Point-counterpoint: how does HR outsourcing impact the power and influence of the function? (Current Practices).

Moderator: Mark B. Hodges, Managing Partner, Business Process Outsourcing Process, TPI, Inc.

Panel Members: Wayne Malik, Vice President, Global Human Resource Services, BP plc; Hugh MacDonald, Vice President, Strategic Alliance Management, Canadian Imperial Bank of Commerce; Sekhar Ramaswamy, Vice President, Human Resources, Prudential Financial

Perhaps the most interesting dimension of this session was not whether HR outsourcing impacts the power and influence of the function, but how. The concept that outsourcing HR transactional activities allows HR to focus on more strategic issues seems now to be an accepted fact of life; therefore, the focus of the panel discussion was determining which activities are best outsourced, and how to strike the right contract with the outsourcing firm.

Background

Mark Hodges was an ideal moderator for this session. He was involved at the inception of Exult, one of the largest HR outsourcing firms, and now works as a consultant to match the expectations of buyer companies with the actual capabilities of outsourcing firms. He positioned the field, as follows:

It is new. Although ADP, IBM, and others took an early stab at providing services to other companies, the HR outsourcing business is only about three years old.

It is big. Major HR outsourcing contracts total over $9 billion today and support over 1.2 million employees in the United States and United Kingdom.

It is growing. Some 22 companies are now in the field, the latest being EDS and ACS.

It is long-term. Contracts are being written for 5-10 years.

It is comprehensive. Companies are outsourcing over 20 HR processes in five major "towers" of related HR work:

1. Compensation and Benefits

2. Organization and People Development

3. Employee Data Management

4. Workforce Planning and Deployment

5. Human Capital Services

The size and growth of the industry immediately led the Forum audience to an understanding of the complexity of the outsourcing process and the work involved in bringing together the functional resources of the company and the expertise of the outsourcing firm. In terms of level of effort and time, a major HR outsourcing relationship is akin to a major M&A transition. Mark Hodges outlined the phased process of the outsourcing lifecycle, as shown in Exhibit 1. EXHIBIT 1 Phases of Outsourcing Lifecycle Phase I Assessment & Preparation Phase II Proposal & Evaluation Phase III Due Diligence Phase IV Contract Development Phase V Contract Initialization (Source: TPI, Inc.)

Across all these phases are work streams related to financial processes, the transition of employees, communications, change management, and vendor management, as seen in Exhibit 2. EXHIBIT 2 Outsourcing Work Streams Phase I Solution Process Phase II Financial Process Phase III Employee Transition Phase IV Comm. & Change Mngt. Phase V Sourcing Managment (Source: TPI, Inc.)

To set the stage for the panel discussion, Mark also provided a series of key issues and common questions to be considered, the headings for which follow. [A list of the specific questions to be answered by those embarking on an out sourcing project is available from the editor via email at wgstopper@msn.com.]

* HR Role in the Organization

* HR Sourcing Strategy

* HR Outsourcing Providers

* Financial Impact

* People Impact

* Second Thoughts

* Business Objectives

With the preceding as background, panel members then discussed their experiences with outsourcing and responded to questions from the participants.

Company Experience with Outsourcing

Canadian Imperial Bank of Commerce

The Canadian Imperial Bank of Commerce (CIBC) is a 150-year-old company. Its processes and systems grew up over time. It was clear the company needed to revise its overall practices. Outsourcing represented an opportunity, not to save costs, but to avoid costs. To have revamped its processes itself, CIBC estimated it would have spent over $40 million. Business Processing Outsourcing (BPS) was an alternative. After receiving the responses to three Requests for Proposals, CIBC settled on EDS as its outsourcing provider.

Prudential Financial

Because of general business conditions and its transformation from a mutual insurance company to a publicly traded company, Prudential experienced significant reductions in headcount since 1995. Along with other areas, HR was tasked with continuing to reduce its headcount. Despite progress made via reorganizations, downsizing, and a major effort to standardize and streamline processes, HR was still faced with further reducing costs. In 2001, a business case was made to outsource major portions of the HR function to Exult. After due diligence and contract negotiations, the move was completed in September 2002.

British Petroleum

Along with AMOCO and ARCO, British Petroleum (BP) was one of the charter companies in Exult. The goal was to migrate the HR staff from transactional to strategic work. The outsourcing contract was signed in December 1999, eight months after preparations began. Implementation took 14 months to complete in the United Kingdom and 24 months in the United States. The decentralized nature of HR operations, coupled with the fact that few HR processes were documented, contributed to the long period of implementation. Exult's and BP's disciplined approach to the conversion was critical to its success.

Questions and Answers

Which HR functions did you retain?

What drove the decision to outsource?

Anything strategic; everything that is not transactional. Policy, design, internal consulting, HR generalists, are functions that stayed in the company. In Prudential's case, the functions to retain were not always determined at the beginning of the process; decisions were made as outsourcing due diligence progressed.

In BP's situation, HR participated in a larger company outsourcing strategy. The belief was that the outsourcing firm had the ability to attract the best and brightest HR talent and to apply the latest and best HR technology. At Prudential, the initial issue was how to improve HR's strategic focus; the economic case was critical but came later.

The belief was that the outsourcing firm had the ability to attract the best and brightest HR talent and to apply the latest and best HR technology.

How do you manage vendor relationships?

CIBC established an alliance management team of eight people to manage 12 service-level agreements with EDS. Expertise was needed on privacy and security laws and on merger and acquisition activity. Of the total "spent," 3-to-4 percent was set aside for governance. Despite weekly reviews, there were still occasional surprises. HR competency requirements changed from managing people to managing service providers. BP also found that maintaining good relationships with the vendor was critical to success. Prudential felt the need to retain functional expertise on its inside team as well as to establish good vendor relationships. The issues are similar to those encountered when moving to internal shared service organizations. Think "boundarylessness"; think "partner," not "vendor." Interestingly enough, once the outsourcing decision is made, the focus quickly turns from "how" to "what."

What was the employee reaction to outsourcing?

In CIBC, the transition was seamless. The Web site, the forms-all still carry the CIBC logo. EDS is not highly visible; however, a change has occurred within HR: There is now less tolerance of lateness and errors by EDS than when the work was being done internally! Much of what took place in BP was "greenfield." It was the first time HR was e-enabled, so the reaction was not so much to outsourcing as to process changes. As in CIBC, it was important to engage HR management itself in the change before getting support for the business case.

Do employees transfer with the operation? What happens to their careers?

At CIBC, 200 employees transferred to EDS with retention bonuses. From being "back office" employees at CIBC they became frontline, revenue producers at EDS. Those remaining in CIBC have not felt a loss of control. Through service-level agreements, metrics, reviews, and escalation processes, they feel more in control of HR work than ever before. Prudential found that "loss of control" is a mindset issue. If the remaining HR people understand their responsibility for managing a major resource, for being more strategic, for gaining in influence, for focusing on "what" and not just "how," they do not feel a sense of loss.

Mark Hodges interjected at this point that new contracts with outsource providers have to be more carefully structured today than in the early days of outsourcing. Once the firms have acquired a certain level of resource and expertise, they do not need the client's employees to accomplish an additional volume of work. For example, in Prudential's case, few of the nearly 300 people affected were employed by Exult: Some were not willing to relocate to Texas or North Carolina, where Exult has service centers, but most were surplus staff for both companies. Similarly, few of BP's people transferred to Exult. In this case, the lack of experience with centralized operations and state-of-the-art HR technology offered no incentive for Exult to transfer BP staff to itself. It is very important to include the terms and conditions surrounding transfers, relocation, and controls in the Request for Proposal, because it is difficult to negotiate such issues after the fact.

If the remaining HR people understand their responsibility for managing a major resource, for being more strategic, for gaining in influence, for focusing on "what" and not just "how," they do not feel a sense of loss.

Why are outsourcing contract periods so lengthy?

The simple answer is that the outsourcing firms make little, if any, money in the first years of the contract as they invest in the conversion of systems and processes and in implementation. They need the time to turn that investment into profit. The duration of the contract does not mean, however, that terms cannot be changed as circumstances dictate. The Request for Proposal and the contract itself need to allow for change.

Do you outsource all functions at once? If not, how do you phase the conversion?

There are several approaches to phasing. CIBC outsourced HR operations in North America first and then expanded to other countries. CIBC also held staffing and training back initially, and then struck a contract with a second firm for these functions. Prudential asked its outsourcing assessment team to start with the question, "Why not outsource?" in coming to a decision about what was outsourced and what stayed. They decided to outsource only domestic operations.

Which IT platforms do the outsourcing firms use?

This is another question to resolved in the RFP. You don't want to be left with systems but no work, and you don't want employees and managers to have to learn a whole new vendor system. EDS took over the operation of CIBC's legacy system. EDS has experience with that in its core business. Other outsourcing firms may not have that capability, but may be using systems already familiar to the client like PeopleSoft, Oracle, or SAP. As mentioned earlier, BP was prepared to encounter change to become more e-based, so whether the change was driven internally or by an outsourcing firm was not material.

So at the end, what's the story on savings?

* BP reduced labor costs by 20 percent, and avoided the cost of investing in certain new systems, such as an expatriation tracking system or a UK training system. Outsourcing met most of BP's financial targets but did not deliver a global solution. Of course, BP did take an equity stake in Exult!

* CIBC did not enter into outsourcing to save money per se. Its goal was cost avoidance and predictability. CIBC negotiated a fixed-price contract, with cost reductions programmed each year.

* Prudential's forecast of savings came primarily from staff reductions.

Among the lessons drawn from this session were:

1. Outsourcing is a complex business proposition and demands expertise in developing and negotiating the right terms and conditions. If that expertise does not reside in HR, then search elsewhere in the company for it or hire outside help.

2. You can't just unload your bad processes and bad systems on the outsourcing firm. You have to spend time on improving processes and systems first, or be willing to accept those already in place by the vendor.

3. Vendor management is a new and exciting competency for HR.

4. Choose your outsourcing firm wisely. Based on the size of your company, decide whether to be the major client of a small firm, or the small client of a major firm. The largest outsourcing firms may not take on clients with less than 25,000 employees.