With the need to focus on high-level human resource issues such as aligning human capital to support the bottom line, more and more companies are outsourcing numerous HR processes, like payroll, benefits administration, performance measurement and onboarding and severance administration.

But while turning over essential functions to an outsourcer may enable HR to ease the transactional burden, it also requires dedicated governance. This entails working closely with the outsourcer to ensure that the services stipulated in the contract are being delivered within budget and staff, managers and executives are satisfied with the quality of services they are receiving.

Lack of effective governance is expensive; in fact, it can result in a 20 percent loss of value from an outsourcing arrangement, according to EquaTerra, an outsourcing advisory firm in Houston.

There Can Be No Effective Governance Without a Punctilious Contract.
The first step in effective governance is negotiating a workable contract as soon as the outsourcer is selected. It pays to take the time to carefully consider your company’s needs and goals– not just in the present but over the life of the contract. A company that initially outsources basic functions may eventually want to add more advanced services, such as retirement planning.

To manage expectations and ensure due diligence, the outsourcing contract should include the following:

--Service levels that the outsourcer has to meet -- including provisions for improvement (included in most current contracts) and clear objectives for managing processes. Service level agreements (SLAs) should be measurable by consistent, standard metrics. Some companies include penalties for not achieving results.
--Expectations of performance by both parties.
--Outsourcer reporting requirements – including frequency and types of reports and performance audits
Organizations may also want to set a 90-day trial period to establish how the relationship is going to work and make any needed changes. “The first 90 days are critical,” says Jason Corsello, research director for The Yankee Group, a technology consulting firm, in Boston.

“What typically happens is that clients don’t commit enough people and organizational resources to make the outsourcing arrangement successful. Relationships deteriorate because the buyer is constrained,” says Corsello.

Employers can prevent problems from developing by assigning adequate resources to the outsourcing arrangement from the start. Some employers may assume that they can just let the outsourcer handle the work, but effective governance depends on allocation of significant internal resources to governance for the life of the outsourcing partnership.

Outsourcing Must Be Closely Governed from the Moment the Ink Dries.
Ensuring that the outsourcing provider lives up to the contract and provides maximum value is a full-time job. This job needs to be filled as soon as the contract is signed, advises Brad Everett, a client executive at EquaTerra.

Vigilant oversight is critical throughout the outsourcing engagement to maintain quality services and client satisfaction. Ultimately, it is the client-vendor relationship that is key to achieving success, according to the 2005 HR Outsourcing Effectiveness Survey Report from Hewitt Associates, an HR consulting firm based in Lincolnshire, Ill.

“Companies that have embraced outsourcing for a number of years understand how to manage the relationship. For companies doing it for the first time, it’s different than doing HR. It varies from company to company if the skill sets are there,” says Corsello. Some companies have outsourced other business processes or have employees with prior experience working with outsourcers or consultants.

Companies may need to hire a new person or turn to an HR consultancy for guidance. “It’s not uncommon to reach outside the organization to bring someone else in,” says Everett.

One essential skill is project management. Often, the outsourcing manager leads a team of HR professionals responsible for specific functions such as benefits and payroll administration. Outsourcing liaisons need not only expertise in their area but project management ability to develop a close relationship with a provider and deal with the inevitable issues that come up, such as last-minute changes in payroll processing, discrepancies in data or giving out incorrect information to employees.

Beyond day-to-day management, the ultimate responsibility for ensuring the outsourcing arrangement meets business goals and makes economic sense lies with the senior HR executive, who should report regularly to the CFO.

Managing the outsourcing arrangement is easier when communications are clear. Communications guidelines can be specific, such as responding to an instant message within 15 minutes or having a scheduled weekly status call.

Developing an effective working partnership with an outsourcer doesn’t happen overnight. It can take two years to work through all the issues that can arise in a client-vendor arrangement, according to the Hewitt report. “It takes time to build trust in an outsourcer to deliver services that you’ve done for the past 20 years,” says Liz Campbell, managing director of the governance practice at EquaTerra.

Metrics Are Critical to Optimal Governance of HRO.
Outsourcers should be required by contract to report periodically. For example, benefits administration status reports are often delivered daily. In some instances, the data can be exhaustive and detailed; for a call center handling employee relations, call volume, duration, time of call and how long it took to be answered can all be measured. Clients can request a more detailed audit if there are questions.

The high volume of tracking data typically provided by HR outsourcers can be organized and analyzed using outsourcing management tools. There are many tools available that manage single or multiple governance processes, tracking contractual obligations against service levels and financials.

However, these tools mainly focus on monitoring service delivery and protecting against risk, rather than realizing benefits, says Campbell. EquaTerra is introducing an outsourcing governance solution that uses a dashboard to provide a broader view of the overall client-provider relationship and performance. The governance team can drill down to an operational level as well as roll up data for executive management.

Ultimately the success of an outsourcing relationship goes beyond ensuring basic service delivery and hitting targets. In HRO, unlike other areas of business process outsourcing, the provider may handle sensitive and critical functions like employee relations, payroll and benefits questions and even training and performance management. The Hewitt survey found that satisfaction levels dropped for processes involving direct employee-vendor contact compared with core HR administrative processes.

“Companies should do a qualitative analysis as well as a quantitative analysis,” says Corsello. “Take regular employee surveys to gauge their experience and whether they are satisfied and happy.”

As HRO continues to make inroads, governance is constantly evolving. Employers and their vendors are always learning what works and what doesn’t. Despite the growing pains, Hewitt found that 70 percent of companies are realizing their goals for HR outsourcing.


Elaine Gottlieb is a freelance writer in Cambridge, Mass. She writes about workplace and business issues, health and technology.