You’ve decided to outsource – now what?

“Is Outsourcing Right for You? The Answer Depends on the Question,”

So you’ve chosen the outsourcing fork in the road to the future, but there are still plenty of opportunities to stumble.

The outsourcing road is not especially well-travelled. The first goal is to create a detailed map of the steps you need to take. This helps you decide what is feasible and suitable. To avoid mistakes, here are a few of the questions you should ask:

•What will be the speed of the journey? You needn’t make the transition to outsourcing administration in a single “big bang.” Big bangs tend to be both expensive and painful. In many situations, a series of small steps makes the transition easier to manage in various ways — project management, successful installation, and winning buy-in from all levels of the organization.

On the other hand, sometimes you need to move quickly. Your preferred speed depends on the business situation, the corporate culture, and other factors discussed below. But be careful: once a strategy is set there’s always pressure from management to do everything they want and to do it fast.

One reason for favouring a slower approach is that it’s critical to make sure the first project you undertake is a raging success. It’s much better to do one thing right, than to try to do many things and not succeed at any of them.

•How will you choose your outsourcing partners? The best process for choosing an outsourcing vendor today is the opposite of the time-worn “Request for Proposal (RFP)” approach. In that approach you defined your requirements in detail, and then published an RFP seeking someone to do just what you had specified. But today, in the era of increasingly specialized expertise, this approach leads to inefficiencies and outright blunders. A more effective method is to collaborate with potential vendors from the start, allowing your outsourcing partners to help you define your requirements.

An example that is as far from high technology as possible is the Pentagon’s infamous $600 US toilet seats. The Pentagon used an old-fashioned RFP approach, and it failed them. The reason was that no existing vendor’s products exactly met the specs put out for the seat. Thus, the chosen vendor had to custom-design and build the seats, resulting in the astonishing cost per unit. By contrast, a short collaborative meeting with potential vendors would have led to equally good products for $12.95 US each.

This is the essence of the recommended “Reverse RFP” process. You should, in fact, work with several vendors to determine the details of the outsourcing strategies and tactics that would best fulfill your needs. This approach lets you benefit from the vendors’ specialized knowledge, and is almost certainly superior to the requirements you would come up with on your own.

•How will you measure progress? In the process of concluding your agreement with vendors, it’s critical to develop precise and meaningful metrics. If you don’t have milestones to measure where you’re going, you won’t know if you’re moving in the right direction and may not even recognize when you arrive at your destination. Quantifiable metrics are essential in any business process automation project, but it is even more important when you outsource.

To develop metrics, first determine in a rigorous and consistent manner the catalog of products and services currently provided by HR, then document them in a manner that allows a longitudinal review. The analysis should be done so that it measures “state changes” rather than processes. For example, the product or service would be described as “from not enrolled in benefits to enrolled.” This approach allows a future apples-to-apples comparison of current and future costs, even if the processes are vastly different.

Once the catalog of products and services is built, it can be updated every three to five years. Doing so will demonstrate that the administrative aspects of HR are trending down in cost, while at the same time effective value-added services increasingly reflect the desires of management.

•How will you manage your risk? One key to successful outsourcing is a robust risk management process. Metrics are critical for identifying potential risks to project failure, and also for taking steps to prevent problems and — if necessary — to correct them before they get out of control.

The largest risk in any project is failing to communicate to management and employees what is happening. They should know why things are changing and that interruptions in service may occur during the transition. They should be told how to react if a disruption occurs.

In modern life there are always problems when any major change takes place. The key to managing expectations is to be honest and forthright at the start by outlining the schedule and risks, so that no one is surprised later. Projects that have taken this approach have had much better success rates than projects that promised everything would be fine and change would be 100 per cent transparent.

Excerpted from “Is Outsourcing Right for You? The Answer Depends on the Question,” by Jay F. Stright in Out of Site: An Inside Look at HR Outsourcing, Section One, pp. 24-27, IHRIM Press, June 2004.

Putting together your outsourcing model

First the destination – then the plan to get there

Even when you’ve started travelling on the outsourcing fork, there are many ways to move to the future. Choosing your specific path should be guided by several variables, such as the following:

•The status of your technical infrastructure, which will determine many of your choices regarding outsourcing. The nature of an organization’s technical infrastructure typically reflects the requirements of the core business. If the organization is a fully vertically integrated operation, it will have the technical infrastructure needed to operate in that mode. However, if the company is organized toward the holding-company model, it will often not have the infrastructure to support integrated communications across all operating units. The good news is that with current portal technology it is common for organizations to grant access to employees through an intranet. An intranet allows for secure access without requiring a robust internal technical infrastructure, as would have been needed a few years ago. The key is to work very closely with your internal IT experts to ensure that the direction you select fits hand-in-glove with the technical direction of the organization.

•Areas of “pain” in your current service offerings. Areas of pain can help you determine where to outsource first. Setting priorities can help you avoid a common pitfall: rushing forward as if implementing your newly agreed-upon outsourcing strategy was your organization’s highest business priority. In fact, it rarely is. That’s because migrating to an outsourced HR administrative approach is generally not a primary key to the organization’s business success. Therefore, it makes more sense to carefully think through the order in which services are moved to outside providers. The best candidates for early migration are services that require short-term investments or that are not providing the level of service required by the business.

•Your company’s position in the organizational life cycle. The path to the future is quite different in a company in the early fast-growth phase than in one in the declining industry phase. The speed with which you must make decisions and implement them is much higher in an organization undergoing fast growth than in a organization with robust services that have developed over time. The importance of economies is greater if you’re in a fast-growth phase than if you’re in a reduction phase of the life cycle. Other priorities, too, will differ in the two phases.

A key thought-process for those in the fast-growth phase of an organization is to determine ways to provide HR administrative services early in order to preclude building capabilities internally that don’t have the scale to support mid-term growth. That mistake often occurs because of an unfortunate paradigm: the idea that “we need to learn how to do it ourselves before we are ready to outsource.” Can you imagine a business leader recommending to the board of directors that even though the long-term plan is to outsource a facet of the business, the business should first invest in mastering it internally? (This fictional leader might say, “We recommend building a tire manufacturing plant. But once we have it humming, we plan to shut it down and outsource the work.”) As ridiculous as that sounds, it is often the rationale given by HR leaders for internal administrative system development.

•Industry type. This goes beyond the question of life-cycle phase to the idiosyncrasies of the industry. For example, the oil industry had to greatly reduce costs 30 years ago, when it lost a depletion allowance. But only in the last decade has the health-care industry been under great pressure to reduce costs. When health-care HR managers in recent years have proposed measures that have long been standard in the oil industry, they have sometimes been challenged as being out of their minds.

•Management decision profile. How quickly are determinations made about changing the delivery method for HR administrative services? It depends on the style of management. What does it take for senior management to be comfortable with a decision? You may find that the answer has something to do with top managements’ career backgrounds. If your senior management is made up of engineers, a decision usually takes more research and time than if the managers came up through sales.

All of these factors play a role in determining the best path to the future for you. Just because another company took a different path and it worked for them doesn’t mean you should follow it.

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