benefits statements or addressed briefly in the RFP. The level of integration and coordination needed across a complex network of internal and external suppliers is major and can be a real bottleneck. Every interface is a service break point; every vendor requires communications, coordination and contracts. Just ask Boeing, which for years has been struggling with delays and burdened by hundreds of millions of dollars in cost overruns due to a complex and uncontrolled supply chain for its largest new planes.

What happens when changes, expected or unexpected, that cross boundaries of the HR network occur? For example, a change to the benefits plans requires changes to multiple systems including payroll, IT, the network of benefits providers, knowledge databases, etc. Who will handle what? What tools and governance systems will be used? Does the provider’s approach sound reactive, or proactive?

When I was with AT&T as contract manager for a large MPHRO deal, I remember the unexpected benefit of our vendor actually managing other vendors and suppliers, and coordinating with our internal IT, treasury and security departments. AT&T HR and my group were deeply involved as well, and together we were able to successfully implement more projects and changes on time and within our budget than ever before.

Buyers, really dig for complexity management proof points. Providers, showcase your competitive advantages!

Linda Merritt, Research Director, HRO, NelsonHall