s 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
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