These days, outsourcing is a viable option for many non-core and even core corporate functions. Unfortunately, outsourcing initiatives can come with significant risks. If not managed effectively, the expected financial rewards will diminish or disappear entirely and previously well running processes and services can be seriously disrupted.
In this post, we’ll see what steps one organization took to reduce its operating expenses by outsourcing key human resource functions and the consequences it reaped by focusing only on the financial outcomes. We’ll also look at the steps it could have taken to yield a very different result.
Thanks to G.A. for the details on this case.
This mid-size technology organization had encountered a downturn in business and revenue when the financial meltdown hit in 2008. The CEO and CFO responded with staff layoffs and compensation reductions but the organization was still facing a cash crunch. The CEO challenged the CFO to scour the organization’s expenses to find other opportunities to cut costs.
One of the areas the CFO highlighted was the Human Resources organization. The function reported to him so a lengthy senior management battle wouldn’t be required. In addition, a number of his colleagues in other firms had mentioned successfully outsourcing their human resource functions while achieving a significant reduction in costs. As well, the CFO would be seen as being proactive and leading the charge to reduce costs. So he reviewed the opportunity with the CEO.
The CEO was enthused with the idea. The existing HR organization cost in excess of $3 million annually. If they could cut that cost by one third or more, it would give them ongoing relief and have a positive impact on the bottom line. The CEO and CFO agreed to proceed with outsourcing of the HR function.
To save $1 million or more annually through the outsourcing of the HR function. The HR Director and a few senior staff would be retained to look after the HR needs of the company’s executives. The target was to have the changeover completed within four months.
The CFO immediately got in touch with two colleagues who had mentioned successfully outsourcing human resources functions. Both used the same outsourcer. They indicated that the outsourcing organization picked up responsibility for placement, payroll, promotions, compensation adjustments, leaves, internal staff moves, contract administration, terminations and the usual suite of HR functions. Their services were accessible through a fully secure internet environment. The only services they explicitly excluded from their offerings were recruiting and screening.
Because of the four month target and the glowing reports from his colleagues about the outsourcer’s performance, the CFO contacted the outsourcer’s local agent directly and set up a meeting to review their offerings and figure out next steps should the meeting go well. Then he talked to the Human Resources Director about the plans. Understandably, the HR Director was livid. He suggested some alternatives. They could look at short term refinements in the current processes. They could launch a reengineering initiative to completely revamp their current processes. They could evaluate a number of Software as a Service (SaaS) offerings he was aware of. Finally, they needed to at least consider other outsourcers and assess their collective offerings, performance and client ratings before making a decision. They also needed to engage with other company managers to get their input on the challenge and the options available.
The CFO saw the suggestions from the HR Director as a delaying tactic. They would have involved more people both inside and outside the organization. They would have involved additional time, cost and debate to arrive at a consensus. The CFO had the CEO’s backing. He felt he needed to act. So the CFO and HR Director met with the targeted outsourcer. They were both impressed with the outsourcers claimed capabilities and client list. When the discussions got down to money, the outsourcers initial cost figures were about double what the CFO was looking for. Negotiations continued for a period of time after the meeting. The CFO become frustrated with the pace of the discussions and finally issued an ultimatum – give me your best price and most aggressive plan to complete the transition or look elsewhere for business. The outsourcer responded with an offer that would reduce the annual HR costs by 25% and complete in eighteen weeks from the date of contract signing.
The CFO reviewed the proposal with the CEO and recommended that they proceed with the deal. The CEO agreed and signed on the dotted line. The project was launched. The CFO then informed the HR Director that the project was his to implement. So, the HR Director sent an email out to all management and staff announcing the deal and the timeframe. He assured everyone that the new arrangement would live up to the “standards of excellence” currently provided by the HR organization. He prepared and distributed a separate letter to the HR staff identifying who would be let go and outlining the termination process and timing. He sent out a third missive to the company’s executives identifying the in-house contacts who would look after their HR needs. Finally, he assigned a senior member of his organization to run the project and work with the outsourcer to make everything happen as planned.
The project was delivered and operational in twenty-six weeks, two months later than planned. The operational impact was hugely negative. Responsibility for recruiting and screening was thrown back on line managers. Services that used to take a day or two, required weeks, sometimes months. Somehow, some of the data provided by HR to the outsourcer was corrupted. That resulted in some employees being in the wrong organizations, in the wrong pay grades, with the wrong employment status. Security was compromised when notices of termination were not appropriately forwarded to remove departed employees’ system and physical access. Compensation for two company executives was mishandled, to the executives’ detriment, because special arrangements weren’t passed to the outsourcer. Response to problems was abysmal.
There was such an uproar among company managers and executives that the CFO dismissed the HR Director and brought in a contract HR professional to do damage control and fix the problems. The contractor immediately brought together representatives from the management and executive ranks, IT, the remaining HR staff and the outsourcer to identify and prioritize the problems and put an action plan in place. He also worked with the group to establish some basic service standards. He set up a hot line for use by company managers and staff to record problems and feed them into the priority setting process. Finally, he produced a weekly bulletin for management that addressed progress against the plan and performance against standards.
An audit requested by the CEO and done about six months after the situation stabilized revealed that actual cost savings would be about $200,000 annually, dramatically below what was expected. The difference was attributable to three factors – higher outsourcing costs from processing more staff and functions than originally planned, the number of “special situations” that needed to be addressed on an exception basis and the retention of more HR staff than originally planned to support executive needs. The audit report noted the increased load on management ranks for recruiting and screening activity but didn’t quantify the cost. The report also observed a reduction in respect for senior management’s leadership capability. As for the glowing outsourcer endorsements from the CFO’s colleagues, it seems they weren’t really in the know on the changes in their own organizations. According to them, everything seemed to be just fine but they weren’t really involved in the transition.
How a Great Leader Could Have Changed the Outcome
This case is similar, in many ways, to my last post, The Need to Confront Executive Edicts. No question, there was an executive edict to cut costs and another one to outsource human resources functions. However, in the previous post, the Product Director did a number of things right and delivered a quality solution. In this case the HR Director chose to “just follow orders” and lost his job because of it. What could he have done differently to ensure a better outcome for himself and his company? Plenty! He needed to manage the change from beginning to end including understanding and articulating his role in the venture. Sure he was under extreme pressure, tight deadlines and the emotional turmoil from the need, potentially, to decimate his organization. All the more reason for a clear, measured response. The following steps would have helped him deliver successfully, regardless of the solution chosen.
- He needed to separate the problem from the solution. The company needed to save money quickly. That should have informed all future actions.
- He needed to identify impacted managers and executives and started the engagement process. Their participation was essential for a successful outcome regardless of the approach taken. And they could have been very useful allies in negotiating a more appropriate course of action.
- He should have solicited feedback on service and support needs – what services, how often, what time of year, turnaround needs, etc. and used this as a framework for establishing service standards for the future solution.
- He should have articulated end-to-end current service processes and costs, not just the HR portion of it, to compare against other alternatives.
- He needed to evaluate other alternatives and talk to customers using these services, even if only at a high level, to create a level playing field. Options could have included:
- Improve/reengineer current processes including more self-serve options for managers.
- Consider SaaS and vendor alternatives including the current HR software provider who may have been in a position to deliver other solutions.
- Consider other outsourcing candidates and whatever feedback they could provide regarding customer satisfaction and industry analysis.
- Within a couple of weeks of being told that outsourcing was a go, he needed to present a balanced assessment of the options, risks, issues, costs, benefits and potential timelines to senior management with his recommendation on how to achieve the desired outcomes. The executives had a vested interest in the success of the change. They needed to be involved in the decision and its execution. With the time pressure he was under, he needed to divide and conquer, to enlist the help of his senior staff to do some of the due diligence, to dialogue with HR colleagues and alternate vendors.
- Finally, he needed to recognize that he was responsible for managing the final operating solution and for managing the relationship with any selected outsourcers. In that context, he needed to guide whatever solution was selected to a successful outcome, keep all of the involved parties focused on the target outcomes and ensure adherence to those targets throughout the project.
You know the old saying, “haste makes waste”. It’s certainly true in this case. If you encounter a similar challenge, take a deep breath and approach the task at hand with a calm, cool and collected mindset. Leverage all those practices you know have been proven and add value. Marshall the insights and support of your colleagues. Involve the affected stakeholders right up front. Always consider alternatives, both business and technology, regardless of the edict. Finally, put these points on your checklist of things to do in future endeavours so you can be a Great Leader. And remember to use Project Pre-Check’s three building blocks right up front so you don’t overlook those key success factors.
In the interim, if you have a project experience, either good or bad, past or present, that you’d like to have examined through the Project Pre-Check lens and published in this blog, send me the details and we’ll present it for others to learn from and comment on. Thanks
Drew Davison is the owner and principal consultant at Davison Consulting, a senior consultant at Mapador Inc. and a blogger on Project Times. He is the developer of Project Pre-Check, an innovative framework for launching projects and guiding successful project delivery, the author of Project Pre-Check – The Stakeholder Practice for Successful Business and Technology Change and Project Pre-Check FastPath – The Project Manager’s Guide to Stakeholder Management. He works with organizations that are undergoing major business and technology change to implement the empowered stakeholder groups critical to project success. Drew can be reached at email@example.com.