Does bundling BPO services work for HR?

Price discounts reaped by outsourcing several HR functions through a single provider are appealing, but experts warn bundled BPO services bring risk.

Bundling is big in many aspects of business today. Want to save money on phone services and Internet data plans? Get both from the same provider for a rate that -- initially, at least -- is less than the cost of two separate plans.

Similarly, in the world of human resources (HR), some organizations are now contracting with a single business process outsourcing (BPO) provider for multiple HR functions, such as payroll, time and attendance and benefits management, to get price discounts. But although the reduced price of bundled BPO services might be a compelling factor, it shouldn't be the only consideration.

Experts advise companies to look beyond the bottom line before signing long-term contracts. "You are multiplying your risk when you bundle HR services," said Morgan Yeates, research director for global HR BPO at technology consulting firm Gartner Inc., based in Stamford, Conn. "What if six or 18 months down the road the vendor just isn't living up to your standards for the agreement? You've not one service, but three services you've got to address."

A better idea is to resist the allure of immediate savings and instead take time to define ongoing HR needs and the key performance indicators (KPIs) that will track service provider performance on a continuous basis, according to analysts.

The evolution of bundled HR BPO services

Bundled BPO services for HR isn't a new idea. A decade ago, a number of vendors offered HR bundles for a wide spectrum of functions, from payroll, benefits, recruitment and learning to compensation, performance management and succession planning. The bundles were comprehensive enough for some customers to hand over all HR operations to a third-party service provider, Yeates said.

But that model didn't last. "Those solutions fell apart under their own weight because employers determined that no one company could be great at each of those services," he said. "So the pendulum swung back to unbundled services where employers looked for individual best-of-breed options."

Recently, bundled HR BPO services have once again gained favor, but in more modest configurations. An HR manager today might choose a single provider for payroll and benefits capabilities, with perhaps corporate learning and training added to the mix. "Today's service providers are not trying to become the entire HR department, they are simply providing services to the HR department," Yeates said.

The cloud adds a new wrinkle. Service providers can take advantage of core cloud characteristics, such as multi-tenancy, to lower their operating costs and pass the savings to clients, in some cases.

Cloud environments also enable providers to roll out new features more quickly. "In many cases, cloud-developed applications offer more sophisticated automation and other capabilities," Yeates said. "So an employer isn't just making a decision about whether or not to go with a cloud solution, it is also considering what new technology is available that handles what they may be paying their own staff or [another] provider to do."

Define KPIs and monitor providers when outsourcing

There's a lot to lure enterprises to bundled HR packages, but experts warn that HR managers should also understand potential drawbacks. Close monitoring of BPO service providers is essential to successful engagements, said Dan Vander Hey, principal consultant at KnowledgeSource Inc., a Dallas-based consulting firm that specializes in HR projects.

"Go ahead and outsource, but don't abandon vendor management efforts," Vander Hey said.

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Outsourcing deals that go bad are often those where clients haven't clearly established their desired KPIs and governance processes, according to Vander Hey. "Companies that struggle with outsourcing often have the attitude that they're paying for a service so the provider should be delivering it successfully," he explained. "That's true, but you still must monitor performance and have accountability."

In addition to defining formal performance metrics during contract negotiations, customers should insist on monthly reports showing how well the criteria are being met, as well as regular meetings to review the status of the engagements with service providers, he said.

Another consideration is a low threshold for customization. Vander Hey pointed out that BPO services customers might have to settle for standard sets of services that aren't fully tailored to the unique requirements of their organizations. "BPO providers will configure the services to address individual needs as much as possible, but customers won't be able to fully customize them," he said.

In the end, an incremental approach to bundling may be best, according to Yeates.

"Consider starting with one area of HR, such as benefits. Over six or 12 months see if the provider is meeting all your expectations, and if it is, then add payroll or time and attendance," Yeates said. "The solution didn't come as a bundle from the start. But, over time, multiple services are delivered from one provider that is likely to offer a price break to keep a client."

About the author:
Alan Joch is a New Hampshire-based freelance writer who specializes in enterprise applications and cloud computing.

This was first published in December 2013

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