The following article was commissioned by ADP to aid industry advisors

in assisting clients with the selection of service providers for outsourcing

HR technology and benefits administration functions.

An Advisor’s Guide to Governing

an Outsourcing Relationship
by Rhonda Marcucci, Consultant, GruppoMarcucci
Administering employee benefits is a complex business and comes with a lot of uncertainties
in today’s reform-focused environment. It’s no surprise then that employers are increasingly
outsourcing HR and benefits administration functions. According to a recent survey by ADP,
employer group decision makers are planning to outsource more tasks in the next 18 months.
Nearly three in 10 midsize (28%) and four in 10 large (42%) companies report plans to do so. 1

Healthcare reform (and the desire to avoid associated lawsuits, fines and penalties) is cited
as the top reason for outsourcing administrative functions. Other drivers include gaining
access to knowledge and expertise, reducing administrative burden on staff, and being more
cost efficient. 2

Regardless of why employers offload the administration of employee benefits, they retain
ultimate accountability for ensuring their employees’ benefits are managed in accordance
with the law and in a manner that meets contractual obligations and, hopefully, provides
good service to the employee. The likelihood of all this happening in a vacuum though is, well,
unlikely. Employer-service provider relationships must be governed and employers should
think about governance before they make the move to outsource. That’s where the advisor or
broker/consultant comes into play.

Good governance increases satisfaction

Relationship governance is the agreed upon set of roles, rights, accountabilities, principles,
procedures and escalation processes that guide decision making, issue resolution, and
changes in an outsourcing arrangement. 3 Poor governance is cited as a key reason for
failure in outsourcing relationships. Good governance, however, not only increases the
overall satisfaction with the decision to outsource, but also the level of satisfaction with
the specific service provider. 4 A robust governance outsourcing model will address the
following components of management: Service Quality, Issues, Change, Compliance and
Communication. 5

Don’t “beat up” on service providers (unless they truly deserve it)
Most companies are poor at governing outsourced relationships. HR managers rarely are
trained in governance (nor are advisors, in my experience) and yet successful governance can
make or break the success of an outsourcing relationship. In cases where advisors are brought
in to assist with governance, they are frequently misused.

A common mistake I see is employers using an advisor to “beat up” on the service provider
when the employer is unhappy with some aspect of the outsourced service. The advisor, who
typically is very service-oriented, willingly complies. Neither action is appropriate. When all is
said and done, the problem remains and is now compounded by a frustrated service provider.
If the situation can’t be easily resolved and tensions remain, the advisor’s response is often to
move the client to another service provider. Again, not an appropriate action at this point. So
what is the role of the advisor in governance?

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It’s OK to be the middleman
The advisor’s role is to take the view from the middle, remain unemotional, fair and objective.
A third-party fact-based point of view can reduce tensions and avoid deterioration of the
relationship. Once a service provider is in place, advisors can help employers:
• Ensure the service provider remains focused on employer needs.
• Monitor ongoing service provider performance to ensure services are delivered as
contracted in the service level agreement (SLA).

Similarly, they can assist service providers:

• Communicate the realities of outsourcing, e.g., scope creep, time needed to
transfer knowledge, etc.
• Confirm best practices are being used.
• Keep the lines of communication flowing among all parties.

One of the most important roles an advisor can play, however, is before the service provider
has been selected or, better yet, before the company has even decided to outsource. This
role is to develop a framework for governance. I applaud the company that works through a
governance model before deciding to outsource, but I find this to be rare. That being the case,
at the point you are engaged to assist with outsourcing, your first task should be to discuss
governance and to work with the employer group to develop a framework that makes sense
for the company.

Guiding the process

In developing a governance framework employer groups should answer these questions:

• What is the role of each management team? Communications, issue identification,

day-to-day decision making, ensuring proper direction/health of the relationship,
achieving business objectives, monitoring metrics, etc.

• What is the role of the advisor? Don’t discount the advisor’s role in governance; make
sure everyone understands the role. (In talking informally with a community of service
providers, they say facilitating open, honest communication among all players is the
most important thing an advisor can bring to the relationship.)

• Who needs to be involved (and who does not)? Everyone who needs to be involved
should be involved and have a clearly defined role.

• Who has decision-making authority? Across the board or by situation? Exceptions?

Who escalates problems; when and to whom?

• What’s important and why? Quality, quantity, customer service, timeliness,

improvement, innovation, exception handling, etc.

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 • How do you want to communicate? Phone, email, face-to-face; frequency.

• What are you measuring/monitoring? Ability to quantify/qualify; establish penalties/

rewards for consistently failing to meet/exceeding metrics.

• What is an acceptable issue response time? What’s the level of severity of the issue,
e.g., an issue that impacts the employee’s ability to utilize coverage versus an issue
regarding the text font for the enrollment systems? Culture may impact this discussion
(see “Culture matters” section).

When these questions are fully and confidently answered, the relationship between the
employer group and the service provider can effectively be governed. When there are
problems with the relationship (and there will be) this framework can guide all the parties
(including the advisor) on how best to address the concern.

A good governance model will support most problem resolution at the account management
level. Advisors need to understand, however, when to escalate issues to senior management
without taking a “beat up the service provider” approach. Severity of the issues, past
performance and the culture of the two organizations contribute to this decision-making
process which is best discussed in advance of a problem. Keep in mind, however, that there is
a normal “break-in” period during which both parties are learning one another and there may
be some missteps in the early stages. Frequent and timely communication will aid in moving
through this phase of the relationship.

Nice idea, but hard to deliver

Getting employer clients to focus on a governance framework can be challenging. The idea of
offloading the regulatory and record-keeping headaches is so appealing that few employers
want to focus on how to manage problems that don’t yet exist. Or, decision-makers assume
that their benefit managers can handle the governance just fine when the poor benefits
manager won’t even be engaged in a discussion about governance until a problem arises.

While outsourcing means relinquishing control of processes to a third party, it doesn’t take
the employer out of the picture, especially at the initial stages through implementation. The
advisor can help employers understand it takes time for the service provider to learn the
company’s processes, just as if the company hired a new benefits manager. Bumps in the road
are to be expected—particularly at the beginning. A strong governance framework can ease
these bumps.

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Following are governance best practices that advisors should discuss with their
employer clients.

1. Define an internal governance framework before making the decision

to outsource (or at least before selecting a service provider). Key roles and
responsibilities are spelled out; mechanisms for establishing, monitoring and
changing direction are outlined; and a structure is in place for reaching agreement on
key decisions. When conflict arises, there’s a process for resolution.

2. Be prepared to blend your governance

framework with that of a service
provider’s. A combined model delivers all
the same things an internal governance
framework does (well-documented
decision making structure and process,
key responsibilities defined and allocated,
process for change control and dispute
resolution), but takes into account both
parties’ organizational structures and
respective interests, thereby increasing the
odds for success. (See sidebar)
Communication is the Success
Factor
As part of the selection process,
bring prospective service providers
into the conversation. Any good
service provider will welcome a
discussion about governance on
the front end of a relationship.
Cover the same points you would
with the employer: roles and
responsibilities, communication,
expectation management, culture,
metrics, etc.

Facilitating regular communication

3. Establish a management team to
oversee governance. This is particularly
important for more complex relationships.
Team members should have tactical and
strategic management skills and be strong
communicators. The team should include
individuals who understand the company’s
IT, employee benefits and finance functions
and who are also aware of the strategic
goals of the company. During the all
critical transition phase (from one provider
to another or from a manual to an online
service), additional resources may need to
be allocated to the team.
between the service provider and
the client (which also includes
you) will go a long way to avoid
or minimize problems down the
road. Service providers report
that the advisor is often MIA until
there’s a problem. By the point it’s
escalated to a level that the advisor
is brought in, a simple resolution is
no longer an option and it may be
too late to salvage the relationship.
When asked, service providers
consistently respond that “open
and honest communication” is the
greatest factor for success in an
outsourcing relationship.

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 4. Frequent, informal communications will increase the success rate of the
relationship. As in a single office or department, regular casual communication
among employees helps to identify concerns and produce solutions; the same
with a client and service provider. Take steps to help establish strong ties between
the two groups—particularly between governance teams, but don’t discount the
value of frequent communication among individuals with day-to-day customer care
responsibilities.

5. Allocate sufficient resources to outsourcing governance. “Resources” usually

means people tending to the relationship (whether internal staff and/or an
advisor). The level of resources required will vary depending on the complexity of
the relationship. Some approach it in terms of a percentage of the contract cost;
others in staff time, but the service provider should be able to estimate what will
be needed from the client to make it an effective partnership and ensure a smooth
implementation and ongoing delivery. Companies that fail to invest adequate time
on the front end often encounter problems that could have been avoided with more
robust governance and end up spending more time/money to clean things up. Over
time, the level of resources for governance may be reduced as both groups settle in
together, but a company (and the advisor) should never become too complacent
about the relationship.

Investment in governance
To help sell an employer on the best practices of governance, don’t shy away from the ROI
(return on investment) discussion. Many companies outsource to be more cost efficient, so
investing resources in governance can be a tough sell. Senior management will embrace
outsourcing as a way to redirect the focus and energy of the company back to its core
competencies. If the company previously handled benefits administration functions in house,
then there may be saving through a reduction in staff. Otherwise staff time can be redirected
to governance, resulting in no net increase in staff resources.

Research with organizations involved in large-scale outsourcing shows that companies that
invest in program governance are more satisfied with their outsource arrangement in general,
and with the service provider in particular. 6 This is a significant value proposition given the
associated cost of changing service providers.

Good governance takes time—time which no one may have agreed to pay for. Consider
including governance in your scope of services with the client to ensure you are compensated.
Your involvement in governance can result in a financial saving to the client through early
problem detection and resolution.

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Culture matters
Culture is a key element in governance. As most companies’ cultures are fairly set, considering
“fit” as part of the governance process is best done before final selection of a service provider.
Client-specific attributes (including culture) is one of six essential components of risk in a
relationship, so attention is needed to this area. Assessing fit calls for an objective point of view
and the advisor is often in the best position to guide this based on knowledge of the parties.

Advisors can facilitate a discussion on cultural fit with their client and prospective service
providers. Discuss what a mutually beneficial relationship might look like and whether the
scenario is feasible. These exploratory conversations can provide the basis for a successful
match if both parties are focused on (and candid about) factors vital to the relationship.

Assessing culture fit is not always easy—particularly for a new client. This harks back to the
question about what’s important in the outsourcing relationship, but goes to a more subtle
level. One service provider reported that the difference in the communication styles between
a west coast client and an east coast service provider resulted in an unhappy client who
projected their dissatisfaction onto the product. The intervention of an advisor helped to work
through the problem and salvage the relationship by confirming the product represented
best practices and the underlying issue was a clash of a laid-back (west coast) style versus a “in
your face” (east coast) approach. Similarly, I know of service providers who maintain sales and
account management teams in both the north and the south to accommodate differences in
the corporate pace of their clients. The product and service quality is the same, but the style of
the people interacting with the client is more conducive to the client culture.

This brings me to the importance of managing expectations. While there may be no such
thing as a perfect match, an advisor can help both groups to set reasonable expectations of
the relationship for all stakeholders. Continuing with our east-west coast example, the east
coast service provider now understands their client expects a little more relaxed approach
to matters. Conversely, the west coast client now sees the direct approach as the efficiency
it is intended to be. Having both sides understand and appreciate each other’s capabilities
and limitations, and having a clear sense of how the respective organizational cultures drive
behavior, will greatly increase the rate of success of the outsourcing relationship.

Governing the governance

While a strong governance framework, a proper allocation of resources, and good
communication are all important to the success of the outsourcing relationship, at the end of
the day it’s the contract that governs the relationship, or at least governs the governance.

Work with clients to develop a transparent, well-thought out contract. Pay careful attention
to the metrics identified for service levels. I know of many instances where service levels are
met, but the client is dissatisfied. For example, the contract specifies all customer calls will be
answered within two minutes, but employees report that the person answering the phone
couldn’t answer their question.

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Performance measurements should benefit the employer group, but be achievable and
motivating to the service provider. Service level guarantees should be quantifiable and
evaluated with easily obtainable data at a reasonable cost. Metrics should demonstrate
value to employees and to the benefits staff making business and budgetary decisions while
addressing the expectations of senior managers who are tracking results against goals.
Contracts with clearly defined metrics aligned with organizational goals make the task of
governance much easier. Further, it can take much of the subjective element out of the
decision to look for a new provider. It will be clear to all when it’s time to make a change.

Develop an exit strategy

It’s a given. Not all outsourcing relationships work. Whether due to a lack of governance, poor
cultural fit, failure to communicate or a dozen other reasons, sometimes relationships fail.
Even employers who report a high level of satisfaction with their service provider evaluate
their options. According to ADP, three out of ten HR/benefits decision makers in midsized
companies (31%) and nearly half in large companies (47%) report that they are at least
somewhat likely to switch service providers within the next 24 months. 6

I previously noted that advisors are often too quick to suggest a change in service providers.
I stand by this. It almost always takes less time, money and energy to evaluate and repair an
existing relationship than to form a new one. I recommend advisors facilitate periodic reviews
to discuss the quality of the relationship, including communications and issue resolution. Also
discuss how the relationship might be improved and/or goals more effectively achieved. Use
this time to air unresolved issues, conflicts or misunderstandings. This should be part of the
governance framework. This strategy also keeps the advisor involved on a regular basis. The
more involved you are as an advisor, the more likely you can divert a problem. When an advisor
gets involved only at the point of a problem, it may be too late for resolution.

Keep in mind that new outsourcing relationships always experience high levels of stress.
This is due, in part, to the “expectation versus reality” gap that exists when moving from a
paper process or a poor provider. Employers tend to have unrealistically high expectations.
Experience proves this to be true no matter how good the product or how smooth the process.
The advisor’s role is to help the client recognize this is the norm and that they can expect
to feel some level of anxiety for at least four months after the new system goes live. Good
governance can manage the degree of anxiety, however, and help the relationship through the
rough spots.

If and when a client is ready to make a change, you will have served them well if you facilitate a
strongly-written termination clause in the contract. Key elements include:
1. Data ownership – Ensure the client owns the data it provided as well as data
generated by the service provider according to the contract.
2. Early termination – Fees should be reasonable and apply only for the first
three years.

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 3. Transition to a new provider – Negotiate cost and scope of transition in advance;
strive for limited or no service disruption for employees.

4. Address advisor services in a separate contract – The service provider should have
a contract directly with the employer in order to be accountable for service level
agreements and other contractual obligations and relationship governance.

5. Continuation of obligations – Confidentiality and indemnification should extend

beyond the life of the contract; this should be expressly stated.

Encourage clients to thoroughly think through the process of ending a relationship with a
service provider and the contractual implications (just like a divorce). Client legal counsel
should pay very close attention to the termination clauses. They may not be favorable to
the client but can be easily passed over by a contract attorney as “boilerplate” terminology.
Your insider view of the industry can help identify contractual red flags. For example, be sure
adequate time is allotted for the termination process (and implementation of a new system).
Neither process goes as quickly as most employer groups think it will and your role should be
to work to ensure there’s no gap in employee benefit services.

Low governance = low success

There is no one “best model” of governance strategy. It depends on the company, its strategic
business goals, and the service provider selected. One constant factor, however, is the reason
for failed outsourcing relationships: poor governance. In a 2011 study, KPMG field advisors and
third-party service providers both cited “insufficient relationship and program governance” as
the top reason for outsourcing transition failure. Second and third causes named by the two
groups (in alternate order) were “inadequate transition project planning/due diligence” and
“a lack of understanding of the deal/scope.” 8

Outsourcing represents a major shift for everyone in the organization. Employer groups that
don’t recognize this and fail to plan for the change are far less successful in their outsourcing
than those that prepare accordingly. In my experience, success of an outsourcing arrangement
is far less about process improvement and technology enhancements than it is about the
governance process.

The governance framework must to be flexible enough to keep pace with periodic changes
in business and HR service delivery strategies, but detailed enough to provide significant
and meaningful oversight and operational direction. The advisor can help to ensure internal
governance issues are sorted out in advance of outsourcing and that the agreed upon
governance framework is adhered to throughout the implementation and service delivery
process. Good governance nearly always results in a successful outsourcing engagement.
And isn’t that what everyone wants?

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1 Benefits Administration: Should You Outsource or Manage In-House? Rep. ADP Research Institute, Feb. 2012. Web. 8 July 2012.
2 Ibid.
3 Girst, Amy L., and Robert J. Schleyer. “Managing the Outsourcing Relationship.” Journal of Work Process Improvement (February
2005): 14-17. Wexford Partners. Web. 24 July 2012. <http://www.wexfordpartners.com>.
4 DeFidelto, Cynthia. “Robust Governance a Key To Outsourcing Success.” HRO Today Vol. 8.No 3 (2009): n. pag. HRO Today.
SharedXpertise Media, LLC. Web. 20 July 2012.
5 Miller, Stephen. “Governance Lessons from DuPont: A Collaborative Outsourcing Relationship.” Society for Human Resource
Management. Society for Human Resource Management, 1 May 2006. Web. 06 July 2012.
6 DeFidelto, Cynthia. “Robust Governance a Key To Outsourcing Success.” HRO Today Vol. 8.No 3 (2009): n. pag. HRO Today.
SharedXpertise Media, LLC. Web. 20 July 2012.
7 Benefits Administration: Should You Outsource or Manage In-House? Rep. ADP Research Institute, Feb. 2012. Web. 8 July 2012.
8 KPMG. More Organizations Using Complex Mix of Shared Services and Outsourcing to Meet Service Delivery Needs, KPMG Pulse
Survey Finds. KPMG. N.p., 3 Nov. 2011. Web. 23 July 2012.

About the Author

www.gruppomarcucci-usa.com
Rhonda Marcucci is a 25-year veteran financial and operations executive with a record of
success in identifying strategy and executing against it to achieve client goals. Her firm,
GruppoMarcucci, is a nationally recognized HR and Benefits Administration technology
outsourcing consulting practice which focuses on strategy and partnership work for
entities wishing to understand, enter, or penetrate the benefits administration market.
GruppoMarcucci provides solutions for all aspects of HR and benefits administration
technology challenges, including providing sourcing advice and service provider capability
audits. The GruppoMarcucci team is on call to respond to clients’ request to “Help me Rhonda.”

About ADP
Automatic Data Processing, Inc. (Nasdaq: ADP), with about $10 billion in revenues and
approximately 570,000 clients, is one of the world’s largest providers of business outsourcing
solutions. Leveraging over 60 years of experience, ADP offers a wide range of human resource,
payroll, tax and benefits administration solutions from a single source. ADP’s easy-to-use
solutions for employers provide superior value to companies of all types and sizes. ADP is
also a leading provider of integrated computing solutions to auto, truck, motorcycle, marine,
recreational vehicle, and heavy equipment dealers throughout the world.

This paper was sponsored by ADP.

Automatic Data Processing, Inc. The ADP logo and ADP are registered trademarks of ADP, Inc.
adp.com In the business of your success is a service mark of ADP, Inc. © 2012.