In outsourcing all of its HR, Danka minimized the risks by retaining staff but under its provider’s badge. This mid-market buyer shows how end-to-end HRO an cut costs, realign processes, and bring flexibility to its organization through HRO.
When St. Petersburg, FL-based Danka USA sought to restructure several years ago, the company faced a harsh reality. Falling sales from tough competition in its core market of copiers and imaging systems handicapped earnings growth. A multi-billion-dollar business built up through more than 140 acquisitions, Danka embarked on some tough measures to ensure its survival, including divestments of unprofitable businesses, reduction in headcount, and other ways to boost the bottom line.
Since that time, the company has trimmed sales from $3.3 billion to $1.2 billion last year, and it continues to look for ways to keep losses from mounting. Within the past 18 months, the company has accelerated its cost restructuring, shifting more fixed costs into variable ones. One result is that the company has taken HRO to a whole new level in its U.S. operations, outsourcing and transferring all HR functions and HR professionals to Bradenton, FL-based Gevity, a provider focused on mid-market HRO. Danka has placed so much faith in its provider that it has retained no internal HR people, relying strictly on those under the Gevity badge. In fact, Danka’s chief HR liaison to Gevity is its chief administrative officer and general counsel.
Few mid-market deals of this size have the risk exposure that Danka has assumed, but to hear senior management tell it, they are more comfortable in an outsourced delivery solution than they had been when HR was internal. In part, the company’s experience in previous outsourcing efforts has been largely successful with positive results. Furthermore, with improved services and lower costs a compelling incentive for outsourcing, Danka said it made sense to outsource on such an extensive scale, as long as the company approached it with diligence and as little disruption as possible.
“Our outsourcing strategy has been all about focusing on what we do well and outsourcing what is not a core competency or a major differentiator for Danka,” said CEO Todd L. Mavis, who was appointed to that position in 2004. “We’ve successfully outsourced many aspects of our business, not only in HR but also in IT, in distribution, and in supply chain. Again, we are very committed on staying close to what we do well. What we can outsource to someone who can do a better job is all the better.”
To understand why Danka is intensely focused on slashing costs, you have to view its financials with a historical perspective. As a leading reseller of imaging equipment—Danka is among the top sellers in both the U.S. and Europe—the company distributes equipment from OEMs such as Canon, Heidelberg, Toshiba, and others and offers technical services and software. An amorphous segment constantly undergoing rapid technological changes, the office imaging market is highly competitive and requires constant investments and reassessment. Furthermore, equipment suppliers are increasingly selling directly to customer, further eating Danka’s reseller lunch.
As a result, Danka’s financials have been anemic in recent years. Since hitting a peak of $3.3 billion in revenues in 1998, the company has steadily witnessed sales dwindle, through both strategic exits from unprofitable business segments as well as from more competition in its core areas. In its latest fiscal year ending March 31, 2005, the company said revenues fell to $1.2 billion, while losses widened to $60 million. This placed an even greater urgency for Mavis’ team to reduce costs.
“Danka has worldwide revenues of over $1 billion. Our challenge has been that our company has had a very high fixed cost infrastructure that did not allow us to have much flexibility with the changes in our business,” Mavis said. “Our high fixed-cost structure made it very difficult for us to remain competitive in the industry. Strategically we have been executing on ways to bring more variability to our cost structure. Again, outsourcing has been one of the ways we have accomplished this.”
The call went out, and HRO answered. Although Danka also has a large presence in Europe, the company decided to tap HRO’s powers only in the U.S. for now because of more Byzantine labor laws across the pond. Entering into an evergreen agreement last July with Gevity, the company transferred 42 HR professionals to its provider, who has since pared that number to around 25, with the eventual goal of downsizing to 20 to serve the company’s 2,500 U.S. employees. Company officials say they have already saved about 30 percent in HR costs since signing the contract.
Retained workers are now all Gevity employees, and some remained on site at Danka’s headquarters. In fact, there’s really no way to tell the HR professionals are not Danka employees other than who writes their checks. Meredith C. Johnson, a regional vice president in client services for Gevity, is based at Danka’s facility and oversees all HR functions.
MORE THAN SAVINGS
While the business case for outsourcing led Danka to consider the significant leap to HRO, it was other benefits that pushed the company forward. As the company consolidated and downsized, it caused anxiety and injected a high degree of uncertainty among the company’s HR professionals. As Mavis pointed out, they worked under difficult circumstances for some time. By transferring them to Gevity, it offered them the opportunity to grow professionally and to experience best-in-class industry practices.
For the company the HRO deal also brought non-financial benefits. For instance, the company had been at a crossroads when it decided to partner with Gevity—it was considering whether to invest internally in web self-service. That would have required significant IT investment and more.
“I figure it’s more than the automation. It’s the customer experience,” said Michael C. Wedge, Danka’s President and Chief Operating Officer, U.S. “It’s a full suite of self service capability in the HR space that we didn’t have. With that potential, our question do we build it or do we buy it was answered because buying the capability, as well as the breadth of skills and service that goes around it, just made great sense.”
Of course full-service HRO is never about just the costs. There are many other benefits. In fact, Mavis said the combination of flexible costs, savings, and improved employee services made it all the more attractive. Furthermore, the company had invested $64 million in the three previous years in Oracle, which dovetailed nicely into Gevity’s own Oracle platform.
“In doing our due diligence prior to selecting an HR solution, we were very interested in if any outsourcing providers were running on the Oracle platform. Danka had made a major commitment to this platform, and as such we were looking for a seamless integration opportunity. We saw working with Gevity as a great opportunity to for us to partner with another company that had tremendous Oracle expertise.” Mavis said. “In many respects, they’re at the forefront of it. Let’s just go leverage that expertise.”
From the provider’s perspective, Danka on its own was clearly not firing on all cylinders, recalled Lisa Harris, Gevity’s CIO and senior vice president of client services. She said HR failed to prove its value to the organization and was a concern from an SG&A perspective.
“HR was heavily transaction-oriented and was therefore viewed as a necessary evil, not a strategic partner. Costs were high and not scalable to the changes in the business. They had disparate systems that weren’t working together,” she recalled, adding that the biggest challenge, as it turned out, was not figuring out how to improve processes but to mark all the bad ones for change.
Another shortcoming in Danka’s internal HR was its inability to be proactive. The company spent much of its time putting out fires rather than considering new HR initiatives. It would conduct internal surveys and measure customer satisfaction only when a problem occurred. Mavis said the whole process was, well, not much of a process. “There wasn’t a cadence to it,” he recalled.
Mavis’ complaint echoes what some industry observers say is the real driver behind outsourcing: process realignment. Danka’s experience mirrors those of many other businesses, especially companies that have grown through a series of acquisition. An amalgamation rarely passes for company culture, and the marriage of disparate systems and processes can hardly stand in for carefully constructed business processes. Danka management conceded that this was perhaps their biggest concern about HR, which proved to be a liability during the past few years. It did not have the resources to improve customer experience, and constant consolidation was taking its toll internally.
“We were aware that due to the performance of our company over the past couple of years, our HR department had not had access to many of the tools required to do their job. We were excited about the opportunity of taking our very dedicated and very capable HR organization and marrying it with the capabilities of Gevity.” said Mavis.
In adopting the “lift and shift” approach to outsourcing, which calls on the provider to “lift” the client’s existing HR operations and “shift” it under its ownership, Danka trusted its vendor to sort out process deficiencies. It demonstrated that the company was comfortable enough with the outsourcing strategy to allow Gevity to perform such a critical function. It’s a strategy that buyers often shy away from because of the inherent risks and perceived loss of control (see sidebar on Outsourcing Failures and Other Lessons).
In weighing the ability of Gevity to deliver the level of service that Danka required, the office imaging company said it examined several critical aspects of Gevity’s model, including the cultural alignment of the two organizations.
Danka’s concerns were not unique; increasingly, buyers cite cultural fit as a critical factor in outsourcing success. Without a match, companies often experience a breakdown in communications, fail to fulfill expectations and obligations, and find themselves referring to the contract document to clarify simple issues. Danka executives say they felt Gevity was the right fit and, since signing the contract, have not had to rely on the accord to resolve any issues.
But defining a cultural fit can sometimes be tricky. Other than specifying service-level agreements, contracts can’t dictate one company to meet another’s cultural needs. So how did Danka determine Gevity was the right partner?
Mavis said one indicator was Gevity’s flexibility. For instance, by signing an evergreen contract, which required Danka to give the provider only 90 days of notice for contract termination, the provider demonstrated an ability to be flexible. Further, unforeseen issues have been quietly resolved without the need for using the contract; he said the two sides have simply sat down and hashed out their differences.
Aside from a cultural fit, Danka management realized that to get the exact service they needed, they had to narrowly define their criteria. In this instance, the company needed a variable-cost structure, improvements in customer service, and lower HR costs. “If we had anything, we had absolute clarity on what we were looking for in an outsource partner. With this clarity, we could quickly go out and see who met our needs and not waste any time with those providers that did not,” Mavis recalled.
Even though Danka was certain of its needs, the vetting process was by no means a quick process. In fact, it took about two years for the companies to reach a deal, recalled COO Wedge.
“One reason it took so long was that Gevity’s own model could not meet Danka’s needs,” he added. It wasn’t until the provider made improvements that Danka felt assured of Gevity’s ability to serve the mid-market.
“We saw it as a big opportunity because we knew how strategic and core it was to Gevity. We knew it would be a success because this is clearly a part of their direction, and they had to make it a success.” said Wedge. “We’re going to get that much more attention because they must be successful in this venture.”
Indeed, Gevity executives conceded that the uniqueness of Danka’s model made this client especially important because the company wanted to prove that assuming all of a mid-market company’s HR functions can be undertaken successfully. The provider said it has identified these types of mid-market clients as the market segment with the most growth potential. Therefore, Danka’s success is closely tied to Gevity’s success as well.
THE REAL BENEFITS
What’s the verdict so far? On the cost-savings front, Danka said it has already achieved its goal. With savings around 30 percent, the buyer said it is pleased with the immediate result. Furthermore, shifting HR costs from fixed to variable enables the company to achieve flexibility, and the evergreen contract provides an out if it ever becomes dissatisfied with Gevity’s service (although Mavis and his staff say they realize it’s difficult to go back to an insourced HR model). The real question, then, is what about customer satisfaction? The jury, it seems, is still out.
Keith J. Nelsen, Danka’s chief administrative officer, said while the company had surveyed internal customers prior to outsourcing, it hasn’t yet asked for their input since implementing Gevity’s services. He said the organizations wanted to make sure employees had a chance to become familiar with these changes before asking for their input. The company plans to conduct two internal surveys each year, with additional ones aimed at any “hot spots” that might arise.
Other changes in HR business processes include improved compliance training and reporting (even SAS 70 reports are included in payroll); the availability of self-service (the company said it was rolling it out as this article was going to press); and tackling new initiatives such as re-examining job classifications and descriptions and revising compensation planning. All of these improvements have led to one real benefit to Danka executives—the freeing of their time from addressing HR administrative chores.
“I measure [success] by where my time is spent. You can spend a lot of time focused on the internal or you can go get engaged in field activities and spending time with customers, looking at the market and the business we’re in,” said Wedge. “When I look at the agenda for my staff meetings and the agenda for my day, I am spending much more time focused on the business than I am on the internal functions of Danka.”
And that is perhaps what every manager looks to focus on: core competencies and how they can maximize the value of the activities they tend to every day. It’s a compelling benefit that every buyer and potential buyer can enjoy, no matter how their outsourced services are delivered.
Whether a mid-market company needs to outsource HR to the extent that Danka has in order to enjoy the rewards is open to debate, but from what Mavis and his team have experienced so far, it certainly doesn’t hurt. Clearly, though, it’s an approach not suited to everyone’s taste, especially for companies steadfastly holding onto the belief that for HR to serve its purpose, some portions must remain under internal control.
In Mavis’ eyes, however, the company has never relinquished control. With many of Gevity’s employees housed onsite at Danka, it’s as if the company never outsourced. And because the contract is flexible in its termination terms, Danka has the option to end the relationship very quickly. Conversely, the company may one day expand its outsourcing strategy to include overseas operations if it proves to be beneficial. However, that would require Gevity to either expand into new markets—it serves a U.S. base of customers currently—or select a provider in Europe. For now, it’s too early to tell whether that will be necessary.
What is necessary, though, is for both sides to continue to communicate, analyze, and develop new initiatives on a regular basis. Only through a disciplined rigor and well-planned execution will the companies achieve mutual goals, leaders from both sides say.
“Our strategy was to make the outsource provider a part of our organization. We were not looking to just hand HR off, we were looking for the outsourcer to be an extension of business,” Mavis stressed.
With former employees now walking around Danka’s offices wearing Gevity’s badge, Mavis’ approach to outsourcing is proof that he practices what he preaches. Under a model sure to be emulated by other buyers, Danka is indeed pushing mid-market HRO to new heights.