Outsource Problems

By Jeffrey Rothfeder  |  Posted 2004-03-01 Print this article Print

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There was nothing ordinary about Merrills decision. Business process outsourcing of basic HR services was—and is—a hot trend. Worldwide, it generated $24 billion in revenue in 2002 and $28 billion in 2003, according to Gartner Inc., which expects BPO sales for human resources to climb to $30 billion in 2004. Many Merrill competitors, including American Express Co., Bank of America Corp. and Washington Mutual Inc., have farmed out portions or all of their HR services.

But HR outsourcing has faced some notable problems. Theres nothing new about outsourcing such purely transactional processes as payroll and pensions management, and it almost always saves money. Establishing remote operations to support the individual needs of employees, however, is a much more difficult undertaking, akin to using an assembly line for a job that requires personal attention.
Accustomed to in-house service, employees too often neglect the new system, turning instead to their managers for answers to personnel questions, and thus adding another layer of work for supervisors. And those who do use outsourced call centers often wonder if they can trust the responses the faceless outsiders answering the phones and responding to e-mails are giving them.

"You cant outsource your problems," says Ian Ruddle, a principal at Deloitte Consulting LLC with 35 years of experience in large IT systems who worked with Merrill on the project. "If you dont have an HR service model that supports staff well enough, and you dont have a culture that will be comfortable and well prepared for outsourcing, passing HR support off to someone else will only compound your troubles."

The most public failure of HR outsourcing has involved the project that launched the trend. In December 1999, BP Amoco signed a five-year, $600 million pact with Exult Inc. to supply HR services to more than 50,000 employees in the U.S. and U.K., with plans to expand to 100,000 employees in 80 countries. After a brief period of optimism, the deal quickly found itself in trouble. By October 2002, the oil companys human resources budget had actually risen by a third, John Melo, then BPs vice president of downstream digital business, told the media at the time. Thats in sharp contrast to the $300 million in annual savings the outsourcing arrangement was supposed to provide. Reluctance among oil company employees to use the system, and the sheer scope of coordinating the dozens of HR databanks that had ballooned at an outside site, made for redundant services and dragged down attempts to increase efficiency. By the end of 2001, the HR chief at BP who championed the effort had left the company and executives were describing the program as "under review." More than two years later, the outsourcing project is still in operation, but its no longer a companywide effort, and it has failed to provide the anticipated savings.

In contrast, Merrills in-house call center, which opened in October 2002, has exceeded expectations. The new service center, which handles about 3,000 e-mails and 3,000 phone calls a month from 40,000 employees—more than 80 percent of the companys workforce—has run nearly flawlessly, according to Merrill officials. More than 80 percent of the time, basic questions about benefits, compensation and corporate policies are answered in the first call or e-mail, taking just minutes. New hires are processed electronically, eliminating much of the paperwork that used to hinder employees from settling into their positions quickly.

Having streamlined the call centers operations and exiting several businesses, Merrill was able to cut its worldwide human resources staff almost in half, to fewer than 600 from about 1,100. With these pink slips, as well as real estate savings and productivity increases from remaining HR positions, Merrill has slashed its human resources budget by 50 percent during the past year. Thats more than double the savings the company would have realized from a pure outsourcing approach.

Equally important, the service center has become the sturdy first leg in a restructuring of Merrills HR business model. Before the call center, Merrill relied for its HR support on teams of relationship managers stationed in individual business units. These "high-touch" human resources experts—several senior and junior staffers might be assigned to a single department—were called upon frequently to resolve issues large and small. Because every employee naturally viewed his or her concerns as an emergency that needed an instant response, relationship managers operated in permanent crisis mode, without the ability to prioritize tasks. The result: low productivity.

By building an in-house call center to handle administrative and routine functions, theres a far smaller number of relationship managers still attached to the business units. But they are now free to work directly with department management to tackle critical corporate strategic issues like recruiting, employee training, identifying executive talent and maintaining morale, key jobs in the financial services industry, where there is always a rough-and-tumble to find and retain star players. Next Page: Not an option.


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