Despite adopting a customer-centric philosophy that leaves most HR services in the hands of in-house staffers, Federated Department Stores has found that some services are better off outsourced. Following its recent acquisition of the May Company, the head of Federated’s payroll operations reflects on how selective HRO has helped meet his department’s needs as well as those of 191,000 exempt and non-exempt employees.
Shoppers everywhere have probably noticed a recent proliferation of the Macy’s brand. How could they not? After all, more than ever, the name is appearing in print, heard on broadcast, and loading on the Web. Even more notable, venerable retailers such as Hecht’s, Filene’s, Marshall Field’s, Robinsons-May, and other household names have given way to the Macy’s name, a result of Federated Department Stores’ acquisition of the May Company in 2005.
Perhaps just as startling is the company’s outlook on outsourcing. At a time when many of the Fortune 100 are cutting HRO contracts left and right, Federated, with sales of $27 billion, is steadfastly holding on to nearly all HR operations, outsourcing only a few processes to St. Louis-based TALX Corporation, its only HRO provider. Even payroll, one of the first services that organizations look to outsource, is regarded as a core competency by the New York-based retailer.
So when I recently had an opportunity to visit with HR leaders at Federated’s Financial, Administrative and Credit Services (FACS) unit in Mason, OH—which provides HR services throughout Federated—they spoke more about why they shy away from outsourcing than their engagement with TALX. Nevertheless, they also conceded that outsourcing is never ruled out as long as it fits their criteria.
“STINGY WITH OUTSOURCING ”
To understand Federated’s against-the-flow stance on outsourcing, take a look at its past and present state. As a retailer that has ascended the ranks of the retail segment, Macy’s is arguably the country’s largest department store operator outside the discount sector. (Wal-Mart, the undisputed retail king, had sales of $312 billion in fiscal 2006, while Target had sales of $52 billion.)
One reason why the company keeps HR services internal is that in its run-up in recent years, the company has grown through numerous acquisitions, most notably the May Company purchase and before that the acquisition of the Macy’s chain. The May acquisition was equivalent to a sea change in the retail sector. The $17 billion buyout, completed in August 2005, saw a significant shakeup not only in Federated but also in the department store sector. In addition to consolidating many brands under the Macy’s name—the exception was ederated’s decision to keep the Bloomingdale name as a separate division—the company has also spun off the Lord & Taylor business as well as redundant stores (80 in all). Following the reorganization, the company now operates more than 850 stores in 45 states, Puerto Rico, Washington, D.C. and Guam.
These buyouts have given Federated strong internal capabilities as well as redundancies that it continues to spin off today. With a knowledgeable staff and an infrastructure already in place, the company has been able to process its own payroll, develop its own online paychecks, and man its own HR support group. These years of acquisitions and tough growth in a highly competitive industry have led HR leaders to this conclusion: outsourcing should only be considered if the customer experience can be improved and if there is a clear business case to be had. Far from being idealists, Federated HR execs argue that their philosophy produces a stronger organization.
“We tend to be very stingy with our outsourcing,” said Frank Gottschall, an affable HR veteran whose booming laughter conveys a genuine delight when conversation takes a lighthearted turn. As the VP of Federated’s payroll services within FACS, Gottschall ultimately controls the purse strings for the company’s 170,000 non-exempt and 21,000 exempt workers. Commenting on Federated’s selective outsourcing engagement—consisting of employment and wage verification and unemployment claims services from TALX —he said the conservative approach is driven by a concern for the employee experience.
“The reason we don’t particularly outsource a lot is we stress customer service, so we look for partners that also stress that aspect. We want to make sure our customers, who are our employees, are satisfied because there is a chain of events that happens when our customers aren’t satisfied,” he said.
“Eventually it will come back to us, whether it’s one or two people. That’s still a problem, so we always try and get those situations resolved as quickly as we can, whether it needs to go around the system or not. But our goal is to make our customers happy.”
NO DAY AT THE MALL
Making employees happy these days is no small task for Gottschall. First of all, the scale of the work has nearly doubled. The May Company acquisition grew the employee base from 110,000 to nearly 200,000—a formidable number for any organization. Secondly, transferring May employees onto the Federated payroll was no day at the mall either. In fact, of the six divisions operated by May, only four have been converted. Two more divisions are scheduled for conversion early next year.
Merging the records required the collaborative efforts of Gottschall’s teams, its systems group, and additional resources to make the conversion. Furthermore, he said, May’s payroll system had operated on an old, antiquated GEAC system, which further complicated the process. “We used the same system they used 12 years ago,” he recalled. A third challenge was the time allotted for the conversion. Federated payroll began discussions with May’s HR leaders in December of 2005 and started performing the conversion work by April this year.
Overcoming these obstacles required Gottschall’s team to consider all contingencies that might occur. This meant developing a comprehensive list of questions to address potential problems, especially because of the disparity in technological competence between the two organizations. For instance, while Federated has more than 400 earning codes—the company prefers giving employees very detailed information about their pay—May’s system was limited to only 100. In the end, Gottschall’s group developed more than 200 questions—some with as much as 60 sub-questions—to address the myriad concerns he and other Federated HR leaders had about the integration. Even then, the team was aware they had not covered all bases.
“We just went in there with expectations of surprises, so when they happened they didn’t seem like surprises,” said Bonnie Sterling, a director at Federated Payroll who helped oversee the integration. She explained that the integration effort required lots of travel and face-to-face meetings with HR professionals at different business units at May. If they were in Arlington, VA, it meant meeting with the Hecht’s staff; Los Angeles was for Robinsons-May; and Houston was the headquarters for Foley’s HR professionals.
Gottschall likened the effort to an on-boarding of an HRO client to a provider’s shared-services center, with all of the risks and rewards inherent in any commercial contract. With that, he said, the payroll department needed to make sure there were as few problems with the conversion process or face the prospect of being second-guessed as a competent outfit.
“I call us an in-house outsourcer only because we are a centralized payroll operation, so our clients are Macy’s East, Macy’s West, and others. Our relationship with them has grown significantly over the years,” said Gottschall. “When you try to centralize the function, you have to gain the confidence of the people. We really worked hard in our early years to gain the confidence of our regional divisions.”
But the company at least had one outsourced partner to help with some of the conversion work. Employment and wage verification services in the Federated organization had been handled by TALX’s Work Number unit for years, and it was one of the first functions that Gottschall, when he took over employee services for the Macy’s East division, decided to centralize. Until then, Federated’s 11 business units—broken down into retail and support divisions—all provided verification services in a fragmented way. He quickly realized that the company could gain greater cost savings and process consistency by turning over all of the work to TALX. So when the May acquisition closed, it was imperative for Federated to move all of its new employees onto the same system.
Although May had a system for wage and employment verification—a service most often used by creditors, pre-employment screeners, and mortgage companies—it was vastly different from that provided by TALX. The May Company offered a dial-in 900 number, but Gottschall said this discouraged users as many companies don’t allow employees to dial into a 900 line. As a result, May only received about 25 percent of the verification inquiry volume that Federated experienced in a year. By shifting those employee records to TALX, Federated expected the call volume to rise significantly.
When the time came for TALX to perform the conversion work—which involved the porting of historical and current employee data—the concerns didn’t go away either. While Gottschall said the company never experienced any major problems with the Work Number’s service, he was nevertheless concerned that a misstep in the conversion process could have far-reaching repercussions.
“I believe TALX handled over 130,000 calls [in 2005]. That was my biggest fear,” he recalled. “If it hadn’t happened properly, you’d have to step up and do this manually and put a lot of people into it. Now I only have 75 people in my payroll department. To say I’m going to throw a lot of people on this becomes more of a challenge.”
Gotschall’s fears, fortunately, never realized, but predictions that call volume would rise significantly appear on target. According to TALX, wage and employment calls are on track to reach twice the volume Federated recorded last year at 260,000. The provider also claims that by outsourcing the verification calls, Federated will save $1.2 to $2 million a year over handling the calls internally.
“This was a very huge and important acquisition for Federated. That was top of mind for us. We thought about the challenges that it brought for Federated in terms of how we would meet that need,” recalled Mike Smith, senior vice president, market development at TALX. “Providing the same service to all Federated employees was important, as was timely education for new employees about how to use the employment verification service.”
Although TALX is Federated’s only HRO vendor, the scope of service it provides has grown over the years, albeit in moderate increments. In addition to providing unemployment and verification services, TALX recently began handling its electronic W-2s and reissues. Expanded services being considered include transferring I-9 management (employment eligibility) as well. While far from being the type of full-service, end-to-end HRO deals many large organizations are signing these days, Federated’s engagement with TALX at least demonstrates one of the trends gripping the outsourcing market—buyers often throw more functions into the deal after the contract is signed.
Still, Gottschall remains guarded about outsourcing. While it makes sense to turn over non-core activities to outside vendors, he contends that internal competencies at Federated such as payroll are as well run as any operation belonging to a large global payroll provider. In fact, the company regularly benchmarks its performance against industry standards and makes sure that employees get the latest offerings on the market. He said three years ago Federated hired an outside firm to perform an analysis of payroll costs. The result, after considering all affiliated spends on payroll processing, was about $1 per employee, and he said that since then costs have stayed flat while headcount has risen, which should mean an even lower per-employee cost.
“Each year we are challenged to do more with less, and rightly so. The last thing I want is to have my whole area to be outsourced, so I have a vested interest in being an in-house outsourcer,” he said. “I would put my team up against any other team in the process of payroll.”
The company is also making a push for greater employee self-service, following an effort that raised participation in direct deposit. (About 50 percent of all employees look at their paychecks online before they are issued; at FACS, paper slips were eliminated a few years ago, and 98 percent of employees view online.) In its drive to increase self-service, the company is weighing different tools that will give employees greater access to the Internet.
He said these and other programs are all directed at improving the customer—employee—experience. While outsourcing can help fill gaps in Federated’s HR services, the company prefers to handle as many activities as possible internally. It all comes down to an entrenched view about retaining control, he added.
“You always think you could really be doing it better. That’s our mentality as a company,” he said. “We are hesitant of letting go because we want to ensure that the same high level of quality service continues.”