How to successfully transition to HR BPO By: Christine Stanowski Michele Gray Mike Friend Part 1/3 Get ready Part 1/3 Get ready Selecting the right HR Outsourcing options Christine Stanowski, Page 01 Vice President of Global Consulting, ADP Getting the business case right Michele Gray, Senior Director of Global Consulting, ADP Page 09 The role of governance in outsourcing contracts Mike Friend, Director, Employee Research, Harris Interactive Page 13 Selecting the right HR Outsourcing options Christine Stanowski ‘s Biography Christine Stanowski, Vice President of Global Consulting, ADP Christine is Vice President of Global Consulting for ADP in Europe. She is responsible for supporting the overall HR Outsourcing sales process for large multinational companies. Christine heads up a team of senior consultants in charge of delivering RFPs, RFIs, due diligence, business cases, service level agreements, transition plans and service organization. Her professional background includes the management of French and international payroll and HR projects. Christine is based in Paris but travels extensively, mainly across Europe. She can be reached at: [email protected] Selecting the right HR Outsourcing options Stepping up in HR transformation, and more specifically HR outsourcing, raises fundamental questions and requires agreement on the processes and activities to keep in-house and the ones to reengineer and outsource. More generally, HR transformation is about deciding on the organization to implement to fit the new business needs. Designing and managing your retained team correctly is a critical factor for the success of your overall HR outsourcing business plan. In particular, the ability to achieve significant staffing efficiencies is typically the key to achieving the financial objectives expected from the outsourcing relationship. This is often the most difficult and poorly planned aspect of the transition to outsourcing HR. The roles and responsibilities that your organization will need to retain during and after transition of HR services will depend on a number of related factors: • • • • • • Scope of services that you will be outsourcing Day-to-day processes that will be left behind for your retained team Complexity of Business Unit structure Diversity of your current information systems and/or service suppliers Expected timeline for the transition to your vendor Number of manual tasks that will be automated by outsourcing 01 Selecting the right HR outsourcing options The first step to design your retained organization is to understand the different outsourcing options available on the market. The chosen service model will have a significant impact on the way procedures and tasks are to be handled once the HR outsourcing contract has been implemented. 1 Models and service levels Constantly evolving HR outsourcing has become an industry. As demand evolves, new offerings are introduced on the market with their own names, terminology and acronyms. A bit of deciphering is required even before benchmarking solutions. BPO, SaaS, AMO…What do you mean exactly? Application Management Outsourcing (AMO), Application Service Provider (ASP), Software as a Service (SaaS), Managed Services (MS), Comprehensive Outsourcing Services (COS), Business Process Outsourcing (BPO)… A lot of acronyms, a rich vocabulary, and almost as many dictionaries! How to obtain a clear definition of each model? By compiling a list of the available solutions on the market, an operational nomenclature of outsourcing models can be built. It is based on two criteria: 02 First criterion: what responsibility is being transferred? The first criterion deals with what is actually being transferred from the enterprise to its service supplier. Is it just IT infrastructure that is being transitioned? Will the partner provide application management? Will the service provider run processes – such as payroll processing – on your behalf? Ultimately, is there a complete transfer of a function or a department to a supplier? Beyond the type of transfer, the dimension of responsibility becomes apparent, revealing the design of the future retained organization. For example, a supplier that provides access to an application takes on the responsibility for its delivery and legal compliance but does not commit to the outcome of its use. On the other hand, when a function or department is outsourced, the service supplier is accountable for measurable, functional results. This highlights the distinction between performing a given task and assuming responsibility for the deliverables of an outsourced function or department. A look at pricing Figuring out the base unit for pricing also helps clarify the actual nature of the transfer: outsourcing can occur at four different levels. These levels are represented vertically in the graph below where added value increases with the level of outsourcing. Segmentation of outsourcing options Business Outcome BPO Comprehensive Outsourcing Services Function Processing Services Process Applications Infrastructure Application Management Outsourcing ((AMO) (A MO)) MO SaaS ASP Added Value One-to-One Model One-to-One "Lift & Shift" One-to-Many Model Managed Services IT Outsourcing Hosting IT Efficiency Cost Effectiveness 03 Infrastructure Application Management Outsourcing (AMO) Applications SaaS ASP Processing Services Process Function IT Outsourcing Hosting BPO One-to-One "Lift & Shift"" Comprehensive Outsourcing Servic Se ces Services Managed Services 04 Infrastructure: the service supplier hosts the IT infrastructure. The client buys the service of installing, running, and maintaining the applications. Pricing is based on Computer Processing Unit (CPU) consumption, gigabytes of memory, and storage and network usage. IT hosting and IT Outsourcing (ITO) are at this level. Applications: the service supplier hosts the infrastructure and the applications and commits to providing their availability and maintenance. The client makes use of these applications and remains responsible for operating activities. Pricing is either based on infrastructure and resources engaged or on application usage (pay per use). Application Management Outsourcing (AMO) and Software as a Service (Saas) fall under this definition. Process: the client outsources the management and execution of a single business process. Performance metrics are primarily linked to accuracy, timeliness, and compliance. The pay-off begins here. Processing Services is a typical outsourcing offering at the process level. Function: the entire function is outsourced. This is Business Process Outsourcing (BPO). The service provider is in charge of the end-to-end value chain for its client and is fully committed to results. “Lift & shift” outsourcing , Managed Services and Comprehensive Outsourcing Services are BPO models. In the case of Managed Services and Comprehensive Outsourcing Services, pricing is based on the number of employees managed. In a “lift & shift” approach, pricing is based on a due diligence assessment. Second criterion: is outsourcing shared or dedicated? The second criterion deals with the environment for delivery of service set up by providers. This critical differentiator, one among many outsourcing options, is depicted horizontally in the graph. The service environment is dedicated – this is the one-to-one model. The provider sets up a specific environment for each client. Only a steep learning curve and the reengineering of internal processes will generate economies of scale and, hence, cost savings. The service environment is shared – this is the one-to-many model. The provider serves multiple clients with the same platform and application environment. Using shared and more standardized tools can generate significant cost savings. One-to-one versus one-to-many If we consider the process or function level, the “lift & shift” approach, Processing, Managed and Comprehensive Outsourcing Services illustrate the difference between one-to-one and one-to-many models. With the “lift & shift” approach, teams and infrastructure remain dedicated to a client as in the one-to-one model. On the other hand, Processing Services, Managed Services, and Comprehensive Outsourcing Services are one-to-many service models. They are based on shared infrastructure, application, and teams for delivering a service to multiple clients. Such models offer a combination of commitment, strong expertise, and economies of scale. How can we pick and choose among one-to-many models? As one of the key drivers for outsourcing, cost control has generated interest in solutions designed according to the shared, one-to-many models: SaaS, Processing Services, Managed Services, and Comprehensive Outsourcing Services. “transforms” the information provided by its client and is responsible for delivering results. Processing Services, Managed Services, and Comprehensive Outsourcing Services The fine line between SaaS and Processing Services SaaS and Processing Services may look very similar. They both provide services online, delivered from a shared environment and billed on a transaction basis. But one difference stands out: with SaaS, the supplier – usually a software vendor – provides only the system. With Processing Services, the supplier performs tasks for its client. In this case, the supplier At first sight, the differences among Processing Services, Managed Services, and Comprehensive Outsourcing Services seem to lie in the parts of the HR function value chain that are transferred and the level of risk shouldered by the supplier. In fact, the differences are greater. If we take payroll as an example, Processing Services corresponds to outsourcing the central – most transactional part – of the payroll value chain (see graph). This requires a strong commitment to service levels: Processing, Managed and Comprehensive Outsourcing Services Comprehensive Outsourcing Services Managed Services Processing Services Data Collection Interpretation & Offline Calculation Data Entry & Integration Checking & Controls Payroll Rules Management Processing Printing & Dispatching Validating Results Declarations Answering Enquiries from Employees, Managers and Third-Parties Payroll is processed on time and accurately, in compliance with legislation, collective agreements and the client’s rules The client company benefits from a support consultant who brings payroll expertise, not only software knowledge Processing Services, initially the model for payroll outsourcing, has evolved towards higher levels. 05 Extending the scope of responsibility Managed Services and Comprehensive Outsourcing Services encompass the entire payroll value chain. The client controls compensation policies, time and activity, etc. but outsources all the burdens associated with payroll management. Managed Services and Comprehensive Outsourcing Services minimize risks and free organizations from compliance concerns. But, Managed Services and Comprehensive Outsourcing Services don’t mean a loss of control, or that there’s no retained organization on the 2 Managed Services can be extended to handle employees’ queries and services to manage payment to employees and third parties. This is called Comprehensive Outsourcing Services. Managed Services and Comprehensive Outsourcing Services are becoming the preferred models for outsourcing. Impact of the HR outsourcing options on the retained organization Does HR outsourcing always mean cutting the HR organization to the bone? One may consider that the direct consequence of HR outsourcing is to enable companies to benefit from a stripped down organization. Reality is often more complex. The newly designed HR organization and the way a company leverages it to improve service delivery efficiency, quality standards, and cost control are directly linked to the outsourced service model implemented. The “1 to 31” approach is a simple and quick guide to establishing how employees occupy their working time on a day-to-day basis. For example: • On day one, 70% of time is spent collating payroll input data, 30% is spent on travel & expenses; • On day two, 50% of time is spent handling employees queries, 50% is spent on accounting • Etc. The “1 to 31” approach At the end of the month, a company can establish where the majority of time is being spent in the HR department. Very often, an employee is perceived as being 100% dedicated to one task or function, but usually spends time on additional activities related to the primary task. As a consequence, this may result in a significant gap in the business case when it comes to comparing the “as is” with the “to be” phase in the course of the outsourcing project. The first step for a company is to challenge its current organization and evaluate its own compelling reasons to outsource before going any further. This preliminary action triggers the analysis of the processes in place, documentation of current HR responsibilities and job descriptions, and prioritization of targets that must be reached in the retained organization. A specific task may take one or two days of an employee’s time each month, but that time could be reduced or even eliminated according to the outsourcing service model option chosen. It is therefore critical to adopt a structured approach to the preliminary phase of outsourcing. This will enable companies to avoid the pain resulting from a miss-match of choice and solution. The interaction between the future HR organization and the chosen outsourced service model makes them inseparable. For example, why continue to let the retained organization monitor payroll tasks if the chosen outsourcing model handles this responsibility? 06 client’s side. Providers operate within the scope defined by the client and steps still require validation and controls. Different service models that fit different dynamics or not complying with data privacy standards. HR outsourcing can take many forms which may generate some confusion. Today service suppliers have gained enough experience to manage all these points in order to guarantee flexibility and security for their clients. In most cases, companies also pursue common objectives that can be covered by the one-to-many approach. The decision to make is whether to choose the one-to-one or the one-to-many model. The one-to-one model can be particularly appropriate for big and mature organizations; companies that want to maintain some specific processes or IT systems and that are ready to integrate in their business case the additional cost related to one-to-one legal maintenance, customized upgrades, and specific country-bycountry management. In some cases, the one-to-one model can also be a good fit for groups that have grown by acquiring businesses in different domains. Specific adaptations are required in order to streamline their processes and organization while continuing to keep some of the Business Units’ strategic specificities. Many companies – common objectives But more often, cost control, cost reduction and return on investment push most companies to consider the one-to-many model as the preferred option. Aside from the strategic considerations that may lead a company to choose between one model and another, mindset also plays an important role. The one-to-many model is sometimes viewed as being too general for a company’s specificities, lacking flexibility for process change, For companies that target cost savings, the one-to-many model is the way to implement an approach based on rapid return on investment and economies of scale. Companies that rely on external growth can use the standardized, one-to-many approach to quickly integrate the new acquisitions in pre-defined, seamless and shared processes to maintain consistency within the group. Organizations with various information systems across countries may opt for one-to-many HR outsourcing to get rid of complex and specific IT upgrades and to run their HR operations on a common platform. The level of services will then depend on a combination of targets and timing. Processing Services is the model of choice for step-by-step progress in outsourcing. Managed Services and Comprehensive Outsourcing Services suit organizations with populations spread across countries and complex processes, as well as companies that are organized around shared services centers and/or that have to manage offshore activities. Wrap-up • HR outsourcing can take many forms which may generate some confusion. • The first step for a company that undertakes HR transformation is to challenge its current organization and evaluate its own compelling reasons to outsource before going any further. • Outsourcing is about selecting the tasks that have to be transferred and opting for the appropriate environment for the delivery of service, according to a combination of targets and timing. • The newly designed HR organization’s efficiency is directly linked to the outsourced service model implemented. • As one of the key drivers for outsourcing, cost control has generated interest in solutions designed according to the shared, one-to-many models. 07 Getting the business case right Michele Gray’s Biography Michele Gray, Senior Director of Global Consulting, ADP Michele is Senior Director of Global Consulting and is responsible for pre-sales consulting support for ADP’s HRO global & regional prospects. She has extensive consulting experience HR BPO, organizational development and change management. She joined ADP in 1999 initially heading up the UK-based business consulting team working with multinational companies that sought to leverage ERP technologies and outsource their payroll. Athough Michele is based in the UK, she travels extensively thoughout Europe. She can be reached at: [email protected] Transcript from Michele Gray’s video interview For GlobalHRstudio.com Reasons for the business case [10s – 1mn15s] It is crucial to understand the timing for the business case as well as its decision-making cycle. Put simply, the business case makes sense only if its purpose is clearly identified. Depending on needs, two types of business cases can be identified. The first one is a high-level and indicative business case. Its main purpose is to evaluate the potential savings that can be generated from a project. This high-level business case is often used as a justification for investment. It is the first step to secure funding for a project. Another form is the detailed business case. It is used when the time has come to precisely detail and validate the project’s costs as well as its expected savings. Both forms of the business case are useful and have to be used according to whether the situation calls for securing funding at the initial stage of a project or having the project finally validated by the board members. 09 Detailed business case [1mn16s – 2mn16s] Companies that are working on a detailed business case are often doing it when they are in the contract finalization phase with their service provider. The business case is used to validate the savings that can be expected in the end. At this stage of the project, the company has already agreed on the project’s scope and its geographical coverage as well as the service level that will be delivered by the provider. The business case is designed to determine future costs, split responsibilities and detail the savings as well as the way they will be generated. High-level business case [2mn17s – 4mn06s] The high-level form of the business case is often used as the first justification for a project. In a climate where funding for new projects is limited, it is crucial to be able to demonstrate where potential savings can be made. Nevertheless, considering a business case from only cost savings perspective would be limited. Cost savings are with no doubt a prerequisite of any business case. However, many decision makers are also looking for the additional business value that any project can bring. In other words, the project’s stakeholders are also interested in the benefits beyond the most obvious cost savings: strategic benefits that will enable a company to set-up its future strategy, facilitate the migration to any new activity or enable it to integrate new businesses faster and manage its international expansion. The role of the business case is to enable a company to articulate different objectives in a single document in order to validate the feasibility of its project. Gathering accurate data [4mn07s – 5mn00s] In most situations putting together a business case is the best opportunity to assess the quality of the information available in a company. After all, building a business case is all about putting the right data together in order to make projections. Not getting the right data is a problem that can’t be ignored. In situations when exact data cannot be collected, companies and their service provider 10 will have to base the business case on assumptions and extrapolations. The usual practice is to work on early studies available in the company or to extrapolate results based on significant examples of costs and/or processes that already exist in the company. This approach is valid as long as the assumptions and extrapolations are clearly documented. Wrap-up [5mn01s – 5mn52s] Getting the business case right is all about timing and purpose. The purpose of the business case won’t be the same according to your project’s status and the objectives you want to achieve in your organization. This is when it is important to determine what form of the business case to present as well as to be clear on the data on which all your assumptions and projections are based. A business case is also designed to offer a detailed view of a problem and the potential solutions for the company. It is crucial to identify the people who will read it even before putting it together. The ultimate goal of any business case is to convince an audience to support a specific project. Tangible and intangible benefits have to be clearly detailed. 11 The role of governance in outsourcing contracts Mike Friend’s Biography Mike Friend, Director, Employee Research, Harris Interactive Mike Friend leads Harris Interactive’s Employee Research group and is responsible for driving global best practice in all aspects of employee research and benchmarking. Harris Employee Research is a world leader in employee opinion surveys, establishing long term relationships with organizations to identify and positively drive improvements in employee engagement, motivation, workforce and business performance. Mike joined Harris Interactive from M3C Consulting, a Human Resource services research consultancy which he founded. Previously he worked as a management consultant in Deloitte’s Human Capital practice where he helped to deliver major public and private sector HR transformation programmes. His 12 years experience in the research industry includes six years as Research manager at IDC, where he established and led the European Human Resource research practice. He was voted an HRO superstar in 2005 and 2006. He can be reached at: [email protected] The role of governance in outsourcing contracts Who or what is to blame when outsourcing contracts fail to deliver on their initial promises? Customer inexperience? Changing business strategy? Poor baselining and definition of success criteria? Vendor overambition or inexperience? The following article looks at the role of governance in outsourcing contracts, how risk can be better managed and some key steps that customers and providers can take to better insure against failure. 13 The role of governance in outsourcing contracts 1 Living with a loss of control Customers entering into outsourcing agreements, knowingly choose to sacrifice direct control of their business processes in return for lower cost and/or better quality services. This is a sacrifice that is easier done where the outsourced HR processes are highly automated and transactional (eg payroll) but considerably harder to do when added layers of complexity are introduced such as the consolidation of multiple global processes and their migration to a shared service model. In order to combat this uncertainty, customers are rightly placing a greater degree of emphasis on governance. However, approaches to governance vary widely and whilst good governance structures can have a considerable bearing on contract performance and will often set the tone of the interaction between the two parties, they are no guarantor of success. So what are some of the key ingredients of successful governance? 2 Whose risk is it anyway? When outsourcing contracts fail as they do from time to time, then the finger of blame is frequently pointed at the role of governance. This is perhaps understandable since governance is no more and no less than a risk management strategy. It describes a wide range of safeguards, processes and structures that the counterparties put in place to maximise the chance of contract success. 14 Good governance requires the establishment of a joint contract management committee that meets regularly to monitor contract performance against defined SLA’s and address key issues from a strategic to an operational level. The role of the customers committee representatives is not to micro-manage the supplier or to dictate how the supplier should execute the contract. Such an approach would immediately endanger the relationship as well as limit the outsourcers ability to leverage its expertise in the market. When contracts are said to have failed, then by definition it is the risk management and therefore governance processes and structures that have failed. For that very reason customers should spend a considerable amount of time identifying which risks will pass to the service provider, which risks the customer will own and which risks will be jointly owned. 3 Start early with governance planning It is an old cliché, but it is not contracts that manage risk, it is people. Whilst a contract is the product of two organisations seeking a mutually beneficial arrangement, the success of that contract comes down to the dedication of a comparatively small number of people, how they interpret that contract and how they engage with one another. For that reason alone, customers should use the sometimes arduous request for information (RFI) and request for proposal (RFP) vendor selection process to identify the key vendor personnel who will participate in governance processes, 4 and commit these people to the governance team. Customers who fail to dig deep in order to understand the providers approach to governance, will significantly limit their understanding of how both parties will engage with each other, measure success, approve and cost change requests or escalate issues. Customers and vendors alike should use the RFI and RFP process to challenge how the programme management office will be staffed, what the reporting lines will be and what the individual roles and responsibilities of staff within that structure will be. Do not underestimate the impact of senior executive sponsorship Inevitably, the complexity of any contract will determine its risk profile, governance requirements and to a large degree its success. Where repeatable solutions are used, customers will likely benefit from the experience gained by the outsourcer and can operate a lighter touch governance model. That is not to say that customers should entrust everything to the outsourcer and stand back from their day to day contract management duties. All outsourcing relationships go through dips and troughs and strong leadership and hands on management of the relationship from both sides is required to make a five year outsourcing contract successful for both parties. One of the greatest potential dangers to successful governance is the loss of senior executive sponsorship. As the key sponsors become diverted by other programmes and initiatives, so the drive and energy that comes from their close scrutiny and oversight can dissipate and timelines slip. 15 5 How much does good governance cost? One of the hottest debating points concerning outsourcing contract management is the percentage of the overall contract value that should be set aside for governance. Once again, the scope and complexity of the outsourcing deal will influence the size of the governance team. The rule of thumb is however between 4-12% of total contract value, though upwards of 15% has been known. Given that this latter figure is approximately half of the cost savings that an organisation would hope to achieve over the lifetime of the contract, then the conclusion to be drawn from such a disproportionately large investment is that valuable resources are being diverted from contract execution and service delivery. Rather than being overly fixated by such a headline number, customers should work with a bottom-up approach, firstly clarifying and agreeing on the strategy and goals of the outsourcing contract before clearly articulating how success will be measured and the relevant measures captured. Only then will a better idea be gained with regard to the number of customer representatives required to sit on the governance committee. Wrap-up Whilst good governance structures and processes cannot ultimately eliminate failure from the equation, investment in good governance can significantly improve the chances of success. Key recommendations for customers include; • • • • • • 16 Be explicit about the purpose of the contract and how success will be measured. Agree on the SLA’s and determine how and when that data will be captured Take time to document which risks will pass to the service provider, which risks the customer will own and which risks will be jointly owned. Challenge suppliers about their governance models and approach during the RFP stage, identifying the key vendor personnel who might sit on the governance team. Gain senior executive sponsorship for the duration of the contract Take a bottom up approach to building governance teams, agreeing on the strategy and goals of the outsourcing contract before identifying and staffing the team. Notes: 17 Notes: 18 Notes: 19 www.globalHRstudio.com