Contract Details

Outsourcing contracts must be carefully wrought. Here are some lessons shared by HR executives who have been through the drill.

Statement of work. The contract needs to include a statement of work—usually as an addendum—describing what the outsourcer is to do and what staff members in the company’s HR department are to do. “The level of detail is critical,” says Dominique Grau, vice president of compensation, benefits and HR services at Agilent Technologies Inc. “Some of our contracts are 100 pages long.”

Performance metrics. Performance metrics are key to making sure the contract is fulfilled. “We decide on the top five areas of concern, adopt metrics for each and [designate] a penalty associated with each one,” says Ron L. Jeffers, manager of benefits consulting for central HR at Shell Oil Co.

Transition period. A lot of companies can be tripped up during this phase. “Know your environment and culture, and the complexities that you are dealing with that might prevent you from completing the transition,” says Debora Catsavas, SPHR, vice president of compensation, benefits and international for Northrop Grumman Corp. in Los Angeles. Metrics can be used, and written into contracts, to track the transition progress: “We have detailed project plans, milestones, quality metrics and dashboard for the transition period before we even get into the steady state,” Catsavas says.

Satisfaction. Standard performance metrics measure things like how fast the call center responds, but another type of measure is becoming increasingly important: employee satisfaction.

“Employee satisfaction isn’t always correlated to how fast the phone is answered,” says LeAnne Andersen, senior director for HR at Best Buy Co. in Minneapolis. “We have de-emphasized some traditional call center metrics. The most important metric now is individual feedback from my employees that interact with the provider’s people.” Most companies, Best Buy included, measure satisfaction through an employee survey conducted by a third party. Expectations and actions are included in the contract.

Duration. For HR BPO and other complicated processes, contracts of seven years or longer are not uncommon. Providers reap better economies of scale, and buyers can save money. “The longer the contract, the better the deal,” says Grau.

But longer contracts also come with a challenge: forecasting fees. “We have a 15-year contract for HR BPO,” says Craig Warren, director of HR business services at Rockwell Automation Inc. in Milwaukee. “The biggest hurdle is to figure out the right financial model for forecasting the fees. You need a lot of discussion with your partner around the fee structure.”

And, Grau says, “Long contracts should have a walk-away clause. One year is reasonable for a no-fault, bidirectional walk-away.”

Revisions. “A contract is a living document,” says Andersen, whose company is now in the fifth year of a seven-year contract. “We’re constantly refining it to improve it. In the last year, we overhauled all our service-level agreements with our main provider.”

Relationship. The contract is only as good as the partnership. “There is a tendency to focus an excessive amount of energy on the contract,” says Warren. “A lot of times, not enough thought is given to the relationship piece: trust, how you will share information, the type of communication you will have. When the relationship doesn’t feel good, you start to look at these.” Warren says it is hard to document what you expect from the relationship in the contract itself, but there should be at least an addendum that states that the two parties discussed this issue and their expectations of each other. “You should document the dialogue you had about these matters,” Warren says.

The author, technology contributing editor for HR Magazine, is a freelance writer based in Prunedale, Calif.