Key Issues in HR Outsourcing

Outsourcing of HR services is a growing segment of business process outsourcing, powered by companies seeking more efficient, cost-effective and harmonized processes to support the administration of human resources. And there are rewards for the bottom line: outsourcing has the potential to decrease baseline costs of delivery, convert fixed costs to variable, and to reduce the need for the customer to use scarce capital on new systems to deliver HR processes.

HR outsourcings range from specific separate processes (such as pensions administration) to comprehensive process sets that cover HR functions from benefits administration to training and recruitment through to severance. Realization of the potential benefits demands sophisticated risk analysis and commercial structures, and depends upon a careful balance of risk and reward that incentivizes superior performance from the service provider.

The following are some key issues and challenges for a customer in concluding its HRO deal with a service provider:

• Defining these processes as objectives and outputs to be achieved by the service provider.

• Identifying the customer’s retained functions such as strategy and policy-setting, program design and decision-making.

• Agreeing the appropriate pricing model (for example based on numbers of employees covered or by process/transaction).

• Ensuring defined change pricing (for example change in numbers of employees, or because of a restructuring, or through the addition of new services).

• Ensuring business and cost model(s) deal with impact on existing third party suppliers and systems.

• Constructing benchmarking processes.

• Understanding the availability of standardized/market-led service levels based on the service provider’s technology systems and platform.

• Obtaining meaningful deductions/credits for sub-standard performance.

• Ensuring continuous improvement in performance at no extra charge to the customer.

• Ensuring the service provider shares best practices learned from its other clients.

• Establishing a robust practical change control process that protects against risk or cost arising through change.

• Ensuring that the outsourcing contract gives flexibility to deal with future strategy or business change (for example pre-priced volume change, rights to terminate all or part for convenience, and the ability to add services).

• Achieving clarity and adequate risk transfer about who bears the cost of dealing with changes in law, regulation and/or policy.

• Developing a comprehensive and feasible transition plan which identifies responsibilities and dependencies.

• Ensuring sufficient training and change management from the service provider.

• Establishing an appropriately skilled and empowered retained organization/function.

• Specifying a problem escalation and dispute resolution process that ensures service continuity and executive-level attention at the service provider.

• Establishing control measures so that the customer has early warning of any problems and can manage overall performance.

• Assessing and dealing with the impact of any relevant legislation protecting rights of relevant employees – initially and on termination/expiry of the outsourcing contract.

• Dealing with the terms and conditions and pensions of those staff who transfer - as a matter of law or agreement - from the customer to the service provider (including liability for any planned redundancy payments and the customer’s determination of how many people to keep in its retained organization).

• Ensuring control over the service provider’s personnel and key subcontractors providing the services (including the right to have them removed from the customer’s account).

• Identifying key service provider personnel and mandating their continued involvement.

• Ensuring service provider’s data protection and privacy law compliance (for example relating to updating/deleting historic personal data, obtaining employee consents to data transfers, taking appropriate security measures).

• Ensuring the security of the service provider’s system against internal and external misuse or attack.

• Determining the extent of the service provider’s liability relief in force majeure circumstances.

• Ensuring the customer’s right to step-in if the service provider cannot/fails to perform

• Ensuring the service provider has limited rights to terminate the outsourcing contract.

• Preserving necessary business/strategy flexibility by obtaining rights for the customer to terminate all or part of the outsourcing contract for convenience.

• Protecting business continuity by specifying detailed exit plans and responsibilities in relation to information, intellectual property, assets, contracts and staff.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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