Being an orphan isnât so bad, especially if you get to start from scratch. In the case of pharmacy benefits giant Medco, its spin-off from merck allowed its hr leader to leverage outsourcing to the fullest.
When corporations are orphaned, their executives scramble to build a new identity, a new organization, and a new workforce. The HR leader responsible for weaning the newly independent business from its parent faces a daunting task fraught with risks and profound repercussions for years to come. A major misstep could lead to career-crushing consequences.
But for one HR leader who found herself under these unnerving circumstances, they were more opportunity than challenge. When Karin Princivalle, senior VP of HR at Medco Health Solutions, the nation’s No. 1 pharmacy benefits provider, was charged in 2002 with recreating service delivery as a result of the company’s spin-off from pharma giant Merck, she saw the chance to build a better HR with the help of HRO.
Sure, there is back-office pandemonium anytime a spin-off occurs, but for HR leaders with vision, it’s a new start, an opportunity to customize service delivery while strategically aligning HR services to an ideal state. It’s hard work, but starting with a clean slate means none of the legacy headaches that most HR leaders contend with daily. After all, who wouldn’t wish for an opportunity to start anew sometimes?
Moreover, starting from scratch means fewer barriers to outsourcing because there are usually no or very few internal stakeholders threatened by an external solution. If anything, orphaned companies embrace HRO with a passion you probably won’t find at most established organizations.
That was the case for Franklin Lakes, NJ-based Medco, which was spun off from pharmaceuticals giant Merck in 2003. At the time, Princivalle faced the classic dilemma every orphaned corporation encounters: Buy or build HR services? With the foresight of an oracle, Princivalle then championed what turned out to be a highly successful outsourcing engagement with Lincolnshire, IL-based Hewitt, and she hasn’t looked back since. “To me, there were only two ways to go: Either build it in-house or opt for a totally outsourced model. Because I really valued integration, I didn’t want different vendors handling different pieces,” Princivalle recalled recently from her office overlooking the tranquil, park-like grounds of Medco’s corporate campus. “We were really intent on transforming this company, and as we embarked on that, I didn’t want [internal] HR people worried about administrative functions. I wanted HR people to focus on, ‘Do our employees understand the strategy?’, ‘Do they get the vision?’, ‘How do we make this a really high-performing culture?’, and ‘How do we embed our values into this new organization?’ So to me it was an easy decision to outsource. .
To her credit, Princivalle, a 14-year veteran of Citibank before a stint at Merck that led to her being named the top HR leader at Medco, was talking about using HRO to achieve HR transformation and strategic realignment long before it became a hot topic in today’s outsourcing discussions. Back in 2002, when most early pioneers were turning to outsourcing to save a few bucks, Princivalle realized the big payoff wasn’t so much on cost savings; it was that HR could better focus resources to make a difference for the business. By turning over payroll, benefits administration, call-center support, and other services to Hewitt, Medco’s retained HR organization could focus on talent and performance management, which has a greater impact on its steadily growing business.
Perhaps it was the clean slate, perhaps it was Medco’s governance, or perhaps it was its choice of vendor, but for Princivalle, the pieces just fell into place. Today, with about 16,500 workers on its books, Medco is continuing to rely on Hewitt for end-to-end services, including HRIS, benefits administration, payroll administration (which is delivered through a partnership with Roseland, NJ-based ADP), call-center support, self-service, and salary planning. The deal has been so successful that in the past 16 quarters, Hewitt has missed meeting service level agreements on only two occasions, according to Medco. Last year it renewed its five-year contract with Hewitt for another five years, extending the accord to 2013.
Prescription for Success
Skeptical veterans of the HRO industry might scoff at Medco’s portrayal of such a picture-perfect implementation. After all, the majority of deals signed early on in the industry’s development have not fared well. To put it in perspective, 2002 was the nascent stage of HRO. A few landmark deals had been cut by then, but for a company of Medco’s size (about 15,000 at the time it was spun off), end-to-end outsourcing was a risky proposition. As it turns out, many of those early-day deals were plagued with problems, and the result was a batch of dissatisfied customers who had second thoughts about outsourcing. Even today, five years later, many early adopters are still licking their wounds from HRO deals gone wild.
Furthermore, the HRO market has matured like any developing market—marked by success stories and high-profile failures, too. Vendors have come and gone as well, and even among those that remain, some have been more successful than others in service delivery. In Hewitt, Medco had contracted a brand name that nearly invented the business, but back then it was still struggling to perfect its business model. As the industry would later witness, Hewitt’s outsourcing business has undergone a series of peaks and valleys, including a signing binge of new clients in 2005 that was followed by massive indigestion a year later. During that time, Hewitt also saw most of its senior leaders leave, creating a knowledge vacuum as a result of the exodus.
So, starting with a clean slate in 2003, how could Medco have achieved such a resounding success story even as so many others flailed in their deals? As one of the biggest pharmaceutical makers in the world, Merck had exceptionally deep pockets and seemingly endless resources to invest in HR and human capital. When it was still owned by its parent company, Medco’s HR needs were tended to by Merck’s internal services, so transitioning from an internal provider to an external one had its share of risks. ““There wasn’t an integrated offering [at Merck]. Payroll was a one-off, benefits administration was a one-off, stock administration was something else. It became difficult when you had a specific issue to pinpoint and resolve quickly,” she recalled.
Still, Princivalle acknowledged she was well aware of the risks of electing an end-to-end outsourcing model, but she said the potential rewards were worth it. All along, she maintained, having internal HR bogged down in checking payroll accuracy, handling rudimentary inquiries, and administering benefits would have distracted the department from performing high-value work. In the hands of a competent service provider, she said, administrative tasks could be performed more efficiently if not more cost effectively. Nevertheless, there was always the chance for a bad implementation that could come back to haunt her.
Embracing risk, however, has become an age-old story in outsourcing, and HR leaders who helped forge the HRO path did so by risking their careers for their organizations. As one senior HR leader after another has told HRO Today over the years, to get a seat at the table requires bold leaders making bold moves to get bold results. Playing it safe, as Princivalle and others who have walked the walk will tell you, guarantees that C-level leaders will overlook your efforts. But there’s a difference between taking on reckless risk and calculated risk, and that distinction determines success or failure. The secret to Medco’s HRO success, as it turns out, is not much of a secret—just good planning, hard work, and a healthy understanding that outsourcing is a two-player sport that needs vendor and client input. “We were actively involved with Hewitt—from the upfront requirement to the project plan, and then the actual implementation. I never believed and still don’t that you just throw projects over the fence to your vendor.” Princivalle said. “I believe if you really want to leverage the capabilities you both can bring, you need to work together. Part of the way I tried to mitigate the risk was to be deeply involved in the upfront requirements—and in execution and implementation. .
Tackling Policy as well
Medco’s outsourcing design and implementation process entailed a regimented examination of policy and process, she recalled. Often in outsourcing deals, most of the attention is on process, but because the company was starting from scratch, it had an opportunity to realign policy as well.
One of the biggest benefits of starting from scratch is avoiding legacy issues, especially when it comes to IT. Under Merck, HR services were delivered by a disparate patchwork of systems built up over the years; some were outdated, and others were limited in their functionality. Princivalle said Medco’s spin-off couldn’t have been more timely because right around then PeopleSoft (later acquired by Oracle) had just released a new version of its human capital suite. She said she liked the product and asked Hewitt to deliver services on the new technology.
Sreeni Kutam, a senior director of HR operations at Medco who had been with Hewitt previously, said the choice of PeopleSoft helped the company to roll out self-service more quickly.
“Hewitt offered a portal solution with one point of entry for all stakeholders—
employees, managers, and HR. And most of the self-service aspect was available through that portal,” he said. “PeopleSoft, I think, during that time, they had just released the newest version, and Hewitt took advantage of that technology. .
For many HR leaders, the concept of HR service delivery on a standardized platform might seem alien, but when you outsource, that’s what you get. Princivalle was even more fortunate to be able to roll out the deal on the platform of her choice, which allowed Medco to make better use of the data generated. And because PeopleSoft is a proven suite, choosing it also helped to mitigate the outsourcing risks, she said.
Hewitt began implementation with the benefits component. Because of its domain expertise in this area, the rollout was quick and seamless, Princivalle recalled. As the provider went live with the other pieces—payroll, call center, etc.—it became clear to Medco that the learning curve was greater, especially because Hewitt was using ADP for payroll service delivery. She acknowledged that it took some time for the two companies to reach a steady state on the other services. Along the way, there was lots of collaboration between the companies to ensure employees were given timely and accurate services. Medco employees participated in numerous meetings and monitored calls with Hewitt workers as if they had never outsourced.
But what’s the point if a buyer must remain intimately involved in service delivery post-outsourcing? Doesn’t HRO’s value lie in being able to shift administrative burdens onto the service provider? If buyers must still monitor the work, what’s the strategic gain?
If you ask Princivalle and other HR leaders who have successfully outsourced HR, buyers can never completely walk away from these responsibilities. She explained that the more the client participates in the implementation—discussing expectations, assigning roles and responsibilities, focusing on continuous improvements—the fewer headaches it encounters later on in the deal.
“It was a process in which I spent time in Lincolnshire with the [Hewitt] reps just talking about our business and how important they were to us,” she recalled. “There was a lot of change management work that we both agreed was very important, and we needed to get up on the learning curve as quickly as possible to ensure our success,” she said. Chris Schramm, Hewitt’s account executive for Medco, echoed her sentiments. While providers are supposed to take charge of administrative tasks, they nevertheless need clients to guide them regarding policies and strategic initiatives, as well as to give them feedback on service delivery.
“We can help in terms of what are the important metrics. We can provide the systematic tools—the dashboards and so forth,” he said. “But Medco has to help us determine what are the things that drive their business. What are the important and strategic roles? That has to be a collaborative effort. .
Indeed, just as an internal HR team needs guidance from HR leaders, line managers, and others, external providers, too, require client feedback.
Now five years into the engagement, has Medco’s HRO gamble led to a more strategic HR, as Princivalle had hoped? And does it make an impact visible to C-level leaders? She said the answer is clear.
“Our internal team is focused on talent management, getting the right people in the right jobs—clearly a key priority for us,” she said. “It enables the business to meet its objective. And then [HR can focus on] a high-performing work environment. They can work on delivering the programs, tools, and capabilities required so employees can feel good about coming to work every day and perform as effectively as they possibly can. If you talk to my HR people, that’s what they are working on. They’re not worried about paychecks being lost in the mail; they’re not worried about answering benefit questions.” Additionally, she said, Medco’s HR staff are visible members of the pharmacy industry. They visit schools and develop relationships with the academic communities, which enable the company to lure top talent and improve workforce effectiveness. They intimately understand the lines of business and talent requirements. And they are well prepared to help the company sustain its steady growth. That, she said, is what a strategic HR is all about.
As Princivalle offered up some final thoughts about Medco’s HRO journey, she sounded not at all wistful about the days when HR was internally delivered by Merck. Today, the company’s HR services are strategically aligned, and she said she believes HR does make a difference to the business. More importantly, her department can better plan for and coordinate future business initiatives. After all, the orphan is no longer working alone; it’s found an extended family in its engagement with Hewitt.