Getting Creative With Pricing

April 12, 2007
As early HRO contracts come up for renewal, price is a key issue, but so are the elements that determine what that price will be. Clients and providers are discussing new pricing approaches and are attaching rewards as well as penalties to service level agreements.

    In 2000, for example, aerospace giant Lockheed Martin signed an HRO contract with PricewaterhouseCoopers’ Unifi division (now Affiliated Computer Services). Under that deal, ACS would have to pay penalties if service levels tailed off from expected targets, says Warren Pfister, director of HR customer service at Lockheed.

    "Like most people, all we thought about was the stick, and that gets you a certain level of motivation. But if you want quantum leaps in how your provider serves you, sometimes you need a carrot," Pfister says.

    In Lockheed’s current agreement with ACS, which was renewed in 2005, the pro¬vider still is subject to penalties if it doesn’t meet certain service level requirements. But it also can qualify for premiums if it surpasses those requirements.

    For example, Lockheed and ACS have expanded how they measure customer service satisfaction with ACS’ service centers. In the past, ACS would be subject to a penalty anytime customer satisfaction fell below a "B" grade. Today, it can receive a premium if customer satisfaction hits B+ or above and stays at that level each month for a whole year.

    "We believe premiums motivate ‘stretch’ improvements for enhanced customer satisfaction," Pfister says.

    Lockheed has realized "considerable savings and efficiencies" from this practice, he says, declining to provide specific numbers.

    On the other hand, some HRO buyers are upping the penalties providers have to pay if they don’t improve the quality of HR processes by a pre-
determined amount, says Mark Azzarello, chair of the HR BPO Buyers Board and, until recently, director of HR operations at Memphis, Tennessee-based International Paper. Azzarello is now the company’s director of compensation.

    "Some contracts have budgets around process improvement and the provider has to come up with a specified number of process improvements to be funded out of this stand-alone budget," Azzarello says. "If the process improvements are not created, then the provider has to pay penalties."

    For example, a contract today might stipulate that the provider has to reduce by 20 percent the amount of time employees are on hold to speak to a benefits specialist. If the provider doesn’t meet that goal, it has to pay a penalty.

    Another new trend among HRO buyers and providers is that more contracts are using "unit pricing" for certain processes that lend themselves to volume-driven pricing, such as payroll and benefits administration, says Lowell Williams, vice president, HR practice lead at EquaTerra, a Houston-based sourcing advisor.

    Pricing traditionally is determined by the process and how many employees are involved, he says. "For example, a buyer would say, ‘I want payroll for 1,000 employees,’ and the provider would come up with an annual price," he says.

    But now, more buyers and providers are pricing transactional processes on a per-employee basis. If an employer has 10,000 employees and needs payroll, the provider will say that as long as the company doesn’t have more than 12,000 employees or fewer than 8,000, the price will be $38 per employee, Williams says.

    "What’s good about unit pricing is that if a company is thinking about acquiring another firm with 3,000 employees, the pricing for outsourcing those employees’ payroll is much more transparent," he says. "It’s clear how much it will cost per employee."

    Thinking into the future often is the hardest part of negotiating HRO contracts, Pfister says.

    "Even when you work with advisors, they tend to give you the current snapshot, but that will be old in five years," he says. "You need to stretch and think ahead."

Workforce Management, March 26, 2007, p. 38 -- Subscribe Now!

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