You don’t have to be a botanist to know roots make the tree strong. And you don’t need to be a BPO expert to know that the root of HR’s biggest challenges today is misalignment of HR processes with business objectives. For healthcare insurance giant CIGNA, it was a lesson that only outsourcing could unearth.
Advice for those without a green thumb: pruning a tree should ideally take place during the dormant season. This is to ensure healthy branches and vibrant blossoms in the spring. But to really spark new-season growth and nurture young tendrils, tend to the roots.
For healthcare benefits provider CIGNA, whose corporate logo is a Tree of Life, such sage advice was exactly the prescription it needed in 2004, when the company signed a transformational, seven-year HRO contract with global provider IBM. Undertaking the project during a dormant period in its corporate history, the company’s HR leaders realized then that even as CIGNA leaders “pruned” away non-core businesses, they needed to prep the “roots” of their business processes for future growth. What they ended up with was an end-to-end HRO program that not only shifted transactional activities to IBM but also ushered in consistent and transparent processes and greater accountability at the $16 billion healthcare benefits giant.
Regular readers of HRO Today understand the myriad reasons why HR leaders, by choice, take on outsourcing. It’s not that they are so self-deprecating that they’d enjoy reducing their own staff. To the contrary, HR leaders who truly understand the value of transformation will outsource, insource, and just about wash dishes if they can realize all the heady benefits that will elevate HR to a seat at the table. And in CIGNA’s case, its HR leaders took an exhaustive look at all options to help their organization gain an edge.
The two main architects of the company’s outsourcing efforts—John Murabito, executive VP, HR and services, and Charlene Parsons, VP of talent optimization, HR and services—didn’t arrive at HRO in some knee-jerk reaction to a cost-cutting mandate. Nor did they feel peer pressure to jump on the HRO bandwagon. No, the decision to outsource came after a deliberate and sweeping investigation of all the ways to reduce costs, to make retained HR professionals more accountable, and to institute a consistent policy throughout the organization, which before 2004 functioned more as a holding company overseeing branches of business than as a cohesive operating company. Pre-2004, CIGNA’s different businesses operated with autonomy but also under disparate policies and processes.
“We needed to change our way of operating from a people standpoint to be under one system rather than multiple systems. So one of the things we jumped into pretty quickly was policy harmonization and determining how we were going to run the organization in one way versus multiple ways,” Murabito recalled recently from his office overlooking the Center City district of Philadelphia. “And that went strategically not just for HR but for other parts of the organization as well.”
CIGNA in HR circles is a household name, but few are aware of its long and storied past. The brand has only existed since 1982, when Connecticut General and INA Corporation married and morphed their names. But the lineage stretches as far back as 1792, when INA was founded in Philadelphia as the first marine insurance company in the U.S. Throughout its history, the company has participated in healthcare, property, and casualty insurance and employee benefits, but it began to tighten its focus on healthcare in the past decade, first by selling off its individual life insurance and annuities business in 1998 and then its property-casualty line a year later. In 2004, the company exited the retirement benefits sector.
Today, CIGNA operates nine distinct businesses largely centered around employee healthcare benefits and insurance. With 2005 sales of $16.7 billion—2006 sales were not released as of press time—the company offers a broad selection of products, including medical, dental, disability, life, and accident insurance. It also provides employee assistance programs, case management services, pharmacy benefits, and other healthcare-related services. Revenue growth was expected to remain strong for 2006, further bolstering the company’s comeback after a dismal 2003 in which CIGNA’s stock price fell into the 30s before the company engineered a turnaround. Today, shares are trading at a little more than $129 a share (as of January 18), a remarkable climb in three years.
It was during the turnaround years that CIGNA considered outsourcing. When the company made its last divestiture three years ago, it was clear about its core market. At the same time, management became clear on how to operate the company, which derives the lion’s share of revenues from its medical insurance products. With more than 30,000 employees in offices around the world, CIGNA in 2003 was a behemoth with different policies and non-standardized processes. The effort to retrench and focus on core competencies unearthed the shortcomings of HR as well as other business functions, and Murabito and colleagues realized change was needed. The call to action was especially urgent since the company had operated on a homegrown ERP system that Parsons described as a “legacy system with a capital L.”
MANY PATHS, ONE BEST SOLUTION
One of the great lessons HR executives have learned in the HRO movement is that outsourcing is not the only way to realign their back offices. That’s right, HRO is not a one-size-fits-all solution. The early promises that HRO would immediately deliver 30-percent savings to new practitioners often proved to be more wishful thinking than a sustainable fact. Many companies have successfully realigned their HR process without turning to an outside provider, preferring to hold onto what they feel are core functions best performed internally.
Murabito and Parsons never bought into HRO’s hype when they were first charged with helping to reshape HR at CIGNA; they set out to discover the truth on their own. Although they both had experience with outsourcing with their previous employers, neither was well versed with end-to-end enterprise HRO. Furthermore, they refused to limit their choices to either outsourcing or internal realignment, so they did what any good leaders without the answers would do—they called in reinforcement.
In CIGNA’s case, Murabito’s team turned to Deloitte Consulting’s Human Capital practice for its process expertise. While they weren’t sure which was the right path to follow, they made it crystal clear to their advisor that the end goal was to align HR, standardize processes and policies, and reduce cost—the same reasons why most HRO buyers engage in outsourcing. When Deloitte’s Michael Stephan was brought in, there were no preconceived notions on how to reach those goals. To get there, Stephan said they jointly undertook an essential exercise.
“We collaborated with CIGNA and the respective functions to develop a future state vision, a desired state, that really would help meet those objectives of the organization. And then we defined possible scenarios, and frankly, some didn’t include outsourcing, which I think is an important note, certainly, for the readers who see this article, to understand that there are multiple alternatives and there is no one-size-fits-all,” said Stephan. “So we evaluated three alternatives, in fact, all of which were defined with the executive committee as options and evaluated those.”
Sourcing advisors today are an essential resource in any large-scale HR transformation project, and they serve clients in numerous ways: most are intimately familiar with the provider community and can narrow the pool of eligible vendors. They also understand pricing strategies and structures and help buyers save significant monies in their contracts. More importantly, they help employers define their end state, which will drive the project in the first place. In CIGNA’s case, there was another benefit of using an advisor.
“There are a couple of things I think you must have in order to make things work. One is very strong project management discipline, which Michael [Stephan] provided in a big way,” Murabito said.
After weighing their options, HRO emerged as the logical choice. This was largely based on a business case as well as anticipated improvements in service delivery, the two HR leaders said. In pure cost savings, derived from a lower HR headcount as well as a reduction in capital expenditures, outsourcing pitched a compelling case. Even in service delivery terms, Parsons and Murabito said they felt HRO could elevate quality from “good” to “world class.”
“The business case was very rigorous,” Parsons recalled. “Because we were taking money away from other areas also requiring investments so that we could lower our company’s overall operating expenses our business case had to be extremely robust, and we were held accountable by the C-suite to deliver on that.”
Being held under a microscope by the C-suite would make most HR leaders more than a little anxious, and Murabito and Parsons conceded that they felt the pressure at times. At the same time, they pointed out, instilling a greater sense of accountability was one of the reasons for outsourcing in the first place. More importantly, they added, by openly demonstrating to senior executives how they went about weighing their options, executive buy-in was assured.
“I think this is a valuable lesson that could be learned by other organizations, in terms of the buy-in, which was a result of the thoughtful process that CIGNA went through to evaluate the alternatives in a methodical, diligent and, to Charlene’s point, rigorous way. So, it wasn’t a business case built with bias. It was a business case that truly evaluated all of the options and all of the components of the service delivery model. I think that’s really what set up and enabled that level of buy-in” Murabito said.
Even though the business case was important, Murabito noted that his boss, CEO and Chairman Ed Hanway, looked beyond dollars—reflecting the thoughts of many buyers today. Although savings initially emerged as the driver behind HRO adoption earlier this decade, today’s enterprise buyers have grown more sophisticated. The business case remains important to winning champions, but in deal after deal, buyers say they are more motivated by what outsourcing can do for them beyond costs. HR leaders and their bosses at buyers such as Whirlpool, Unilever, and others have cited the softer benefits behind their decision to outsource. In some cases, the appeal is being able to lift service delivery to a higher level. For others, it’s having access to new technology. And elsewhere in the mix are buyers seeking the best-practice expertise of global buyers.
“Although Ed [Hanway] appreciated the financial savings, frankly the bigger attraction for him all along and to this day was the opportunity to have a stronger HR function; the opportunity to have a cultural message to the organization of having one company versus multiple; to have consistent and fair policy throughout the organization that was administered in the right way; and to support the cultural change that we were trying to drive,” Murabito pointed out. “Ed was more enthusiastic about that, and those were to some degree the soft kinds of things that we got and continue to get out of the model.”
A CULTURAL SHIFT
For a company such as CIGNA, which until its HRO deal had largely shied away from outsourcing, signing an end-to-end deal was a seismic event. Consider this: it had tended to just about all of its HR needs, including payroll, benefits administration, and employee call center support on top of provider member services and many more transactional services. So when CIGNA began turning over services to IBM—including compensation and administration, HR call center support such as benefits eligibility and plan design questions, payroll, and HRIS—Murabito and Parsons had to steel their nerves and plan the change in a very thoughtful manner.
“Our employees appreciated the in-house service, the in-house benefits administration people—you always like to be able to walk over to the person and say ‘help me understand x’ as opposed to get someone on a phone in another country,” Parsons said. “And so the change management aspect of that was a challenge for us, one we are addressing.”
If the decision to outsource seemed like CIGNA’s biggest risk, you might be surprised by the company’s choice of provider. IBM today is recognized as one of the biggest global BPO providers. But back in 2004, the company was just getting its feet wet in HRO. In fact, Parsons pointed out, CIGNA was only IBM’s second big, enterprise deal and its first transformational client. (Its first was with Procter & Gamble, more of a lift-and-shift model.) So not only did CIGNA choose to change its culture, it did so with what was then an unproven entity.
She explained that the decision was based on the delivery capability of IBM, its willingness to flexibly accommodate CIGNA’s needs, and its global footprint. In fact, the company had an established call center in Costa Rica it acquired from P&G. With what seemed like a highly skilled call-center staff, a nearshore location, and low costs, CIGNA’s HR leaders felt this was an ideal facility.
But a hard lesson that many HRO buyers learn is not all problems can be anticipated, especially when rolling out a major deal. This axiom held true in CIGNA’s case when transferring the call center. While the facility’s employees were fluent in English, a communication breakdown persisted between CIGNA’s employees and the call-center staffers. Prior to outsourcing, CIGNA operated its center from Philadelphia so language wasn’t a barrier. In Costa Rica, however, the staff experienced “very serious” problems with comprehending the calls they received, which led to grumblings among the rank and file employees.
Whether a problem is anticipated or not, effective outsourcing strategies call for effective mitigation steps. IBM responded by hiring a speech pathologist and partnering with the local university to provide further training, while CIGNA sent some of its own staffers to Costa Rica to give call center workers a refresher course. Parsons pointed out the communication problem has since been resolved.
Although they’ve handled the bumps in the road without any major incidents, neither Parsons nor Murabito is ready to grade the outsourcing effort. Because it is being rolled out in stages—it began with the Feb. 1, 2005 implementation of a new compensation and administration system, followed by the call center and employee relations, benefits enrollment, learning management, and PeopleSoft on January 1 of last year—CIGNA is still assessing the rollout. Moreover, the introduction of PeopleSoft in Asia had been scheduled for January 1 of this year, with further implementation later this year in Europe except for Ireland, which was included in the initial rollout.
Although the phased approach was to minimize the effect on employees, Murabito and Parsons conceded that it has been a sometimes rocky transition for workers. Remember, not only were services outsourced, but policy changes and self-service were thrown in as well, which they said would have been part of the forthcoming change whether CIGNA outsourced or not. They pointed out that it would have been more disruptive had the company rolled out the outsourcing and then made policy changes.
With the bulk of the rollout behind them, CIGNA is now better prepared to take on the growth that management envisioned as part of their corporate restructuring. Though still working toward a steady state, the company hopes that as it tends to the roots of its business—CIGNA employees—it will result in leafier revenues.