One of the largest and most daunting decisions the executive team will face during an outsourcing program is how to effectively manage the impacted employees.
One of the largest and most daunting decisions the executive team will face during an outsourcing program is how to effectively manage the impacted employees. The HR executive and his or her team have a critical and challenging role. The job is made even tougher by the increase in off-shoring and larger-scale outsourcing transactions.
This is a critical issue now for practicing HR professionals for several reasons. Outsourcing and offshoring are growing trends, and the likelihood of facing these challenges is high and growing. Outsourcing and offshoring are increasingly unwelcome developments for employees, who can feel threatened, impacting their productivity and satisfaction. Very few HR professionals have an appreciation of outsourcing’s potency, complexity, ethical dilemmas, and commercial nature until they are faced with it. Many unprepared HR professionals will be asked to join outsourcing programs. Finally, HR will be asked to make use of outsourcing in its own domain, and needs to be prepared to respond.
HR’s Role
The nature and scope of an outsourcing program will vary immensely. In most cases, outsourcing will involve a reassignment of staff and fixed assets to the winning bidder. Large outsourcing deals involve may hundreds of employees and billions of dollars in contract value. The human capital considerations are often overshadowed by services negotiations and commercial arrangements, and that fact should be a clarion call to HR.
HR’s key activities in an outsourcing program include:
Gathering Employee HR And Financial Data
HR will need to work with the impacted area to determine and categorize employees/contractors who are in-scope for the initial outsourcing assessment. Data gathering is often complex and drawn out, depending on the service that is being outsourced and how clearly jobs/roles are defined and documented. Steps to be considered during the data gathering include determining the scope of employees, critical staff, employment data, and legal limitations.
A significant driver behind negotiations and the decision to transition all or some of the employees to the service provider will be the financial costs. The HR team will need to work closely with the deal finance team to compare the costs of each bidder’s HR proposal and to understand the internal cost ramifications. Steps to consider include:
Overall definition of the costs (open and hidden) of transitioning to the service provider (salary and benefits costs, retention costs, or no costs at all)
Overall definition of the costs of selective hiring, including the significant upfront severance costs
Defining the financial costs associated with each of the options (for example, severing after some retention period)
Identifying and defining the so-called “hidden costs” HR Due Diligence
HR due diligence takes place as part of the wider due-diligence effort, and is often done prior to and during contract negotiation with competing bidders. The key goals of HR due diligence are to understand the comparative employment pictures and value of benefits between the bidder and the client company—getting a similar value is key as achieving a like-for-like comparison for the overall deal. Examples of data compared include:
Managing The HR Risks
Staff Turnover: The uncertainty surrounding an outsourcing is always likely to make staff consider other jobs. They may be influenced by factors such as the current job market, the reputation of the suppliers, and previous experience with outsourcing. What is critical is who leaves and when they leave.
Staff performance: Again, the uncertainty involved and the fact that outsourcings can drag on may undermine staff motivation and performance. Staff performance is the critical link.
Stakeholder buy-in: There are often numerous parties within the client organization who have some form of interest in the service being outsourced.
Legal, legislative and employee representation: This is a potential minefield and requires input from HR specialists and employment lawyers, particularly in Europe, where works councils can stop a deal from going through. Other countries may not have organized representation, but laws do exist to protect employee rights in the United States.
HR data: It is easy to underestimate how difficult it can be to gather the right employee data early on in the project. Difficulties can arise due to scope “creep,” data not centrally held, inaccurate data, legislative restrictions.
Retained organization: The structure and processes of the retained organization need to be developed in line with the outsource program timeline.
Managing The Change—Communications Supporting Line Management
An outsourcing program is likely to be highly emotive and difficult for all employees affected in any way by the project.
Investing in honest, straightforward, and timely communications so that employees understand the case for change and what’s happening is a critical activity. For example, informing employees that communications will be as frank and honest as possible is helpful. However, it’s important to include appropriate caveats that there will be times when questions will not be answered due to the commercial implications. Providing employees with a realistic picture of what to expect will also manage expectations and concerns. For example, if employees should know if severances are likely or how they will be supported through the process (such as outplacement or counseling).
Supporting senior and line managers (the latter who are likely to be in scope for outsourcing) is an important activity for a number of reasons: Managers are involved in numerous pre-negotiation activities, meeting providers, providing and validating data, and most critically they need to ensure that service quality is maintained during a period of uncertainty and disruption. Developing “toolkits” for managers is one way to provide a good practice checklist, references to other sources of support, and an explanation of the different stages of the outsourcing project.
Detailing Options for Managing Affected Employees
As the outsourcing deal evolves the options for impacted employees are generally:
It’s useful to analyze each potential option for relevance to the situation in hand. First, executives may choose to rule out some options based on cost, risk, or commitments to employees. The process then continues with matching impacted employees to option and calculating the resulting costs and risks.
Conclusions
Making the right decision on how to manage employees through an outsourcing program is a challenging task. The HR team plays a key role in enabling the executive team or decision-making group to reach an informed decision about how best to balance the human capital, risks, costs, and obligations. The HR executive has the responsibility to provide knowledgeable resources to support outsourcing programs. Failing to do so undermines HR’s strategic role and function, and misses an opportunity to add significant value and reduce risks to the business. It is also important that the HR team does not work in isolation but works closely with other functions including legal counsel, subject-matter experts, and finance.
When faced with HR issues around outsourcing programs, the first question many senior executives will ask is “What has the company done before?” Most organizations don’t have a lot of history when it comes to large-scale outsourcing. Frequently, HR has played little or no role in outsourcing decisions. So, where can HR executives turn for internal precedents? One option is to turn to similar transactions, such as mergers, organizational restructures, and redundancy/severance programs for insight. This works to a degree and helps clarify whether any previous precedents have been set, but outsourcing is a unique process. Our recommendations are to:
Scott Lever is a senior consultant with PA Consulting Group, specializing
in outsourcing, transforming IT performance, and organizational
design. Scott can be reached at scott.lever@paconsulting.com. Neena
Dosanj is a senior consultant who specializes in transforming the IT
and HR functions through effective organizational design and management.
Neena can be reached at neena.dosanj@paconsulting.com.
