Determining the Success of Your HR Outsourcing Provider

Updated: April 30, 2007

Issue

HR outsourcing is like any other service-oriented business relationship — there is a certain amount of care and feeding required to nurture the partnership. Yet beyond the feel-good aspects of personal dynamics and relationship building, both parties need to agree to a set of clearly defined metrics in order to keep everyone on the same page.

If this sounds like a basic business tenet, it is. However, it's a principle that, while essential in such fields as IT or call-center outsourcing, has yet to catch on as a best practice in HR outsourcing relationships. "Most HR professionals don't think in terms of ROI (return on investment) and aren't versed in drawing a correlation between how the services will impact the business," maintained Larry Casey, senior vice president of human resources at Key Safety Inc. , a Sterling Heights, Mich., manufacturer of safety components like airbags and seat belts. "They think more along the lines like if we throw benefits out there and no one complains, we're in good shape."

Without official metrics in place, what appears to be a successful outsourcing arrangement to some might seem to others like a giant mess. It boils down to a simple matter of managing expectations so that the service levels the client expects are manageable and desirable, from a profit standpoint, by its outsourcing partner. "The key thing in any outsourcing relationship is expectation management," noted Tom Darrow, president of the Atlanta chapter of the Society for Human Resource Management and president of Talent Connections, an Atlanta-based provider of outsourced recruiting services. "It's essential for the outsourced provider and the client company to sit down in advance and talk through and understand what the expectations are. Otherwise, it doesn't matter how good a job is done if expectations aren't being met."

Analysis

Darrow and others suggest applying metrics and business analyses to three key areas:

  • Cost: If the price stays in the ballpark of what was promised, and more importantly if the relationship delivers more efficiencies and/or is more cost-effective than keeping the HR functions in house;
  • Time frame: If projects and HR processes are completed in the specified time period and
  • Customer satisfaction: If employees are getting what they need from an HR standpoint.

SLAs (service-level agreements), those requisite benchmarks of the IT world, come into play from there to provide very granular targets for the outsourcer to meet. The nature of the targets will dictate how they should be measured, experts say.

While the need for SLAs is fairly universal, what the SLAs actually measure will vary greatly depending on the outsourced HR service. "There is no magic pill — there is not one, two or even three metrics that will ensure success," said Key Safety's Casey. "It depends on what you're outsourcing and at what levels you're outsourcing."

For example, if a company is outsourcing its recruitment processes, time to hire would be a critical metric. If the area outsourced is benefits administration, the in-house HR professional would need to routinely evaluate such metrics as the customer response time for handling employee calls to the call center, processing time for benefits requests or how many calls the outsourcer could field on a weekly or monthly basis. The appropriate Sample SLAs in these areas could be something like customer satisfaction rates of 95 percent or higher for call center processing or filling a position within 28 days.

"A critical metric for us might be how many positions were filled during the course of a year," said Talent Connections' Darrow, explaining how a client might evaluate his organization. "If a company is trying to hire 200 people, we should be measured on if we filled those 200 positions in the specified time frame."

Bringing in purchasing and contract experts to help craft the SLAs and HR-outsourcing contracts is critical, experts say, as is getting HR managers to think in business terms when entering such partnerships. "How to maximize costs or efficiencies — these are terms that need to be addressed from an HR perspective," said Casey. "By thinking in those terms, they can then develop metrics that are quantifiable and demonstrate value to the operations people who are making the business and budgetary decisions."

HR professionals should also be sure to write in language around penalties if metrics aren't consistently met. For instance, if the outsource provider isn't meeting its SLAs in a particular area, establish a penalty or rebate to be paid for compensation. Along those same lines, you could specify a premium to be paid to the outsourcer if metrics are continually exceeded. "It's all about the business relationship," Casey said.

Next Steps

If several months go by with missed metrics, it could be time to consider termination. Contracts should be written with termination clauses (90 days seems to be the going time frame) and there should be provisions in the contract that specify how to properly transfer intellectual property, such as key employee information, in the event that the arrangement goes south. Having some level of redundancy, be it HR systems or personnel on site, is another critical factor so a company is covered if it decides to terminate its HR outsourcer, noted Ronald B. McKinley, Ph.D. SPHR, vice president of human resources for the Cincinnati Children's Hospital .

At all times during the termination process, professionalism is key. "A company can't wake up on Monday morning and say, 'It's over,'" said Darrow. "The nature of this is that the outsourced provider is so ingrained into a company and its processes that it's probably a couple-of-months process to shut it all down."

For more information on HR outsourcing, read our comprehensive Buyer's Guide: HR Outsourcing. Be sure to check out the HR Resource Center for more research, community-contributed content and advice from Focus Experts on other HR issues.

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