Finding the right contract that works for you
Current research into customer satisfaction with the outsourcing process and the resulting benefits has raised some interesting issues. A study by PA Consulting Group shows that 78 percent of respondents said their HRO supplier was delivering the service levels that had been agreed upon, but 74 percent said they weren't satisfied with the contractual relationship.
Put simply, most were getting what they had asked for, but few were getting what they wanted. At a deeper level, the message is that service levels alone are not enough to underpin a successful HRO relationship.
This piece of research springs to mind when I am commonly asked an apparently straightforward question: ‘What sort of outsourcing contract works best?’ The trouble with this question is that starting from the legal contract is actually part of the problem. Instead, the key to successful HRO is to start from cultural compatibility, common objectives, gain sharing and progressive improvement through innovation.
This is not always easy in an environment where traditional customer-supplier relationships have been the norm. At the HRO World conference in New York earlier this year, some providers highlighted a trend for customers to seek HRO agreements based on short-term supplier contracts lasting as little as three years. These same customers wanted the freedom to switch providers easily should they feel dissatisfied with the way things were working.
Clearly, in any marketplace the buyer is boss. But, as an approach to HRO, such an attitude is potentially nothing short of disastrous − to the extent, I would suggest, that any company approaching HRO with this mindset should probably abandon the idea, and seek some other solution to its HR performance problems.
Why? Because if you try to define the HRO relationship and the service being delivered as a total commodity − effectively as a fixed unit of utility delivered for a fixed price for a fixed period − then you will inevitably drive down the quality of the resulting service. Add to that an overt readiness to swap your HRO supplier as readily as your provider of catering or paper towels, and the negative effect on quality will be all the greater.
If you look at it from the provider’s viewpoint, it is not hard to see why. The bottom line is that HRO suppliers need two things to deliver success for customers and for themselves. First, they need to build up sufficient volume to drive down costs and exploit economies of scale. And second, they need a sound basis for significant up-front investment to improve service quality. Short-term commoditised deals means they can have no certainty on either point. The likely result: poorer service and little investment in improving quality.
In contrast to a commoditised approach, experience shows that the route to really successful HRO lies through the creation of a long-term ‘win-win’ partnership founded on shared benefits and objectives. The customer should allow the provider sufficient scope and incentives to innovate and reduce costs progressively through developments such as new technology, greater automation and enhanced self-service. When service problems arise, the partners should collaborate to solve them rather than resorting to blame.
All of these elements help to sustain a partnership that builds positively on the hard black-and-white of the contract. And it is only through this partnership that the contract can really be made to work. So of course you need a flexible but crystal-clear contract with agreed service levels and improvement targets, formal dispute resolution procedures and a get-out clause in case the relationship is fundamentally broken. But these wheels must be oiled by cultural alignment, mutual understanding and respect, and a shared willingness to give-and-take.
This is why the first step towards HRO should not be a draft contract, but an in-depth orientation process in which both parties get to know one another, and decide whether they can get along both personally and professionally. Equally importantly, the customer must appreciate the sheer scale of the change programme that HRO entails − especially when you take into account the organisation-wide behavioural implications of HR self-service. With a change programme of this order, you cannot expect a provider to reach optimal performance in less than 18 to 24 months. Which means a contract of three or even five years is really far too short.
So, what sort of HRO contract works best? In simple terms, one that is clear, flexible and responsive to change. But what really makes it work is a truly collaborative relationship. And that is something you can never entirely encapsulate in legalese.
