DINING ON HRO

When the Catalina Restaurant Group emerged from bankruptcy in 2002, building robust HR and F&A processes was a critical, if not economically feasible, task. But thanks to outsourcing, the company today can focus on feeding hungry customers instead of back-office headaches.

by Andy Teng

Chaos. It’s a fair description of companies in the mid-market segment. Measured by headcount or revenues, these businesses—whether manufacturers or service providers—have one thing in common: a constant stream of corporate drama.

That’s because as they scrap with bigger competitors, mid-market employers undergo myriad changes from mergers and acquisitions, shifts in their market, global expansion, and other unforeseen developments. One thing is for sure: the HR needs of mid-market companies are always varied.

Take the case of the Catalina Restaurant Group (CRG) of Carlsbad, Calif., an operator of two well-known chains serving hundreds of thousands of diners each year on the West Coast and in the southwest U.S. With 220 Coco’s and Carrow’s restaurants dotting the restaurant landscape throughout California, Colorado, Nevada, Washington, Arizona, Oregon, New Mexico, and Texas, the privately held company has undergone a series of dramatic changes in the past five years, and at every step of CRG’s journey, HRO has been a cornerstone of its operations. In fact, you can say outsourcing is the backbone at CRG—squarely in the mid-market segment with 8,000 employees—because it also outsources 100 percent of its finance and accounting functions, placing it among a small group of multi-domain service buyers.

If you’re curious about why CRG—a Japanese subsidiary with annual sales of $290 million—has so enthusiastically embraced outsourcing, start with its CEO, Sam Borgese, a seasoned corporate leader who’s a bit of an outsourcing zealot. His enthusiasm stems from decades spent as a buyer or a provider of outsourcing services dating back to his earlier days in the corporate real estate market, where as an executive he outsourced development to third-party vendors. These days,
however, Borgese not only strategically employs outsourcing in his organization, but he is also so smitten in his relationship with Witchita, Kansas-based Accenture BPO Services that he travels around the country to spread the gospel about HRO and dispel negative myths that often accompany it. So if you see him on the HRO speaking circuit frequently, you’ll know it comes from a genuine belief in outsourcing.

“I think outsourcing is a pejorative term because it sounds like you’re moving something out, and it has various tones of job loss and position loss in the company doing the outsourcing and other kinds of negative dealings that you get from a corporation,” said Borgese. “It really should be called insourcing only because you are bringing a team into your company that is able to more efficiently spread the cost of what I call standardized corporate processes, whether it be small-, medium-, or large-scale businesses. If you are able to cost effectively obtain those services and obtain the same or better results from outsourcing, more than likely there will be a cost advantage and an intrinsic advantage of you being able to concentrate on other core areas of your business.”

Borgese’s advocacy of HRO is not unique. This kind of ebullience is often echoed by other buyers of end-to-end outsourcing services. What’s novel here, however, is that most of the cheerleaders have been big corporate buyers engaging in multi-million and sometimes
billion-dollar deals; few mid-market practitioners have been vocal advocates of outsourcing. That, however, may soon change.

A Mid-market Explosion
HRO Today in the past few years has predicted the arrival of the mid-market, but we’ve yet to report on a deluge of deals. As it turns out, these smaller engagements aren’t the stuff that most companies jump up and down about. In fact, many mid-market companies prefer to keep their HRO buys under wraps, out of the news, and off the lips of industry pundits. But don’t be fooled: Instead of a deluge that washes over your head, the stream of new deals is quietly but steadily flowing just underneath your feet and out of sight.

According to Dallas-based Everest Research Institute, of the 170 HRO deals signed through 2005, 48 percent were by companies it defines as mid-market in size (employing 3,000 to 15,000 workers). However, because the deals are significantly smaller, the 48 percent accounts for just 12 percent of the market’s total contract value. That means on average mid-market deals are valued at $29.3 million each, while enterprise deals—covering companies with more than 15,000 employees—are worth an average of $206.8 million. Although the deals are smaller, the number of mid-market HRO engagements so far is not significantly lower than enterprise ones.

Monica Barron, vice president of research at Everest, pointed out that the mid-market is vastly different from the enterprise-wide segment and that while big deals have received all the attention in the industry, this part of the market has lots of pent-up demand for outsourced HR services. The key, she added, is for enterprise-solution providers to figure out a way to cost effectively deliver services.

“They are all looking at this opportunity and trying to figure out how to get into it,” said Barron, who added that cost savings are the primary driver behind the mid-market adoption of HRO. “They are looking at what this strategy should be: buy, build, or partner. There aren’t that many options or that many that bring material value to them.”

Indeed the mid-market presents a formidable challenge to the current crop of providers. Unlike the enterprise segment, mid-market buyers have different priorities. Discussions about HR realignment, transformation, data transparency, and other strategic values that HRO offers have overshadowed costs savings in the large-market segment in recent times. But not so in the mid-market, where costs by far are the most important criteria in any engagement, where HRO sales and implementation cycles are significantly shorter, and where a one-to-many standardized platform is a must. The economics of catering to a customer insisting on a proprietary platform are simply unsustainable, Barron added.

But when the economics are right, HRO in the mid-market can be a bright beacon for these companies, drawing them to a virtual pot of gold in profits. For a variety of reasons such as capital expenditure avoidance, back-office cost reduction, process standardization, self-service, and others, HRO may present a better value to companies straddling this segment than their larger counterparts.

Riding out rough patches

These were the exact benefits that CRG management sought out when it first hired Accenture to provide outsourcing services (at the time of the engagement, the provider was known as Franchise Service Corp (FSC) before it became Savista, which was acquired by Accenture in 2006). CRG, which had been part of the Denny’s chain when it went into bankruptcy in 2000, emerged in 2002 under new ownership. Borgese’s predecessor at the company immediately sought to outsource the key functions of finance and accounting and HR payroll by appointing FSC to take over these back-office services.

While the intentions were good, the execution was awful. By now, veterans of the HRO industry—buyers, providers, and sourcing consultants—know the routine: a blissful courtship, a celebratory launch, an oh-so-brief honeymoon, and then love on the rocks. Thankfully, many outsourcing relationships right themselves eventually, but the painful time spent in between can seriously test the mettle of even the most optimistic HR leader. Although he is today a big champion of HRO, Borgese also refuses to whitewash the rough goings early on. He blames CRG’s management decision to adopt a lift-and-shift approach initially, but he’s also not reticent to pin much of the stumbling on FSC.

“When they (CRG management) contacted FSC, what they really did was move the numbers from Denny’s—all the accounting, finance, and payroll—straight across to FSC, and that was probably the worst thing they could have done,” said Borgese, who joined the company in 2003 and was named CEO the following year. “This was one of the biggest accounts for FSC. It was not a franchise but a corporate account, and they really had a hard time getting their arms around the complication that was built into the Denny’s accounting system.”

Jeff Bizzack, the CEO of Accenture BPO Services, conceded that the HRO deal got off to a rocky start. Like Borgese, he also did not oversee the consummation of the deal, having joined the provider afterward. But Bizzack said he quickly realized FSC was failing to deliver as promised and that changes were needed.

“When I first met Sam, I realized we needed to take our delivery to a new level to empower them to focus on their core business. We had to work hard and fast to ascend to a new level as CRG was facing some significant challenges in their own business,” he said.

To improve service delivery, Bizzack said he looked at the fundamentals. He made management changes at FSC and put in place a new customer service team for CRG. Enhanced metrics were implemented, and the two parties assessed what worked and what didn’t. “We transformed from a reactive to a proactive model,” Bizzack added.

Borgese said these initiatives may have saved the outsourcing deal because the service problems had been so severe that some CRG executives were having doubts. Moreover, it was clear that FSC had dropped the ball in giving Catalina the amount of attention it deserved.

“There was a lot of disbelief at CRG that outsourcing was something they wanted to maintain. They actually wanted to move away from outsourcing because their history with FSC wasn’t very strong,” Borgese recalled.

Aligning Expectations
Discontent with HRO is nothing new, and it’s not unique among mid-market buyers. In fact, bigger deals, because of their visibility, have been a source of chronic complaints about the failings of HRO. (See this issue’s Buyer’s Voice column, p. 48.) Industry analysts say buyer dissatisfaction often stems from misalignment of expectations, in which employers correctly or incorrectly assume that their day-to-day burdens will lessen as a result of outsourcing. But often, the opposite may be true in the beginning, when more heavy lifting is required of buyers during the implementation phase.

Borgese said shortly after he and Bizzack were named CEOs at their respective companies, the two began to work more closely to align their expectations and goals. Also, after a more responsive service team was put in place at FSC, the engagement began to operate much more smoothly, Borgese recalled.

“That began the communication chain that ended up being where we are today, which is a much more robust relationship between Accenture BPO and CRG,” he said.

Although problems crop up regularly, Borgese pointed out that the two companies have an established process for resolving issues, and he believes it’s an approach that can benefit any outsourcing relationship. To start, there should be a single point of contact on both the vendor and buyer side (for CRG, its VP of finance oversees the outsourcing relationship). Having these counterparts in place helps to minimize confusion and improves communication between buyer and vendor.

Also, schedule “a periodic review—quarterly or monthly but no less than quarterly—of where the relationship sits and how the expectations are being met and an annual review of the efficiencies you are getting from outsourcing to see if it has helped you to meet your strategic objectives. It’s a lot of work, but any relationship is a lot of work,” said Borgese.

He also advises executives implementing outsourced services to approach it as if they were embarking on a 100-day plan following an M&A event. At the beginning of the 100 days, expectations of the work ahead must be clearly stated, and a review should be conducted following the 100 days to assess which goals were met and not met. The bottom line: buyer and provider must take responsibility for each of its tasks.

Five Years later
With the companies having recently completed a five-year relationship, CRG has signed on for an additional two years, and Borgese said he sees no reason at this point to sever the relationship after 2009. In fact, he conceded that it would be difficult for the company to internally take over all the services Accenture now provides. Currently, Accenture oversees all F&A services, ranging from managing receivables and payables to maintaining the balance sheet to preparing closing statements. On the HR side, the company performs payroll as well as run its employee contact center. Bizzack said future components may include services in performance management, recruiting, talent management, learning, and other higher-value functions

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“Those are things we will bring to CRG when they are ready,” he added.

Whether the chain incorporates those value-added services Accenture is ready to deliver remains to be seen. Some HR functions, for instance, have remained in-house. Maintaining a modest three-person HR department, CRG has two internal recruiters to help its restaurant to staff up. (Borgese said a 100-percent turnover rate in personnel is not unusual for the restaurant business; CRG has been able to minimize its rate to about 70 percent.) Considering the difficulties of staffing, he added that he prefers to maintain personalized internal recruiting capabilities for the rank and file, but executive level searches are done externally. Borgese added that he’s not sure that the company will eventually adopt a completely external RPO model.

As he reflected on the five years since the company began outsourcing—a move born of deadline-driven necessity rather than a contemplative process—Borgese said he feels the company made the right decision despite earlier problems with service delivery. With growth minimal during those years while CRG worked to stabilize the business following its emergence from bankruptcy, it now has plans for aggressive growth following its acquisition by Zensho Co. of Japan. An owner of 2,500 restaurants in Japan and China, Zensho hopes to open “many more” establishments in the future, said Borgese. He estimated that for each new restaurant, the company will add about 100 employees.

To support the growth initiative, CRG will need scalability in its HR systems, which Borgese conceded would be difficult if it were not outsourcing. He said this is one more reason why HRO has been the
right choice.

“When you think about the infrastructure necessary for Catalina, which does not have an enterprise software computing environment, to take it in-house, it would take at least a year to have the software applications, the processes, and the staff necessary to replace what’s happening in Witchita, Kansas, at Accenture,” he pointed out.

So while Borgese speaks highly of his service provider and the relationship they have built—he regularly speaks at industry gatherings to voice praise for outsourcing and Accenture—at the end of the day, it’s still the business case that keeps CRG engaged in an outsourced model.

“We have a very good model and very good relationship at this point. Until the day comes that it doesn’t make economic or strategic sense, we would continue to renew the contract,” he added.

Posted June 10, 2007 in Sourcing

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