1/3/2007
Bringing outsourced HR functions back in-house isn’t easy, but sometimes it’s the best course for an organization.
Michael Molina, SPHR, executive vice president of human resources at Advanced Marketing Services, must have chuckled when his CEO asked Molina what he knew about outsourcing.
Before joining the San Diego-based publishing services company last February, Molina outsourced all HR processes except for employee relations and the generalist HR function as part of a large business process outsourcing (BPO) deal between computer maker Gateway and outsourcing firm ACS.
Molina, who served as Gateway’s vice president of HR, brought those same HR processes back in-house about a year later when the $400 million, seven-year deal was terminated. The deal ended after Gateway and ACS reached a mutual, and by most accounts amicable, decision to sever the relationship; the computer maker slashed the size of its workforce, making the agreement unprofitable for both parties.
The work related to moving the processes in-house was multi-faceted.
“You have to re-establish your internal processes all over again,” Molina explains. “You have to educate your leaders and the workforce and then make sure that the necessary talent is in place, systems are up and running, and there are places for people to sit. Logistically, it’s an enormous challenge.”
Bringing outsourced functions back in-house is no laughing matter for HR executives. “The most important strategic priority for any HR executive going through this type of transition is the transition itself,” Molina emphasizes. “Any other priorities—you might as well forget.”
For HR, understanding what it takes to bring an outsourced function back in-house is essential to ensuring that the process goes smoothly.
To date, few large human resources outsourcing (HRO) agreements—those that involve five or more processes and contract values north of $50 million—have been terminated and brought back in-house.
However, the repatriation of a single HR process during the course of a multi-year, multi-process BPO deal is becoming more common. “It’s just good hygiene,” says Mark Hodges, executive director, corporate development, for Houston-based outsourcing advisory firm EquaTerra. For example, outsourcing domestic relocation to an HRO provider may have made sense at the time a deal was struck. Two years later, the client company may determine that domestic relocation can be conducted more efficiently in-house or with a different vendor who specializes in that work.
Small to mid-size companies bringing back a single, previously outsourced HR process will confront less complex challenges, but will typically be able to marshal fewer resources to work through similar steps involved in large-scale HRO repatriation. (See “Managing Repatriation,” at right.)
“All of the things that HR executives told the provider to do as part of the initial outsourcing transition need to be performed in reverse,” says Charles Arnold, a vice president with EquaTerra, which purchased Arnold’s previous firm that specialized in helping companies repatriate previously outsourced IT functions. “It’s just like implementing an outsourcing deal, only you’re setting up yourself as the service provider.”
Molina agrees, noting that similar project milestones—such as the timelines used for completing the transfer of staff or technology between organizations—are used for both outsourcing and repatriation. “You look at what you did when you outsourced and say, ‘OK, let’s modify our dates because all of this stuff is coming back.’ ”
And that’s only the beginning of a complicated process, which experts say the top HR executive usually directs. “HR should be the lead in bringing HR functions back in-house,” notes Rich Dunphy, who leads the HRO practice of Houston-based technology and services firm Ephor Group and has assisted a handful of Fortune 500 companies in bringing previously outsourced HR processes back in-house. Why? Because HR is responsible for understanding the rationale for the decision, and because HR will be responsible for the processes on their return. Dunphy and others also point out that HR executives tend to possess the communications skills necessary to help manage outsourcing repatriation.
Bringing outsourced processes back inside a company requires HR executives to be “communications strategists while articulating a business case that supports the shift,” says Molina. “It’s also about retaining the right resources—on your team and/or the outsource team—to make sure the right people are in place in those critical jobs to make sure the service delivery model works.”
The reasons for HRO repatriation vary. Splits may spring from business-model overhauls, client dissatisfaction with the outsourcer’s performance, change-in-control clauses in outsourcing contracts (whereby a client is free to terminate a deal if its outsourcing provider is acquired by another firm) or the natural expiration of an agreement. Only one of those reasons makes a significant difference on the repatriation effort: If the outsourcer’s processes are functioning poorly, they will require restructuring before they are shifted back inside the client company.
“If quality figures prominently in the decision, you should take the opportunity to revise and implement a better, more streamlined process,” notes Stephen Joyce, HR practice leader with Atlanta-based The Hackett Group.
Arnold says it’s common for executives at a company with a comprehensive, 10-year outsourcing agreement to “start getting the itch” in year six. “That usually happens about two-thirds of the way through a contract,” he says. “People say, ‘Four years is a long time. Can we do this better?’ ”
The length of time it takes to restore processes internally after a decision is made varies depending on several factors:
The ACS-Gateway handoff, from the official announcement of the decision to the point where the processes were restored internally, required about six months. The entire process, including the planning, consumed a year.
Robert Crow, a senior consultant with Washington, D.C.-based Watson Wyatt Worldwide, estimates that pre-implementation planning requires two to three months, while the actual transition requires three to six months.
Some processes require more attention than others, Molina says. “You’re not going to transition recruiting overnight, but you may be able to do so with relocation services.”
The process of entering and exiting outsourcing agreements is challenging, time-consuming and costly. For that reason, “I think the most important skill set an organization must possess in this whole process is project management,” says Molina. “That sounds obvious, but I mean serious project management: detailed spreadsheets, project forecasts, project milestones, and everything noted, tracked and measured. It takes a special talent and special skill sets to ensure that the project is progressing effectively.”
Dunphy, Crow and others provide detailed process maps to guide clients through HRO repatriation; their guidance generally covers the following areas:
Diagnosis. “You need a basic diagnostic or an assessment at the very beginning that answers the question, ‘what am I getting myself into?’ ” notes Joyce. “What is inventory of services, technology and processes that are contained within the scope of what I’m considering bringing back in?”
That baseline assessment frequently reveals that the outsource provider changed the process. “If that process is perceived as being good, then you’re OK,” Joyce adds. “If it’s not perceived as good and you’re perpetuating a bad process, you need to understand that and decide how to improve the process.”
The diagnosis should also identify any changes in technology, staffing and ongoing process management, or governance, the shift requires.
Collaboration. The diagnosis almost always requires internal help from finance (in understanding and projecting costs), IT (in understanding and planning technology requirements), corporate communications (in communications planning) and, frequently, external assistance from an outsourcing adviser who has guided other HRO repatriations.
“The business partners understood that they had to help get us through this transition,” recalls Molina. “They knew they had to understand that their work processes and roles were changing.”
The most important collaboration takes place between the outsourcer and its client. “Work as professionally as possible with the provider,” Hodges advises. “The provider is motivated to be professional because one of the best references for an outsourcer is a client who used them and then decided to bring functions back in-house for whatever reason.”
Communication. Molina stresses that communication is crucial and often challenging. “When you go to the outsourcing model, you have to sell it to your people who are transitioning to the outsource providers,” he says. “And then they’re in that model. And then you have to sell them on the concept that they have to come back to the organization as they once were.”
Jim Sowers, national managing director, human resources management, for New York-based Buck Consultants, an ACS company, suggests that HR executives communicate early and candidly. “In a very proactive communication, recount the reasons that you decided outsourcing was the correct strategy, and why you have now decided to bring the services back in-house,” he says.
The level of communication depends on the magnitude of the effect on employees: Bigger changes require more frequent communication.
“The number of communications sent [to employees] should be relatively the same regardless of whether the relationship failed or if your organization opted not to renew. The more proactive and straightforward the communications can be, the better,” Sowers adds.
In situations where the contract was not renewed for performance reasons, an internal business-model overhaul or anything other than the agreement’s natural expiration, Sowers says the communication plan should “address the reasons why the contract was not renewed and must be tailored to how this change will impact different audiences.”
For instance, communicating to the organization’s leadership should focus more on why the repatriation is necessary while communicating to employees should focus on how the process will be performed and how it will affect them.
People management. Gateway rehired several key employees who had been lured away from the computer maker by ACS during the original outsourcing transition. Between that approach and internal reassignments, Gateway only needed to bring in a few new employees.
Arnold emphasizes that managing the transition and managing the repatriated processes going forward are distinct talents. “It is much different to run an operation than it is to build an operation,” he says. “Don’t think that you can take your existing operations-manager skill set—which you probably don’t have anymore because you outsourced everything—and expect that person to manage the transition. You need people who know what it’s like to take something that’s not there and build it, vs. people who can take something that’s been running and can continue to tweak and manage it.”
In addition to assessing staffing needs and managing the hiring process, HR also may need to arrange training—for newly hired employees as well as the rest of the business if the processes (or the service delivery model) will change significantly during the transition.
Process management. Unless something has gone terribly wrong, processes are generally in better shape coming in than they were going out, Arnold notes. That said, the ease with which processes can be re-introduced to a company’s internal structure depends in large part on how well those processes have been documented.
While a company may have lost the internal “process knowledge” after the original outsourcing agreement took hold, that knowledge can be transferred from the outsourcer back to the company with the help of rigorous documentation. And, as Joyce stressed earlier, the ease of process transition also depends on whether or not those processes need to be altered.
Technology management. The ease of technology transfer depends on similar conditions: Will the company use the same technology platform and applications that the outsourcer used? If significant changes are taking place, such as the transition from one human resources management system to another, the technology component of the transfer can quickly become the most expensive and difficult aspect of the shift.
By addressing all of these areas with detailed project-management plans, HR executives overseeing HRO “bring backs” will strengthen change management, which Molina describes as one of the most challenging aspects of HRO repatriation.
Managing costs related to bringing outsourced HR functions back in-house also represents a major challenge. Crow details a lengthy list of costs that should be projected and tracked, including those related to:
Internal collaboration can help provide an accurate read of those costs, Crow notes. IT can identify infrastructure costs and sizing requirements while finance understands the way the organization manages costs. For its part, HR should develop a firm grasp of all of the various requirements that need to be addressed. And outside advisers can help generate accurate cost benchmarks.
The line about a married couple “not being able to afford a divorce” does not necessarily hold true for a faltering HR outsourcing agreement. However, the statement does serve as a strong reminder that in-sourcing transitions can be just as expensive and involved as outsourcing transitions.
“Marriages fail and so do outsourcing agreements,” Arnold says. “You don’t want it to fail, but, if it does, you should have a good plan identifying what you’re going to do about it.”
Eric Krell is a business writer in Austin, Texas, who covers HR and finance issues.
Hillsboro, Ore.-based FEI Co. knows how to take a close look at complex matters. The 1,700-employee global company, which builds the electron microscopes and other devices nanotechnologists use to image, measure and manipulate infinitesimal material, scrutinized its staffing process and concluded it would be best to bring it back in-house.
Prior to that decision two and a half years ago, FEI Co. relied on a globally dispersed combination of contract recruiters and external search firms to find the highly specialized talent needed to design its products in Oregon, the Netherlands, the Czech Republic and other locations. As the firm emerged quickly from the wake of the dot-com bust, its external staffing model did not hold up.
That staffing model, with multiple agencies and search firms, resulted in “a lack of accountability,” recalls Brian Fix, SPHR, senior manager of human resources.
To bring the staffing function in-house, Fix says FEI “went hard after the best person we could find, someone with extensive experience and a great reputation.” In addition to hiring Staffing Manager Jasmine Jeske, SPHR, the company also hired a staffer who reports to Jeske and a European-based staffing expert responsible for the company’s recruiting and hiring there. The company continues to use contractors to augment its staffing efforts when the number of job requisitions swells.
Although FEI only brought in-house a single process, HR executed the same steps—recruiting a manager to oversee the internal process, redesigning and improving a flawed process, and communicating the changes to the workforce—that organizations overseeing much larger HRO repatriations must do.
“It really comes down to HR working hard together to make things happen to produce better results than the vendor did,” Fix adds.
—Eric Krell
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