What's notable about the deal is that it provides RewardsPlus not with some form of internal functionality it had to have, but with an additional offering it can take to the market. Spriggs hopes to sell clients on the value of increased employee satisfaction.
He cites an internal Sears, Roebuck and Co. study that found that a 5 percent increase in employee satisfaction translated into a half- percent increase in revenues. "Employees who are happy with their benefits demonstrate a much greater commitment to the company," he says. While the ability to shop on company time may seem like a curious addition to the usual retinue of employee perks, the fact that RewardsPlus can offer that capability so cheaply, thanks to its outsourcing arrangement, means that payback does not hinge on wide acceptance.
According to Margaret Johnsson, president of The Johnsson Group, a Chicago-based finance and accounting consultancy, the payback from E-sourcing must be assessed not only in financial terms, but from a broader, more-qualitative perspective as well. She cites as one example a large health-care company that wanted to expand its stock-option program from senior management to its entire 10,000-person global workforce.
The program had been managed by two full-time employees, but it immediately became clear that they wouldn't be able to handle a vastly expanded program, one that called for a transaction-based Web site so that employees could manage their accounts at any time.
The outsourcing of the entire project to a major financial services firm allows employees to buy or sell options instantly. (In the past, transactions took two weeks to execute.). In addition, errors have been reduced because the system is integrated with the company's internal HR applications. Staffers who had once shuffled papers are free to help employees with more complicated stock option problems, and the outsourcer takes care of international compliance and reporting issues for the foreign markets in which the company operates.
There are many challenges to making such deals work, including choosing the right partner, coping with often bumpy transition periods, establishing and monitoring appropriate service levels, and deciding what to do with any staff members who might be rendered obsolete. It can also be difficult to gauge the value of capabilities that E-sourcing makes possible.
Case in point: outsourcing intrusion detection on a corporate network. "Intrusion detection is one of the most critical issues a company can address. But it's more like cost avoidance than return on investment," says Jeff Dow, vice president of information security at News Corp., a $14 billion media company in Los Angeles.
After all, it's difficult to put a price tag on a network attack that doesn't happen. News Corp. outsources this facet of computer security to Vigilinx Inc., in New York, a company that relies on real-time and post event analysis of all network traffic to detect and react to suspicious activity. Dow says he didn't have to think too hard about the value proposition.
"We would need to hire people who had a lot of security experience — people who would cost at least $100,000 per year," he explains. Throw in overhead, and consider that with more than 50,000 employees Dow figured he would need a team of 10 to 12 of these expensive professionals, and the appeal of E-sourcing becomes immediately apparent.
Outsourcing network security was largely impossible prior to the coming of the Internet, says Michael Assante, vice president of intelligence at Vigilinx. With traditional outsourcing, you would have to be on- site to manage network security of the network, and it would be just as easy for customers to build their own departments. With the Internet, we have the ability to leverage substantial expertise from a central location — at a reasonable price.
Alex Thomson, director of technology for Houston Harbaugh PC, a Pittsburgh law firm that advises small to midsize businesses on outsourcing, says that because so many companies in this space are new (Vigilinx, for example, was formed earlier this year), due diligence should be a top priority for would-be clients.
He recommends running a Dun & Bradstreet inquiry on the company, asking to see its financials, and scrutinizing its income statement, balance sheet, and capitalization structure. "It's so easy to start an ASP today," says Thomson, "but that doesn't mean it's a good company that will be around." Always ask for customer references, and don't settle for two or three.
"If an outsourcer can readily fork over 10 customer references, that means something," says Laurie McCabe, vice president at Summit Strategies Inc., a Boston market strategy and consulting firm. "If they can give you only one, that may mean something else."
News Corp.'s Dow agrees that due diligence is critical. "I investigated how much funding they had received and what their balance sheet says. I didn't want to go with a company that was $20 million in debt."
Although he has confidence in Vigilinx, Dow made sure the contractual terms allow him to walk away easily. While making the transition from a conventional outsourcing arrangement can be a thorny process, with E-sourcing it's another matter entirely. As Dow says, "It would take less than two minutes to disconnect them from our network."
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