Grabbing the Reins

Growing problems with outsourcing firms are forcing some companies to take back functions in-house.

Tuesday, November 1, 2005
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About four years ago, Houston-based Marathon Oil Co. began outsourcing its recruitment process. Since staffing levels remained fairly stable, supporting an in-house recruitment function didn't seem to make much sense to the global company that supports 26,000 employees.

But in 2003, the demand grew for highly technical professionals, such as geophysicists, petroleum engineers, petrophysicists, geologists and even stratographers. The company's outsourcing firm fell behind in tracking industry changes that impacted staffing, lacked strategic direction and was inexperienced at finding people to fill such high-tech jobs. To make matters worse, colleges and universities also began cutting back on educational programs or training opportunities that prepared students to work in these fields.

The applicant pool began shrinking a little more each day, something no company could afford to ignore. After examining its options, Marathon realized it only had one choice: to reinsource recruiting, or take it back in-house.

Like Marathon, other companies around the country have found themselves in similar situations. What was once thought of as a solution to drive down costs and boost their bottom lines has boomeranged. Tired of lackluster results, they're firing vendors or not renewing contracts. Instead, companies are turning to their own employees to perform those same functions in-house and produce efficiencies and outcomes they haven't seen in years.

In Marathon's situation, HR re-examined the company's strategic picture and became increasingly aware of its outsourcer's shortcomings. It was time to take action. So HR made a business case for reinsourcing and sold the idea to senior executives, says Nancy Tootle, who was hired last year as the company's manager of talent acquisition.

"There's been some very personalized, high-touch communication versus e-mail," she says, explaining that in-person persuasion was used to persuade key executives to regain full control of recruiting.

After Tootle came on board, one of the staff positions was filled by a former recruiter who was already on staff and had developed very strong internal relationships, which is absolutely key, she says. Then the new recruiting team began building relationships with preferred providers, which included recruiting firms that specialized in oil and gas professionals.

Meanwhile, HR's to-do list kept growing. The department evaluated what tools and resources would be needed to rebuild the recruiting function. The company's senior leaders partnered with HR to prepare an in-depth cost-benefit analysis of the function, then examined current staff skill levels, future skill gaps, what skills will be needed to fill those gaps, the availability of applicants with such skills and a realistic timeline to recruit them.

Workforce Planning

Even the company's intern and college-recruiting program was revamped. Determined to head off a future labor crisis, the recruiting team established effective relationships with the American Petroleum Institute, the U.S. Department of Labor and other organizations.

None of these tasks had been performed, or perhaps had even been considered, by the outsourcing firm.

"Most recruiting and staffing firms do not do workforce planning," says Tootle, adding that her employees handle staffing worldwide. "A lot are trying to adapt their current capabilities to provide it, but they have to understand the industry and have to have a fairly good handle on our demographics going forward. It's just not an area that the firm we had at the time was able to do."

Although companies have reinsourced various functions for years, technology advancements are convincing more companies to do so, says Marc Solow, senior manager at Deloitte Consulting in Atlanta.

"A lot of companies are looking to leverage huge investments that they've made in the enterprise relationship-planning systems that run HR, and have the functionality to support data management and processing of payroll or benefits," he says. "They're saying: 'Some or all of the things that we've outsourced, we can do now [in-house] because we've got better computer systems.' "

Technology, however, isn't the only reason. Earlier this year, Deloitte conducted a study, Calling a Change in the Outsourcing Market, that surveyed executives from 25 large companies across various industries regarding their experiences with outsourcing. Its findings revealed that 70 percent of participants had "significant negative experiences," and one in four are bringing outsourced operations back in-house in hopes of reducing costs and increasing efficiency.

Some are dissatisfied because of administrative complexity. Solow explains that some companies underestimated the level of effort involved in managing outsourcing contracts. Others simply didn't understand the cost implications or the outsourcer's expectation of them.

"That's probably one of the bigger catalysts for some of the insourcing projects that I've been involved with," Solow says. "The expectations weren't mutually understood."

Shadow Practice

In fact, companies can inadvertently jeopardize the success of an outsourcing arrangement. Scott Lever, managing consultant at PA Consulting Group, a global HR consulting firm based in Boston, recalls what happened at one large corporation (which he prefers not to name) that outsourced staffing and recruitment.

He says in-house managers refused to use the outsourcing firm and built shadow recruiting functions at the organization. The company also maintained its HR staffing capability and offered very little financial incentive for the vendor to create innovative processes or technology to drive down costs.

It didn't take long for problems to erupt.

"There were issues associated with the service levels [the company] was getting," says Lever, recalling problems such as slow response time to staffing requests. "When [the vendor] didn't meet these targets, the company thought the service actually had gotten worse [than it had been when the process was in-house] when in reality, service levels were much higher."

In the end, the company brought recruitment back in-house. Overall, he says, the transition was handled well because the company treated the insourcing initiative seriously. Following the decision to reinsource the recruiting practice, it took three months to transfer intellectual properties from the vendor, develop new processes and transfer or hire the right level of staffing professionals to handle the volume.

However, no department wanted to adopt the new function, much less pay for it.

"There needed to be the right level of investment put into this new organization," he says. "There was a bit of controversy in terms of who was going to pay for it, who was going to own it, take care of it and feed it."

As it turned out, HR picked up the tab. Looking back, he says, the company was so soured on the entire arrangement that it never considered an alternative provider, painting all vendors with the same brush. He says it swung hard in the other direction, "maybe too hard, too fast."

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Bumpy Road

Brent Longnecker says an increasing number of his clients are talking about insourcing because their outsourcing companies don't seem to have the necessary passion or drive to complete tasks to their client's expectation.

"I've [heard] people start to question outsourcing a little more strategically for the last two years," says Longnecker, president of Longnecker & Associates, a 20-year-old HR consulting firm in Spring, Texas. "They say, 'I'm not sure I want to outsource anymore. . . . Maybe we want to bring some of the functions back that have employee-relations value to them.' "

At times, outsourcing can be more expensive than performing the same functions in-house. Some firms, he says, try to generate as much work as they can to validate their own worth.

About five years ago, he performed an audit for Compaq, now a division of Hewlett-Packard, on what types of IT, finance and accounting processes or tasks had been outsourced. Apparently, the outsourcing firm launched accounting and finance projects on its own that no one at Compaq approved, driving up service fees to nearly $1 million.

"That was really kind of wicked," Longnecker says. "[Compaq] was shocked at the costs. I worked with them on bringing some of it back in-house."

Before any processes are reinsourced, he says, HR must ask itself if the reason is strategic or a knee-jerk reaction. One way to check is to conduct a mock scenario of the entire process. For example, determine how HR would get management buy-in, how long the transition would take, which divisions would pay for the new function and if there were any employees with appropriate skills and background who could be transferred to the new department. Employee focus groups could also be set up to survey people's reactions to the idea.

Roughly two years ago, Modern Business Machines was faced with this decision. However, the answer became painfully obvious, says Fritz Merizon, president of the 49-year-old company based in Appleton, Wis. After 18 months of outsourcing its recruitment function, he says, the quality of candidates was still inconsistent. The vendor also lacked a clear understanding of the types of skills or attributes that were needed, and couldn't fill positions at a fast enough rate.

"Before recruitment was outsourced, we would use technical recruiting and staffing firms to try to find network engineers," he says, adding that his company supports 85 employees. "We were also looking for a cultural fit that [the vendor] was paying very little attention to. We had poor retention of system engineers -- our turnover rate in those positions was 100 percent a year."

After senior executives made the decision to reinsource, key department managers became involved in the recruitment process. Among their first steps was to hire a recruiting specialist. Since this was a new position, Merizon says, there were many things they learned and would now do differently. For example, he says, the company should have developed a clearer understanding of how to best apply this person's skills to match the company's goals.

That issue was addressed during the recruiter's first month on the job, when she met with the company's VPs and top performers for a crash course on the organization's culture, skill gaps and overall business competencies before hiring a single person. She was a quick learner, making the hand-off smooth, and was able to take control within 30 days of the contract's expiration date.

So far, he says insourcing has been successful, mainly because everyone involved in the process made a huge commitment from the beginning.

"We had no understanding of what the results were going to look like," Merizon says. "In the last 15 months she's been here, the caliber of employees we've hired has been exceptional. Ultimately, time will prove if their tenure will be very strong. It's really helping to position our business in a very positive way."

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