There are now more than 50 organisations that have used HR outsourcing (HRO) to help transform their multinational HR functions. Almost all have found the journey difficult, both in setting up the contract and, once live, in achieving the promised value. That said, most mature buyers consider their contracts a qualified success, as they have allowed their organisations to save costs and improve services in ways that would have been impossible without external help. The European HRO market has taken a pause for breath in 2008, with only two or three multinational contracts currently being negotiated, compared with more than ten at this same time over the past three years. Let’s reflect on the reasons why this slowdown has occurred and what needs to be done to ensure HRO remains the useful tool that it is for multinationals.
HRO marketplace slowdown: economic or contract related?
The primary reason for the recent reduction in the number of contracts being negotiated is that the business case for multinational HRO can be marginal. In particular, where there is transformation involved clients often have to bear significant up front costs. This has proved a real barrier to starting new contracts. Organisations that might have otherwise considered outsourcing are now holding back - at least for 2008 - preferring to make incremental changes themselves.
A secondary cause is the lengthy decision making process, which can exceed one year. A lot can happen during this time: acquisitions, leadership and business changes can all undermine the original intent. This also impacts service provider appetite for the work. The major multinational service providers have re-evaluated their bidding strategies and there has been a marked increase in their pulling out of competitions.
A root cause of these issues may be the way that HRO contracts are negotiated. The prevailing commercial approach often pits service providers and buyers against each other in a confrontational negotiation over a rigid agreement that is laden with risk. In international projects, these risks are magnified. The cost of bidding, scope misunderstandings, reduced control, relative naivety of buyers and patchy contribution from advisers, have all contributed to the issue.
Striking the right and balanced HRO contract
Together, service providers, buyers, lawyers and sourcing consultants need to find ways to make HRO contracts easier to prepare and agree.
Some techniques that are being adopted in Europe include:
- Running a more rapid selection process. A competitive selection process should take no more than three months, even for a complex project
- ‘Try and buy’. Less ambitious pilots, for example outsourcing in certain geographies as a test before rolling-out to other locations, can reduce risk on both sides, while lowering selling and buying costs
- ‘Open book’ relationships. The service provider and buyer share a view of each other’s financial position in a transparent contract. This approach was common in the 1990s and may be making a comeback, as it is an effective way to align incentives and reduce costs. Of course, this can only be achieved where both parties are confident in the genuineness of their relationship, and there is a commitment not to undermine the other party’s business case
- Putting the ‘intent’ at the centre of the contract. Where contracts are to result in a high level of transformation, the original intent can get lost behind a fog of compliance within a rigid contract. Putting some of the service provider’s fees at risk based on the achievement of the desired transformational outcome can help maintain this intent. Service providers have traditionally been slow to accept this approach, as they are rarely in control of project outcomes, but there could be an increased willingness if buyers are also prepared to share their upside with service providers through gain sharing
- Using assisted transformation for low-cost and small countries. A perennial issue in business cases for multinational HRO is that, outside a few core western countries, organisations rarely spend much on their current HR operations. An assisted transformation approach, where delivery risk is shared with the service provider without a transfer of service responsibility, can have the same desired effect to outsourcing but at a much reduced price.
Each party must play their part
These and other approaches are increasingly being adopted as we move into a more cost-conscious time. However, they will only truly work if buyers and service providers are able to develop mature and trusting relationships. Sourcing consultants and lawyers have a key role to play in making this happen and all parties need to keep an open mind of the impact that they have on creating a mutually-beneficial HRO contract. In these lean times, leaning on each other will allow HRO to continue to be a valid tool for multinationals both to save costs and improve services.