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Successful contracting for HR outsourcing


PuzzleMore HR outsourcing contracts succeed than fail, yet success depends on the positions taken and behaviours used when contracting for these services. Tim Palmer offers some practical advice.

Prepare well

Understand why you are considering using outsourcing and what you want to achieve. You have many options in approach, and your intent will impact which route you take. Write an outsourcing strategy and share it with your key stakeholders, taking their concerns into account. Most request for proposals (RFP) for global HR outsourcing (HRO) that I’ve worked on have been written and approved in four weeks or less, due to effective pre-work on an outsourcing strategy.

Get finance on board

You will need a robust economic model, based on both data and appropriate assumptions, which will guide you throughout the project. Your chance of getting an accurate outcome and having your model accepted by the business rises if there is a trusted finance person on the team putting their name against the business case.

Start measuring

Historic service performance information puts you in control during an outsourcing contracting process. However, it is rare for companies to have reliable baseline data when they start, so we advise our clients to pick the 12 or so metrics most important to them and start measuring at the start of the process. To help you start, a generic recommended service level agreement for HR is available for free on the HR Outsourcing Association website.

Explore the role of process definitions

“Understand why you are considering using outsourcing and what you want to achieve. You have many options in approach, and your intent will impact which route you take.”

Most HRO projects are scoped using a list of activities called a ‘statement of work’ that shows which party does which tasks. This is appropriate, but probably the most common issue with HRO contracts is a misunderstanding between client and service provider about what each point means. We would advise you to take the time before you create your RFP to map out your target processes, at least to a level of detail that allows you to specify the parts of service that you will outsource. This investment is worth it for two key reasons.

Firstly, it will make it easier to have detailed conversations with a service provider during scoping. If there is an area of contention during negotiation, you can map the process in more detail until there is clarity and mutual understanding. Secondly, during the term of the contract you can ask the service provider to update the process, ensuring that you understand and have control over the way that the service is being delivered.

Select quickly

Run a selection process in a collaborative way, ensuring that there are multiple opportunities for your team to meet potential service providers. In most cases we recommend having two or three service providers in the competition, with an objective to get through the formal competitive process within 12 weeks. It is far better to work in detail with your preferred service provider than to string out the process with more. You can always revert to a second choice provider if you cannot agree terms with your first.

Use competition intelligently

Use contractual schedules during the selection process to secure the things that you most want. Schedules that you should agree before you select a preferred service provider include: a description of the solution; key commercial terms (but not the full contract); scope of services; service level agreements; and firm (but not final) pricing. This can then allow you to compile the ‘legal’ content of the contract into a short document written by lawyers, with further detail in attachments written in business language.

Beware of sub-contracts

“Price and commercial terms should be stage gates rather than decision criteria.”

I am not saying don’t use them, in many cases they are unavoidable, however understand what you are getting into. If you have a sub-contract you will be paying a service provider a margin on top of the price of another party. If something goes wrong with the sub-contractor, you will not have a contractual relationship with that party – you will need to rely on your relationship with your prime contractor.

Don’t buy on price alone

This is a slightly controversial point with some procurement functions, but price and commercial terms should be stage gates rather than decision criteria. We generally advocate that if an acceptable market-relevant financial and commercial case is achieved, we should not encourage clients to get their providers to race to the bottom on price. Instead, you should make your selection on items such as proven capability, solution fit and cultural compatibility.

Test how the contract will work before you sign

In the heat of the negotiation it is hard to find the time to do this, but working through some scenarios with your service provider to ensure that you both have the same interpretation of the contract will help ensure that there are fewer surprises. Particularly include in this the change control process, and the levers of influence that you have, such as service credits and audit rights. Test also where the liability lies for delays in the roll-out schedule. This is the major cause of business cases failing to meet expectations.

Get help

Advice from people that have been through this before is going to pay back multiple times. You can find help internally. The CIO is a good place to start; they have usually been through multiple outsourcing contracts, and their experience is pretty transferable. Independent sourcing consultancies (such as my company) can help you short cut the process, manage your risk and allow you to make steady sustainable progress through the work. The right lawyers are also important. Make sure that your lawyer has done business process outsourcing (BPO) on your scale before. And finally, network with peer organisations, such as the members of the HR Outsourcing Association’s buyers group.

Tim Palmer is from PA Consulting Group and is one of Europe’s leading sourcing advisors.

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