HRO Today got exclusives with five big HRO buyers and four blue chip advisors and analysts to tell us why being a part of HRO’s second generation is so much better than having to go first.
Here’s the truth: The HR task that Warren Pfister was handed at Lockheed Martin was a dog’s dinner. At the time, the 135,000-employee, $37 billion aerospace defense giant had 1,639 HR staffers, 130 legacy HR systems, 45 defined benefit and defined contribution pension plans, 69 group insurance plans, and 115 union collective-bargaining units. To simplify the mess, management was looking for a fearless and grizzled ice-calm green beret type. By that I mean a seasoned HR operations professional with a high pain threshold. Oh, and along the way, this professional would be expected to save $85 to $90 million.
I ask Pfister, the rocket maker’s director of HRS customer services, what he thought about the assignment when he got it. After a thoughtful moment, he replies, “Hey, this is not rocket science, it’s more complicated.” What I found most interesting about his answer, however, is what he did not say. Failure in this assignment would have made Pfister’s career at the company like life in the Middle Ages: nasty, brutish, and short.
But Pfister kept his eye on the prize. That focus helped him deal with the anxiety of knowing that his most prudent course was a flier into the land of the unknown. Armed only with his vision and wits, Pfister ventured into the HRO Zone. He became the quarterback on Lockheed Martin’s HRO pact with a relatively untested PwC unit called Unifi. As time went by, PwC divested itself of outsourcing services, and Unifi was acquired by Mellon, the global financial services superpower. And as even more time went by, Mellon decided that the best home for HRO clients such as Lockheed Martin would be global outsourcing giant ACS, which acquired Mellon’s HRO portfolio in 2005.
Despite all the M&A activity, Pfister was able to make good on his mission. Since 2000, he reduced the HR headcount from 1,639 to 1,102, cut costs from $270 million to $198 million, and saved $15 million on a separate payroll outsourcing contract. Mission one accomplished.
And then Pfister was handed mission two: renew the contract. Lockheed Martin was to become one of the few companies whose HRO deals are in their second generation. As such, he is helping set expectations for the upcoming wave of G2 clients.
Pfister takes his role as mentor to the new generation seriously. To help next-gen clients, he is speaking out about his experience. Pfister starts by listing the three improvements his recent HRO contract renewal with ACS has made over the original pact.
First, he cites “phased-in increases for levels of measured user customer satisfaction that stretch beyond current industry practice targets that have already been met or exceeded.” Second are “considerable savings and efficiencies, aligned with the market.” And third is “technology improvement to provide a refined, integrated customer experience to serviced
Pfister’s counterpart at banking giant CIBC is VP of HR Hugh MacDonald, whose contract with ExcellerateHRO is G2 material itself. He has a unique take on the contrast between G1 and G2 pacts.
“In confronting the major differences between first- and second-generation HRO contracts,” MacDonald says, “I found it useful to focus on the three Rs of mid-term BPO. That is review the strategy, review the scope, and review the situation. At mid-term, at periodic intervals, and whenever a second-generation event occurs, the buyer needs to review the strategic intent of the original deal in today’s terms. This will lead into a review of the scope of the contract and a review of the current situation. This is a form of generic gap analysis that will articulate the differences which will be specific to any given HRO contract.”
The chairman of the HR BPO Buyers Advisory Group, of which Pfister and MacDonald are also founding members, is Mark Azzarello, the director of International Paper’s HRO effort. His colleagues’ experience in passing over to G2 has him thinking ahead. International Paper’s deal with Hewitt was a 10-year pact that runs through December 31, 2011.
“If I were to renegotiate today, however, a few things stand out,” Azzarello says. First, he notes, is choice. “There are a lot more vendors today than there were in 2001 with the capabilities to do end-to-end processing. Therefore, I think there’s a greater opportunity to ensure alignment with a vendor who can meet all of a buyers needs.”
Second in Azzarello’s mind is strategic focus. “I’m afraid too many of the early contracts were based on outsourcing as the strategy. I believe outsourcing is the enabler to meeting the strategy of service delivery, and it’s important to understand the difference.”
His third consideration is metrics. “We’re getting smarter about our businesses, and it’s important we measure the right things—measure what is important to the customer, the employee using the service, and not the client (International Paper).”
And a fourth would be competitive bidding. “When we did our deal, Exult (which was acquired by Hewitt) was really the only organization with the capability to do end-to-end processing comparable to what we were delivering in-house. Therefore, for all intent and purposes, they were the only organization to whom we spoke. If we were new to the market today, I’d certainly go through a more formal RFP process and integrate other vendors into the equation.”
Another pioneering HRO buyer looking forward to his company’s G2 event is Sekhar Ramaswamy of Prudential Financial. Like Azzarello, Ramaswamy is a Hewitt client. The Prudential executive believes that his approach to Prudential’s G2 negotiations will involve drawing a line in the sand.
“We would identify the top five or so items that are absolutely non-negotiable and go in knowing where we were willing to give,” he says. Ramaswamy thinks that Prudential’s G2 experience will have the benefit not only of its own experience but of a large amount of comparative information not available when the company signed its initial deal.
“We signed with Exult in the early stages of the outsourcing industry, so there was little or no comparable experience to reference during our diligence process. Given the spectrum of contracts and providers that today’s advisors have access to, they are uniquely positioned to help educate buyers on the strengths of providers as well as best practices for contract terms.”
One of the most interesting developments in the G2 evolution is pointed out by Towers Perrin consultant David Rhodes, a key driver behind The Buyers Group. Many providers thought that they would increase the scope of their HRO contracts by adding consulting to their suite of services, which would allow them to add even more services. But Rhodes says this theory is yet to be proven. Clients are indeed using both a provider’s HR consulting and transaction-processing functions, but they are keeping the two separate. For many providers in the market, one plus one has not yet equaled three.
For his part, Lockheed Martin’s Pfister found the second time around a much more satisfying buying experience.
“Today’s providers,” Pfister observes, “can much more readily ‘prove’ their deployed capability versus the studied risk we took years ago when a handful of providers would promise to build something that didn’t yet exist—the phrase at the time was ‘vaporware’—hoping to capture their first large-company business in order to increase their scale for new tools and service. Today we would be able to thoroughly inspect providers for mature service delivery tools and service models successfully applied to companies similar to ours.”
The Everest Group’s Mark Pramuk says that the end result of G2-level client experience with HRO is what he calls a new focus on how things get done rather than what gets done. For example, he says, “there is greater understanding of the steps required in handling change management, the roles and responsibilities for buyer and supplier in handling change management, solution design and implementation, and a growing preference for a phased implementation rather than big bang.”
HRO OFFSHORING’S EVOLVING ROLE
A topic that was much more incendiary when today’s G2 contracts were first being formulated was offshoring. As recently as the 2004 HRO World Conference in New York, hundreds of protesters gathered in front of the hotel to try to stop the trend. Even today, for companies such as Lockheed Martin whose business is dominated by U.S. government contracts, offshoring is a non-starter, but for more than strictly legal reasons. Pfister explains how his concerns about offshoring are more focused on the management time required to bring a new provider up to speed.
“First, taking HR BPO work offshore is ‘starting over’ with associated implementation energy and cost. We smoothed original implementation bumps and have spent years passing through a learning curve required to build integrated subject matter expertise in our current domestic service delivery. While we always must look at the most cost efficient means to operate our business, we must ensure that our service delivery is our first and foremost concern, and we will not take any action which could compromise the commitment we have to our employee customers.”
In contrast to Pfister’s opinion, Rahul Gujral of leading sourcing advisor Everest Group sees quite a different picture of attitudes toward offshoring in G2 deals.
“The use of and acceptance of offshore has changed, particularly in the U.S. As such, clients are more open to it,” Gujral reports. “We would have frank conversations with our clients earlier about the pitfalls and opportunities presented by offshore as a component of outsourcing, whether they are G1 or G2. If the G2 client had a pretty good experience with outsourcing, then it might make sense for them to offshore. If, on the other hand, the outsourcing did not go smoothly, there is no reason to believe that sending the work from say Phoenix to Bangalore is going to make things go better in G2.”
For Azzarello, using offshore services is an economic necessity, but he has set some strict limits. “We understand the need for offshoring in order to help develop the provider’s economic model,” he says. “Our views have not changed on the subject—assuming the appropriate data privacy protections are in place—we support the use of offshoring for back-office and programming activities. However, we continue to resist the offshoring of customer-facing HR activities.”
Prudential’s Ramaswamy has also evolved his view of the use of offshore services. “If we were negotiating a contract today, we would expand the existing language to include more specificity relative to the kinds of work that could move offshore, and how readiness would be assessed, approved, and transitioned,” Ramaswamy added.
Veteran HRO sourcing advisor Michel Janssen of Everest Group puts a point of emphasis on the evolving distinctions between onshore and offshore services.
“Businesses,” he says, “have to consider that it is B-to-C issue versus many other BPO areas, which are essentially B-to-B processes. As in any B-to-C process, businesses must be cognizant that individual employees, and often other family consumers, are being impacted by the decision to offshore. Those reactions will be very different than a B-to-B interaction, where the interaction is just part of the job.”
Oh, and then there is the matter of the role of sourcing advisors and outsourcing lawyers in a G2 contract: who to use, when to use them, and who to avoid. On this topic, our G2 or nearly-G2 buyers all have strong opinions. CIBC’s MacDonald sets the stage with his advice to G2’ers on what to do with advisors and lawyers.
“Their first best use,” he smiles, “is to, in fact, use them. Their industry knowledge and skills sets will complement your own.”
While they were not available when he first inked his deal, Pfister has become a fan and power user of sourcing advisors and veteran sourcing attorneys.
“Now,” he observes, “sourcing consultants have inventories of hundreds of deals upon which they have advised over the years. They can factually guide second-generation companies on comparative industry or ‘market’ pricing, contemporary scope of services, terms and conditions, performance measures including structure of associated penalties and premiums, effective governance, and renewal negotiation strategies. Likewise, lawyers specializing in outsourcing contracts are available and skilled and can help companies reduce risk specific to nuances of this industry.”
Pfister’s sourcing advisor during his G2 negotiations was Ann Etter of Watson Wyatt. Etter’s colleague, Robert Crow, comments, “During the second-generation negotiations, the clients are more savvy and seasoned. We are able to work with (Lockheed Martin) to leverage their experiences—including lessons learned from the original contract period—along with our broader market expertise to create a contract that helps them better align their objectives and ensure that expectations are met. Having this prior experience allows the client to have more levers to negotiate during the process.”
One of the better-known HRO lawyers is Akiba Stern, a partner at Park Avenue law firm Morgan Lewis. He says that “Round 2 gives you the opportunity to adjust the agreement to truly reflect the relationship as it has evolved, not based on your five-year-old guess.”
But he also points out that since most of the available cost savings have been taken by the end of the first contract, G2’s objectives are different, focusing on what Stern calls “transformation, re-training, investment, and gain-sharing.” He adds a bit of new vocabulary, saying that G2 clients can “harden the environment” by closely examining and revising the performance metrics, including service-level agreements (SLAs) to reflect the true indicators and drivers of performance.
“If there weren’t enough flexibility built into the SLA structure to allow the client to react to the provider’s performance—like being able to shift weightings—the customer builds it into the new agreement.”
Scope is another area that veteran advisors such as Stern say gets significant scrutiny in G2 deals. Aligning the deal’s scope with those “hardened” performance metrics is a major G2 effort. He also points out that the most tedious part of the G2 contracting effort is to make sure “that the interfaces and hand-offs between the provider and the customer or other third-party providers are properly documented.”
On G2 and the future of sourcing advisory services, the final word comes from Towers Perrin’s Rhodes. He talks about sourcing advisory’s “molt” from selection, deal making and negotiation support to extracting greater value from the deals and from the broader relationship.
“We are seeing more interest in marriage counseling to improve governance,” Rhodes observes, “and in establishing more powerful, negotiated, and measured approaches to continuous improvement and innovation. Buyers expect additional value, operational improvement, and innovation but don’t necessarily expect, or rule out, paying for it. Achieving this level of deal performance will keep advisors busy, at least for a while longer.”
As for what HRO has done for HR, all four pioneering buyers—Pfister, MacDonald, Azzarello, and Ramaswamy—are clear. As Pfister sums it up: “Yes, HRO has changed HR forever.” Ramaswamy says HR now runs “more like a business,” while Azzarello claims HRO is “not just a fad but rather a way of doing business that is here to stay.”
MacDonald concludes, “I’ve seen the enthusiasm and increased confidence in the eyes of HR specialists who have gone from being back-office support staff to front line, revenue-producing, employees. Betters jobs for HR staff in HR BPO firms, more focus for HR generalists and strategic advisors within the firm—what’s not to like?”