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The Transformation

Outsourcing can give HR executives the opportunity to become more strategic. However, the process is far from pain-free.

Friday, March 16, 2007
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Before International Paper Co. outsourced several human resources functions to a single vendor in 2001, its HR executives had little time for high-level planning and strategizing. Now they have lots.

"We're doing more important work than we were doing before," with fewer employees, says Jerome N. Carter, senior vice president of HR at the Memphis, Tenn.-based forest-products company, which has 65,000 employees.

Instead of administering payroll and benefits,

International Paper's corporate HR staff -- fewer than 90 now versus 300-plus before the company outsourced the functions to Hewitt Associates -- spend their time on activities such as global talent management. Today, HR managers at the company's plants oversee leadership development programs and other "things that add more value to the business," including workforce planning and employee development, says Carter.

Comprehensive HR outsourcing (also known as HR business-process outsourcing) has given corporate HR departments the time and resources to become more strategic, HR executives say. Instead of contending with the daily headaches of payroll, benefits and recruiting administration, they and their staffs focus on activities that support overall business goals and strategies.

However, the change from transactional cost center to strategic business partner requires a new set of HR skills, often acquired through new hiring, retraining the retained staff and reassigning or (in some cases) laying off colleagues with purely administrative skills.

Those who've worked through the complex issues of transforming HR's mission, structure and staffing say the payoff is worth the effort.

"We didn't think HR had a full seat at the table [before outsourcing]," Carter says. "That's not the way it is today . . . That's the ultimate measure of how successful we are."

Defining "Strategic"

Among the potential benefits of HR BPO, making HR more strategic doesn't rank as high as cost savings or improved efficiency, but it's part of the mix, experts say. Nevertheless, in practice, it's often taking longer than expected, says Mark Hodges, chairman of Houston-based outsourcing advisory firm EquaTerra.

"Allowing HR to be more strategic was definitely something the buyers felt they were buying and the providers thought they would deliver," he says. "What actually evolved is that buyers are spending more time on strategic activities, but not as much as they thought they would."

For a number of reasons, implementation can last most or all of a contract's duration, Hodges says, eating up HR executives' time. Still, there are success stories.

Fifth Third Bank's HR department no longer spends 75 percent of its time on administration, as it did before the bank signed a five-year HR BPO contract with Convergys Corp. in 2003. Today, HR staffers at the Cincinnati-based financial-services company focus on HR-systems integration and talent management, especially employee engagement and retention.

"Because we've been able to invest the time and resources . . . it's helped us identify top talent to invest in. It's also helped business managers understand the need for [investment in talent]," says Linda Tuck Chapman, Fifth Third's senior sourcing officer.

The bank has 22,000 employees in 10 states. Fifth Third's HR staff have created a development plan for every employee at the manager level and above. It's boosted internal recruiting. It's worked more closely with business-unit managers on coaching and workforce planning.

As a result, "[talent management] is much more structured and systematic than in the past," Chapman says.

"Being strategic" is generally understood to mean involvement in governance, strategy and policy decisions that support overall business goals. In other words, "let us help the business get better through people," says Iris Goldfein, vice president of global product development at ExcellerateHRO, an outsourcing provider based in Plano, Texas, that is jointly owned by EDS and Towers Perrin.

As an August 2006 research paper by the Society for Human Resource Management entitled Outsourcing and Offshoring HR, by researchers Belin Tai and Nancy R. Lockwood, explains: "Generally, core [strategic] activities [consist of] transformational work that creates unique value for organizations, such as top-level strategies critical to the cultural and strategic objectives of the organization."

An important component of this work is the ability to get and use employment data proactively, says Gary Kilzer, a consultant in Watson Wyatt Worldwide's Boston office. For example, HR departments can use data on turnover, employee demographics and labor markets to create a workforce plan to guide future recruiting and retention strategies, he adds.

Being strategic can play out in all sorts of ways, from workforce and succession planning to benefits design and technology integration. There's no one-size-fits-all application because different companies have different goals and needs.

HR executives agree that outsourcing can be a means to HR becoming more strategic. One benefit is that initiatives can be completed faster.

At the beginning of this year, for example, Goodyear Tire & Rubber Co. -- which signed a 10-year outsourcing deal with ACS in 2004 -- implemented a new health- insurance benefit for about 900 part-time employees at its tire-service retail stores who'd previously had no company-sponsored coverage. Benefit-design specialists at Goodyear worked with ACS to develop the program, then let ACS handle the details of communication and enrollment so they could move on to other things, says Kathleen T. Geier, senior vice president of HR at the Akron, Ohio-based tire company.

Goodyear would have adopted this program had it never outsourced HR functions, she adds, but "it would have been a longer time line." The company, which has 80,000 employees worldwide, expanded its HR outsourcing initiative from North America to Latin America last summer.

A Fundamental Rethinking

Before HR can reap any strategic gains from outsourcing, it must first address a critical -- and often overlooked -- aspect of HR BPO: realignment of the department itself. With major functions offloaded to a vendor, retained HR has a new mission and new goals. Planning this restructuring is a big piece of the change management needed to make any outsourcing arrangement a success.

HR transformation involves more than defining core activities and deciding who stays and who goes, experts say. It's a fundamental rethinking of what HR is and does.

"There needs to be appropriate governance over the HR transition and the transformation of the HR function," says Mark Oshima, director of HRO strategy at Lincolnshire, Ill.-based Hewitt Associates.

A 2004 Hewitt report, On the Road to Post-Outsourcing Success, states: "Understanding how the HR staff and structure need to change internally -- and making the changes -- will ensure that the full and promised value of outsourcing is achieved."

A key element is defining competencies for the "new" HR. Those skills typically include vendor management, including oversight of HR service delivery, consulting skills such as coaching and building relationships, program design, data analysis and information-systems deployment.

"It's a different skill set. Some people will make it. Some people won't," says Thomas Neltner, vice president of HR operations at Fifth Third Bank.

International Paper's Carter says one of the benefits of outsourcing "was to change the set of capabilities within HR." Instead of "paper pushers," his department needed people skilled in change management. "HR was expected to demonstrate its capabilities in this area," he says.

To ensure HR had the right skills in this new environment, International Paper created "Change Process," an internal certification program for training HR and other employees in change management. As part of the program, participants spend one week in the classroom and complete a workplace project that demonstrates their newly acquired skills.

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Change Process, adapted from a similar program at General Electric, includes a number of different elements -- for example, setting up for success, shaping a vision and creating a shared need -- necessary for building a change plan for various initiatives around the company. 

Effective change plans were put in place to accompany recent HR initiatives, including the rolling out of International Paper's learning- management system in Brazil and integration of disability-plan management for its North American locations, Carter says.

Vendors can often help with restructuring. Accenture HR Services runs a "retained HR academy" to guide its clients through competency assessments and training, both online and in-person, in change management and analytical skills, says senior executive Michelle Adelman. The academy is an informal program, available upon request, and is tailored to a company's particular needs.

HR restructuring is by no means an easy, perfect process, consultants say. Common issues include HR's fear of losing control and subsequent micromanagement of the vendor or outsourced functions, internal resistance to a self-service delivery model and failure to reduce HR head count as planned, according to outsourcing surveys and reports.

"HR professionals end up micromanaging the provider when they really should be focused on the outcomes," Hodges says.

"Scary" Process

Restructuring under an outsourcing agreement necessarily entails restaffing. At least half of internal HR practitioners end up leaving, Adelman says. Layoffs, retirements and buyouts are common. Some "transactional" employees transfer to the vendor, while others get new jobs within the company.

Budget pressures can force HR to lay off people before it's really time to let them go, vendors say. Ideally, enough staff should be retained -- via "stay bonuses" and other incentives -- until HR processes and technology are standardized and integrated, Kilzer says.

Assessments can determine who has the right skills to stay on and who is best let go. Outsourcing providers don't hire as many client employees as they used to, consultants say, because service-delivery technology is improving, and vendor call centers and other worksites aren't always in the same location as former employees.

"We believe in taking a small group of people with the most knowledge," says Goldfein of ExcellerateHRO, which employs about 5,200.

Whatever their fate, affected employees should know the company's reasons for outsourcing and what to expect. It's best to be up-front during a process that can be "scary," Geier says.

"The people being affected knew what we were looking at," she says. Goodyear eliminated 25 administrative and training jobs and transferred 100 others to ACS. "What was left were [75] tactical but largely strategic positions," including HR generalists in each business unit, benefit-design experts and program developers, she says.

Similarly, International Paper transferred about 200 employees to Hewitt. Fifth Third Bank opted for internal transfers.

Companies get the HR skills they need by training staff or hiring from the outside. Either way, it's important to measure changes not just in cost savings and process efficiency, but in internal HR performance as the outsourcing arrangement evolves. "You have to determine what success looks like and how quickly people are picking up those skills," says Oshima.

The most common way to gauge HR's effectiveness is by surveying line executives and managers that asks about HR's impact on critical initiatives such as retention of key employees, he says.

Outsourcing doesn't guarantee that HR will become more strategic, executives say, but it can be a way to gain the time and focus needed to delve into activities that directly support corporate strategy. But success won't happen without the difficult, sometimes painful, work of restructuring and restaffing to make HR a true business partner.

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