Protect Your Outsourcing Investment

Don’t discount outsourcing as Vendor Management 101. The outsourcing industry in North America heftily rings up around $141 billion a year, according to the Economic Intelligence Unit in London. And HR activities comprise a big chunk of that outsourcing bill—as high as 12 percent of total outsourcing business in North America, according to a 1997 study by Murray Hill, New Jersey-based Dunn &Bradstreet Corp. and New York City-based The Outsourcing Institute.

Given the importance of such functions as the administration of 401(k)s and pension plans, benefits, relocation and expatriate management, the investment should be considered as a priority. With each transaction, the “cha-chings” of the cash register are recording far more than nickels and dimes.

Yet how many HR managers are mentored or trained to work with outside service providers? Far too few of them to make sense. How often have you wondered if you’re really maximizing the time, effort and expense that you and your organization devote to outside services? Learning these skills may be simple and straightforward, but it’s no small change.

Identify your needs.
“Using outside providers is a necessity in today’s environment, in which cost effectiveness and service quality is paramount,” says Lynn Tamburo, a global relocation and compensation consultant who was formerly at New York City-based JP Morgan, in charge of the organization’s entire expatriate program. “It requires you to look for centers of excellence in the services you need to provide. You have to decide what capabilities you have internally and which ones you’re going to obtain from the outside.”

If you’re going to look for an external source to obtain some of the abilities you need, it’s important that you identify upfront what your needs are, what your selection criteria is, and what you’re looking for in a service provider. And cost isn’t the most important consideration. In fact, when you think of the reasons that you’re outsourcing services to begin with, cost is only one consideration among many.

Take a step back and think about why you’re outsourcing the functions. Think about the strategy of your actions. Is it because the area is outside your core competency? Is it because you want to reduce the need for specific in-house expertise, either as a cost-savings measure or because you can’t locate the talent? Is it because you believe outside providers can offer better service, as well as save money?

Match your needs to provider capabilities.
Once you make a list of your needs, move on to the selection criteria—find what’s important to you. This is the time to benchmark against other comparable companies with similar situations. The most effective way to approach this is networking with colleagues. Talk with them about what types of services they receive, whom they receive them from, and what the advantages and disadvantages are.

Next, identify the potential providers and solicit proposals from them. This could be a formal process by which you solicit proposals from several providers and put them through an evaluation process, critiquing them against the information you gathered from your initial examination of your needs.

Surprising as it may seem, some managers feel pressured to accept the conditions of the providers, allowing the vendor’s capabilities to dictate. Your organization’s needs should be paramount in the discussion; foremost is how well the provider can satisfy your needs.

“Personally, I would weigh the objective criteria (cost, services provided or referrals) more heavily than the subjective. But by the same token, I would not ignore the subjective. You need to ensure there’s good chemistry between you and your outsource provider when making a decision,” says Tamburo.

In other words, think of this relationship as a partnership. Have face-to-face meetings with the potential partner to determine if your goals and ways of doing business are compatible.

Manage the relationship with open communication.
Once you’ve honed in on who you think is the best provider, you’ve interviewed for personal fit and negotiated the best deal, then write a service agreement. Specify service levels and costs. What do you expect? What are the timetables? Outline the methods you’ll use to measure effectiveness. Document all of this before you begin to work together.

To manage the relationship, think of it as an alliance that allows you to provide to your clients. It reflects on you, so your clients are the ones who should give you feedback about the service, not the provider. Do this formally or informally, by survey or ongoing discussions.

For example, let’s say you’re looking for feedback on a moving company. After the move takes place, you’re able to call or send a questionnaire to your client and ask for various feedback on aspects of the move. Or you might want to talk to everyone who used that service to get all the information at once. But, particularly with a new service provider, getting immediate and ongoing feedback is preferable. Recognize that it’s particularly noteworthy when feedback comes to you unsolicited—good or bad.

It’s also essential to frequently communicate with your provider. Talk about what it’s doing for you and how it’s doing it. The frequency obviously depends upon the service being provided; if it’s a tax provider, the service tends to be once a year, while in other cases, it’s ongoing.

Continue to be specific about your expectations in terms of what you need and when you need it. Reinforce those messages until your expectations are being met. Ask about other ways in which the provider may be of service to you. Be open and candid about your needs.

Maintain the relationship by evaluating it.
Finally, conduct periodic service-level reviews. Consider annual reviews, which could be based on your evaluation methods and the anecdotal feedback you’ve received. Discuss what’s working and not working, and if improvements are necessary. You’ll also want to conduct internal reviews to find out how your clients think the outsourcing is working.

Repeat the competitive bidding process every so often, on two- to five-year intervals, depending on your confidence with the service provider, the results of your external benchmarking, and how stable your needs are. During this time, benchmark against your colleagues, and always question if the situation continues to work for you.

Outsourcing is more prominent than it used to be, and it’s much more important because the sophistication of the HR capability has increased. In the past, HR facilitated administration as it related to people. Now, the function is more strategic, and needs outside support. HR managers are working with business managers to help fulfill their business goals. Working proactively to identify service needs and how to effectively manage providers is not only important financially, but it can also be critical to the ability to meet business goals.

Workforce, October 1998, Vol. 77, No. 10, pp. 130-132