If the shoe fits ��: before outsourcing your HRMS, make sure the provider's systems are a good match for your long-term business needs

Outsourcing an HR management system (HRMS) platform--paying someone else to run, maintain and upgrade the software at your site or theirs--can save money and improve service. But the HR executive who is choosing an outsourcing partner should determine whether the provider is committed to investing in technology and people over the long haul, and whether the provider's systems have the capabilities needed to meet the customer's specific technology and business requirements.

The long-term benefits can be substantial, but HR executives who think outsourcing is easier than selecting and implementing their own HRMSs are in for a rude awakening.

"This can be more bewildering than choosing an HRMS," says James Holincheck, an analyst at Gartner Inc., an information technology (IT) research and consulting firm in Stamford, Conn. For example, the relationship between customer and outsourcer needs to be tighter than the relationship between customer and HRMS vendor, he says. "Choosing an outsource partner is a hard and complex decision because there are more dimensions than choosing HRMS software."

Further complicating this decision is the fact that HRMS outsourcing is still in its infancy, relative to other forms of outsourcing. In a survey of 122 large companies last year, The Conference Board, a New York-based business research and consulting firm, and Accenture HR Services, based in Chicago, found 8 percent had fully outsourced their HRMSs, 18 percent had done so partially, and 14 percent had plans to do so. By comparison, 76 percent had fully or partially outsourced their 401(k) programs, and 8 percent planned to do so, according to the Conference Board/Accenture survey report, HR Outsourcing: Benefits, Challenges and Trends.

The main reason companies outsource their HRMSs is to reduce costs. "Many companies are looking ... to reap the benefits of new technology without capital investment," the Conference Board/Accenture study concludes. About 80 percent of the survey respondents listed cost savings as their driving motivation.

However, many larger companies, while also interested in managing HR costs, are fueling the growth in HR outsourcing with their efforts to move beyond transactional HR. That requires a solid partnership between the employer and the provider. (For more information, see the Special Report on HR Outsourcing in the July 2004 issue of HR Magazine.)

But when it comes to finding that kind of partnership, large companies face both a challenge and an opportunity--one that smaller firms may not be able to afford: considering the pros and cons of what Lowell Williams, vice president and HR practice leader at Houston-based outsourcing consultant EquaTerra Corp., calls full-spectrum or full-service HR outsourcers. These outsourcers can provide all HR systems needs either through their own platform or through their own platform or through third parties, unlike companies that limit their services to specific functions, such as recruiting or benefits.

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There are at least 17 such firms, with more potentially on the way, says Williams. "There are new providers every year," he says. "Some Indian companies are on the brink and could enter the market by the end of the year."

All these factors make HRMS outsourcing an intensive task for larger businesses. Companies with large workforces, numerous locations and multiple complex legacy systems to integrate should not underestimate the amount of work it will take to outsource their HR platform. Even after selecting the right provider, employers must implement the solution and manage the new relationship. "Many of my clients don't understand how hard some of this stuff is," Williams says. (For more information, see "Managing the Partnership" on page 70.)

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Look for Long-Term Capabilities

Atop Williams' list of things an HR executive should consider is whether an outsource provider has a long-term demonstrated capacity in full-spectrum HR outsourcing. The market is so new that most don't.

"Not one of the larger providers has sorted out the model yet with a repeatable, sustainable and profitable delivery system," says Naomi Bloom, managing partner of Bloom & Wallace, a strategic HR consulting firm in Fort Myers, Fla. Without profits, providers won't stay in business.

Even Exult Inc. of Irvine, Calif., one of the most established names in HR outsourcing, has only 16 HRMS clients, and, when it merges with Hewitt Associates of Lincolnshire, Ill., the combined company will have just 21, according to Jim Koniecnzy, who runs Hewitt's outsourced-benefits service, which has 300 clients and is much more mature than its HRMS offering. Exult signed up its first large client, BP p.l.c., the London-based global petroleum giant, in 1990.

Since most providers lack demonstrated long-term capacity, consultants urge HR executives to kick the tires hard, ask current clients about the provider's capabilities, and grill the provider on its vision and its plan for accomplishing it.

The decision is tough in a nascent market, Holincheck says. A company wants a partner that will evolve with it over time. "It would defeat the purpose to have to go through this selection process every two or three years," he says. Because so many providers are new to the game, it is crucial to make sure they have financial staying power, he adds.

Williams suggests that clients find out a provider's long-term dedication to outsourcing by asking several key questions, such as: "Is it investing substantial amounts in technology, people, process and facilities? Do they have a strategic plan for evolving the business? Are they just going to process payroll or use it as a base to deliver more effective management for you? Frankly, some of them never get beyond just doing transactions faster and cheaper," he says.

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Know Exactly What You Need

To make sure the provider can meet all of your requirements--beyond simply reducing costs--you have to first identify those needs. "Up front, you need to define the scope of what you want to do," says Holincheck. "If you don't have a good idea of what you want your service provider to do or not do in a specific process, that can lead to problems."

Take recruitment, for example. Do you need a provider that can enter data from a paper resume into an applicant tracking system? Can it do background checks on applicants, or will you need a third party to handle that? "Some vendors offer these services, and some don't," Holincheck says. "Ferreting out these issues is important so you know what you are buying." No two adopters will have precisely the same needs.

Whatever the scope of service, make sure it is clearly spelled out in the service level agreement, says Mike Azzarello, director of HR operations at International Paper Co., which in January 2002 became one of the first Fortune 500 companies to outsource its entire HRMS.

The 80,000-employee paper and forest products giant, based in Stamford, Conn., transferred the payroll/HR portion of its HRMS, a call center in Memphis, Tenn., and 200 HR information systems (HRIS) and call center staffers to Exult. Executives at International Paper knew what they wanted. Before the company outsourced, it had spent a few years aligning business goals with payroll/HR processes, choosing best HR practices from the mishmash in use across the company, implementing them on the HRMS purchased from SAP of Walldorf, Germany, and setting up a call center to support users.

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"Everyone must ask, 'What is my current infrastructure? What are my processes? Do I have a system I want to continue running and find someone to run it, or start from scratch?'" Azzarello says.

In contrast to International Paper, BP started from scratch. That's because the company's HR operations had become quite messy because of a lack of corporate standards and several acquisitions by the time it decided to move to a single integrated payroll/HR system in the mid-1990s, says former BP executive Nick Starritt. He was BP's vice president of HR at the time and today is managing director of Sirota Consulting Europe, based in Surrey, England.

When the decision was made to outsource, Starritt knew he wanted a partner that was willing not only to implement software but also to help BP determine best practices. Exult was looking for its first big global customer and was eager to build a partnership with BP, he says. BP handed over all its HR processes to Exult, which scrutinized them and made recommendations. BP didn't even have standard data to migrate from its many legacy systems. It had to start by defining standard data sets and making them consistent.

"This was a painful process at times," Starritt recalls. "But the easiest way to sort out our best practices was to engage the rigor and discipline of an external provider who has to make a profit on it."

Even so, Starritt says, "It was as painful as if we had done it ourselves. Many people don't take this into account and think the outsourcer will sprinkle magic dust over nonhomogenized processes and it will be fine in a few months."

To successfully outsource an HR platform, all but the smallest companies will need to do a detailed analysis of how an outsourcer's processes match up with their own. "If you are a company of a few hundred employees on up, you have to look at this with some rigor," says Bloom.

Unlike larger firms, smaller companies may not be able to afford customization, so they will keep their processes relatively simple and choose the vendor whose standard processes best match their needs.

Despite what many employers believe, doing this kind of analysis for an external technology provider can be just as difficult as adopting an HRMS internally, says Bloom, who has been involved in both kinds of projects.

"The providers don't want to tell you this because they don't want to scare people away," she says. "The customers don't want to say it because they haven't done their homework and they're in denial."

Demonstrating Gapabilities

As with any HRIS project, the devil is in the details, Bloom says, and the details are in the outsourcer's software. Some run proprietary software, others run commercial packages, and some run both. Exult, for example, offers a proprietary system and systems from SAP and PeopleSoft Corp. of Pleasanton, Calif. If the outsourcer runs a commercial platform, it usually layers proprietary software on top.

Whatever the case, understanding the outsourcer's software is essential.

"The breadth, quality and cost-effectiveness of their services, now and in the future, depend on what their software can and cannot do, or cannot do easily," says Bloom.

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The company does not need to consider all of the issues that would arise if it were to implement the software itself, such as IT infrastructure issues, Bloom says. But the HR executive must determine whether the outsourcer's software can actually deliver--now and into the future--the company's needed business rules, content, embedded intelligence and business processes, she says.

Take self-service as an example, Bloom says. The best self-service systems have embedded intelligence to help the user. For example, embedded intelligence would alert an employee who is entering a new home address into the database that the person's current HMO won't provide coverage in the new ZIP code area and that the employee needs to choose another provider. "Self-service without embedded intelligence and content produces costly-to-correct side effects," Bloom says.

How does an HR executive make sure the technology fits the need? The same way the executive would choose an HRMS to implement internally, she says. Bloom especially encourages prospective adopters to develop and use scripted scenarios to test the outsourcer's system and its capabilities to make sure it can handle your company's processes.

Scripted scenarios are like the mini case studies MBA programs include to help students understand business and management problems, says Bloom, who has helped her clients develop and use scripted scenarios to evaluate HRMS software for internal use and outsource providers.

The script, developed by the adopter, includes the provider's demonstration of the desired results from the customer's perspective, Bloom says.

"In a scripted scenario, you describe a specific business context, place a business situation within the context, and then ask how the offered services respond to that business situation," she explains. Prospective providers are required to demonstrate--not in writing but in actual fact--how their services respond, whether they are automated or manual. Employee self-service is an example of an automated service; responding to a user's call to the help center is an example of a manual service.

Scripted scenarios can also illustrate to a potential customer where the provider is automated and where it is still manual, which can help the buyer understand areas in which the service must still evolve.

There's no ideal number of scenarios an HR executive should give to a prospective partner. One way to avoid overkill is to be sensitive to areas the potential provider is most likely to do well, she says. For example, if an outsourcer has been a national payroll service for years before expanding its offerings to full HRMS platforms, it is probably safe to assume it knows how to calculate withholding taxes accurately.

The best way to develop scripted scenarios, Bloom says, is to begin by making a list of all the HR business processes, business rules and data that have been the biggest source of aggravation in the past, and then to set some priorities and write the scripts.

Scripted scenarios came into use several years ago when traditional requests for proposals (RFPs) became almost useless. HRMS software vendors, Bloom says, would simply answer yes to everything requested. "We don't believe software vendors anymore. We stopped writing RFPs because they said they could do it all," she says. "The same thing is happening with outsource providers."

Bloom expects push-back from outsource providers when they are confronted with companies' requests for demonstrations of their automated and manual responses to scripted scenarios.

"Vendors discourage these because it takes extra work on their part," she says. But the market is so new that providers don't have much choice if they want your business, and Bloom urges adopters to require potential providers to demonstrate their capabilities with the scripted scenarios.

Even if you're confident of your vendor's capabilities, don't neglect oversight. Stay involved in the operation. "People think they've outsourced it and that now it is the partner's problem," Azzarello says. "No, it is not their problem. If something is screwed up, your employees don't blame Exult."

Online Resources

Visit the online version of this article at www.shrm.org/hrmagazine/04October for links to:

* The July 2004 HR Magazine Special Report on HR Outsourcing.

* A webcast on selecting an outsourcing provider and forging a sound contract.

* The June 2002 HR Magazine feature on International Paper Co.'s HR technology systems.

* Two recent studies on HR outsourcing's growth and challenges.

RELATED ARTICLE: Managing the Partnership

Don't assume you can relax once you've inked a deal to outsource your HR management system (HRMS).

"It surprised me how much time managing the relationship takes," says Mike Azzarello, director of HR operations at International Paper Co., based in Stamford, Conn., which outsourced its entire HRMS nearly three years ago. "The biggest complaint I hear from others is, 'We thought this was in the service agreement, but it was not;'" he says.

"It takes up more than 50 percent of my time, and that's too much. People who go into outsourcing do not recognize what is required to manage the relationship." That's part of the governance effort by the customer and the vendor, and governance is one of many issues HR executives often overlook when they choose to outsource their system.

Partnering with an HR platform outsource provider is not a lifelong commitment, but it ideally is a long-term commitment, one that is typically much closer than the relationship you might have with an HRMS vendor. It therefore needs to have the right governance mechanisms from the start. "Your governance is how your relationship is managed," says Azzarello. "How do you introduce new applications and resolve issues of cost?"

Naomi Bloom, managing partner of Bloom & Wallace, a strategic HR consulting firm in Fort Myers, Fla., urges companies to set up a governance board that includes representatives from the outsource partner, company HR management and line organizations who are familiar with the pertinent HR topics. "These people would establish practices and guidelines by which the outsource relationship will operate," she says.

Azzarello agrees. "Make sure the proper internal people are involved as you move forward, especially the stakeholders who are impacted by the change. For us, we include finance, information technology and the legal departments."

BILL ROBERTS, TECHNOLOGY CONTRIBUTING EDITOR FOR HR MAGAZINE, IS A FREELANCE WRITER BASED IN LOS ALTOS, CALIF., WHO COVERS BUSINESS, TECHNOLOGY AND MANAGEMENT ISSUES.

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