Sunday, September 30, 2007

VETTING A VENDOR'S VALUE

Experts say it pays to do your homework when sorting through human resources products that serve your organization. The key is to quantify how software and systems solve pressing business needs.

YVONNE BOSSON wears her detective's hat when choosing human resources vendors, methodically gathering evidence and building her case to present to top management. Like any good sleuth, she relies on paid informants: the employees at Texas Instruments, where Bosson serves as human resources manager for international assignments. Using special surveys, they provide the scoop on how vendors are performing. "When I start seeing low-rated surveys, evidently that vendor isn't working out and I need to see if they can step up to meet the demands of our employees," she says.

Bosson also snoops around for information when adding new vendors to the mix, building a dossier on each one. She then lets those that can't meet her criteria eliminate themselves from the running. If she needs products that integrate with PeopleSoft, a huge application suite used by Texas Instruments, vendors lacking this capability are scratched off the list. Likewise, vendors that can't provide Web reporting or Web-based global access for managing the human resources functions of Texas Instruments' overseas-based employees are automatically disqualified.

Her gumshoe efforts are paying off. Bosson has already solidified deals this year for expatriate administration and other expat services, and expects to sign long-term contracts for destination services and global immigration before the end of 2003.

The investigative work takes its toll, though. Bosson says it takes about three months to sort through different vendors before making a selection. It can take another five months for the company to make the transition to new providers. "It can be agonizing, but it's well worth it" Once you select a vendor that understands your business culture and corporate goals, she says.

An uncertain economy has left many companies in a state of suspension about new expenditures. Human resources departments, always under pressure to prove their value to upper management, have to tread cautiously these days when it comes to winning management approval for new systems, software and services. Still, experts say, by wisely managing the vendor-selection process with an eye on the company's balance sheet, human resources emerges as a strategic partner able to furnish solutions to critical business problems.

"HR can be a drain on profits or it can provide value, depending on how smart you are in your contracting relationships with vendors," says Neff Krupp, national practice leader for Deloitte & Touche in Chicago. "If you make bad choices, a lot of money will be spent with really no return."

Making the Case
Vendors provide services and products ranging from complex human resources management systems to software packages for payroll, time management, training, recruiting and a host of other functions. Analyzing software products, systems and services is a time-consuming but critical task requiring legwork and research. It's also one of the last steps in choosing a vendor.

First, workforce-management professionals should get feedback from different departments on ways to boost productivity, enrich profits or squeeze more efficiency out of company systems. Find out what departments need and help them draw specifications that vendors must meet.

"Don't even look at products until you first look at your organization's needs. This is what a lot of HR executives tend not to do," says Bill Dickmeyer, a human resources consultant in Madison, Wisconsin.

Grilling department heads on what's important likely means you'll get several different answers. Find out what management is looking to achieve--reduced turnover, heightened customer service, cost savings--and orchestrate a high-level plan to help meet those goals, says Krupp. "HR needs to understand what drives the company's policies and programs" before approaching vendors.

Learning about these departmental needs helps surmount a second hurdle: upper-management resistance. Presenting a well-reasoned business case can convince the CFO or CEO that spending money for new human resources software and services yields concrete benefits to the organization.

"In these cost-conscious times, HR professionals need to differentiate between 'nice to haves' and the core of what the business has to have," says Pete Weaver, senior vice president of leadership solutions and chief learning officer for Development Dimensions International in Pittsburgh.

Pie-in-the-sky claims aren't good enough, agrees Charles Handler of Rocket-Hire, a New Orleans-based firm specializing in online screening and assessment. Only extensive analysis of a company's most important needs, as well as strategies and solutions for meeting them, persuades decision-makers that the cost is worth the investment. Even then, you may have to find someone in the organization with the clout to help you get the ear of the people at the very top.

"If turnover is costing your company x number of dollars a year, you need to compare the price of the system you're looking at to the money saved in reduced turnover. If you can prove the system reduces turnover by 2 to 5 percent a year, then the company will make money on it," says Handler.

Those are the metrics that get attention. Handler says it's equally important to demonstrate the impact of doing nothing. Instead of focusing on cost, think about the downstream effect of not solving the problem. "You can only compare expenses after knowing what the problem is costing your organization, and you need to understand that information at the beginning of the process," he says.

In addition to justifying purchases of new technology, Dickmeyer says, it may be necessary to quantify other costs. These could include how many personnel can be devoted to an implementation. The size and scope of individual systems also influences cost.

Dickmeyer urges purchasers to move deliberately, phasing in workforce-management technologies gradually and in order of importance. It might be necessary to temporarily add IT staff or hire outside consultants to help with design and implementation. It's a better approach than slamming new servers in place and spending half a year debugging them.

"Come up with a 5-year plan and a 10-year plan for the system. That does two things: gets the project in the budget cycle, and gives you time to evaluate vendors so the system runs properly from day one," says Dickmeyer.

So many vendors, So little time
There are about 3,000 vendors of specialized human resources software packages, so the process of elimination requires some innovative techniques. Begin by focusing on the most pressing business problems and vendors that could fix them.

Take Black & Decker Corp., for example. The Towson, Maryland-based manufacturer of power tools, hardware and home-improvement products went back to school-literally-when evaluating vendors for its global e-learning system. The company hired MBA students from the University of Maryland to help analyze more than 100 vendors in a 10-month-long process that included four competitive rounds and nearly 30 hours of presentations. In its U.S. rollout of the program, Black & Decker says it expects to save $100,000 on training rooms alone, a cost it hopes to duplicate in other countries.

Don't forget to take advantage of free offers. Most vendors of Web-based products provide special passwords that let prospective users test-drive the software, usually for up to 30 days. That may not be enough for a full evaluation, but it gives a snapshot of how the product operates. "It enables you to look at the main menu of the software and [test] its capabilities and functionality," says James G. Meade, a human resources consultant in Fairfield, Iowa, and author of The Human Resources Software Handbook.

Experts recommend finding a handful of similar vendors and contacting them with a formal RFI. This tends to be where human resources earns its money. Establish metrics with vendors to narrow the field. Obviously, the same set of metrics can't apply to a moving company as applies to vendors of cross-cultural training or third-party sales.

"You've got to be a smart consumer because typically there is a lot of money at stake. Unless you know the nuances of what vendors do and don't do, you're buying in the blind," says Krupp.
Meade suggests using a "selection matrix" consisting of different modules that are weighted according to priority. If you're looking for Internet recruiting software, for instance, list the desired features in descending order of importance. Is price more important than the product's ability to handle compliance issues? How does the product stack up on pre-screening or background checks? What about warranties and service-level agreements?

Prioritizing using weighted modules helps yield a short list of potential candidates. "This is a great tool to present to management because it identifies the strengths and weaknesses" of each vendor's product, says Meade.

Further narrow the field by sending an RFP to each vendor on the short list. Don't rely solely on the vendors' claims of service or special features, though. Challenge them to demonstrate their expertise. Given the tough economic sledding in their market, most vendors understand the need to quantify what they can deliver.

"Give them a specific business problem you have and ask them to delineate how they'll go about solving it," says Handler.

In many ways, it is a buyer's market. Many vendors, anxious to add subscribers in an uncertain economy, are willing to deal on price or defer payments. Others may be willing to help you customize your in-house software at reduced fees. Still, vendors tend to put their best foot forward when bidding on contracts for their services and products.

Tracking whether you actually receive the best possible service is a nettlesome task. Asking vendors to put their fees at risk is an innovative way to separate pretenders from contenders. Deloitte recently began advising its clients to ask for rebates and other price breaks when negotiating with vendors. "This is a tough one for vendors that don't feel they can back up their fees with performance," says Krupp.

Although a formal documented process for gathering vendor information is widely endorsed, informal networking also is important. While vendors' own customer success stories might be useful, it's often smarter to find companies that already are using the product and get direct feedback about their experiences with the vendor.

'I'm amazed by how little purchasers [of HR products] ask around," says Weaver. "There's a lot to be learned from simple networking--phone calls to colleagues who have dealt with some of the solutions you're looking at."

Consulting provides another barometer for judging vendors. Does the company apply best practices to address business needs? Is it willing to provide individual consulting to ensure that the products are performing properly? What is its experience serving competitors in your industry? "For complex issues, the level of consulting that a vendor can give you tells you a lot," says Handler.

Comparisons based solely on price probably won't help much, as vendors use an array of pricing schemes. Some vendors charge an annual license fee, while others assess per-installation fees based on the number of users. Still other vendors levy maintenance and other fees. Dickmeyer suggests preparing comparisons of similar vendors' costs, starting with the first year and amortizing them for years 2 through 5 and years 6 through 10.

Regarding cost, Weaver says it's best to avoid paying for frills. For back-office systems like payroll and benefits, companies ought to buy low-cost generic products and stitch them together using the "connective tissue" of middleware. These are software products that enable disparate systems to communicate. "It's more important to spend money getting systems to talk to one another, rather than on the core of the software," Weaver says.

Shakeout and economic doldrums
Complicating the buying process is an ongoing shakeout in the software industry, especially among vendors of enterprise resource planning (ERP) software. In early fall, Oracle Corp. still was pursuing its highly publicized hostile bid for PeopleSoft. Oracle's bid came on the heels of PeopleSoft's acquisition of another ERP player, J.D. Edwards. Other smaller providers also have been swapping names and personnel in a flurry of mergers and acquisitions during the past year. Such volatility can make it difficult to know the status of a particular vendor you might want to hire.

Industry consortiums, work groups, consultants and news sources like Workforce Management are good ways to keep tabs on vendor mergers. It's equally important to learn as much as you can about your potential vendors, including financial solvency, lawsuits and pending sales of assets. Some of this information is readily available in databases, media outlets and online, but reviewing it requires time and effort. "You need to find out what's behind the brave face a vendor is wearing because what happens behind the scenes could influence your HR purchase," says Meade.

The volatility of the software market has also injected caution into the buying process. Even companies with money budgeted for human resources products are taking longer to make purchases or delaying them altogether. Some enterprises have opted to make do with older legacy systems until the economy shows noticeable improvement. This reinforces the need for a compelling business rationale to justify purchases, says Dickmeyer. "A few years ago, vendors were pushing ERP software. Obviously, that's scaled back, and it's harder for HR executives to sell a high-dollar system now unless costs can be recaptured in three to five years," he says.
Nonetheless, the research should serve as a precursor to a decision, not a reason to delay the inevitable. Meade says companies that have gone through the process should not stop at the moment of truth--especially if the purchase addresses key business issues that harm productivity or profits.

"Be ready to pull the trigger," Meade says. "So many companies go through this process but then wind up afraid to spend the money."

Check, check and recheck
Signing multiyear contracts with vendors does not mark the end of the process, at least for the workforce-management leaders. The detective work should continue, with periodic evaluations to determine whether vendors' systems and services are providing the expected benefits.

Krupp says too few companies adopt this deep approach to monitoring what's been bought. Without it, though, there is no way to confront the vendors that haven't measured up. "It's important to do an analysis of what you paid for and what you actually got. You need to do this periodically so, if necessary, you can redirect the vendor in terms of their service performance."
Keeping tabs also helps when you get set to gear up for the process anew. Says Bosson of Texas Instruments: "If you invest the time up front, you'll get the product you want and have a few years of peace of mind."

It's hard to put a price on that.

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By Garry Kranz

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