An Advisor s Guide to Governing an Outsourcing Relationship

Transcription

1 The following article was commissioned by ADP to aid industry advisors in assisting clients with the selection of service providers for outsourcing HR technology and benefits administration functions. An Advisor s Guide to Governing an Outsourcing Relationship by Rhonda Marcucci, Consultant, GruppoMarcucci

2 Administering employee benefits is a complex business and comes with a lot of uncertainties in today s reform-focused environment. It s no surprise then that employers are increasingly outsourcing HR and benefits administration functions. According to a recent survey by ADP, employer group decision makers are planning to outsource more tasks in the next 18 months. Nearly three in 10 midsize (28%) and four in 10 large (42%) companies report plans to do so. 1 Healthcare reform (and the desire to avoid associated lawsuits, fines and penalties) is cited as the top reason for outsourcing administrative functions. Other drivers include gaining access to knowledge and expertise, reducing administrative burden on staff, and being more cost efficient. 2 Regardless of why employers offload the administration of employee benefits, they retain ultimate accountability for ensuring their employees benefits are managed in accordance with the law and in a manner that meets contractual obligations and, hopefully, provides good service to the employee. The likelihood of all this happening in a vacuum though is, well, unlikely. Employer-service provider relationships must be governed and employers should think about governance before they make the move to outsource. That s where the advisor or broker/consultant comes into play. Good governance increases satisfaction Relationship governance is the agreed upon set of roles, rights, accountabilities, principles, procedures and escalation processes that guide decision making, issue resolution, and changes in an outsourcing arrangement. 3 Poor governance is cited as a key reason for failure in outsourcing relationships. Good governance, however, not only increases the overall satisfaction with the decision to outsource, but also the level of satisfaction with the specific service provider. 4 A robust governance outsourcing model will address the following components of management: Service Quality, Issues, Change, Compliance and Communication. 5 Don t beat up on service providers (unless they truly deserve it) Most companies are poor at governing outsourced relationships. HR managers rarely are trained in governance (nor are advisors, in my experience) and yet successful governance can make or break the success of an outsourcing relationship. In cases where advisors are brought in to assist with governance, they are frequently misused. A common mistake I see is employers using an advisor to beat up on the service provider when the employer is unhappy with some aspect of the outsourced service. The advisor, who typically is very service-oriented, willingly complies. Neither action is appropriate. When all is said and done, the problem remains and is now compounded by a frustrated service provider. If the situation can t be easily resolved and tensions remain, the advisor s response is often to move the client to another service provider. Again, not an appropriate action at this point. So what is the role of the advisor in governance? 2

3 It s OK to be the middleman The advisor s role is to take the view from the middle, remain unemotional, fair and objective. A third-party fact-based point of view can reduce tensions and avoid deterioration of the relationship. Once a service provider is in place, advisors can help employers: Ensure the service provider remains focused on employer needs. Monitor ongoing service provider performance to ensure services are delivered as contracted in the service level agreement (SLA). Similarly, they can assist service providers: Communicate the realities of outsourcing, e.g., scope creep, time needed to transfer knowledge, etc. Confirm best practices are being used. Keep the lines of communication flowing among all parties. One of the most important roles an advisor can play, however, is before the service provider has been selected or, better yet, before the company has even decided to outsource. This role is to develop a framework for governance. I applaud the company that works through a governance model before deciding to outsource, but I find this to be rare. That being the case, at the point you are engaged to assist with outsourcing, your first task should be to discuss governance and to work with the employer group to develop a framework that makes sense for the company. Guiding the process In developing a governance framework employer groups should answer these questions: What is the role of each management team? Communications, issue identification, day-to-day decision making, ensuring proper direction/health of the relationship, achieving business objectives, monitoring metrics, etc. What is the role of the advisor? Don t discount the advisor s role in governance; make sure everyone understands the role. (In talking informally with a community of service providers, they say facilitating open, honest communication among all players is the most important thing an advisor can bring to the relationship.) Who needs to be involved (and who does not)? Everyone who needs to be involved should be involved and have a clearly defined role. Who has decision-making authority? Across the board or by situation? Exceptions? Who escalates problems; when and to whom? What s important and why? Quality, quantity, customer service, timeliness, improvement, innovation, exception handling, etc. 3

4 How do you want to communicate? Phone, , face-to-face; frequency. What are you measuring/monitoring? Ability to quantify/qualify; establish penalties/ rewards for consistently failing to meet/exceeding metrics. What is an acceptable issue response time? What s the level of severity of the issue, e.g., an issue that impacts the employee s ability to utilize coverage versus an issue regarding the text font for the enrollment systems? Culture may impact this discussion (see Culture matters section). When these questions are fully and confidently answered, the relationship between the employer group and the service provider can effectively be governed. When there are problems with the relationship (and there will be) this framework can guide all the parties (including the advisor) on how best to address the concern. A good governance model will support most problem resolution at the account management level. Advisors need to understand, however, when to escalate issues to senior management without taking a beat up the service provider approach. Severity of the issues, past performance and the culture of the two organizations contribute to this decision-making process which is best discussed in advance of a problem. Keep in mind, however, that there is a normal break-in period during which both parties are learning one another and there may be some missteps in the early stages. Frequent and timely communication will aid in moving through this phase of the relationship. Nice idea, but hard to deliver Getting employer clients to focus on a governance framework can be challenging. The idea of offloading the regulatory and record-keeping headaches is so appealing that few employers want to focus on how to manage problems that don t yet exist. Or, decision-makers assume that their benefit managers can handle the governance just fine when the poor benefits manager won t even be engaged in a discussion about governance until a problem arises. While outsourcing means relinquishing control of processes to a third party, it doesn t take the employer out of the picture, especially at the initial stages through implementation. The advisor can help employers understand it takes time for the service provider to learn the company s processes, just as if the company hired a new benefits manager. Bumps in the road are to be expected particularly at the beginning. A strong governance framework can ease these bumps. 4

5 Following are governance best practices that advisors should discuss with their employer clients. 1. Define an internal governance framework before making the decision to outsource (or at least before selecting a service provider). Key roles and responsibilities are spelled out; mechanisms for establishing, monitoring and changing direction are outlined; and a structure is in place for reaching agreement on key decisions. When conflict arises, there s a process for resolution. 2. Be prepared to blend your governance framework with that of a service provider s. A combined model delivers all the same things an internal governance framework does (well-documented decision making structure and process, key responsibilities defined and allocated, process for change control and dispute resolution), but takes into account both parties organizational structures and respective interests, thereby increasing the odds for success. (See sidebar) 3. Establish a management team to oversee governance. This is particularly important for more complex relationships. Team members should have tactical and strategic management skills and be strong communicators. The team should include individuals who understand the company s IT, employee benefits and finance functions and who are also aware of the strategic goals of the company. During the all critical transition phase (from one provider to another or from a manual to an online service), additional resources may need to be allocated to the team. Communication is the Success Factor As part of the selection process, bring prospective service providers into the conversation. Any good service provider will welcome a discussion about governance on the front end of a relationship. Cover the same points you would with the employer: roles and responsibilities, communication, expectation management, culture, metrics, etc. Facilitating regular communication between the service provider and the client (which also includes you) will go a long way to avoid or minimize problems down the road. Service providers report that the advisor is often MIA until there s a problem. By the point it s escalated to a level that the advisor is brought in, a simple resolution is no longer an option and it may be too late to salvage the relationship. When asked, service providers consistently respond that open and honest communication is the greatest factor for success in an outsourcing relationship. 5

6 4. Frequent, informal communications will increase the success rate of the relationship. As in a single office or department, regular casual communication among employees helps to identify concerns and produce solutions; the same with a client and service provider. Take steps to help establish strong ties between the two groups particularly between governance teams, but don t discount the value of frequent communication among individuals with day-to-day customer care responsibilities. 5. Allocate sufficient resources to outsourcing governance. Resources usually means people tending to the relationship (whether internal staff and/or an advisor). The level of resources required will vary depending on the complexity of the relationship. Some approach it in terms of a percentage of the contract cost; others in staff time, but the service provider should be able to estimate what will be needed from the client to make it an effective partnership and ensure a smooth implementation and ongoing delivery. Companies that fail to invest adequate time on the front end often encounter problems that could have been avoided with more robust governance and end up spending more time/money to clean things up. Over time, the level of resources for governance may be reduced as both groups settle in together, but a company (and the advisor) should never become too complacent about the relationship. Investment in governance To help sell an employer on the best practices of governance, don t shy away from the ROI (return on investment) discussion. Many companies outsource to be more cost efficient, so investing resources in governance can be a tough sell. Senior management will embrace outsourcing as a way to redirect the focus and energy of the company back to its core competencies. If the company previously handled benefits administration functions in house, then there may be saving through a reduction in staff. Otherwise staff time can be redirected to governance, resulting in no net increase in staff resources. Research with organizations involved in large-scale outsourcing shows that companies that invest in program governance are more satisfied with their outsource arrangement in general, and with the service provider in particular. 6 This is a significant value proposition given the associated cost of changing service providers. Good governance takes time time which no one may have agreed to pay for. Consider including governance in your scope of services with the client to ensure you are compensated. Your involvement in governance can result in a financial saving to the client through early problem detection and resolution. 6

7 Culture matters Culture is a key element in governance. As most companies cultures are fairly set, considering fit as part of the governance process is best done before final selection of a service provider. Client-specific attributes (including culture) is one of six essential components of risk in a relationship, so attention is needed to this area. Assessing fit calls for an objective point of view and the advisor is often in the best position to guide this based on knowledge of the parties. Advisors can facilitate a discussion on cultural fit with their client and prospective service providers. Discuss what a mutually beneficial relationship might look like and whether the scenario is feasible. These exploratory conversations can provide the basis for a successful match if both parties are focused on (and candid about) factors vital to the relationship. Assessing culture fit is not always easy particularly for a new client. This harks back to the question about what s important in the outsourcing relationship, but goes to a more subtle level. One service provider reported that the difference in the communication styles between a west coast client and an east coast service provider resulted in an unhappy client who projected their dissatisfaction onto the product. The intervention of an advisor helped to work through the problem and salvage the relationship by confirming the product represented best practices and the underlying issue was a clash of a laid-back (west coast) style versus a in your face (east coast) approach. Similarly, I know of service providers who maintain sales and account management teams in both the north and the south to accommodate differences in the corporate pace of their clients. The product and service quality is the same, but the style of the people interacting with the client is more conducive to the client culture. This brings me to the importance of managing expectations. While there may be no such thing as a perfect match, an advisor can help both groups to set reasonable expectations of the relationship for all stakeholders. Continuing with our east-west coast example, the east coast service provider now understands their client expects a little more relaxed approach to matters. Conversely, the west coast client now sees the direct approach as the efficiency it is intended to be. Having both sides understand and appreciate each other s capabilities and limitations, and having a clear sense of how the respective organizational cultures drive behavior, will greatly increase the rate of success of the outsourcing relationship. Governing the governance While a strong governance framework, a proper allocation of resources, and good communication are all important to the success of the outsourcing relationship, at the end of the day it s the contract that governs the relationship, or at least governs the governance. Work with clients to develop a transparent, well-thought out contract. Pay careful attention to the metrics identified for service levels. I know of many instances where service levels are met, but the client is dissatisfied. For example, the contract specifies all customer calls will be answered within two minutes, but employees report that the person answering the phone couldn t answer their question. 7

8 Performance measurements should benefit the employer group, but be achievable and motivating to the service provider. Service level guarantees should be quantifiable and evaluated with easily obtainable data at a reasonable cost. Metrics should demonstrate value to employees and to the benefits staff making business and budgetary decisions while addressing the expectations of senior managers who are tracking results against goals. Contracts with clearly defined metrics aligned with organizational goals make the task of governance much easier. Further, it can take much of the subjective element out of the decision to look for a new provider. It will be clear to all when it s time to make a change. Develop an exit strategy It s a given. Not all outsourcing relationships work. Whether due to a lack of governance, poor cultural fit, failure to communicate or a dozen other reasons, sometimes relationships fail. Even employers who report a high level of satisfaction with their service provider evaluate their options. According to ADP, three out of ten HR/benefits decision makers in midsized companies (31%) and nearly half in large companies (47%) report that they are at least somewhat likely to switch service providers within the next 24 months. 6 I previously noted that advisors are often too quick to suggest a change in service providers. I stand by this. It almost always takes less time, money and energy to evaluate and repair an existing relationship than to form a new one. I recommend advisors facilitate periodic reviews to discuss the quality of the relationship, including communications and issue resolution. Also discuss how the relationship might be improved and/or goals more effectively achieved. Use this time to air unresolved issues, conflicts or misunderstandings. This should be part of the governance framework. This strategy also keeps the advisor involved on a regular basis. The more involved you are as an advisor, the more likely you can divert a problem. When an advisor gets involved only at the point of a problem, it may be too late for resolution. Keep in mind that new outsourcing relationships always experience high levels of stress. This is due, in part, to the expectation versus reality gap that exists when moving from a paper process or a poor provider. Employers tend to have unrealistically high expectations. Experience proves this to be true no matter how good the product or how smooth the process. The advisor s role is to help the client recognize this is the norm and that they can expect to feel some level of anxiety for at least four months after the new system goes live. Good governance can manage the degree of anxiety, however, and help the relationship through the rough spots. If and when a client is ready to make a change, you will have served them well if you facilitate a strongly-written termination clause in the contract. Key elements include: 1. Data ownership Ensure the client owns the data it provided as well as data generated by the service provider according to the contract. 2. Early termination Fees should be reasonable and apply only for the first three years. 8

9 3. Transition to a new provider Negotiate cost and scope of transition in advance; strive for limited or no service disruption for employees. 4. Address advisor services in a separate contract The service provider should have a contract directly with the employer in order to be accountable for service level agreements and other contractual obligations and relationship governance. 5. Continuation of obligations Confidentiality and indemnification should extend beyond the life of the contract; this should be expressly stated. Encourage clients to thoroughly think through the process of ending a relationship with a service provider and the contractual implications (just like a divorce). Client legal counsel should pay very close attention to the termination clauses. They may not be favorable to the client but can be easily passed over by a contract attorney as boilerplate terminology. Your insider view of the industry can help identify contractual red flags. For example, be sure adequate time is allotted for the termination process (and implementation of a new system). Neither process goes as quickly as most employer groups think it will and your role should be to work to ensure there s no gap in employee benefit services. Low governance = low success There is no one best model of governance strategy. It depends on the company, its strategic business goals, and the service provider selected. One constant factor, however, is the reason for failed outsourcing relationships: poor governance. In a 2011 study, KPMG field advisors and third-party service providers both cited insufficient relationship and program governance as the top reason for outsourcing transition failure. Second and third causes named by the two groups (in alternate order) were inadequate transition project planning/due diligence and a lack of understanding of the deal/scope. 8 Outsourcing represents a major shift for everyone in the organization. Employer groups that don t recognize this and fail to plan for the change are far less successful in their outsourcing than those that prepare accordingly. In my experience, success of an outsourcing arrangement is far less about process improvement and technology enhancements than it is about the governance process. The governance framework must to be flexible enough to keep pace with periodic changes in business and HR service delivery strategies, but detailed enough to provide significant and meaningful oversight and operational direction. The advisor can help to ensure internal governance issues are sorted out in advance of outsourcing and that the agreed upon governance framework is adhered to throughout the implementation and service delivery process. Good governance nearly always results in a successful outsourcing engagement. And isn t that what everyone wants? 9

10 1 Benefits Administration: Should You Outsource or Manage In-House? Rep. ADP Research Institute, Feb Web. 8 July Ibid. 3 Girst, Amy L., and Robert J. Schleyer. Managing the Outsourcing Relationship. Journal of Work Process Improvement (February 2005): Wexford Partners. Web. 24 July < 4 DeFidelto, Cynthia. Robust Governance a Key To Outsourcing Success. HRO Today Vol. 8.No 3 (2009): n. pag. HRO Today. SharedXpertise Media, LLC. Web. 20 July Miller, Stephen. Governance Lessons from DuPont: A Collaborative Outsourcing Relationship. Society for Human Resource Management. Society for Human Resource Management, 1 May Web. 06 July DeFidelto, Cynthia. Robust Governance a Key To Outsourcing Success. HRO Today Vol. 8.No 3 (2009): n. pag. HRO Today. SharedXpertise Media, LLC. Web. 20 July Benefits Administration: Should You Outsource or Manage In-House? Rep. ADP Research Institute, Feb Web. 8 July KPMG. More Organizations Using Complex Mix of Shared Services and Outsourcing to Meet Service Delivery Needs, KPMG Pulse Survey Finds. KPMG. N.p., 3 Nov Web. 23 July About the Author Rhonda Marcucci is a 25-year veteran financial and operations executive with a record of success in identifying strategy and executing against it to achieve client goals. Her firm, GruppoMarcucci, is a nationally recognized HR and Benefits Administration technology outsourcing consulting practice which focuses on strategy and partnership work for entities wishing to understand, enter, or penetrate the benefits administration market. GruppoMarcucci provides solutions for all aspects of HR and benefits administration technology challenges, including providing sourcing advice and service provider capability audits. The GruppoMarcucci team is on call to respond to clients request to Help me Rhonda. About ADP Automatic Data Processing, Inc. (Nasdaq: ADP), with about $10 billion in revenues and approximately 570,000 clients, is one of the world s largest providers of business outsourcing solutions. Leveraging over 60 years of experience, ADP offers a wide range of human resource, payroll, tax and benefits administration solutions from a single source. ADP s easy-to-use solutions for employers provide superior value to companies of all types and sizes. ADP is also a leading provider of integrated computing solutions to auto, truck, motorcycle, marine, recreational vehicle, and heavy equipment dealers throughout the world. This paper was sponsored by ADP. Automatic Data Processing, Inc. adp.com The ADP logo and ADP are registered trademarks of ADP, Inc. In the business of your success is a service mark of ADP, Inc