489172

Hochschule Bremen School of International Business - HBSIB University of Applied Sciences

MBA in Global Management Herr Prof. Dr. Ulrich ROHR

OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE

Master Thesis 31st July 2003

Ms. Mathilde RENAUX & Mr. Eloi MALTA-BEY

First reader: Herr Prof. Dr. Karlheinz SCHWUCHOW – HBSIB – Bremen, Germany Second reader: Herr Prof. Dr. Werner VOIGT – UPAEP – Puebla, Mexico

Directed by Mrs. Dominique CALMANT Director of Human Resources Services and Staffing IBM EMEA

…the company without borders has its heart beating in the hands of its partners…

1 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

ACKNOWLEDGMENTS First of all, if only one person could be warmly thanked for this particularly enriching experience, it would definitely be Dominique Calmant, Director of Human Resources Services and Staffing IBM EMEA, for having supervised this master thesis, for the time she has spent with us, and for the confidence she placed in our work. We hope we have fully satisfied her high expectations, since that has clearly been our main goal throughout this project. Similarly, we would like to express our grateful thanks to Eloïse VerdéDelisle, Director of Employee Relations IBM France, whose discernment is quite unquestionably high, and who actively participated in making this partnership with IBM EMEA possible. We would also like to thank Alexandra Dudouet, Human Resources Operations Officer IBM France, for her support and her help in the whole process, as well as Mathilde Malta-Bey, for her precious literature research in the Lille III University Library, and Christopher Minnich, for his advice despite his heavy work as a student at the George Washington University Law School. Finally we surely do not want to forget our professors, tutors, and correctors, who have been involved in the whole process of our education, from kindergarten to the MBA. Thanks to them.

2 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

GENERAL TABLE OF CONTENTS A CK N O W LE DG MEN TS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 G EN E RA L TAB L E OF CO N T ENT S . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 F O RE WO RD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 IN TR OD UCT I ON . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 P A R T I. S CO P E & DE FIN I TI ONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1 CHAPTER 1. OUTSOURCING OVERVIEW ...................................................... 12 1 .1 . Ou t sou r c in g Defi n i ti on A nd Ob j ec tive s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 1 .2 . Ou t sou r c in g Si t ua t io n s A nd A pp r oac he s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 4 1 .3 . Ou t sou r c in g T ren d s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 9 CHAPTER 2. HUMAN RESOURCES DEPARTMENT OVERVIEW ................................ 25 2 .1 . H um an R e so u rce s De p a rtm en t Ro les . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 5 2.2 . S t ructure Of Hum a n R e source s Organiz a ti onal Ac tiv i ti e s . . . . . . . . 28 2 . 3 . H um an R e so u rce s I s s ue s O f T he Mul t i na ti o na l C om pa ny I n E u ro pe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 0 CHAPTER 3. HUMAN RESOURCES OUTSOURCING OVERVIEW ............................. 38 3 .1 . H um an R e so u rce s O u t so u rc i ng De fi ni t io n . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 8 3 .2 . H um an R e so u rce s O u t so u rc i ng S pec if ic i tie s A nd T re nd s . . . . . . . . . 4 3 P A R T I I . S TR A TE GI C A P P R OA CH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 0 CHAPTER 4. HUMAN RESOURCES OUTSOURCING AND THE NEW COMPETITIVE ENVIRONMENT .................................................................................... 51 4 .1 . On go in g C om pet i t io n . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 1 4 .2 . B o rd erl e s s O r gan i za t io n s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 3 4 .3 . K now le d ge w o rke r s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 3 4.4 .

N TIC

(New

T e c hn ol o gi e s

of

I nfo rma t io n

an d

C om mu n ic a ti on ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 4 3 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

CHAPTER 5. HUMAN RESOURCES OUTSOURCING AND THE NEW CHALLENGES ........ 66 5 .1 . Two Fa s t - Mov ing T re nd s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 6 5 .2 . S co pe Exp a n si on s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 9 5 .3 . Ex p ansi o n s Ex p la n a ti on s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 9 5 .4 . I s s ue s Fo r T he Ou t s ou r ci n g Co mp a ny . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2 5 .5 . H um an R e so u rce s N ew Ob j ec t ive s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 3 CHAPTER 6. HUMAN RESOURCES OUTSOURCING STRATEGIC APPROACH .............. 77 6 .1 . Ou t sou r c in g Dec i s io n Th eo r y . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 7 6 .2 . Wh a t S ho u ld Be O u t so u rc ed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 3 6 .3 . A dv an t a ge s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 5 6 .4 . D r aw ba ck s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 6 P A R T I I I . I M P LE ME N TA TI ON . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88 CHAPTER 7. MANAGING THE HUMAN RESOURCES FUNCTIONS OUTSOURCING PROJECT ........................................................................................... 89 7 .1 . P ro j ect Te am . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 9 7 .2 . P ro j ect D ef in it ion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 7 .3 . I n te rna l I s s ue s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 1 7 .4 . Ex te r na l I s s ue s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 3 7 .5 . Fa ct o rs de te r mi ni n g t he s uc ce s s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 0 0 7 .6 . P ro b lem s Li ke ly T o Oc cu r . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 0 1 CHAPTER

8.

LEGAL

ASPECTS

OF

A

HUMAN

RESOURCES

OUTSOURCING

OPERATION ....................................................................................... 102 8 .1 . Ou t sou r c in g L ega l A c to r s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 0 2 8 .2 . Le g al F r a mewo rk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 0 3 8 .3 . Ou t sou r c in g Con t r ac t s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1 1 8 .4 . P ro b lem s Li ke ly T o Oc cu r . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2 0 CHAPTER 9. MANAGING OUTSOURCED HUMAN RESOURCES ACTIVITIES .............. 121

4 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

9 .1 . E le men t s T o K e ep I n te r na l ly . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2 1 9 .2 . R eq u i re d Sk il l s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2 3 9 .3 . Ot he r S ol u ti on s To K ee p Con t r ol . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2 4 9 .4 . P ro b lem s Li ke ly T o Oc cu r . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2 5 P A R T IV. CAS E S TU DIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2 8 C H A P T E R 10. H U M A N R E S O U R C E S O U T S O U R C I N G E X P E R I E N C E D C U S T O M E R S . . . . . . . 1 2 9 1 0 . 1 . Com p an ie s T h a t H av e O u t so u rc e d T h e i r T r a n s ac t io n al A c t iv i ti e s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2 9 1 0 . 2 . A Co m p a ny Th a t H a s O u t so u rc e d S o m e O f I t s H um an R e so u rce s P r oce s s e s: K e ll og g Fo od s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 3 6 10.3 . Companies That H ave Outsourced A ll Of Their H uman R e so u rce s Bu s i ne s s P ro ce s se s Ex ce pt M an a ge r i al On e s . . . . . . . . . . . . . . . 1 3 8 C H A P T E R 11. H U M A N R E S O U R C E S O U T S O U R C I N G E X P E R I E N C E D P R O V I D E R S . . . . . . . . 1 4 2 11.1 . HR O P rovi de rs S p ec ial ize d In Som e H um an R e so urce s F u nc t io n s O u t so u rc in g Se rv ic es . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 4 2 1 1 . 2 . H R O P rov i de r s P ro po s i ng A n I n te g ra t ed So l uti o n I nc l udi n g T h e Wh ol e Ra n ge Of H um an Res o u rc e s P ro ce s se s . . . . . . . . . . . . . . . . . . . . . . . . 1 4 3 C H A P T E R 12. IBM (I N T E R N A T I O N A L B U S I N E S S M A C H I N E S ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 4 8 1 2 .1 . Comp a ny Ov e rv iew . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 4 8 1 2 .2 . Ma j or O ut s ou r ci n g P r ovi de r . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 5 0 1 2 .3 . Comp e ti t ive Hu m an Re so u rc e s O rg a n iz at io n . . . . . . . . . . . . . . . . . . . . . . . 1 5 2 1 2 .4 . H uma n Re s ou rc e s S e rvi ce s P rov id er . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 5 9 1 2 .5 . Co nc l u si on . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 6 5 C ON C LU SIO N . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 6 7 A FT ER WO RD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 6 8 R EF EREN CES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 6 9 T A B LE O F IL L U ST RAT IO N S . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 8 1 D ETA I LED TAB L E OF CO N T ENT S . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 8 2 5 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

D EC LA RA TIO N S . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 9 5

6 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

FOREWORD When we chose the topic of our master thesis in December 2002, we could not imagine how fast our theoretical work would be severely challenged by the reality of facts, if indeed it was not already so challenged at the outset. At the time Dominique Calmant agreed to supervise our work, our shared idea was to explore the outsourcing concept, as far as Human Resources activities are concerned. It quickly turned out that a conceptual approach alone was not enough as such a practice was already clearly in the pipelines of several multinational companies. Of course, concepts are always welcomed to provide a better understanding of a trend or a practice, but the empirical method is what finally differentiates between a strategy that is merely feasible and one that can actually produce an efficient competitive advantage. As the Vice President and Business Transformation Executive IBM Systems Group, Jamie Hewitt, summed up: “What looks good on paper doesn’t necessarily work in the real world.”1 It is always hard to deal with the outsourcing approach, as it suffers most of the time from an extremely bad reputation. Indeed, outsourcing an activity is always primarily understood as getting rid of the fellow employees of the concerned activity. We quickly found out that the outsourcing world is refreshingly far removed from that instinctively dark view of the practice. Outsourcing, in fact, starts from an ideal way of imagining the community: collective interdependence and individual recognition. In other words, on an individual basis (the employee), outsourcing brings closer together identity and action: one identifies with what one does. Moreover, and on the other hand, the Human Resources field is all the more concerned by the unpleasant connotation of the outsourcing strategy, since it is precisely the people who feel victimized by this approach who

1

Reengineering the Corporation, Michael Hammer and James Champy, Harper Business 2001, p 201

7 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

constitute the essential “raw material” of Human Resources. People are the kinds of resources that not only need to be managed to achieve their best results, but also need to be convinced that these results are optimized. As the modern organization is made of the “brains” of the people who compose it, if it outsources its Human Resources activities, it must surely realize more than ever that it may of course secure its success in this way, but in exchange for a relative loss of control of its identity. In other words, on a collective basis (the company), one identifies with both what one does for the others and what one has done by the others. Finally, as a business strategy includes processes, an information technology system that supports them, an organization that uses them, and a culture that shares them, one can say that outsourcing Human Resources activities of a multinational company is all about assigning those activities to the people that understand them best and implement them most effectively, once and for all fulfilling the vision of the modern company that has its “brain” performing in the “brains” of its partners.

8 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

INTRODUCTION Outsourcing Human Resources Activities of a Multinational Company in Europe. That is indeed exactly what this whole master thesis is about. Human Resources, because we found quite fascinating the fact that still too many managers have at the same time a hard time defining the real essence of the Human Resources department of their own company and nevertheless blindly support the fact that Human Resources management is absolutely necessary to their success. Outsourcing, because we have been rapidly convinced that it is one of the best way to understand and drive businesses of the future. The outsourcing strategy stands somewhere between customer relationship management and strategic alliances, allowing it to take advantage of the market to a much greater extent than the market dictates to it. The Multinational Company in Europe finally, because it specifies to whom and where our thesis applies in particular; because a company set up throughout Europe is still on the one hand necessarily a multinational company, but is inevitably facing on the other hand the tangible and remarkable European integration process that impacts its business more and more as a whole. In order to clarify and encompass as much as possible the meanderings of our topic, we thought four main parts would be necessary. We chose to start, in the first part, with taking stock of the situation, as far as the outsourcing phenomenon and the Human Resources department practices are concerned, to finally come to an overview of the Human Resources activities outsourcing industry. After extensively laying out the needed scope and definitions of our thesis, we step back a little, in order to understand the underlying stakes of a Human Resources outsourcing strategy. We then begin with key points of the business environment that lead to such an approach, following with the 9 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

description of the new challenges faced by Human Resources departments, and finally ending with a clear vision of what is really meant by a Human Resources outsourcing strategy. Next to fill in the theory with more pragmatic details, the third part present the different practical key issues resulting from the implementation of such a Human Resources outsourcing strategy; that is to say, we describe and analyze the different steps involved in putting into practice such a solution, highlighting the specificities of the European environment. Finally, the fourth and last part supports our analysis with several topical case studies, first of all describing Human Resources outsourcing strategies of some multinational companies around the world, and then sharing experiences of some of the first providers of such a service. In the end, our focus is on the IBM Europe case, a case that we have been given the chance to follow quite closely since July 2001.

10 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

PART I. SCOPE & DEFINITIONS In this first part of the work, our aim is to encompass the substance of the thesis. It is important to define precisely what is understood by the terms we use. Moreover, we would like to offer here a useful picture of the phenomenon taking stock of the situation, as far as the outsourcing and Human Resources department practices are concerned; in order, in the end, to provide an overview of the Human Resources outsourcing industry. This introductory section is designed to serve as an icebreaker and is intended to demonstrate that the outsourcing trend is not just a short-lived fashion sustained by trendy consulting firms, but an important consideration for Human Resources departments that has nothing at all to do with minor operations.

11 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

Chapter 1. Outsourcing Overview The term “outsourcing” is currently frequently used in the business world, but very few managers know in fact exactly what is hiding behind this concept. Most of them would reduce outsourcing to subcontracting, to core business recentering, to having externally done what could be internally done, or finally to resorting to a specialist. We will take some time here to figure out what exactly hides behind “outsourcing”, its definition and objectives, its situations and approaches, and finally its trends.

1.1. Outsourcing Definition And Objectives 1.1.1. Outsourcing definition Outsourcing is, in simple words, giving the responsibility and the management of an activity to an external supplier (manufacturing activities) or provider (service activities), instead of doing it internally. It is different from subcontracting, which implies an obligation of means, whereas outsourcing is based on an obligation of results. It must also not be confused with downsizing, which consists in increasing productivity, efficiency, and competitiveness by reducing the size of a company.1 In this case, a group of activities is totally abandoned, which cannot be amalgamated to an outsourcing strategy. To the contrary, an outsourcing strategy consists in a real transfer of activities from the clientoutsourcing company to the providing outsourcing company (also called provider or outsourcer). The downsizing strategy is a consequence of the redefinition of a company’s core business, whereas the outsourcing strategy follows from a strong will to refocus on its core business. It is nevertheless

1

“Organizational downsizing: a convergence and reorientation framework”, Marcia S. Freeman and

Kim S. Cameron, Organization Science, 4, 1993

12 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

interesting to notice that 23% of downsizing operations result from outsourcing operations.1 Another confusing practice is reengineering, which consists in the fundamental rethinking and radical redesign of business processes to achieve dramatic improvements in critical, contemporary measures of performance, such as cost, quality, service, and speed.2 Reengineering must certainly not be assimilated to outsourcing, even if it sometimes leads to it. Even while all these related practices might be part of a whole outsourcing operation, they cannot be assimilated to outsourcing strategies. The complexity of the issues that arise in connection with outsourcing projects varies depending upon many different factors requiring numerous areas of expertise to be tapped into, such as tax, insurance, risk management, finance, project management, change management, information technology, and a perfect and essential knowledge of the environment involved.

1.1.2. Main objectives of an outsourcing strategy The main objectives for a company when it outsources some of its activities are, on the one hand, to improve the quality of the (outsourced) activity thanks to a new expertise that was not internally available, and on the other hand to reduce at the same time (directly or indirectly) the costs of this activity. Therefore, if only the quality improves, at least the net result for the company has to improve as well; and if only the costs are reduced, the savings are direct, but one should watch out for possible future harmful consequences. One would obviously try to combine quality improvement with cost reduction, but most of the time outsourcing requires balancing the pros and the cons of a certain level of quality for a certain level of cost, and ideally finding the optimum point.

1

American Management Association, 1997

2

Reengineering the Corporation, Michael Hammer and James Champy, Harper Business, 2001, p 35

13 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

Companies sometimes want to take advantage of this new outsourced activity to create the new business opportunity themselves, thus generating new revenue and services that will be sold to others and, if the venture is successful, maximizing both its outsourcing strategy and its investment. Finally, whatever the type of outsourcing approach or situation one has, three kinds of strategic intents usually drive the decision to outsource: 1 • Improving the outsourced activity’s operations; • Increasing the outsourced activity’s contribution to the global performance of the company; • Exploiting business advantages of the outsourced activity.

1.2. Outsourcing Situations And Approaches 1.2.1. Different kinds of outsourcing operations A] Different outsourcing situations Two fundamental characteristics distinguish the different situations involving outsourcing: • The prior existence of the activity inside the company; • The proximity of the activity to the core business. By crossing these two criteria, one obtains a typology of the four main possible outsourcing situations:

1

Inspired from the article “Strategic intent for IT outsourcing”, Anthony DiRomualdo and Vijay

Gurbaxani, Sloan Management Review, Summer 1998, Volume 97, Number 4, pp 67-80

14 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

Illustration 1: The four types of outsourcing situations1

a) Traditional outsourcing This kind of outsourcing situation applies when a non-sensitive regular activity is concerned. The client-company outsources and has actually always outsourced this activity as it is permanently needed for the business, but is on the other hand far removed from the core business.

b) Traditional outsourcing with disintegration In this situation, one deals as well with non-sensitive activities, but activities that were nonetheless formerly internally managed. “Disintegration” stands for the transfer of the concerned activities from the client-company to the provider-partner. Here arises the problem of initiating an outsourcing strategy or not.

c) Strategic outsourcing with disintegration In contrast to the two first situations, this one consists in outsourcing activities close to the core business. In this case, the outsourcing strategy can

1

Stratégies d’Externalisation, Jérôme Barthélemy, Dunod, 2001, p 10

15 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

create a competitive position, but it can also freeze the company.

d) Strategic outsourcing The last main outsourcing situation occurs when the regular activity is also close to the core business and when it is already outsourced, since a provider-partner is offering an expected quality of services. The question of how to renegotiate the partnership conditions is then asked.

e) Outsourcing with assets leasing We may also add this fifth situation, in which a company willing to outsource an activity but unwilling to transfer its assets to the provider simply leases these assets. In other words, in this case, assets remain the property of the outsourcing company, and there is no real need to transfer anything. This option usually occurs when assets are too specific, too expensive, or too strategic. It is nevertheless unlikely that a company would lease assets of an activity that was not inside the company before. Leasing is in fact the alternative to disintegration.

B] Different outsourcing approaches As an example, Leslie Willcocks distinguished recent approaches to IT outsourcing1: • Offshore outsourcing, consisting in outsourcing to a provider located in countries such as Ireland, Israel, Malaysia, Hungary, Mexico, Philippines, Egypt, or India; It is interesting to know that India recently warned the U.S. and other developed countries that if they limit the extent to which information technology is outsourced, it will damage their domestic

1

industry

as

outsourcing

is

a

huge

international

“L’externalisation maîtrisée des systèmes d’information”, Leslie Willcocks, L’Art de l’entreprise globale,

Village Mondial, 1999

16 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

movement resulting from globalization.1 Nevertheless, under the pressure of lobbying groups such as the MUNCI (Mouvement pour une Union Nationale des Consultants en Informatique) in France, the PCG (Professional Contractors Group) in the U.K., or other such organizations in Germany and in the rest of the developed world, governments are considering proposals to curb growth of offshore outsourcing in order to, in the end, avoid the transfer of jobs outside their borders.2 • Value-added outsourcing, consisting in fixing the revenue of the provider according to the value it really creates; • Outsourcing with equity, consisting in giving the client-company the possibility to acquire shares of the providing company, according to certain conditions; • Diverse outsourcing operations, consisting in reducing one’s dependency on a unique provider by contracting with several of them; • Co-outsourcing, consisting in fixing the provider’s revenue to a percentage of the revenue the provider generates; • Subsidiary outsourcing, consisting in the creation of a spin-off.

C] Different uses of outsourcing a) Automotive

and

administrative/operative

outsourcing These constitute the first layer of activities addressed by outsourcing. Because they are characterized with repetitive tasks, it is very easy to determine the objectives that the provider should reach. These activities often

1

“India warns U.S. over outsourcing”, Habib Beary, BBC News Online, 12th June 2003

2

“Protectionism hits the outsourcing industry”, Gillian Law, John Blau, Per Sayer and Marc Ferranti, Info

World, 15th April 2003

17 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

represent a non-negligible part of a business function, but are not really the value-added generating vector.

b) BPO (Business Process Outsourcing) i/ Selective BPO This solution consists in outsourcing only those parts of a department that are the most distant from the core business.1 With this solution, companies can focus their financial resources on the most important parts of the targeted department; they can also keep their strategic components internal to the company, and according to practical experience so far, this solution seems to be the most successful.

ii/ Total BPO This solution consists in outsourcing all processes of a given function or department, thereby guaranteeing a fully integrated management of the different processes.

c) Total outsourcing Finally, total outsourcing, which is still rare, consists in outsourcing the entire department, from the bottom line all the way to the management. The objectives given to the provider are crucial to the overall strategic results. In this case, the provider is considered more as a real partner than as a simple service seller.

1.2.2. Outsourcing advantages A lot of institutes and authors, specialized in outsourcing, list its numerous benefits. Among all these, we can distinguish four main advantages of outsourcing:

1

“The Value of Selective IT Outsourcing”, Mary C. Lacity, Leslie P. Willcocks and David F. Feeny, Sloan

Management Review, Volume 37, Number 3, Spring 1996, pp 13-25

18 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

• Cost reductions on the outsourced activities; • Improvement of the outsourced activities’ performance; • Refocus on core business activities; • Improvement of the company overall performance.

1.2.3. Outsourcing risks The same commentators assess numerous risks of such an operation, which have to be considered and balanced before taking the decision to outsource. The most important factors are: • Underperformance; • Dependency; • Losing know-how and skills; • Social risk, as such an operation is often felt as a betrayal of the employees. In the end, according to the last report from The Conference Board1, nine out of ten companies surveyed said they would outsource again if given the choice, but many said they would do things differently. Notably, companies would do more to prepare employees for the change, particularly the greater responsibility placed on workers to manage their benefits. The report emphasizes the fact that outsourcing is becoming a critical competency for most large companies. “HR departments are not yet good at this”, says David Dell.

1.3. Outsourcing Trends While discussing his project of a “company without factories”, the French CEO of Alcatel, Serge Tchuruk, publicly announced what all the specialists had

1

HR Outsourcing Trends, Lisa Gelman and David Dell, The Conference Board, 2002

19 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

been claiming: globalization forces companies to refocus on their core business, and therefore systematizes outsourcing practices.1 Outsourcing is a classic phenomenon since the 1950s as far as production activities are concerned. It is no more unusual to see well-known brands labeling, with their own name products or services that were entirely made by external providers. The outsourcing trend is of course not completely new as applied to service activities2, but it is mainly used in that sphere to deal with peripheral activities such as restoration, gardening, cleaning, or care-taking. On the other hand, the outsourcing of activities that are critical to the good functioning of the company are relatively innovative and is no longer considered as a last resort for companies with financial difficulties. In fact, in the hope of reducing costs, gaining efficiency, and improving the level of service, companies are taking a hard look at their business processes to assess which areas would best be performed by an outside provider. In parallel, these providers are restructuring or expanding their service to accommodate the growing demand for outsourcing services.3 Finally, whereas the original aim of an outsourcing strategy was to reduce costs, companies are nowadays more interested in gaining direct value for shareholders. This necessity encourages companies to transfer some of their business resources (equipment and employees) to an external provider in order to lighten their balance sheet and increase their profitability. In the end, it also allows companies to concentrate more of their financial and managerial resources on valuable activities, in other words on their core business resulting from their core competencies. One can already see that a successful outsourcing strategy consists in a profitable sharing of the different companies’

1

“L’externalisation, un mouvement de fond”, Patrick J. Miliotis, Les Echos, 29th August 2001

2

Intelligent Enterprise: A Knowledge and Service Based Paradigm for Industry, James Brian Quinn, Free

Press Publishing, July 1992 3

“Business Process: Consider Outsourcing”, Thomas Kiely, Harvard Business Review, May-June 1997, pp

11-12

20 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

core competencies, which gives in the end a maximum value-added to companies that are part of the network.

1.3.1. Global evolution of outsourcing According to a study by Dun & Bradstreet and The Outsourcing Institute, the outsourcing phenomenon developed rapidly during the last few years. Moreover, according to forecasts, the European market will reach $52 billion in 2003 and will concern ever more different kinds of activities. In comparison, the European market reached $40.2 billion in 1998, at a time when the American market reached more than $160 billion.

Illustration 2: European outsourcing practices in 19981

Outsourcing is nowadays very well developed and accepted for activities such as office management, payroll, security, and office maintenance. It is also increasingly implemented (but is not very developed yet) for logistics, IT, after-sales services, and other similar activities that are closer to the core competency.

1

“L’irrésistible montée de l’externalisation”, Alain Perz, Les Echos, 21st October 1998

21 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

In the U.S., a 1997 study1 dealing with outsourcing practices involving 619 companies showed that 94% of American companies outsource at least one activity. Moreover, administrative services and Human Resources activities (see 3.2.2.) are those that are the most commonly outsourced. Nevertheless, it is important to emphasize that, in the U.S., pension fund management costs are included in HR budgets, which obviously implies huge amounts of money that are not directly linked to HR management processes, but rather to pension financing.

1.3.2. Factors

favoring

these

booming

outsourcing trends This increase would not have been so important without a certain number of external and internal factors.

A] Internal factors A company performance is nowadays measured by the value that it creates and delivers, and almost no longer by its revenue or by the increase of its market share.

B] External factors a) Supply pressure Ever more qualified actors are appearing on the market and expanding little by little the global opportunities for companies to outsource. Whereas before they were limited to small contracts signed with different providers, they are now complex ones dealing with a whole function assigned to a single provider.

b) Development of information technology Another main enabler for such an increase is the development of new

1

American Management Association, 1997

22 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

technologies and particularly of information technologies, which allow a decrease in the costs of coordination between companies, and the costs of communication with providers (see 4.4.). Indeed, more and more complex operations can be processed thanks to the circulation of large amounts of information at a very low cost. Moreover, it is no longer necessary to use specific production assets.

c) Benchmarking By benchmarking, companies compare their performance (internal costs, productivity, technologies) to one or several “company-yardsticks” for each part of their organization. The “company-yardstick” is usually a model company in its area. If a company selects a “company-yardstick” that is its competitor, it will try to “play the same game”; and if a company selects a “company-yardstick” that is a specialized provider, it can consider a possible outsourcing of the concerned activity.

d) Mimicry Finally, mimicry plays a very important role as far as outsourcing behaviors are concerned. A good example of this occurred in 1989 when Kodak outsourced its IT department to IBM. Big competitors followed this example based on the assumption that such a big company must have conducted an in-depth analysis before taking such a decision. This risky tendency can also be seen within a single company when one department is outsourced and thereby others follow in turn.

1.3.3. Main BPO providers There are no real exemplars yet, but three distinct groups of competitors:1

1

“Building a Case for BPO-Part 2, For Buyers’ Eyes Only”, Damon Rosenhan, Everest Group, September

2002

23 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

• Big 5 players or their spin-offs, which built upon their traditional consulting strengths to enter the BPO market: Accenture, Deloitte Consulting, OPI/PMG spin-off, Cap Gemini-Ernst & Young; • Venture capital funded niche players, which used capital infusions and technologies to specialize themselves in a single area for which they have strong value-added but limited delivery capacity: Exult, SourceNet, Equitant, Creditek; • Traditional

Outsourcers,

which

took

advantage

of

market

opportunities to acquire BPO organizations and supplement their IT consulting expertise with business process consulting expertise: IBM (which acquired PwC Consulting), ACS, EDS, and CSC.

24 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

Chapter 2. Human Resources Department Overview After having polished the outsourcing phenomenon, we found it useful to make in parallel a point on the actual state-of-the-art Human Resources department organization in most multinational companies in Europe. Indeed, according to Spencer, 60% of the costs generated by the HR department concern traditional administrative activities of the job while representing only 10% of the department value-added; conversely, 60% of the department value-added results from strategic activities that only represent 10% of the costs generated by the department. His solution: reengineering and outsourcing.1

2.1. Human Resources Department Roles The

Human

Resources

department

supports

interactions

between

managers and employees. It insures overall consistency in decisions taking. It determines the rules of the game in situations where employees and companies accept not to spend their whole professional path together but just a part of it. It makes sure, on the one hand, that the company acts in the interests of employees by giving them opportunities to advance their careers; and on the other hand, that employees bring as much value-added as possible during their stay in the company. It finally prevents one part from playing its own game to the detriment of the other. We can distinguish two different roles within the HR department: the organizational ones and the operational ones.

2.1.1. Organizational roles Organizational roles can be classified in the two following categories: • Human Resources management, including HR support to business

1

Human Resource Management, Dave Ulrich, Volume 36, Number 1, Spring 1997

25 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

and HR design & delivery; • Legal obligations including employee relations and well-being programs. All employee relations’ issues occurring in any company are nowadays mostly organized by country regulations, even if large companies try to homogenize them globally.

2.1.2. Operational roles Operational roles can be in turn divided into the two following categories: • People management, including company managers; • Personnel management, including industrial relations managers (HR local specialists). Even though it does not and cannot belong to the HR department, people management is absolutely essential to HR management as a whole. Personnel management is, on the other hand, the public face of the HR department, locally and operationally speaking, and if personnel management is as operational as people management is, it is nevertheless completely part of the HR department. Both roles are in fact involved in the HR process as far as they are responsible for the day-to-day HR management.

2.1.3. Human Resources organization If a “shared services center” also called a “HR services center” is included in the HR organization, and according to the two organizational and operational role distinctions above, the HR organization could be drawn as following:

26 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

Illustration 3: HR Organization

This organization model illustration underlines the distinction between the main HR actors. HR roles could be, at a more detailed level, described as following: • HR services center: ~

Administers corporation-wide programs;

~

Creates HR efficiencies across the organization;

~

Resolves customer administrative issues;

~

Processes transactions, as needed.

• HR functions experts: ~

Exhibit functional expertise;

~

Develop global HR programs and adapt them to business unit specifications;

~

Provide responses to specialized issues.

• HR business partners: ~

Define and meet the unique needs of the customer;

~

Implement HR programs using knowledge specific to individual business units;

27 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

~

Define HR strategy at the business unit level.

• Corporate HR: ~

Guides the development and implementation of HR strategy;

~

Ensures customer satisfaction of entire HR functions;

~

Manages executive facilitation and coaching.

• Industrial relations managers (HR local specialists): ~

Manage and administer local specific programs with input from corporate HR and from HR functions experts.

• Company managers: According to the managerial grid of Blake and Mouton, there are two important dimensions for managers1: ~

Manufacturing interest dimension;

~

People interest dimension.

The people interest should conduct managers to observe good day-to-day HR management practices, and to consider employees’ desires without losing sight the business unit organization, needs, and economic imperatives.

2.2. Structure Of Human Resources Organizational Activities 2.2.1. Key Human Resources functions To explain our idea, we enumerate the main organizational HR functions

1

The managerial grid, Black and Mouton, 1964

28 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

as follows: • Payroll administration; • Employee services administration; • Talent management (recruitment and staffing); • Employee development; • HR support to business; • Compensation; • Benefits; • IT systems and HR data management tools; • Employee relations; • Industrial relations; • People management; • Well-being programs (health and safety); • HR policy and planning. All these activities represent both the whole employee life cycle and the HR roles expressed through attracting, motivating, and retaining employees.

2.2.2. Activity types crossing HR functions

29 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

Illustration 4: Activities crossing HR functions

Illustration 4 above demonstrates how each HR function is composed of different activities, from automotive ones to managerial ones. This table provides a clear vision of all the different types of activities involved in the HR management of almost any medium or large-sized company in Europe (See 4.2. for organizational vocabulary definitions).

2.3. Human Resources Issues Of The Multinational Company In Europe 2.3.1. The

European

labor

market

and

intercultural management issues 1 A] Figures The E.U. (European Union) contains today more than 370 million

1

“Y a-t-il un marché du travail européen?”, Maurice Thévenet, Les Echos, Summer 2002

30 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

inhabitants from 15 different countries, all sharing the same labor market. In January 2004, 10 other countries will join the union, raising its total population to more than 450 million. For the moment, the E.U. countries sustain more than 150 million jobs. As you can see in the following illustration, unemployment is not homogeneously spread throughout Europe, but seems to reflect instead the remaining differences in terms of social policies among the E.U. members. It is to hope or even more to expect that the European integration, and especially the social one, will guarantee fair competition inside the E.U. labor market.

Illustration 5: Unemployment in the EU, % of workforce in December 2002 and December 2001, seasonally adjusted1

1

Industrial

relations

developments

in

Europe

2002,

EIRO

&

E.U.

Commission,

p

29,

http://www.eiro.eurofound.eu.int * September 2002, ** October 2002, *** November 2002

31 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

Illustration 6: Fixed-term work in E.U. member States1

B] Trends While many differences still characterize the different European countries’ legal systems and cultures, multinational companies tend to adopt a homogenized approach as far as workforce management is concerned. It is interesting to note that national education authorities throughout Europe have been working hard these last ten years to harmonize the European diploma system in order to allow easier comparisons across European borders. Students, as well as employees, are now organized in Europe-wide unions in order to efficiently face Europe-wide issues. Even while mobility inside Europe is not yet very significant (it stands currently at less than 1.5%), multinational companies clearly use one single recruitment and career management strategy for the whole of Europe. As confirmed by 303 multinational companies in Europe, European integration is one of their most

1

Industrial

relations

developments

in

Europe

2002,

EIRO

&

E.U.

Commission,

p

55,

http://www.eiro.eurofound.eu.int * Population between 15 and 74, ** Population over 15, *** 2000 data

32 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

challenging missions in terms of HR management.1 Integration on a European scale means that multinational companies apply the same answer to the same problem wherever it arises in Europe. As an example, remuneration is also based on performance across Europe and 360° manager assessments are systematically implemented. Thus, optimists would attribute this result to European integration whereas others would simply cite the globalization process.

Illustration 7: Average collectively agreed pay increases, 2001 and 2002 (in %)2

Despite these developments, legal social systems are still very different from one another and multinational companies are fully expected to apply the local law. For instance, in Germany, the labor laws encourage collective bargaining, thereby avoiding state intervention, whereas in France the state is a major actor in the social life inside companies, and whereas in England

1

2

Comment évoluent les stratégies de rémunération en Europe, a Towers Perrin Study, January 1998 Industrial

relations

developments

in

Europe

2002,

EIRO

&

E.U.

Commission,

p

34,

http://www.eiro.eurofound.eu.int * Average of 18 countries, ** Average of 16 countries for 2001 and average of 15 countries for 2002, *** Average of 12 countries for 2001 and average of 11 countries for 2002

33 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

employer-employee bilateralism (excluding the state) is the rule.1 Another example is the working time negotiations: while this debate is taking place almost everywhere in Europe, each country has a different way to cope with it, a different cultural approach.

Illustration 8: Average collectively agreed normal weekly hours, 20022

Some of the most complex problems faced by HR departments are intercultural issues. Despite significant efforts to educate and inform workers, stereotypes are still too stubborn.

C] Challenges The European labor market is confronting four main challenges that HR departments must imperatively cope with: • Skills: this particular challenge, which is also faced by universities,

1

2

L’Europe des ressources humaines, D. Cazal and Jean-Marie Peretti, Editions Liaisons, 1992 Industrial

relations

developments

in

Europe

2002,

EIRO

&

E.U.

Commission,

p

36,

http://www.eiro.eurofound.eu.int * 2000 figure, ** 2001 figure, *** Average of 18 countries

34 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

refers to the development of system of reference for evaluating skills on a Europe-wide basis in order to gain time and efficiency in domains such as recruitment and career development; • Diversity: too much importance is given to national cultural differences, as they are very easy to notice. More and more groups of workers will be clearly transnational, defending common interests resulting from a complex common association; the challenge is here to imagine innovative ways to manage this new type of diversity; • HR organization: more efficient in a more complex environment and more flexible in a more demanding environment; probably the key challenge, the one that leads to great success in the end if mastered; • Social capital: legal and geographical unity is not enough to guarantee a shared culture; in other words, multinational companies need to participate in the European social integration as European social actors, and as the key to their success.

2.3.2. An ever more organized social dialogue in Europe A] The European social integration process Since 1985, three stages can be distinguished as far as concerns the evolution of social dialogue across European industries.1 First in 1985 when, at the initiative of the President of the European Commission, Jacques Delors, the social partners embarked upon a dialogue, the first step towards creating a “European bargaining area”. Then, the Social Policy Protocol and Agreement attached to the Maastricht Treaty (which came into force in 1993) and

1

Industrial

relations

developments

in

Europe

2002,

EIRO

&

E.U.

Commission,

http://www.eiro.eurofound.eu.int

35 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

subsequently incorporated into the Amsterdam Treaty gave rise to the second stage, in which the social partners reached and implemented agreements by means of Council Directives on the following issues: parental leave, part-time work, and fixed-term contracts. Finally, in December 2001, the social partners’ joint contribution to the Laeken European Council was a crucial step for the social dialogue, opening up a third stage of independent European-level dialogue. European social partners intervene on various subjects such as employment, lifelong learning, stress at work, gender equality, restructuring, disability, young people, racism, ageing workforce, harassment, telework, undeclared work, industrial relations, social dialogue, E.U. enlargement, mobility, etc. with a clear objective to harmonize national laws. A European legal frame is also rapidly appearing in various fields such as: worker consultation and information, the ECS (European Cooperative Society), working time, protection of employees in the event of insolvency of their employers, temporary agency work, equal treatment for men and women, health and safety, etc.

B] European Works Council 1 The setup of a European Works Council aims to improve the social dialogue between the employer and its employees throughout Europe. Since 1994, a European Directive obliges multinational companies in Europe to inform and consult employee on certain management decisions. 600 companies have so far implemented their European Works Council. Companies concerned are at least set up in two or more European countries, with at least 150 employees in each of them, reaching an overall headcount of more than 1,000 employees Europe-wide.

1

Dialogue dans l’entreprise: consultation des travailleurs et comité d’entreprise européen, Centre

d’Information sur l’Europe, 23rd April 2003, http://www.info-europe.fr/europe.web/document.dir/QR000914.htm

36 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

The European Works Council is dedicated to employee consultation and information as far as concerns Europe-wide issues such as employment, business health, restructuring, mergers and acquisitions, outsourcing, etc.

37 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

Chapter 3. Human Resources Outsourcing Overview Now that we have seen what is to be understood by outsourcing on the one hand, and the Human Resources department organization on the other hand, we may now enter this chapter trying to get a better overview of the Human Resources Outsourcing phenomenon itself.

3.1. Human Resources Outsourcing Definition 3.1.1. Defining

Human

Resources

activities

outsourcing Outsourcing Human Resources activities is giving a provider the management of part or all HR functions we listed earlier (see 2.2.1.).

3.1.2. Human Resources outsourcing levels A] Self-Service (e-HR) This first step in HR outsourcing is increasingly developed in Europe. It consists in managing some HR processes directly on the Internet. Managers and employees can access tools and information at any time from any intranet access point. Self-Service strategy is mainly applied in Europe for the four following processes:

38 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

Illustration 9: The four processes that are mostly managed by Self-Service in Europe1

This use of new technologies indeed allows the HR department to spend less time on administrative tasks and more on value-added services, as it is represented in the illustration here below.

Illustration 10: HR Self-Service: resource reallocation on higher added-value activities2

1

Le management des Ressources Humaines en Europe: les professionnels RH doivent développer de

nouvelles compétences face aux défis du e-business, PricewaterHouseCoopers, November 2000, p 5 2

Le management des Ressources Humaines en Europe: les professionnels RH doivent développer de

nouvelles compétences face aux défis du e-business, PricewaterHouseCoopers, November 2000, p 5

39 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

As an example, U.S. BASF employees may already print their pay stubs directly from the HR intranet. The challenge is to enroll managers in the use of that tool. Most of the time, managers are instinctively resistant and skeptical. The only way one can succeed is to spend a lot of time bringing managers into the fold by demonstrating the value of the tool with transparent statistical results.1

B] Transactional

HR

outsourcing,

shared

services

centers, or HR services center a) Definition Shared services imply that services (transactional activities) are handed over to a provider. The outsourcer will provide all standard transactional and administrative activities, giving advice to employees on HR processes, and the outsourcing company keeps all management responsibilities. This kind of outsourcing is principally composed among of an HR services center, which implies “a centralized office that handles routine administration and answers enquiries from managers and staff throughout an organization on Human Resources related matters.”2 As shown earlier in the part dealing with HR organization, all transactional activities are given to this HR services center, supported by HR experts for each function and with all strategic activities done by HR business partners, as well as local and corporate Human Resources specialists in-house.

1

Converting the Managers Makes Self-Service HR Work, Beth Ellyn Rosenthal, April 2003,

http://www.outsourcing.requests.com 2

“Dictionary”, Business The Ultimate Resource, Bloomsbury Publishing, 2002, p 1259

40 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

Illustration 11: Shared services model1

b) Objectives The goal is that employees and managers have access to HR information, through the shared services function, which is technologically equipped and has an immediate and accurate knowledge of local policies, procedures and employee history. Contrary to the totally HR department outsourcing (see 3.1.2.D]), this strategy does not move control to corporate or to a central entity but rather creates a centrally managed organization that serves employees and businessbased HR professionals as clients. It allows an increase in quality, an improvement in service, and a reduction of processing cycle time as well as expenses.

C] HR processes outsourcing

1

Transforming the Human Resource Function, Arthur H. Mazor and Meredith A. Paxton, Human

Resource Effectiveness Practice, Buck Consultants, Inc., 2002

41 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

Companies can decide to outsource some of their HR activities, which they do not consider as part of their competency scope, and for which they consider that it can be better and cheaper if a HR outsourcing provider manages them. They outsource all administrative and most of their HR activities to outside firms, leaving very few other activities, such as strategy and salary decisions, in-house. In this case, the provider is totally responsible for the good running of these activities, and often integrates its client’s employees (see 7.4.3.C]).

D] Totally HR department outsourcing Another particularly integrated outsourcing solution consists in giving the management of all the HR activities with no exception to a Human Resources outsourcing provider. The provider is responsible for keeping the HR activities in accordance to and in service of the overall activity and strategy of the company, and the company is no longer responsible for any HR decision. This kind of outsourcing is nowadays mainly used in the U.S. where can be even found the premises of co-employment. Co-employment simply consists in hiring people on the basis of a three parties contract: the employee, the business partner, and the Human Resources professional. Signing this contract, the employee accepts to be under the business authority of the business partner, and agrees to depend on the Human Resources provider (also called PEO (Professional Employer Organization) in the U.S.) as far as social problems are concerned; and in the end, the three contractors assume distinct responsibilities. Co-employment is finally a good way for companies to outsource their social responsibilities to an accredited co-employment provider. In the U.S., PEO are on a lobbying campaign to obtain federal and state legislative recognition and to overcome existing laws that create barriers or additional costs for third-party administration of HR operations. State legislators have responded by appointing them as the front-line tax collector and pension-administrator with legal liability for non-compliance. In Europe, the E.U. Acquired Rights Directive and other local legislation 42 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

make effectively HR outsourcing a costly solution by leaving the outsourcing company with the ultimate burden of managing its workforce and taking financial responsibility for employee restructuring.1 It clearly prevents, for the moment, co-employment to develop in the Europe. Nevertheless, since June 2003, Bremen’s (Germany) job center PSA (Personal Service Agentur), for instance, offers co-employment contracts to local companies for a duration of nine months in order to facilitate the reinsertion of unemployed workers, as the workers are leased to the company during the nine months period. Of course, this is a social and short-term initiative, but it really looks like the start of co-employment habits in European countries.2 Moreover, in the U.K., Adecco, for instance, provides permanent employment contracts to workers that are in fact working for a third-party client-company. Adecco has the main “Admin Contract” with its clientcompany and supplies a complimentary workforce to the same clientcompany. The employee is then considered to be a contractor working for Adecco within Adecco’s client-company. The employee has an Adecco consultant responsible for all HR issues it faces (holiday, sickness, appraisals etc.) and a manager from Adecco’s client-company that is solely responsible for it for day-to-day activities in its job role. These kinds of employees are on a threemonth probationary period. Finally, as the employment contract is permanent ongoing, there is no end date. This is again some evident kind of coemployment in the E.U.

3.2. Human

Resources

Outsourcing

Specificities

And Trends 3.2.1. Global overview

1

“Legal Eagles of HR Outsourcing”, William Bierce, HR Outsourcing Today, December 2002

2

“Zeitarbeit als Brücke auf dem Weg zum neuen Job”, Elke Gundel, Weser Kurier Online, 6th June 2003

43 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

A] HR outsourcing expenses trends An article in HRO Today reported that the total volume of BPO (Business Process Outsourcing) topped, worldwide, hundreds of billions of dollars with 40% of them occurring in the United States, and with 60% concerning the Human Resources department.1 Nevertheless, it is here very important to emphasize that in the U.S., pension funds management are included in HR budgets, which obviously implies huge amount of money that are not directly linked to HR management processes, but to pension financing. To illustrate the global trend, fourteen contracts that worth more $6 billion have been concluded between 1998 and 2002.2

B] HR outsourcing trends More than three-quarters of surveyed companies (165 companies surveyed, primarily from the U.S. and Europe), responding to a recent survey by The Conference Board3, reported that they are currently outsourcing a major Human Resources function or at least are planning to do so in the near future. Among U.S. companies that have already outsourced HR functions, two-thirds say that they fully or partially outsourced five or more functions.4

C] Reasons to outsource trends The Conference Board survey5 found that top managers were more likely than line managers or HR executives to cite cost reduction as the impetus for outsourcing, whereas HR executives mostly cited the need for service improvements and the ability to free the in-house HR staff to concentrate on

1

“The 100 Superstars of HR Outsourcing”, Human Resources Outsourcing Today, www.hrotoday.com,

November 2002, p 51 2

Creating value through HR Outsourcing, Strategies, Opportunities, Pitfalls, Dave Connaughton

(Director Business Development Asia Pacific Region Exult), Sourcing Interests Group, Melbourne, February 2002 3

HR Outsourcing Trends, Lisa Gelman and David Dell, The Conference Board, 2002, p 4

4

HR Outsourcing Trends, Lisa Gelman and David Dell, The Conference Board, 2002, p 5

5

HR Outsourcing Trends, Lisa Gelman and David Dell, The Conference Board, 2002, p 6

44 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

value-added services.

D] HR outsourcing future According to a survey carried out between march and may 20011 among more than 100 companies located in big fields of work worldwide (North America, Europe, Australia, Asia), the Human Resources actors will be in 2010 more involved in deciding the company strategies (for 89% of surveyed professionals), and will be more required to show the value-added of their department. The high technologies and the outsourcing of some activities will be the solutions for HR departments to meet these requirements, by being able to focus on their core business thanks to economies of scale: 92% of surveyed companies think e-learning packages will be more used, and 81% of them support that e-selection tools will be widespread and will shorten time and marginal costs of the recruiting process. The new HR roles of the future are predicted to be rethinking the performance and loyalty concepts, and focusing on managing skills. They will no longer manage equality but equity.

3.2.2. U.S. overview A] HR outsourcing expenses trends The U.S. Human Resources outsourcing market is expected to grow from a $21.7 billion industry in 2000 to a $58.5 billion industry in 2005, according to Dataquest Incorporation.2

B] HR outsourcing trends A study carried out by the American Management Association3 showed that 77% of the surveyed companies already outsourced some Human Resources activities.

1

Predicting the Workplace of 2010, Cubiks (a PA Group Company), between March and May 2001

2

http://www.dataquest.com

3

American Management Association, 1997

45 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

In 2001, Peter Drucker in The Economist1 strengthens this trend, when he wrote: “Outsourcing the entire Human Resources administrative function which ten years ago barely existed, is now growing at a rate of 30% a year”.

C] HR outsourcing future For the U.S., the Gartner Group2 forecasts a future growth of 25% each year, which represents in facts a tripling of revenue in five years.

3.2.3. Europe overview A] HR outsourcing trends In Europe, 40% of employers have increased their use of external HR services providers in the last three years.3 The diversification of HR activities outsourced is more and more important and go over traditional outsourced activities, like perks management for instance. A study4 carried out among companies with more than 200 employees in 15 countries all over Europe, shows that the most commonly outsourced processes, are first of all “training and education” with almost 80%. Similarly, the use of recruiting consultants is growing: 59% of European companies outsource their “staffing and recruiting” processes, even if their assignments are still very limited (recruitment of a professional for example). The last most commonly outsourced process is “payroll administration” with 30%. The content only is outsourced but not the container: all the “attention management” and the function itself are for the moment kept internally.

1

“The

Near

Future

(Part

II)”,

Peter

Drucker,

The

Economist,

9th

November

2001,

http://www.cfo.com/printarticle/0,5317,5642%7C,00.html 2

http://www.dataquest.com

3

European trends in HR Outsourcing, J. van Ommeren, C. Brewster, P. Vernon and J. Philips, Cranfield

School of Management and William M. Mercer Research Report, June 2000 4

Ressources Humaines : l’externalisation en Europe, Jean-Pierre Poinas, ADP, Agence ARCA

publishing, February 2002, p 12-17

46 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

As a result, the shared services center model is more and more implemented in Europe, whereas only few companies apply the “American model”, which consists in outsourcing complete HR functions and not only some activities. In 2000, 58% of European companies with more than 5,000 employees have implemented a shared services center.1

B] HR outsourcing future The shared services solution seems to have the most predictable potential growth in the near future throughout Europe, because of particularly strong regulations and because of the decisive importance of social links. But on the other hand, as we will see later, social law complexity clearly leads to ever more HR outsourcing.

3.2.4. France overview A] HR outsourcing trends

Illustration 12: French HR outsourcing market shares in 20002

a) Small and medium-sized companies

1

Le management des Ressources Humaines en Europe: les professionnels RH doivent développer de

nouvelles compétences face aux défis du e-business, PricewaterHouseCoopers, November 2000, p 4 2

“Externalisation: les solutions de BP Amoco et d’IBM”, Laurence Ritter, Les Echos, 28th November 2000

47 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

In France, only 9% of small and medium-sized companies have already outsourced their Human Resources functions, and 38% of them plan to do so in the next two years.1

b) Large companies Concerning HR outsourcing in large companies, figures are on the one hand on a growing trend since 1999, as 24% of these kinds of companies have, in 2002, already outsourced parts of their HR activities (recruitment activities for 47% of them), when there were only 17% in 1999, 19% in 2000, and 20% in 2001.2 But on the other hand, this study shows that only 17% of all large companies prospect to outsource HR, whereas they are 56% for IT, 51% for finance and administration, 41% for distribution, logistics and transportation and 32% for facilities management.3

c) New market companies Concerning HR outsourcing in the new market companies4, 40% of them outsource their HR functions, which consists in fact mainly in payroll outsourcing (for 88% of them). This trend is higher than for large companies, but it decreased compared to 2001 (56%).

B] HR outsourcing future In France, only a very few number of companies are enough structured internally and have solid and trustful information systems to be able to outsource HR activities. Moreover, the number of providers is very small and

1

A Coopers & Lybrand Consultants and l’Association Nationale des Directeurs Financiers et de

Contrôle de Gestion (DFCG) Study, 1997 2

Baromètre Outsourcing 2002, Pratiques et tendances du marché de l’externalisation en France,

Ernst&Young en collaboration avec Taylor Nelson Sofres, 2002, www.ey.com, p 17 3

Baromètre Outsourcing 2002, Pratiques et tendances du marché de l’externalisation en France,

Ernst&Young en collaboration avec Taylor Nelson Sofres, 2002, www.ey.com, p 21 4

Baromètre Outsourcing 2002, Pratiques et tendances du marché de l’externalisation en France,

Ernst&Young en collaboration avec Taylor Nelson Sofres, 2002, www.ey.com, p 17

48 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

companies are afraid to lose control on strategy and corporate vision. For these reasons, only specific activities are outsourced in a same department, but almost never a whole function. Companies outsource almost only, as for Europe, training, payroll and selection processes for example. The chosen option in France is mostly the implementation of shared services centers, as companies find this solution more flexible, and as they are afraid that outsourcing would lead to a loss of control (49%), to social problems (for 38% of them), to a loss of quality (36%), to a costs increase (32%), and finally to a loss of know-how (17%). Finally, the shared services model allows minimizing all the outsourcing risks (see 1.2.3.).1

1

Baromètre Outsourcing 2002, Pratiques et tendances du marché de l’externalisation en France,

Ernst&Young en collaboration avec Taylor Nelson Sofres, 2002, www.ey.com

49 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

PART II. STRATEGIC APPROACH Now that we have demonstrated the real extent of the phenomenon, our aim through this second part is to show why multinational companies in Europe can simply not ignore outsourcing when the reengineering of their Human Resources functions becomes necessary. We would like to give readers a good idea of the reasons why outsourcing is an unavoidable strategic solution for companies who want to lead the business game in the following decades or even more so in the following years.

50 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

Chapter 4. Human Resources Outsourcing And The New Competitive Environment We will start to analyze in this chapter the new competitive environment in which companies move about, its state as well as its trends and revolutions. We will try to understand in parallel which business environment should give rise to HR outsourcing.

4.1. Ongoing Competition A sailing crew battles high seas, violent storms, dead calm, and ice during its quest to win the Jules Verne trophy. This is the most challenging and complete sailing race in the world, requiring survival skills and careful planning to deal with the traps and dangers that abound. The route takes them around the world, crossing seventeen different weather systems along the way. The Jules Verne sailing competition is similar to the race in which companies compete every day, except that this race is an ongoing contest, one that companies aim to win again and again. They are never sure which way the wind will blow, or if it will blow at all. Adaptability is vital. The challenge is to keep the company upright, moving forward, and to ensure that it is sailing in the right direction.1 Indeed, companies move about in the same kind of environment as do the sail boats competing in the Jules Verne race. It is also true that the business competition never ends; it has no clear starting point and it has no end. Sport competitors can taste what it means to be the best in their chosen endeavor, because they define their success by unambiguous and instantaneous victories. But this experience cannot in any way apply to companies since business success does not consist in fulfilling a unique, clear, and lucid objective; it is not one-dimensional but multi-dimensional. As soon as

1

Transformational Outsourcing, Changing the course of business services, Cap Gemini, Ernst & Young,

2002, p 3, www.cgey.com

51 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

companies collectively understand that the rules are not as easy as they seem, that they are not just a problem of short-term profits but a problem of positioning, of taking the advantage more than just winning, they are likely to be successful. In fact, something is missing in the Jules Verne trophy comparison, and unfortunately, without catching it, companies would be completely blind. The race example does not emphasize the fact that business competition is an arena where actors are themselves largely shaping their environment, that competitors strongly participate in designing rules, and that they are sometimes even partners. This example does not underline either the extremely decisive fact that a company’s workforce is not exclusive anymore, that today’s employees will be tomorrow’s competitors, partners or even clients. And all this occurs during the same race, way before the arrival line, if any. Business is more an endless chess game with millions of participants - temporary winners and temporary losers. Actually, this description of the business competition is not quite original nor is it particularly new. It only aims to focus on the very important fact that business competition is characterized by actors that are ever more aware of how to take advantage of such a competitive environment, where everything is linked to something else, and where you need to know how to know, more than anything else. The only really new aspect of this environment is the everquicker innovation process, which imposes on the one hand the shrinkage of the distance between cause and effect, and offers on the other hand the technological tools to cope with this relative instantaneousness of information broadcast. In the end, if we claimed that the success of a company was hard to define, it is just a question of point of view, since each stakeholder of the company is a potential distinctive reference for the definition of its success. On the other hand, companies are commonly defined by the process of generating value or, even better, value-added. The value-added is a concept developed by Michael Porter that has the particular quality of not focusing only 52 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

on short-term financial key performance indicators, but on the whole valuecreating process model shared by most companies.

4.2. Borderless Organizations Before starting and in order to clarify our demonstration, it seems useful to specify here the definition of the vocabulary we used to describe the organization of the company. Indeed, to make it perfectly clear and simple, we considered the company to be composed of “departments” (such as finance, HR, marketing, production, etc.); similarly, departments have been considered to be composed themselves of “functions” (or sub-departments such as payroll, benefits, etc. for the HR department); and in the end the “activity” is a subfunction characterized by its type, that is either by management, by processing, by administration, or by self-services. (See Illustration 4)

4.2.1. The value chain To analyze the specific activities through which companies can create a competitive advantage, it is useful to model the company as a chain creating value through its activities. Michael Porter identified a set of interrelated generic activities common to a wide range of companies that he named the “value chain”. The value chain is a chain of activities that generates the value and hopefully most of the time value-added. In fact, every observed value creation process may be represented by a value chain as designed by Porter.

53 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

Illustration 13: Porter’s Value Chain1

In all value chain, one can distinguish two different kinds of activities: • The primary value chain activities; • The support activities. The primary value chain activities are fundamental generators of valueadded at the end of the whole process. Without them, we would never even expect to achieve value-added. You can tangibly feel their effect in the resulting value produced by the whole system. They directly participate in the results of the process, as they literally shape the final characteristics of the resulting value. It is at this point interesting to notice that company workers usually identify strongly with these activities. Moreover, if one knows someone working for IBM, one will spontaneously associate this person with computers, even if this person is an HR professional for instance. In parallel to these primary value chain activities, Porter identifies the support activities, which include all activities that are, of course, on the one hand, absolutely necessary to obtain the final expected value, but that do not,

1

L’Avantage concurrentiel, Michael Porter, Dunod, 1999

54 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

on the other hand, directly influence the final value’s identity. In fact, a good know-how of these activities is almost never a reason why a value chain is built up. They are only there to support the primary value chain activities. But this would mean that the support activities do not create value-added and that they only support the creation of primary activities. Of course, this is absolutely not the case. Support activities do create value. The problem is that one often forgets that value is quite subjective, and that it can be differently considered according to various points of view; it is also a problem of reference. Whenever a value chain is set up, its aim is evidently to generate value-added, but even more important is to identify the destination of this value-added. As a result, one may claim that even support activities of a value chain create value and probably as much as most primary activities, but in fact the comparison is really not apt, as they do not share the same direct stakeholders. Indeed, a value chain as described above is made of distinct activities that all together build the whole value chain. But they also individually constitute sub-value chains that can be themselves in turn organized like perfectly regular value chains. This means that each support activity is a value chain itself with its own support activities but also its own primary activities. The main difference with the company’s overall value chain lies in the fact that it does not exactly share the same clients. The company as a whole generates value-added that benefits external clients in total respect of market laws, which is actually not the case of any corporate support activity that generates valueadded for the good functioning of other internal support and primary activities.

4.2.2. The virtual organization Now we introduce the concept of borderless companies or virtual organizations. Interactions between companies’ value chains make it difficult to see the real borders between companies. The value chain of any business organization cannot indeed be isolated from the whole context it is involved in. It is, in fact, permanently in contact with other value chains, upstream as well as downstream, which makes the company part of a complex value 55 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

chains system.1 The virtual corporation can be defined as being “composed of several companies interdependent to another, legally separated, but bringing each their resources and skills in order to make up a specialized network, able to generate more value than the sum of its individual components”.2 The virtual corporation keeps indeed internally a hard core of strategic activities and outsources all the others.

A] Clover leaf The virtual corporation is also called the ”clover leaf” organization3, broken down into three leaves: • The first one represents the staff internal the company which is composed of high-skilled collaborators essential to the good functioning of the company; • The second one represents the specialized provider that takes charge of the resting activities; its specialization allows it to be more efficient and less expensive than internal services; • The third leaf represents the whole temporary workers that participate in the reaching of the company’s targets.

B] Alliances 4 It is therefore more than ever necessary for companies to build efficient alliances and cooperative relationships all the way to the core of their business. The alliance is not a new form of relations between companies, but the new global competitive environment encourages ever more different kinds of joint actions. Moreover one may observe that both small and large companies are concerned, whether they are new or old, national or multinational, and

1

STRATEGOR, Collectif HEC, Dunod, 3rd edition, 1997, p 50

2

Benetton ou l’entreprise virtuelle, F. Fréry, Dunod, 1999

3

L’Age de la déraison, Charles Handy, Village Mondial, 1996

4

Alliances interentreprises, entre concurrence et coopération Dominique Jolly, Vuibert, 2001

56 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

finally wherever they are located around the globe. It seems that cooperation between companies represents according to its growing practice a serious alternative to mergers or acquisitions. Most of the concepts, models, and strategic decision tools developed since the 1950s - by the Harvard Business School, Igor Ansoff, the Boston Consulting Group, or Michael Porter, for instance - rely on rivalry between companies. This rivalry is even guaranteed by governmental organizations such as the “Conseil de la Concurrence” in France, the “Bundeskartellamt” in Germany and the “Monopolies and Mergers Commission” in the UK. Nevertheless, we are currently clearly witnessing a certain erosion of the competitive systematic behavior. An alliance is defined as a link between several companies that direct an operation, pooling their resources in order to benefit from the resulting advantages of the cooperation, remaining absolutely independent outside the context of the alliance. Its success relies on: bilateralism, the choice of the best organizational approach (that is centralization, task-sharing or duplication), a theory that sticks to reality, and a clear view of the independence or dependence of the companies in the fulfillment of their tasks. Thus, the construction of a competitive advantage should rely on a more efficient coordination between direct partners. Outsourcing may now concern any stage of the value chain. Companies with a largely outsourced value chain are also called “virtual corporations”.1 Their heart beats in the hands of their partners and their brain performs in the brains of their partners. In fact, outsourcing stands somewhere in between cooperation and CRM (Customer Relationship Management), an alliance in which both parties benefit from its success but not from the same part of that success.

C] CRM

1

The Virtual Corporation: Structuring and Revitalizing the Corporation of the 21st Century, William H.

Davidow and Michael S. Malone, Harper Business Publishing, October 1993

57 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

CBIC’s (Canada Imperial Bank of Commerce) Hubert Saint-Onge depicts the stages of client-provider intimacy and the growth in human1, structural2, and customer3 capitals (on both side of the relationship). According to him, customer capital is resulting from the accumulation of both human capital and structural capital, and with time and experience, the client-provider’s relationship will pass several stages from the simple transactions relation to the complex partnering. The great challenge of HR outsourcing is to reach the last stage of a business relationship degree of maturity, as fast as possible.

Illustration 14: Customer Relationship Management evolution4

At the bottom are transactions where sellers simply sell and the buyers merely buy. Customization is the second level as it represents specific solutions. At the business solutions level, the service itself becomes secondary: the client has a business problem that needs the provider’s analysis and state-of-the-art

1

The part-owned knowledge a company disposes of through its employees.

2

The fully-owned knowledge a company has accumulated through its operations.

3

The available knowledge a company has on its clients.

4

Intellectual Capital, Thomas A. Stewart, Doubleday Publishing 1999, p 158

58 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

expertise. Finally, in a full-fledged partnership, the provider actually takes over the management of the business extension: this last level is the kind of intense, demanding relationship, but also immensely rewarding to both parties.1

4.2.3. Core competencies and core business A] Definition In 1990, C. K. Prahalad and Gary Hamel2 used the term core competencies to define the collective learning and coordination skills behind the company’s product lines. They support the idea that core competencies are the source of competitive advantage and enable the company to generate the largest value-added. This previous concept comes actually from the elder concept of core business activities as activities that differentiate the company from others, make a vital contribution to its success, and offer to companies their largest ROI (Return On Investment). In fact, it became prominent when Tom Peters and Robert Waterman3 suggested that organizations should stick to their most profitable activities in terms of value-added creation and avoid diversifying into areas beyond their field of expertise. In 2002, “Le Journal du Net”, a French high-tech online newspaper, ranked IBM France as the number one high-tech company in which people most like to work. When Dominique Calmant, then IBM France HR Leader, commented on this classification, she said that IBM’s best asset consists in the variety of its professions.4 She probably had simultaneously in mind what Samuel

1

2

Intellectual Capital, Thomas A. Stewart, Doubleday Publishing 1999, p 159 “The Core Competence of the Corporation”, C. K. Prahalad and Gary Hamel, Harvard Business

Review, May 1990 3

In Search of Excellence: Lessons from America's Best-Run Companies, Thomas Peters, Robert H.

Waterman, Warner Books, Reissue edition, August 1988 4

Le Journal du Net, Fabien Claire, 11th February 2002, http://www.journaldunet.com

59 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

J. Palmisano, IBM CEO, stressed as IBM’s core business1: “All of this is what we mean by e-business on demand […]”; in other words IBM is specialized in and one of the world leaders in e-business on demand, but as it is one of the best and as it offers a great variety of professions inside its core business, people like to work for them. Indeed, if it seems clear that companies need to be on the one hand quite obsessively specialized in order to be the best, they also need on the other hand to build, within this great focus, a wide variety of career opportunities in order to attract the best workers and to be the best in the end.

B] Segmentation of activities In the process of determining the core competencies of a business, of a function, or of any system that aims to generate value-added, one has to identify and segment the different activities that compose the whole chain. The value chain described above helps to understand the mechanism that is hidden behind the creation of value, but it does not help to identify which parts are absolutely decisive to achieve the competitive advantage; in other words, which activities are part of the core competencies field. Value chain activities can be differentiated with the help of three different dimensions: the inclusion within a function (sub-department) or sub-value chain, the degree of proximity to the strategy, and finally the type of activity. The inclusion within a function or sub-value chain dimension corresponds, as we saw before, to the activity theme. At minimum, the activity must be classified as a support or a primary activity, but it can be delineated even more precisely to the point of actually defining its specific role in the whole process. The degree of proximity to the strategy dimension corresponds to the degree of closeness that the activity has with strategic activities. In fact, these strategic activities become more strategic as their impact on the previously fixed corporate objectives increases. This is indeed the most important dimension, the one each value chain’s leader has to define precisely in order

1

IBM 2002 Annual Report, p 14

60 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

to maximize the resulting value-added. One should notice that we deliberately choose to differentiate strategic activities from core competencies to the extent that the former are absolutely necessary but not decisive (from an identity point of view) whereas the latter really are decisive not only for the success of the company but also for the “raison d’être” of a company’s positioning: its core identity. Finally, the activity type dimension consists in the segmentation of activities according to the four types described above, related in a way to the level of competency (see Illustration 4). That is, first, automotive activities, which are activities that are mainly automatically done without too much need of human presence; then, administrative or operative activities, which are activities that are systematic and repetitive; next, processing activities, which are activities that deal with the elaboration and the management of processes; and in the end management activities, which are related to strategic planning and controlling activities. In the following illustration are represented by a regular cone all activities included in a value chain. Each activity can be placed in the cone according to the three dimensions described above. The function of the activity is placed on the disc, because it is important to avoid a function hierarchy, a priori; for example, sales functions are not always more important than HR. We symbolized the proximity of the activity to the core competencies in accordance with its distance to the center of the disc: the more centered the activity is on the disc, the more strategic it is. And finally, according to how high you locate the activity in the cone, you define the activity as being part of one of the different generic types of activities seen previously. As we are here interested in the identification of the core competencies, we darkened the virtual position of what are in fact the strategic activities of the value chain. 61 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

Illustration 15: The Cone of Core Competencies

One can easily see that those precious core competencies are symbolized also by a cone (the dark one), but obviously smaller and on the upside down, with its top plunged in the base of the whole activity cone. This actually clearly emphasizes the fact that a core competency may arise from a support or a primary activity, with a noticeable higher frequency for the latter; and that a core competency may concern any type of activity, from the lowest rank to the top management, with of course a bigger advantage for the latter. Each value chain has its own cone, shaped in accordance with its own particular environment. People who are responsible for the success of the value chain have to ask themselves what their core competencies are made of, that is to say the clear definition of their competitive advantage. Once these core competencies have been identified, the strategic decisions can be taken with no possibility of missing their targets, but these are just basic management rules. In fact, the most important point here is to focus on the complexity of core competencies, and especially not to define them too simply, according to a single dimension. Moreover, core competencies are 62 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

not always fixed over time and strategic planning should strongly be taken into account when core competencies are defined. Again, a core competency is defined in reference to a particular purpose also called a value chain; it has nothing to do with prestige, it only aims for maximum value-added.

4.3. Knowledge workers 1 Collaborators also represent, of course, a key element to the success of a company. In the knowledge-based economy that characterizes nowadays’ competitive environment, key employees know probably less than 20% of what they need to know. The challenge is actually to help them catch the 80% left. It is, as a consequence, more important today for organizations to pay close attention to the health and well-being of all their workers than it was 50 years ago. The success of every business will increasingly depend on the performance of its knowledge workforce, and the only way that organization can succeed in a knowledge-based economy and society is by managing its knowledge workers for greater productivity. Finally, what made the traditional workforce productive was the system, which embodied the knowledge and which was productive because it enabled individual workers to perform without much knowledge or skills. In a knowledge-based organization, on the contrary, the individual worker’s productivity makes the entire system successful. Whereas, in the traditional workforce, the worker served the system, the system must serve the worker in the knowledge workforce, as the system is more than ever inside the brains of the workers. It would be difficult to overstate the importance of focusing on knowledge workers’ productivity. The critical feature of a knowledge workforce is that workers are not labor but capital, and also that what is decisive in the

1

“They’re not Employees, They’re People”, Peter F. Drucker, Harvard Business Review, February 2002,

pp 70-77

63 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

performance of capital is not what it costs but how much it is being invested.1 Finally, Tom Peters supports the idea that workers tend to be given irrevocably

a

lot

more

responsibilities

and

autonomy,

contesting

the

hierarchical power that is inefficient in facing the chaos. On the other hand, Alfred Chandler has always been an adept of clear hierarchy, considering that the reality of an official scale of authority encourages managers to be more professional. To try to remedy this lack of balance between the efficient hierarchy and the creative chaos, some companies simply outsource some of their workers.2 Companies offer indeed the opportunity to build their own business to some of their workers, by offering its first contract to the new start-up and sometimes even by taking equities. The method allows the company to get rid of a noncore but still perfectly strategic competency, which explains why the company is motivated to secure the survival of the start-up. For the ex-employee, it is a great opportunity to be its own boss, to develop a business in accordance to the vision of its core activity; the only failure observed with this solution arises when the start-up begins to compete on the same markets as its former employer.

4.4. NTIC (New Technologies of Information and Communication) The change brought about the technological innovations of the 1990s and early 2000s have affected all business aspects. There was a time when people had the choice to be linked electronically or not. Today, it is absolutely expected. Technological change accelerates overall environmental change. Rapid

1

“They’re not Employees, They’re People”, Peter F. Drucker, Harvard Business Review, February 2002,

pp 70-77 2

“Ces entreprises qui externalisent leurs salariés”, Sabine Grandadam, Les Echos, 3rd October 1995, p

26

64 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

technological change, combined with drastically changed market forces, have driven massive shifts trough the competitive environment. Each shift changes the rules of the game and one of the most pressing challenges for companies is to manage employees in virtual organizations. Technologies have for objectives to improve performance, reduce costs, and may give access to a practice. They are definable by their sources, their application domains and their purpose. Technology is by the way really one of the most important dimensions considering the outsourcing solution: if technology is an old industrial catalyzer, its power is indeed newly applied to organizational and administrative management. Contrary to science, technology has an economical goal. Moreover, as it is the exclusive belonging of a company or a group of companies, it is a source of differentiation and competitive advantage. A technology will become, little by little, a simple technique, as soon as all the actors of the business area master it.1 Facing the globalization of the economy, the speeding up of innovation in all areas, and the inlet of NTIC, companies can definitely not remain isolated (in autarky). NTIC bring the chaos and the tools to manage it, and as Albert Einstein is said to have claimed: “Not everything that can be counted counts, and not everything that counts can be counted.” That is the real NTIC challenge, the information age.

1

Alliances interentreprises, entre concurrence et coopération, Dominique Jolly, Vuibert, 2001, p 60

65 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

Chapter 5. Human Resources Outsourcing And The New Challenges Human Resources are facing the ever more demanding evolution of companies. They are expected to demonstrate their value-added and to reduce their costs always more. The Human Resources are moreover drastically changing, as knowledge replaces strength: intangible beats tangible, the resource itself is no more valuable, and the value comes for now on from the mastering management of its flows.

5.1. Two Fast-Moving Trends Two fast-moving trends are changing the way companies have to manage talents: • A huge number of people who work for companies are no longer traditional employees; • A growing number of businesses have outsourced their Human Resources functions. It is one thing for a company to take advantage of long-term freelance talent or to outsource its Human Resources management, but it is quite another not to forget, in the process, that developing talents is companies’ most important task to compete in a knowledge economy.

5.1.1. Temporary

employment

industry

development A] Figures 1 Europe is the geographical area where the temporary employment

1

Rapport économique et social annuel 2002, SETT (Syndicat des Entreprises de Travail Temporaire),

http://www.sett.org/etudes_statistiques/Rapport_économiŠl_2002_SETT.pdf

66 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

industry makes its highest revenue with €73 billion in 2002.

The European

temporary employment market increases by 10% every year. Finally, the U.K., just after the U.S., generates the highest revenue with €36 billion in 2002, and it concerns 4.7% of its working population (still the first rank in Europe).

B] Trend Thanks to Klaus Jacobs, Vice President Adecco1, the temporary employment industry may be divided into two main activities. The first one consists in matching offer with demand, especially with the great help of the Internet, powerful tool. The second one, more complex, consists in assessing applicants in order to identify those who not only have a real potential, but much more those who will satisfy the client-company in the end. Moreover, the temporary employment industry is shifting from the industrial sector to the service sector, and this service sector expects more project approaches, that is to say group temporary solution to a given problem, very close to the HR outsourcing concept.

C] Threatened flexibility The European Commission issued a proposal for a new Directive regulating the working conditions of temporary workers in March 2002. The proposal aims to ensure equal treatment between temporary workers and comparable workers in the user company, on a range of basic working conditions, including pay, working time, breaks, and holidays.2 This proposal is actually already applied in France (just as well as in Austria, Belgium, Spain, Luxemburg, the Netherlands, and Portugal). Conversely, business leaders in the U.K. have warned that it could be very damaging for companies. Digby Jones, CBI (Confederation of British Industry) Director-

1

“Au-delà de l’interim, Adecco veut gérer les ressources humaines de ses clients”, Laure Belot, Le

Monde, 20th April 1999 2

“Commission

proposes

directive on

temporary

agency

workers”,

EIRONLINE,

April

2002,

http://www.eiro.eurofound.eu.int/2002/04/feature/EU0204205F.html

67 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

General,

claimed

that

without

improvements,

taking

on

temporary

employment would do irreparable damage, not just to business but to employees as well.1 On the other hand, John Monks, the TUC (Trade Union Congress) General Secretary, welcomed the draft proposal arguing that lower rates of pay for temporary workers undermine workforce motivation and act as a brake on productivity.2 Finally, this debate will all the more be on the European agenda, as John Monks has just been elected at the head of the ETUC (European Trade Union Confederation), last May 2003.3

5.1.2. HRO

(Human

Resources

Outsourcing)

industry development 4 In a related but distinct development, after the outsourcing of manufacturing operations in the 1980s and the following wave of outsourcing by the early 1990s of information technology and software development, the global economy is now about to live its third big business revolution: outsourcing of business services, including HR activities. PEO (see 3.1.2.D]), which manage their clients’ HR activities, were the fastest-growing business service in the United States during the 1990s. Even though they were virtually unknown only ten years ago, they had become, by 2000, the “co-employers” of 2.5 million to 3 million U.S. workers, and are by the way already in the U.S. at least 1,800 such organizations. Finally, both the temporary employment industry and HRO industry are growing quickly. The HRO industry as a whole is growing at a rate of 30% a year, and PEO expect to be collectively the co-employers of 10 million U.S. workers by 2005.

1

“CBI launches new bid to block irreparable damage from E.U. temping law”, CBI Press, 30th May 2003

2

“Bosses war against rights for temps”, BBC News Online, 18th February 2002

3

“La CES prend l’accent britannique”, Isabelle Moreaux, Liaisons Sociales, June 2003, p 6

4

Inspired from “They’re not Employees, They’re People”, Peter F. Drucker, Harvard Business Review,

February 2002, pp 70-77

68 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

5.2. Scope Expansions 5.2.1. Temporary work scope expansion When the temporary employment industry first started nearly fifty years ago, it supplied low-level workers to take the place of employees who were sick or on vacation. Today, there are temporary agencies for every kind of job, from bottom line to top management.1

5.2.2. HRO providers scope expansion HRO providers, like temporary agencies, have expanded their scope in recent years. The first HRO provider in the late 1980s offered to do bookkeeping, especially payroll, for their clients, but now they can take care of almost all Human Resources activities. HRO providers originally confined themselves to taking care of small businesses, but may now be designed from the start to be the co-employer for the largest multinational companies.

5.3. Expansions Explanations 2 5.3.1. Flexibility The popularity of temporary workers is usually justified by the need of always more flexibility, but in fact, many temporary workers are full-time workers for long periods of time in the same company. Moreover, flexibility has no account on the emergence of HRO providers. It is finally more likely the growing burden of rules and regulations for employers that encouraged both developments. To that extent, it seems interesting to briefly present the law case opposing

1

Interimsmanagement, für die Wirtschaft im Wandel, Management Angels GmbH, Business Village,

2002, http://www.managementangels.de 2

Inspired from “They’re not Employees, They’re People”, Peter F. Drucker, Harvard Business Review,

February 2002, pp 70-77

69 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

Vizcaino to Microsoft in the U.S.1 Microsoft has indeed been charged in 1999 for having misclassified 15,000 temporary workers that were in fact entitled (as employee-considered for this matter) to receive its employees stock purchase plan (a liability that could easily reach $20 million). This case clearly demonstrates that the litigation probably could have been avoided if the company’s benefit plans had been drafted differently. The growing complexity of overlapping legal references that face ever more HR departments in the U.S., and actually even more in Europe, tend to stress the need of at least an external counsel, and at best of an external provider, that is expert in (has for core competencies) the management of this kind of complexity as a whole.

5.3.2. Costs reduction and time gains Temporary agencies and HRO providers favor costs reduction and time gains for the client-company.

A] Costs reduction A 1997 McKinsey study concluded that a multinational company could cut its labor costs by 25% to 33%, having its Human Resources functions managed by an outside company. The outsourcing of employees and Human Resources activities is an international trend, as although employment laws and regulations vary widely from country to country, the costs they impose on businesses are high everywhere in the developed world. Even more onerous than the costs of complying with employment laws are the enormous demands that the regulations place on management’s time and attention. They require managers to file multiple reports, and they all threaten punishment for noncompliance.

B] Time gains No wonder that employers complain that they have no time to work on

1

Vizcaino v. Microsoft Corp., 173F.3d713 (9th Cir 1999)

70 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

results, as they work, instead, on problems (employee regulations). The success of temporary agencies and HRO providers is thereby evidently due to the fact that they both enable management to focus on the business, and there is not the slightest reason to believe that the costs or demands of employment rules and regulations will decrease in any developed country.

5.3.3. Managing knowledge workers Beyond the desire to avoid the costs and complexity of regulations, there is another major reason for both the rise of temporary workers and the emergence of HRO providers: the nature of knowledge work and the fact that knowledge-based organizations have lots of experts. Managing all of them effectively is a big challenge, one that temporary agencies and HRO providers can help to address. Knowledge workers are not homogeneous, as knowledge is effective only if it is specialized. This is particularly true among the fastest-growing group of knowledge workers that are innovative industry specialists. Because knowledge work is specialized, it is a deeply splintered work, even in large organizations. A direct negative consequence of this specialization is indeed that knowledge workers have most of the time fewer career opportunities within the organization. Moreover, it is then evident that the identity they have is often too distant from the collective company identity. Culture builds identity, but identity allows recognition, and thereby motivation, etc. As a consequence, one must share the same corporate culture without sharing individual identities, but various identities lead to a unique corporate culture. If this corporate culture is not a reliable reflect of the parties (the workers), thereby it is not optimized to be considered as a strategic asset for the whole (the company). In conclusion, specialized workers are better managed in specialized companies (with the same specialization), as their corporate culture better reflects individual identities. Both the large temporary agencies’ clients and the HRO providers’ clients lack the ability to effectively manage, place, and satisfy highly specialized 71 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

knowledge workers. Temporary agencies and HRO providers perform this vital function for employees as well as for their clients. This explains why HRO providers can claim, and apparently document, that the people they coemploy are high job satisfaction, in contradiction to what Human Resources theory says. In a total HR outsourcing contract, it is expressly provided that the HRO provider has the duty and the right to place people in the jobs and companies where they best fit. Balancing its dual responsibilities, to the corporate client and to employees, is probably HRO providers’ most important challenging job. In the end, HR management is all the more expected to perform well as it is applied in brain-based industries such as consulting or services. But as all industries are now obliged to cope with the information age, brain resources management or human capital management concerns for now on absolutely all industries.

5.4. Issues For The Outsourcing Company A] Temporary workers motivation and management HR policies still assume that most, if not all, of the people who work for a company are employees of that company. But as we have seen, that is not true. Temporary agencies claim to be selling productivity, and to be doing the company’s oversight job for them, but it’s hard to see how they deliver. The productivity of the people they supply to a client depends not only on how and where those workers are placed, but also on who manages and motivates them. The temporary agency has no control over those last two areas and this lack of oversight is a real problem. Every organization must take management responsibility for all the people whose productivity and performance it relies on, whether they’re temporary workers, part-timers, or employees of its outsourcers, suppliers, and distributors. Who would dare say that interns are less productive than formal unfixed term contract junior collaborators?

B] People development 72 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

Temporary agencies and especially HRO providers free up managers to focus on the business rather than on employment-related rules, regulations, and paperwork. Companies have thereby ample reason to try to do away with the routine issues of employee relations, whether by systematizing employee management in-house or by outsourcing it to temporary agencies or to HRO providers. But they need to be careful that they do not damage or destroy their relationships with people in the process. Indeed, the main benefit of decreasing administrative work may be to gain more time for people relations, and the key to greatness is to look for people’s potential and spend time developing it. Leaders in knowledge-based businesses must spend time with promising professionals: get to know them and be known by them, mentor them and listen to them, challenge them and encourage them. Even while those people are not traditional employees, they are still a capital resource for the organization and critical to its business performance. The functions that are involved with employee relations should be systematized, but then, they may become impersonal. If employee relations are being outsourced, executives thereby need to work closely with their HRO provider counterparts on the professional development, motivation, satisfaction, and productivity of the knowledge workers on whose performance their own results depend. This trend will require more than just same new programs and new practices. It will require new measurements, new values, new goals, and new policies. People are capital, people are opportunities. HR does not manage a collection of fully-owned workers, but a network of partly-owned knowledge workers.

5.5. Human Resources New Objectives The HR function faces a growing challenge from business leaders: it has indeed to enable the organization to achieve excellence by developing strategies to attract, develop and retain human capital.1 HR must enable companies to meet the expectations of their stakeholders, while increasing

1

Intellectual Capital, Thomas A. Stewart, Doubleday Publishing 1999, pp 79-106

73 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

employees’ service quality. In other words, it has to work better, faster and cheaper.

5.5.1. Meet

stockholders

expectations

through

costs reduction After requiring HR functions to reduce their expenses and more generally all their external costs, Chief Executives now expect the HR department to decrease its own operational costs on the one hand, but also companies’ operational costs in general on the other hand, without of course creating any social problem. To this purpose, benchmark is realized, and ratios are implemented. A common ratio is the number of HR employees divided by the annual revenue, but the most recurrent and relevant one is the number of HR employees divided by the global number of employees, also called HR staff-to-employee ratio. As far as this ratio is concerned, the American average is very different from the European. In the U.S., indeed, a lot of tasks are outsourced and companies are equipped with very advanced information systems, and the average is of only 0.4%. In Europe1, the average is of 1.75% with of only 1.4% in Scandinavian countries, and of 2% in France. HR leaders use lots of tools to evaluate their performance, such as balanced scorecards2 and decisional analysis tools (turnover, recruiting, absenteeism costs), to implement new strategies to reduce costs and to improve efficiency, such as outsourcing strategies. Thus to that extent, when J. Randall MacDonald (now Vice President Human Resources IBM Corp.) was head of HR at telecoms giant GTE, he

1

Le management des Ressources Humaines en Europe: les professionnels RH doivent développer de

nouvelles compétences face aux défis du e-business, PricewaterHouseCoopers, November 2000, p 3 2

Le tableau de bord prospectif, Robert S. Kaplan and David P. Norton, Les Editions d’Organisation,

1998, pp 137-155

74 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

introduced one of the most robust Human Resources scorecards. He took clear measures from every corner of Human Resources functions and rolled them into a four-pages report, which was distributed around the company. As a positive consequence, when discussions took place on which areas of the business were adding value, there was almost never a question about what the Human Resources department did, what its value was, and how it was improving.1

5.5.2. Generating value for the company Though reducing costs is clearly one motivator to transform HR, far more compelling is the interest in generating value for the whole organization. Indeed, HR ROI is now calculated and expected to be so. New HR performance leverages are also implemented: they consist in being more aligned with the business thanks to HR Business partners working with operational collaborators, or in no longer being just a provider but a pro-active actor by forecasting future issues. HR Business partners are thereby empowered to grow business partnering, change

management,

workforce

development

and

organizational

effectiveness capabilities, and to truly support organizational excellence.

5.5.3. Seven questions to challenge objectives William Schiemann of Metrus Group suggests that there are seven main questions HR leaders ought to ask themselves to know if they are on the good way or not to challenge future HR issues2: • Is HR present at mergers and acquisitions planning meetings, strategy reviews, and restructuring discussions? • Does HR provide an annual report on its ROI? • Does HR lead the people strategy? Has it developed key

1

“Be seen and heard or face extinction”, Personnel Today, Lance Richards, 19th February 2002

2

“Trends to Watch in HR’s Future”, HRFOCUS, December 2002, p 7

75 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

performance indicators for the success of that strategy? • Do its customers rate HR? • Does the organization conduct strategic vs. entitlement employee surveys? • Are HR employee and other survey initiatives linked to customer and financial metrics? • Does HR have an ROI process to evaluate its initiatives connected to the business strategy?

76 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

Chapter 6. Human Resources Outsourcing Strategic Approach Whatever you might think, outsourcing Human Resources activities will be human-focused or condemned to fail.

6.1. Outsourcing Decision Theory Now that one knows how to define the HR activities that may be outsourced (activities outside the dark cone of the illustration 15), one is now invited to enter the mechanism that leads to the outsourcing decision.

6.1.1. Bases A] The transaction costs theory This theory1 deals with two main important issues of the outsourcing process: decision (is it worth outsourcing or not?) and management (how to manage successfully an outsourcing operation?).

a) Principles According to this theory, there are three ways to organize an activity: • Managing the activity by oneself (called “firm” governance); • Delegating

the

activity

to

the

market

(called

“market”

governance); • Make it managed by a provider with whom one has solid relationships (called “hybrid” governance). The best governance structure, as far as costs are concerned, is the one

1

“L’outsourcing : une approche par les coûts de transaction”, Bertrand Quélin, Réseaux, July-August

1997

77 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

that minimizes the most the sum of production costs and transaction costs.

b) Fundamental hypothesis The transaction costs result from the interaction between a limited rationality and a similarly limited opportunism (hypothesis on which the theory is based) of individuals with environmental factors. The limited rationality consists in an inability to forecast all events that may occur during the outsourcing contract, and then all renegotiations that may be necessary. Opportunism occurs when there is a small number of providers and an atmosphere that may encourage the provider to take advantage of this context and to be unfaithful with its clients. There are finally three environmental factors interacting with the two behaviorist fundamentals: the uncertainty, the complexity, and the number of providers.

c) Transaction attributes The transaction costs theory allows the determination of the optimal governance structure, thanks to four criteria: the assets specificity, the uncertainty, the frequency, and the difficulty to measure the provider’s performance.

i/ The assets specificity Specific assets are assets that have been specifically developed or adapted to a special usage. There are specific locations (when a provider established equipments close to the clients to reduce storage and transportation costs), specific physical assets (when the provider developed or adapted equipments for the client), specific human assets (when the provider developed special skills just for the client needs), but also temporal specificities (when the provider developed specific assets to respect time of delivery to its client). 78 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

The less the assets are specific, the easiest it is to make the activity managed by an external provider.

ii/ The uncertainty The uncertainty is the fact that it is more or less difficult to forecast the future evolutions of the environment and the provider’s behavior; one can conclude the following: the bigger the level of uncertainty is, the bigger the transaction costs are. These problems occur all the more as it is combined with a strong specificity of assets. Indeed, we saw in the hypothesis that the individuals’ rationality was very limited, and it is thereby impossible to write a contract that includes all future contingencies.

iii/ The frequency Transactions can be unique, casual, or recurrent. The less frequent a transaction is, the more it is recommended to outsource it.

iv/ The

difficulty

to

measure

the

provider’s

performance The more difficult it is to measure the performance of an activity, the less it is recommended to outsource it.

d) Governance structures 1 The transaction costs theory not only distinguishes insourcing and outsourcing, but it suggests three types of outsourcing: outsourcing with classical contract law, outsourcing with neoclassical contract law, and outsourcing with relational contract law.

1

“L’outsourcing : une approche par les coûts de transaction”, Bertrand Quélin, Réseaux, July-August

1997

79 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

i/ Insourcing As seen previously, when the assets specificity, the uncertainty, and the frequency are all particularly high, it is more careful to manage the activity internally and not to outsource it. A high uncertainty would make the contract difficult because of the necessity to renegotiate it permanently.

ii/ Outsourcing with classical contract law This kind of outsourcing strategy must be implemented when the activity to be outsourced is slightly specific and allows economies of scale. It is, in this case, not necessary to implement complex contractual mechanisms, and this kind of contract is used to manage simple and welldefined relations. It is short-written and plans all eventualities: formal documents are emphasized, and the relational aspect is very slight.

iii/ Outsourcing with neoclassical contract law This contractual outsourcing is recommended when the assets specificity is high, and when production costs are almost the same for the provider as it is for the client internally. Risks are more tolerable when the uncertainty is low. These contracts are detailed and used for long-term inter-enterprises relationships. Formal documents are emphasized, and flexibility clauses are added because all eventualities cannot be anticipated. Moreover, it is possible to ask a third part to be referee in case of future conflict (see 8.1.).

iv/ Outsourcing with relational contract law This contract applies when both the assets specificity and the uncertainty are high, and when the production costs are almost the same for the provider as they are in the client-company itself. Concerning repetitive activities, it is recommended to keep them internally in these conditions.

80 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

B] The resource-based theory This theory deals with important topics for managers such as “core business” and factors activating outsourcing. The goal is to determine factors that underpin competitive advantages of companies. This theory is based on an easy idea: performance differences between companies of a same industry can be explained by differences in resources and skills. The mission of the management board is to create a high level of resources and skills by making them adapted to the environment. Resources and skills are strategic when they are the foundations of a lasting competitive advantage, that is to say when they: • Open access to a large number of markets, and thereby give a product value from clients’ points of view; • Are very rare and almost unknown by other competitors; • Have almost no competitor able to imitate them; • Have almost no substitutes possible. Resources and skills that present all these characteristics must absolutely not be outsourced.

C] Conclusion of the two theories In conclusion, one can say that insourcing resulting from the risk of individual opportunism tries to avoid this opportunism by keeping the targeted activity inside the company. In parallel, insourcing has for goal to benefit from coordination abilities and from the flexibility that are more important inside the company, where opportunism has only an obvious secondary role.

6.1.2. The decision itself As

seen

before,

outsourcing

has

advantages

(see

1.2.2.)

and 81

OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

disadvantages (see 1.2.3.) at the same time. The question is to know how to decide the outsourcing of this or this activity. We shall then distinguish several decision criteria: the belonging of the activity to the core business, the level of performance and the level of transaction costs.

A] The belonging of the activity to the core business All activities, which do not belong to the “core business” can be outsourced, which is actually the basic logic of the labor division and specialization emphasized by Adam Smith at the end of 18th century. Outsourcing presents two main interests: • A direct one, as costs decrease and performance increases; • An indirect one, as economies can be done and reinvested in the “core business” activities, in order in the end to create always more value. According to James B. Quinn1, companies waste their financial resources when they do not outsource all their activities that are not part of their “core business”. But one must be aware of the definition of a “core business”, because general managers often subjectively decide it, and this approach is very limited. One must have objective approaches by using the four criteria we developed before (see 6.1.1.B]), which make the competitive advantage of the company.

B] The level of performance Supposing the activities do not belong to the core business, there are two possibilities: whether the internal performance is worse than the provider’s performance and thereby it is recommended to outsource, or the internal

1

“Strategic Outsourcing”, James Brian Quinn and Frederick G. Hilmer, Sloan Management Review,

Summer 1994, pp 43-55

82 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

performance is better than the provider’s, and in this case the activity must whether be kept internally but there is no focusing reinvestment in the core business, or (better solution) be managed by a subsidiary created to this purpose and which can propose its services to the holding but also to other companies (spin-off strategy).

C] The level of transaction costs 1 These costs can be very high, all the more as the outsourced activities are based on specific assets, as there is a high uncertainty and as they are regularly processed. There are non-negligible fixed-costs, and the difference of performance and costs that are necessary to set about an outsourcing operation is all the more important as amounts involved are low.

6.2. What Should Be Outsourced Any activity can be a candidate for outsourcing, provided it is not critical to the “raison d’être” of the company. As far as HR activities are concerned and as HR core competencies obviously differ from one company to another, arises then the problem of defining which of these activities are part of the HR core competencies and which are not. This question is all the more crucial as it strongly determines in the end the HR department competitive advantage. In fact, the HR department constitutes a real value chain itself, inside the whole company. As a consequence, one can use the cone of (HR) competencies previously described (see 4.2.3.B]), in order to clearly situate each HR activity according to the three defined dimensions: the HR function belonging, the degree of proximity to the HR department global strategy, and finally the type of activity.

1

“The hidden costs of IT Outsourcing”, Jérôme Barthélemy, Sloan Management Review, Volume 42,

Number 3, Spring 2001, pp 60-69

83 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

Two dimensions are indeed already given by the illustration 4 (HR function belonging and type of activity), only remains thereby the evaluation of each activity’s distance to the HR strategic activities. Once the cone (see illustration 15) is clearly set up, the decision to outsource some of these HR activities becomes a lot easier to take. Indeed, each square of the matrix representing a particular activity can be chosen to be outsourced or not, according to its location inside the cone. The closer to the central core competencies cone the activity is located the less it should be outsourced. The cone allows bringing about a global reflection on what is strategically decisive and what is actually not in the process of creating valueadded, with the advantage not to limit systematically strategic activities to managerial ones. As far as we are concerned, we strongly support the idea that the dark cone of HR core competencies is quite thin. In other words, we think that the future will show that HR functions may be largely and successfully outsourced. Traditionally, clients have parcelled up discrete areas such as recruitment, benefits administration or training, and outsourced these to providers with reputation as specialists in the niche service areas. But we are convinced that the next generation of HR outsourcing will be characterized by clients taking a more strategic, integrated approach and that there will be the advent of new providers offering (helped by the technology) “life cycle” services, which handle all employee issues, from recruitment to retirement and beyond. The current main brake to this trend is the structuring of the offer; the market is not mature enough, and it evidently is lacking large worldwide credible providers. But as soon as some reliable multinational companies will be able to provide the all range of HR outsourcing services, we bet the dominos will fall quicker than so far expected. In the end, outsourcing most HR activities aims to improve the four soft “S” of the seven “S” approach developed by McKinsey, that is to say: Style, Shared objectives, Skills and Staffing (whereas the hard ones are: Strategy, Structure and System). These are the real challenge of HR outsourcing. 84 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

6.3. Advantages Outsourcing provider capabilities enable Human Resource’s shift of attention and skills to more strategic roles. Outsourcing Human Resources activities to a third specialized company allows benefiting from communities of practice1 that accumulate experience and know-how of excellence. If it is true that Human Resources activities must be tailor-made for each different company, it is according to us not an argument to justify its insourcing. It is in fact the complete opposite: a business relation would have the advantage of largely stressing the crucial customer knowledge strategy. Outsourcing implies understanding that in the intellectual capital era, the company does not own the human capital assets; it is only one of its part-owners.2 And as it is so, companies

should

favor

connection

more

than

collection.3

The

real

competitive advantage relies thereby on your network. According to Exult4, the main advantages of HR Outsourcing are the following: • Ability to focus on aligning HR Strategy to business strategy; • Lower unit cost for any given level of service; • Supports devolution of people management to managers; • Rapid scalability (a solution to solve a problem has to be rapidly efficient as the size of the problem increases); • Access to meaningful Management Information System and measures; • E-enabling the workforce; • Efficient management of third party;

1

Intellectual Capital, Thomas A. Stewart, Doubleday Publishing 1999, p 100

2

Intellectual Capital, Thomas A. Stewart, Doubleday Publishing 1999, p 104

3

Intellectual Capital, Thomas A. Stewart, Doubleday Publishing 1999, pp 114-122

4

Creating value through HR Outsourcing, Strategies, Opportunities, Pitfalls, Dave Connaughton

(Director Business Development Asia Pacific Region Exult), Sourcing Interests Group, Melbourne, February 2002

85 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

• Reciprocal services; • Shareholders dividend. Finally, for American companies that have subsidiaries in Europe, outsourcing is a good way to manage their HR functions, in the European regulations patchwork, as it is an effective mean of harmonizing a number of different regulated HR systems. It may also be seen as alternative to making a capital investment in the new technology necessary to support the HR function. Moreover, it enables the outsourcing company to shift risks to a third party with expertise and to get a single neck to strangle when problems occur and shareholders complaint. Nevertheless, most of the current management tools still do not allow an accurate measure of the hidden-costs generated by these advantages and by flexible corporate organization in general. It seems indeed necessary to rethink systematically HR indicators (or scorecards) in the direction of a better assessment of the HR contribution to global value-added, its impacts on the company’s level of competency as a whole, and on the corporate long-term benefits, even better in financial terms.1

6.4. Drawbacks Outsourcing HR operations may sometimes pose some challenges and problems.

6.4.1. Quality decrease and loss of control In The Conference Board Survey2, 51% of respondents reported that they had fully achieved their outsourcing objectives. Another 42% had partially achieved them. Those who expressed dissatisfaction cited lower-than-

1

“Le prix réel des nouvelles organisations d’entreprise”, Marie-Béatrice Baudet, Le Monde, 7th

September 1999 2

HR Outsourcing Trends, Lisa Gelman and David Dell, The Conference Board, 2002, p 6

86 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

expected service levels and loss of control as problem areas.

6.4.2. High unexpected costs The costs can be difficult to control, as far as each new process implementation by the outsourcing company after the contract is signed, is likely to be discussed and charge negotiated by the outsourcer, which has now the possibility to increase its prices, as it leverages the activity.

6.4.3. Security issues Another preoccupation is the security concern. Human Resources outsourcing creates indeed an increased security risk. It is a necessity for the company that outsources, but difficult to control, that the provider will adhere to the security policy, and that all work done adheres to proper security procedures. It is all the more crucial as HR activities deal with a lot of confidential and personal data.

6.4.4. High

commitment

required

during

outsourcing implementation One must also not forget that mergers and acquisitions, plant closings, major hiring activity and shifts to business strategy will happen while HR is moving to a new model and is totally or partially outsourced. This implies the development of change management skills on parallel to particularly developed organization skills. The implementation of a new model in order to gain value in the end will be, during the transition, in most of the cases a real nightmare.

87 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

PART III. IMPLEMENTATION We would like along this third part to surround the outsourcing concept by now determining the conditions of its successful practical implementation and by laying the foundations of an efficient outsourcing operation management. First is presented how we suggest one should manage an HR outsourcing operation. Thereafter we describe the legal environment in which such a project takes place. Finally the essential aspects of the management of outsourced HR activities are analyzed.

88 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

Chapter 7. Managing

The

Human

Resources

Functions Outsourcing Project For HR outsourcing to be optimized and successful, the outsourcing company has to focus on the project phase not to forget any aspect of the process, and to anticipate problems. Moreover, as will strongly emphasized later on, a good contract is absolutely essential to the success of any outsourcing operation. It is indeed very important that it is balanced and that it makes both parties winning the deal. Nevertheless, the outsourcing solution does not prevent from keeping internally some decisive resources that also participate in making the difference and coordinating the interaction between the two structures.

7.1. Project Team Managing an HR outsourcing project consists for the outsourcing company in considering both internal and external issues, from project definition to staffing reorganization, and communication to the provider’s selection process. These issues must be directed and resolved by a dedicated team, composed of internal employees and/or external consultants specialized in project management, as they have the needed experience in managing a project. The team may also include experts in legal (see chapter 8), technical, financial, environmental, and of course in business areas. They may be directed by an external project manager (consultant or interim manager) specialized and experienced in HR outsourcing, and that has the necessary skills to consider all specific issues of this sensitive kind of outsourcing. This project team may also include one or more members of the future piloting committee, as this last cell will coordinate the relations between the outsourcing company and the provider. It is essential that they are involved 89 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

and take part in the project from the beginning, in order to manage it the best way, once the outsourcing deal is effective. Finally, one or more members of the managerial activities, according to the size and the ambition of the project, may also be members of this project team.

7.2. Project Definition 7.2.1. Project plan The project plan defines the project requirements in more or less detailed. The more detailed it is, the more the provider is hold to fixed pricing and time tables. The major typical topics included are: project specifications, definition of specific provider’s tasks with milestones and deliverable dates, implementation schedules,

installation

and

implementation

requirements,

testing

and

acceptance requirements, training requirement, assets and environmental requirements,

reports

and

authorizations,

quality

plans,

meetings and

(documentation),

finally

the

permits

outsourcing

and

company’s

responsibilities. Generally, the project team develops two project plans, the first one defining the outsourcing company’s initial requirements, and a second one (in the final stage) specifying commitments and deadlines for the provider. As already mentioned, one must remember that the more detailed the final project plan is, the better the operation development will be.

7.2.2. Risk assessment The project team must identify and outline the risks HR outsourcing operation could lead to, and assess the weight of benefits compared to risks. Identify these risks due to new methodologies implementation will allow the project team considering the way these risks can be reduced; for example, by defining parallel running environment or pilot phases.

90 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

7.2.3. Cost analysis The costs of the project phase itself have to be assessed (external consultants costs, legal advise costs or travel costs for example); but the costs of HR function outsourcing must also be assessed (separation costs, mismanaged employee transition, implementation costs, running costs, taxes, transition costs, travel costs, etc.). In order to obtain a reliable statement of the quality of the investment, it is possible to use the calculation of the NPV (Net Present Value), as it will evaluate the profitability of the investment based on anticipated cash flows and discounted at a state rate of interest. While using the NPV tool, one must be aware of the degree of accuracy of its assumptions. Moreover, it is important to stress that the NPV ignores intangibles (decisive as far as HR outsourcing is concerned) that may make an outsourcing operation worth pursuing despite a negative NPV. One may also add the use of the transaction cost theory seen earlier in 6.1.1. A].

7.3. Internal Issues 7.3.1. Management commitment The

project

team

has

to

convince

the

outsourcing

company’s

management team, not only to be aware of the project, but also to actively support it. Moreover, the project team should not forget to tactfully inform all the other and parallel areas managers which could be affected by the project, to help them managing the organizational change.

7.3.2. Organization’s ability to absorb change Whatever the kinds of HR functions outsourcing procedures adopted, some other internal businesses will be affected and obliged to change. 91 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

Not only the leaving HR staff will have a completely different job, as they will work with outsourced employees, but also other departments will have to absorb some changes in the organization. If some departments will be positively affected, others will be disadvantaged, which implies for the project team an assessment of the ability to absorb change.

7.3.3. Staffing reorganization As developed in 7.4.3.C], HR outsourcing often includes staff transfer, and such an operation surely leads to staffing reorganization, as some functions will be reduced internally, or even totally transferred. On the other hand, the outsourcing company will maybe need new staff with other profiles. As an example, when at the beginning of the year 2001, AstraZeneca signed a $1.7 billion contract with IBM, IBM was committed to run and support the information system of the pharmaceutical company for duration of seven years. But IBM was also committed to integrate in its own staff the 1,200 former employees of the Anglo Swedish company.1 As just mentioned, the impact will not only be apparent in the directly affected department, but also on others, which will also maybe have to reorganize their staff themselves. Finally, outsourcing support activities such as HR functions consists in fact in a collective empowerment of the people involved, and leaders would gain remember it.

7.3.4. Communication The project team should include in the project guidelines procedures related to confidentiality and internal communication, according to the sensitivity of the project. A communication strategy must be set up from the beginning of the project, in order to communicate the vision and the strategy of the outsourcing company and to avoid any confidentiality issue.

1

“L’externalisation à toute vapeur”, Frank Niedercorn, Les Echos, 2nd May 2001

92 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

We can distinguish three main communication strategies, with pros and cons for each approach: being transparent with employees from the beginning and along all the different phases; just informing employees that there will be an outsourcing operation but waiting until the negotiations are well under way; or hiding everything to employees until the deal is done and the contract signed. Each approach has its reasons for being according to its specific environment.

7.4. External Issues 7.4.1. Communication The outsourcing company, implementing an HR outsourcing project, has to plan an external communication strategy, in order to remedy in the end to the often very sensitive dimension of such an operation. Indeed, as we already mentioned it, a particularly critical issue is the selected period when to make the announcement: is it during the project phase and before the provider is selected, during the provider’s selection, or once the deal is done and the contract is signed. Moreover, the decision to outsource and the name of the selected provider should be announced to the press after announced internally to employees, or at the limit simultaneously. Announcement and information to some other stakeholders has to be carefully managed: government, stockholders, and the outsourcing company’s clients.

7.4.2. Provider’s selection issues The decision to deal with one or another provider is absolutely crucial, as the reversibility of this particular choice will be very difficult to consider in the future.

93 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

A] Three different selection processes There are mainly three ways to identify one’s best choice, which differentiate from one another, according to the number of providers on the market: • The ordinary invitation to tender (all potential providers of the market are in demand); • The invitation to tender with preselections (a small number only of providers are in demand); • The direct selection (only one single provider is in demand).

a) The ordinary invitation to tender This approach, which implies concretely an RFP (Request For Proposal) process, is actually being largely applied. Indeed, a study1 dealing with IT outsourcing in the U.K. revealed that two thirds of the surveyed companies used it to make up their mind. In the case of logistics outsourcing, the proportion is even greater2, as three quarters of the outsourced companies used this method. It seems indeed that this approach combines two main advantages, which are obtaining the lowest prices on the market, and reaching at the same time propositions of a good quality. It is also called a competitive procurement process. To do a good competitive procurement, the outsourcing company will need to understand the scope of what it want to outsource and document its requirements as part of the RFP. The RFP should clearly describe what it wants the provider to do, any assumptions that it wants the provider to make, and give a clear timeline. The RFP should be structured in such a way that it will be relatively easy for the outsourcing company to compare the proposals from each provider. The pricing proposed by the provider, in particular, should be

1

2

The maturing of outsourcing, KPMG Research Report, 1997 Chaîne logistique globale: l’externalisation en marche? Etude sur l’externalisation de la chaîne

logistique globale dans les entreprises industrielles en France, Logistique et Management, 1996

94 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

broken down to a level that makes "apples to apples" comparisons possible.1 However, if it is quite easy to evaluate prices according to the market, the quality is a lot harder to define in strict terms. In fact, in spite of its theoretical efficiency, one shall draw the attention on two limits as far as the ordinary invitation to tender is concerned: the longest process period and the low attractiveness for potential providers. As this method implies that all providers of the market should be in demand, it takes a long time to manage the perusal that brings to the decision. Moreover providers investing themselves in such an invitation to tender consider this method as being less interesting as the competition is the largest; as a consequence, some providers simply ignore this kind of selection process to concentrate on the two others, and this situation sometimes strongly weakens its impetus need of competition. In the end, to maximize the use of this technique2, the invitation to tender must be as clear as possible, as precise as possible; it must let enough time for candidates to return their proposition and assure direct contacts with decisionmakers.

b) The invitation to tender with preselections This approach is intermediate between the ordinary invitation to tender described above and the direct selection described later on. The only actual difference with the first approach is the suggested preselection. In other words, both processes are exactly the same, but in this case, one will have to deal with fewer candidates. Advantages for companies willing to outsource are: less applications to assess, a more attractive process to provider’s point of view (as competition is more acceptable) and a low influence information broadcast as far as the outsourcing project is concerned.

1

“Common Problems, Legal and Otherwise With Outsourcing Deals and How to Avoid Them”,

Attorney at Shaw Pittman, 2003, http://www.chiefofficer.com/particle.php?t=25 2

Strategic Outsourcing, Maurice F. Greaver, Amacom, December 1998

95 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

The main advantage for candidates is that they consider the challenge valuable, as they were already selected by the client-company. They may not win the business, but their investment returning the invitation to tender is optimized anyway. Finally, one can underline the fact that this option is less expensive and equally efficient to the previous one in surrounding its future partner. Moreover, as this option involved fewer actors, it is all the more possible to make it more complex in order to get the most obvious results.

c) The direct provider’s selection This last approach consists in selecting one single provider to be in demand for the invitation to tender. The main advantage of such a method lies in its cost. On the other hand, there are no guarantees concerning the reliability of such an option; the whole success of that kind of approach entirely relies on the quality of the information at the disposal of the outsourcing company. In fact, the outsourcing company must have good reasons to focus on only one provider, such as former partnership or any other strategic pressure. Sole sourcing approaches are common in case of requirement of a very strong buyer-service provider relationship due to a lack of competition.

B] The selection criteria First of all, the spontaneous criteria are economical and technical ones, such as price, performance, flexibility, and capacity in helping transferred staff to integrate their new structure. If these criteria are obviously particularly decisive, one should not ignore more general criteria such as financial stability, revenue, balance sheet and income statements, banking references or even the notoriety of the providers as well as the professional references of the particular persons representing the candidate. Following, two non-exhaustive lists of objective and subjective criteria

96 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

thanks to Maurice F. Greaver1: • Good reputation; • Satisfaction of current clients; • Financial stability; • Good managerial competencies; • Problem-solving method implying the client-partner; • Permanent wish of improvement; • Strong experience as far as staff and equipment transfer are concerned; • Commitment to invest in specific assets for its client-partner. The subjective suggested criteria above are all dealing with the suitability between the client and the provider: • Trustful and respectful of confidentiality; • Constructive general behavior; • Suitability between interacting corporate cultures; • Flexibility and ability to change; • Willingness to share expertise; • Clear vision of the market.

7.4.3. Assets transfer The transfer of activities to the provider typically includes some or all of the following2: • The transfer to the provider of client’s assets used to manage and facilitate the business function, such as facilities and business

1

Strategic Outsourcing, Maurice F. Greaver, Amacom, December 1998

2

Business Process Outsourcing, Process, Strategies and Contracts, John K. Halvey and Barbara Murphy

Melby, John Wiley & Sons, Inc., 2000, p 51

97 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

equipment, and other related tangible assets; • The assignment or license to the provider of proprietary methodologies or technologies used by the client in connection with its business function operations; • The assignment or sublicense to the provider of any third-party methodologies previously used by the client in connection with its business function operations; • The transfer to the provider of all or a significant portion of the client’s employees previously involved in the internally managed business function operations to the customer’s organization.

A] Assets leasing As we saw in 1.2.1.A], when the outsourcing company does not want to transfer its assets to the provider, it can choose to simply lease them.

B] Equipment transfer Many outsourcing deals lead to equipment sale from the outsourcing company to the provider, in exchange for payment or reduction in annual fees. The parties have to assess the most favorable means to transfer these assets on a site-by-site basis (to minimize tax and regulations weight). They will need to negotiate a purchase and sale agreement. As we will further develop in 8.3.2.K], the contract should include a clause for intellectual property protection, what could be critical in the case of assets transfers in general and equipment transfers in particular.

C] Staff transfer Three different possibilities are possible for the outsourcing company concerning its staff when it outsources its HR activities: • Find other opportunities inside the company for displaced employees; 98 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

• Try to transfer the greatest number possible to the provider; • Find opportunities outside the company (outplacement).

a) Transfer perception The only difficulty with transferring equipment is the evaluation of its value. On the contrary, staff transfer is a lot more complex. Staff transfer is, during an outsourcing operation, often felt by the concerned collaborators as being a staff failure. Moreover, if on the one hand they surely feel betrayed by the outsourcing company, they also feel insecure as far as their future business environment is concerned, as well as their future carrier, salary, perks, etc. In fact, most of them did not participate in choosing this particular provider or they did not even know it existed. Collaborators were used to identify themselves to a particular product, brand or culture, and they are now asked to focus on their profession and to redefine their points of reference in this new environment. Even while, in the long term, they will most of them benefit from such a transfer, it is still often felt like a tangible traumatism that companies must necessarily cope with.1 Moreover, as Alison Humphries, Director of BNB (Barkers Norman Broadbent) Outsourcing says: “Nor need HR staff being transferred to another company necessarily feel they are being dumped”. In her experience, employers putting out to tender are usually keen to ensure that the provider can offer outgoing staff with good career development opportunities. Indeed, as Michelle Walker, Personnel Services Director Rebus HR Services, underlines: “My staff act more as consultants, which gives them the chance to become much mire rounded in their skills. And when they choose to progress, their CVs will be much more broader as a result.” Finally, in any outsourcing operation, just as in any other business operation, people make the difference; and one cannot, on no account,

1

“Le délicat volet social de l’externalisation”, Anne Galez-Rovan and Catherine Lévi, Les Echos, 26th

October 1999, pp 47-48

99 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

leave aside the particularly touchy staff transfer problematic. The whole success of an outsourcing operation largely depends on the staff transfer successful outcome.

b) Staff transfer: a good bargain For the staff, it is most of the time a great opportunity to be transferred in a company that have for core business the profession it is specialized in. In other words, the provider will be much more armed to take the biggest advantage of its staff’s skills and to develop them. As it is part of its core business, the outsourcer management team has for prior mission to improve the productivity of its capital that is to say of its staff. Outsourcers offer in most cases better career opportunities. As

emphasized

by

Alison

Humphries:

“It

provides

much

greater

opportunities. With an outsourcing partner, the role of HR professionals becomes central rather than peripheral. Instead of being regarded as being of doubtful value they will find themselves an essential fee-earning part of their business.” It is easier for transferred employees to change job inside the core business or to be promoted inside the profession; it can give them the opportunity to work with several different clients on projects that are up to their skills and it also allows them more geographical flexibility, national as international wide. We are convinced that if HR outsourcing keeps growing, as expected, HR professionals will be less likely to follow careers in companies operating in other sectors; they will be employed by HR outsourcing providers, handling a range of different accounts.

7.5. Factors determining the success

100 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

According to the Saratoga Institute1, there are six leading indicators for successful HR restructuring that have been identified by twenty-six Top Companies, which had recently undergone significant restructuring: planning, business focus, communication, teamwork, commitment, and benchmarking. Indeed, these factors are determining the success or failure of an outsourcing operation, as we saw previously. According to Mark Lifter2, predictors of success are “adequate diligence, effective communications, and agreement between the employer and provider regarding performance levels and roles”.

7.6. Problems Likely To Occur In less than 5% of the cases, during the quarter before the forecasted starting date of its services, the provider might postpone this starting date, either because it is unable to meet contracted quality expectations or because it cannot respects contracted tariffs. This situation results from a lack of attention of both parties considering abilities to face the real ambition of the project and the needed level of excellence.

1

Restructuring the Human Resource Department, objectives, methods, trends, Saratoga Institute,

American Management Association Special Reports, 1997 2

The Beat Goes On: Outsourcing Your Human Resource, Knowledge@Wharton in collaboration with

Aon Corporation, AON Human Capital Consulting, p 5

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Chapter 8. Legal Aspects Of A Human Resources Outsourcing Operation Outsourcing operations have a lot to do with complex legal issues, and of course especially when the contractual aspects arise. That is mainly the reason why companies have to appeal to legal professionals. They can just be the internal legal staff, as many large companies expect that internal legal professionals must stamp all contracts involving transactions from a certain amount. Moreover, the legal support may also consist in a law-firm or any independent attorney specialized in outsourcing cases. This legal support has in fact two very important roles to fulfill: • Actively participating to the whole outsourcing implementation process; • Negotiating as the company’s spokesman all the contractual details and framework of the deal.

8.1. Outsourcing Legal Actors 8.1.1. Legal professional As we saw before, implementing an HR outsourcing solution is managed like any other project. It is indeed crucial to gather appropriate profiles to be part of the leading team. One of the profiles must correspond to a legal professional, with experience in outsourcing contracts, and if possible especially with HR functions outsourcing contracts. The legal professional in the team should not have a leading position but has to be part of all operation stages, from the decision motivation to the board, until at least the beginning of the HR functions outsourcing first effects, as it will then be able to assess the legal risks following such an HR outsourcing operation. 102 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

8.1.2. Outsourcing negotiator In all kinds of negotiation situations, conflicts must arise whatever precautions were taken, but the negotiator can help obtaining a fair contract (see 8.3.1.) that will anticipate as much as possible the likely occurrence over the term and anticipate with a process to resolve disputes. It will also lead the whole negotiation process, that is to say a “give and take” process. The outsourcing company must not forget that the deal must be built on business value and desired outcomes. In the particular case of HR outsourcing, the negotiation opponent is likely to be soon one of the most important business partners, a partner absolutely necessary to the good functioning of the company’s business. That is mainly the reason why companies will have made the negotiations by a third-party. It can be a businessperson or most of the time a legal professional team, as they surely best fit to the job. In fact, legal professionals who are moreover quite used to it will exclusively share all negative feelings that could be given off conflicts during negotiations. It is very important that conflicts with future partners do not get personal; conflict is part of the game, but one should not let it have too much useless impact.

8.2. Legal Framework 8.2.1. Governing law Because laws can be different from one country to another or even from a state to another (like in the U.S. or within Europe), effects can be different according to the chosen governing law, and it is always better to agree on one before the conflict arise (national, federal, state or local). All the future outsourcing relationship management will depend on this choice.

103 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

8.2.2. Relocation of service locations Some countries expect the outsourcing company to get a government consent and approval (or sometimes just to notify it), before to relocate any service outside its borders. In some cases, the government can even impose to keep a service location in its country. We can divide the countries into four categories1: • Countries where approval from a regulatory agency is necessary prior to the provider taking over business process operations; • Countries where approval from a regulatory agency is necessary prior to migrating business process operations to a provider site; • Countries where notice – either formal or informal – is necessary: this category can be further divided into two subcategories in order to reflect whether notice is required prior to the provider taking over business process operations or whether notice can be given afterwards; • The fourth category is for those countries where no action is necessary. The main issue is that if authorities are not cooperative, the entire operation can be delayed or even cancelled.

8.2.3. Staff transfer The provider might be required to make offers of employment to parts or all the outsourcing company’s staff, and that certainly determines the success of the outsourcing company’s decision to outsource. The terms and conditions of employment (employee transitioning,

1

Business Process Outsourcing, Process, Strategies and Contracts, John K. Halvey and Barbara Murphy

Melby, John Wiley & Sons, Inc., 2000, p 124

104 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

schedule for employee communications, contract-related issues, administrative and financial responsibilities, etc.) for the client’s employees is often one of the most heavily negotiated and regulated provisions of the contract. As a general way, the legal framework of such a transfer represents only a minimum protection for collaborators, concerning especially pension plans, severance payments, termination notice requirements, and union rights for example. As a consequence, if companies want to be successful, they must absolutely go way beyond the strict minimum legal expectations, whatever the legal environment is. Managing the issues associated with staff transfers will be a key issue, particularly given the HR expertise of the employees involved. The legal procedures are very heavy and take quite a long time; many brilliant elements will just leave the company even before the transfer is over. It is all the more necessary to work on a fair plan, as the staff motivation is the key to the success. One does not want transferred staff that feels it has been sold with furniture.1 Both companies have to organize the transfer in a transition period, in order to help the concerned staff to evacuate worries linked to this situation. They must accompany the staff with waving their former company goodbye and with their integration in their new professional environment. The outsourcing company may even follow the transferred staff situation a long period after the deal, by expecting from the outsourcer regular quantitative as well as qualitative information. In this case, it is nevertheless very important not to go too far, and slow down the integration process of the staff into the outsourcer’s organization. Finally, one of the most important aspects in managing such a transfer is the communication policy. The more transparent and clear the management communication will be, the more constructive will be the debates. The faster problems or doubt arise, the faster solutions or answers are found. Whatever your ambitions are, when you manage a project, there is nothing more armful

1

Dictionnaire de l’infogérance, Pierre Laigle, Hermès Science Publication, 2000

105 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

than a misunderstanding purpose. Whatever the true reality is, imagination is always more dangerous in such a case. No matter if one outsource outside or inside the E.U., if the depart point is in the E.U., and if there is any staff transfer planned in the HR outsourcing deal, the E.U. regulation will be effective (knowing that the deal can exclude any staff transfer).

A] European context In Europe, staff transfer within the E.U. is regulated by the Acquired Rights Directive (2001/23/EC1) Council Directive, of the 12th March 2001. This Directive, coming in effect the 12th april 2001, abrogates all the disposals of the 1977 (77/187/EC2) and 1998 (98/50/EC3) Directives and codifies the reconciliation of E.U. members regulations concerning the preservation of the employees’ rights in case of company transfer. This Directive, its local implementing legislation and Work Council regulations will dictate whether the customer’s existing HR staff will transfer to the service provider and oblige the new service provider to continue the employment of the concerned employees. It includes specific notice, authorization, and consent requirements. As far as the transfer of employees is concerned, E.U., as national regulations in general, tends to protect employees against the hidden restructuring operations by selling an economically independent activity of a company and by avoiding this way all negative publicity and heavy procedure related to such an operation. Although people transfer in an outsourcing context do not particularly aim social restructuring, most European national and supranational regulations tend to assimilate however those transfers to a new kind of restructuring operation.

1

2

http://europa.eu.int/eur-lex/pri/en/oj/dat/2001/l_082/l_08220010322en00160020.pdf http://europa.eu.int/smartapi/cgi/sga_doc?smartapi!celexapi!prod!CELEXnumdoc&lg=EN&numdoc

=31977L0187&model=guichett 3

http://europa.eu.int/eur-lex/pri/en/oj/dat/1998/l_201/l_20119980717en00880092.pdf

106 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

If the outsourcing deal is done from E.U. to outside of the E.U., in India for example, this protection (apart from information and consultation before the transfer) does not apply.

B] French context a) Individual transfer In this case, each transferred collaborator agrees to break off his work contract to sign a new one with the providing company.

b) Collective transfer 1 In this case, the outsourcing company and the providing company negotiate the staff transfer according to the French Labor Code, Article L. 122.12 and following. If a compromise is found between the two parties, the whole staff has to be transferred to the providing company. If this one does not want to integrate all associates, it will have to entirely assume and take care of the dismissal procedures and severance pays. If some collaborators do not want to be transferred, the providing company will automatically make them redundant. The social legislation (Art L 122.12) implies for the outsourcing company2: • Prior information and consultation, working contracts transfer, and collective conventions alignment; • Continuous information; • Transfer preparation, to detect reluctant aspects and establish guarantees; • Give value to professional advantages for the employees: career opportunities, training, and employment security;

1

Droit du Travail, Droit Vivant, Jean-Emmanuel Ray, Edition Liaisons, 2001, pp 208-213

2

“7 conseils pour… réussir une demarche d’externalisation”, Dominique Genelot, INSEP CONSULTING,

November 2002

107 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

• Change

management

help:

cultural

adaptation,

identity

transformation, practical organization, etc. The consequences for collaborators, as far as the transfer of their work contract is concerned, are: • The standing by of individual advantages, that is to say everything related to status, remuneration, seniority and position; • On a collective scale, the standing by of the former industry-wide collective labor agreements during fifteen months; • The possibility to be transferred again if the outsourcing company changes its provider, and to reintegrate it if it finally insources the activity back. This law seems nevertheless not always applicable to outsourcing operation, as it is subject to three necessary conditions that are: • The existence of an autonomous economical entity; • The transfer of the whole entity; • The standing by of the entity after the transfer.

C] English context The TUPE (Transfer of Undertakings Protection of Employment) regulates the employees’ transfers in the U.K. since 1981. The purpose is to protect the rights of employees where there is a transfer of undertakings of their work to a new employer.1

8.2.4. Dispute resolution A] Informal dispute resolution Most of the time, the contract includes a provision on informal dispute resolution methodologies, as an outsourcing operation often give rise to

1

The Challenge of Outsourcing Human Resources, Sally Vanson, Chandos Publishing, 2001, pp 181-188

108 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

operational disputes.

B] Formal dispute resolution This informal methodology can sometimes not be sufficient. To prevent this to occur, parties should agree before to conclude the outsourcing deal, on a formal dispute resolution: mediation or arbitration procedures if applicable for example. As just mentioned, these kind of resolution will only be possible for businesses disputes, but not for problems regulated by the law, such as staff transfer for example.

8.2.5. Data issues In the context of technological advances in the communication and data savings area, of always more globalization, and of more and more outsourcing of HR activities of large businesses in Europe, it is important (and the E.U. Commission stated it1) that data protection laws do not differ anymore from one jurisdiction to another. It is for the moment still the case. E.U. members have different processing of medical data, different drug and genetic testings legislations, etc. The practice regarding this issue is diverse and can be incredibly complex. Even while there are already two E.U. Directives, they are too general, and E.U. Commission works on it at the European level, suggesting a new European framework of principles and rules, building on those already existing, developed later. Finally, the outsourcing company must ensure that its organization is in position to comply with its obligations under the relevant data protection legislation, and the contract need to contain detailed provisions relating to the provider’s handling of data, including its rights to monitor the provider’s compliance with these obligations.

A] International data flow

1

http://www.eiro.eurofound.eu.int/2002/11/feature/EU0211206F.html

109 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

Countries generally impose restrictions on transborder data flow, which needs to be taken into account, as HR outsourcing implies new and different data flows, and maybe new governmental permissions. Most of the E.U. countries have general legislation on the processing of personal data and the free movement of data.1

B] Data security Concerning the outsourcing company’s data security, countries ensure the protection through more or less strong regulations. Indeed, several countries: • Impose minimal security measures (access code for example); • Require or prohibit encryption; • Prohibit all third-party access to certain types of data. As the E.U. Commission states2, most E.U. members do not have specific legislation concerning the protection of employees’ data.

C] E.U. Directives The E.U. Commission states3 that there are two Directives regulating the processing of personal data: • The Directive concerning the protection of individuals with regard to the processing of personal data and the free movement of such data (95/46/EC4) of the European Parliament and of the Council (24 October 1995), requires Member States to ensure the rights and freedoms of natural persons with regard to the processing of personal data, and in particular their right to

1

http://www.eiro.eurofound.eu.int/2002/11/feature/EU0211206F.html

2

http://www.eiro.eurofound.eu.int/2002/11/feature/EU0211206F.html

3

http://www.eiro.eurofound.eu.int/2002/11/feature/EU0211206F.html

4

http://europa.eu.int/smartapi/cgi/sga_doc?smartapi!celexapi!prod!CELEXnumdoc&lg=EN&numdoc

=31995L0046&model=guichett

110 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

privacy, in order to ensure the free flow of personal data in the Community; • The Directive concerning the processing of personal data and the protection

of

privacy

in

the

telecommunications

sector

(97/66/EC1). This Directive provides for the harmonization of the provisions of the Member States required to ensure an equivalent level of protection of fundamental rights and freedoms, and in particular the right to privacy, with respect to the processing of personal data in the telecommunications sector and to ensure the free movement of such data and of telecommunications equipment and services in the Community. These Directives are very general and without enough precisions on their application to the workplace. That is the reason why the E.U. Commission is working on data protection, to protect both employers and employees, in the form of a statutory instrument or a social partner’s agreement.2

8.3. Outsourcing Contracts A particular attention must be given to the structure of the outsourcing contract for the viability of the deal, as it will be used in the event of a dispute between the parties. Most of the time, providers propose their standard and prepared contract, and are unwilling to change it. But the outsourcing company must refuse this contract, as each outsourcing process and conditions are different, and make its project team negotiate and work closely with the provider to elaborate a new and singular contract. It is particularly the case with HR outsourcing contracts, as earlier seen in this thesis HR services are necessary tailor-made. Indeed, even if the tools are quite universal, and economies of scales made unquestionably possible, any company would expect its HR services to be

1

http://europa.eu.int/eur-lex/pri/en/oj/dat/1998/l_024/l_02419980130en00010008.pdf

2

http://www.eiro.eurofound.eu.int/2002/11/feature/EU0211206F.html

111 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

performed in accordance with its own and singular corporate strategy.

8.3.1. Overview Numerous outsourcing contracts are set up from an insourcing situation. In other words, most of the time, companies are outsourcing activities that they used to manage internally. As a consequence, a very important aspect of the contract deals with staff and equipment transfer. The most common form of outsourcing contract involves the transfer of control and ownership of all or part of HR functions to the provider. In return, the outsourcing company agrees to compensate the provider according to a negotiated fee schedule. The contract will accurately record each party’s rights and responsibilities at any given time during its term. Given the wide variety of business issues and the many different legal disciplines involved in even the easiest form of outsourcing transaction, it should come as no surprise that one of the most difficult stages of an outsourcing transaction is drafting and negotiating the contract, which can be simply distilled in five basic issues that must be considered and addressed by the parties1: “What is it?”, “Who does it?”, “Who owns it?”, “How much is paid for it?”, and “What happens if it is not done?”. If, at the end of the contract negotiation process, the parties are confident that these five issues have been fairly and comprehensively addressed, it is likely that the relationship between the parties will survive the inevitable day-to-day disputes that arise in complex contractual relationships, and hopefully, flourish as methodologies and technology advance. It is important to note at this point that a fair contract is not one that is necessarily ideal from either party’s perspective. A negotiation with respect to an outsourcing arrangement is not one that either party should be willing to win. A fair contract may well be one that requires both parties to perform in a

1

Business Process Outsourcing, Process, Strategies and Contracts, John K. Halvey and Barbara Murphy

Melby, John Wiley & Sons, Inc., 2000, p 52

112 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

way that will not result in optimal economic performance, but more likely in an optimal balanced economic performance. Similarly, there is no bright line for determining

when

comprehensiveness

a is

contract too

is

subjective.

sufficiently A

contract

comprehensive, that

might

as

seem

comprehensive for one organization could be, in the eyes of another organization, considered insufficiently detailed.

8.3.2. Key contract issues 1 A] Structure of the agreement The requirements of a contract for the outsourcing of a company’s global HR will have a different order of complexity to a contract for a limited number of HR processes in a single jurisdiction. Depending on the complexity and variety of services and countries involved, it may be necessary and clearer that the contract contains a multiple-agreement including different contract structures (one contract for each process or each country for example). The structure of the contract is crucial to motivate service providers to deliver and create value-added.

B] Scope of services To avoid future problems, the contract must include the most exhaustive detailed list of HR services to be provided.

C] Service level agreements It is necessary to mention the level of HR service expected, as it will allow the outsourcing company to monitor the provider performance, and to check the contract compliance or non-compliance. These agreements describe the level of HR services expected, as far as, for example, response time, delivery

1

Inspired from Business Process Outsourcing, Process, Strategies and Contracts, John K. Halvey and

Barbara Murphy Melby, John Wiley & Sons, Inc., 2000, pp 53-66

113 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

requirements, reporting requirements, users satisfaction, and even cost reductions, are concerned. To establish these levels, it is preferable to measure, if the function was insourced before, the existing service levels achieved by the HR activity prior to the outsourcing operation. It is also very useful to include in the contract some benchmarking provisions in order to compare the provider’s performance and the costs associated with the services on a periodic basis against an appropriate external benchmark. Concerning the users satisfaction all aspects must be described, from the number of persons to be surveyed to the content of the survey. Some provisions must absolutely be taken in the contract mentioning damages applicable if any service level failure occurs, in comparison with the service level and performance agreed; a provision that will force changes in the service levels, in case of underperforming.

D] Term/Effective date The duration of the contract term, as much as the effective date reference (beginning of the provider’s control on outsourcing company’s operations) are also very important, and the contract should include renewal options and conditions, if any.

E] Transition Parties should include in the contract, to avoid any misunderstanding from the beginning, some details concerning the transition plan, that is to say of deadlines and methods planned to transfer operations, assets and staff to the provider, of parallel operating environments (duplication) and planned testing for example. As explained in the legal framework part, transfers are regulated and must be operated very carefully.

114 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

F] Staff transfer The contract could specify any obligation for the provider concerning the business process staff, knowing that, as it has been developed in the legal framework part, regulations are very restrictive and the subject is very sensitive in Europe. Moreover, parties can decide whether the provider must hire the former team or not, and the contract must for this reason mention the nature of the provider’s obligation in respect to these employees.

G] Assets transfer This second kind of transfer is also critical, as it can allow the outsourcing company to get cash rapidly. For this transfer, a purchase or sale agreement must be established, but it should be mentioned in the contract by security.

H] Integration of methodologies/technologies Both the outsourcing company and the provider must specify if there is any IT-failure to be solved for them to be compatible as far as technologies are concerned. Concerning the methodology, the outsourcing company should notify whether it wants the provider to apply its own standards and methodologies. It can also be required the writing of a management procedure manual for example.

I] Roles and responsibilities The

outsourcing

company

may

wish

to

retain

certain

critical

responsibilities, and on the other hand may be obligated to provide certain assets or services. It is essential to define the different roles and responsibilities in the contract.

115 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

J] Governing agreement 1 As seen earlier, instability, inequity or mistrust are dangerous to an outsourcing agreement. It is for this reason more than advisable to include in the outsourcing contract a governance agreement that will state how the parties desire to manage their relationships over the long term and design responsibilities as it: • Reflects the components of how parties will interact and communicate at various levels of the organization, handle changing business requirements and new objectives, strategically plan for the future and continuously improve the value they wish to achieve through their relationships; • Establishes how the parties will work together on an ongoing basis at the level beyond day-to-day operations and metrics; • Governs

the

parties’

attitudes

and

reactions,

preventing

misaligned attitudes from governing the relationship, when challenges occur.

K] Intellectual property 2 As a general matter, the contract should include provisions with respect to the ownership of HR processes for instance, to the right to use of each parties, and to any other intellectual property assigned or licensed to the provider or used by the provider in order to provide the ordered HR services to the client (methodologies, tools, software, patents, inventions, trademarks, etc.). It should indeed be clearly specified the respective proprietary rights of the provider and its client.

L] Confidential information

1

Governing Attitudes: 12 Best Practices in Managing Outsourcing Relationships, Kathleen Goolsby,

Outsourcing Center, May 2002 2

Business Process Outsourcing, Process, Strategies and Contracts, John K. Halvey and Barbara Murphy

Melby, John Wiley & Sons, Inc., 2000, p 59

116 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

In this particular case of HR outsourcing, the provider will necessarily access to very confidential information, such as personal data on the outsourcing

company’s

employees,

but

also

data

on

know-how,

methodologies and technologies, strategic plans, and a lot more. Similarly, the outsourcing

company

will

also

access

to

the

provider’s

know-how,

methodologies, and technologies. For this reason, the contract should protect and secure the confidentiality of each party’s data and information.

M] Data flow The legal framework of transborder data flow has already been described in 8.2.5., but the outsourcing company should re-mention it in the contract to minimize risks. Too many details seem to be always better than too few.

N] Data security To the same extent, the legal framework of data security has been developed in 8.2.5., but it is more secure to re-mention this issue in the contract as well.

O] Reports and documentation All reports expected by the outsourcing company must be defined in the contract, specifying their delivery times.

P] Pricing / Method of payment The way the fees (fixed and/or rate-based for example) are determined and will be paid must also be defined and made clear in the contract. A provision that will force changes in the service charges in case of overcharging should be included.

Q] Currency risk The contract must also include the definition of the currency or currencies that will be used for the payments just evoked. Indeed, except if both the 117 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

provider and the outsourcing company stay in the same economical area such as E.U., this selected currency is subject to exchange rates fluctuations. This leads to possible discussions, as only one party will support the risk.

R] Taxes Because the tax liability imposed on an HR outsourcing operation can be very heavy, both parties should assess the tax exposure. In the contract, they can decide the allocation of responsibility for taxes (VAT, service, sales) on a country-by-country basis for example.

S] Audit An eventual wish of internal or external audit to audit the services or the fees charged will be addressed and assessed in the contract.

T] Business variability If the term of the contract is long, it must be considered possible variabilities in the outsourcing company’s business, or in the provider’s business. To limit the damages, parties should include in the contract flexibility and clauses (agreements) to allow this potential variability, such as termination clause as it will be developed later, or renegotiation right for example. There should be no "Assumptions" in the final agreement. "Assumptions" are providers’ codes for "If this doesn't turn out to be true, the price will change." Any assumption should be discussed in detail and the impact to the price or services of variations in that assumption should be clearly documented.1

U] Governing law As explained in 8.2.1., it is necessary to mention the governing law chosen in the contract, in order to manage any future potential problems.

1

“Common Problems, Legal and Otherwise With Outsourcing Deals and How to Avoid Them”,

Attorney at Shaw Pittman, 2003, http://www.chiefofficer.com/particle.php?t=25

118 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

Moreover, the contract should include a clause mentioning how changes in laws and regulations will be handled (which party is responsible for it, which party pays, what will happen if the change prohibits some processes of the outsourced operation, etc.).

V] Dispute resolution As seen in 8.2.4., it is advisable to include in the contract an informal dispute resolution process. On the other hand, parties should also add a formal dispute resolution: mediation or arbitration procedures if applicable for example. As just mentioned, these kinds of resolution will only be possible for businesses disputes, but not on problems regulated by the social law, such as staff transfer regulations.

W] Indemnities It is also advisable to add an indemnification clause to prevent potential property damage, personal injuries, security violations, intellectual property infringement, or environmental claims that might occur.

X] Termination The contract should finally include all cases by which each party may terminate the agreement according to certain events (termination for convenience, for change of control, for cause, for failing to meet service levels, etc.). It is also useful to define the way dispute will be resolved (applicable fees, currency chosen, etc.). According to a Gartner Group Outsourcing Study & Report 19971, 25% of outsourcing contracts will have to be renegotiated or cancelled within 3 years. These key contract issues list is a non-exhaustive one, but all the main topics concerning HR outsourcing in Europe are covered.

1

http://www.dataquest.com

119 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

8.4. Problems Likely To Occur In 75% of the cases, during the year before the signature of the outsourcing contract, it may happen that the time negotiating the contract goes beyond what was initially expected. Moreover, lot of hidden costs can appear once the contract is signed, if the contract is not complete and not totally clear. Most of the time, traditional contracts are too rigid (fixed-prices for instance) and cannot be changed in consideration of the technological or activities changes, or of fast fluctuations of prices and performances on the market. As a result, deadlines and costs previsions might not be completely respected. It is indeed important to notice that contracting processes can reach almost 20% of the total annual costs of any outsourcing service, and a too long contracting process can endanger the good running of the whole project.

120 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

Chapter 9. Managing Outsourced Human Resources Activities 9.1. Elements To Keep Internally 9.1.1. Managerial activities The outsourcing company should necessarily keep in-house the strategic coordination of the outsourced activities and their control, as they are core to the outsourcing company’s business. The most important is that the HR overall responsibility stays inside the outsourcing company. In our opinion, companies of the future will outsource their whole HR department, except for both, on the one hand, HR activities that are mandatory in certain European countries and, on the other hand, activities that have for essence the strategic coordination with the whole company. As explained further, the piloting committee is a new organ that will take in charge the control of the outsourcing relation, and to some extent could even be outsourced to a third-party. The managerial function may stay the same; in fact, the only difference is that it does not own the resources it manages anymore. It does not manage throughout direct authority but throughout contractual relations. On the one hand, one can say that it may seem harder to do so, but on the other hand it is easier for the management to lead on effective results without having to take care of the day-to-day issues. In the end, the management team has three main activities to fulfill in order to assume their complete responsibility of the function: • Defining big orientation needs and priorities of the business; • Assuring the coordination with the business; • Taking strategic decision for the business.

9.1.2. Piloting committee 121 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

When activities are going to be outsourced, it is the client's job to make sure that the contract is done properly in order to increase the likelihood that the relationship will be a happy one.1 The piloting committee, one person or more (according to the size and the ambition of the project), is directly reporting to the management team described above. Its role consists in controlling the relation between the clientcompany and the provider. It regularly checks whether the contract fits to the needs or not, whether both parties respect the deal or not and constantly evaluates the performance of the outsourcing solution. It must be composed of people combining good knowledge of the company, good legal skills and excellent know-how in the field of Human Resources Management, but also assemble skills in legal, technical, finance, environmental, and of course business areas to be able to check and evaluate the performance in all these important matters. As just said, it could even be outsourced itself to a third-party specialist company. Dave Ulrich2, HRM editor, defines nine decisive actions, which the piloting committee should, according to us, make sure the provider performs: • Focusing on the service; • Emphasizing transparency as far as practices and their results are concerned; • Encouraging HR business-partner approaches; • Developing global HR tools and interfaces; • Increasing the knowledge it masters concerning its client; • Measuring the accurate HR impact on the whole business; • Managing various and flexible careers inside a single core competency;

1

“Common Problems, Legal and Otherwise With Outsourcing Deals and How to Avoid Them”,

Attorney at Shaw Pittman, 2003, http://www.chiefofficer.com/particle.php?t=25 2

Dave Ulrich, Human Resource Management, Volume 36, Number 1, Spring 1997

122 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

• Mastering the knowledge of the company’s business and its environment; • Investing in always more human capital management asset.

9.2. Required Skills In the end, to maximize its chances to build a successful outsourcing operation, the company has to make absolutely sure that it has the following competencies at its disposal.

9.2.1. Strategic vision skills These skills allow defining which outsourcing strategy would best serve the competitive advantage of the company.

9.2.2. Outsourcing implementation skills These skills allow making sure that the provider does its job the way it announced it would do it.

9.2.3. Influencing and conflict management skills These skills are very important as well, as they imply developing flexibility and credibility. As

David

Koch,

European

leader

for

HR

outsourcing

at

PricewaterhouseCoopers, said: “You are establishing a partnership with the organization, not a service, so you will need a different kind of person, someone who is focused on managing relationships rather than handling transactions. It doesn’t take a lot of those sorts of people but it needs someone with clout.”1

9.2.4. Alliances management skills These skills make it possible to manage the relation with the different providers. The aim is to reach a win-win situation, even more than an

1

“Change Management”, Personnel Today, 18th April 2000

123 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

unbalanced particularly winning situation.

9.2.5. Change management skills Outsourcing implies strong operational changes for companies, and that is mainly the reason why it is important and surely decisive to have internal excellent change management skills, especially in order to help collaborators facing their new environment.

9.2.6. Social capital development skills 1 It order to make a HR outsourcing operation work on a long-term basis, it seems that social capital development would be very useful. Developing social capital consists in fact in favoring people connections, enabling trust and fostering cooperation. As an example both companies should think of incentives that workers could enjoy together (and not alone and outside the company), and when possible mixing both employees of the provider and the outsourcing company.

9.3. Other Solutions To Keep Control Aside the contract, other structural mechanisms allow a certain control on the outsourced operation.

9.3.1. Transfer of specific assets If the client-company transfers particularly specific assets to the provider as part of the deal, and if those specific assets are being hard to standardize for the need of other deals with other client-companies, thereby the exclusive client-company gain a big influence on the provider. In fact, most of the time, the provider accepts only assets that can often be standardized. But it is always

1

“How to invest in social capital”, Laurence Prusak (Executive Director IBM Institute for Knowledge

Management) and Don Cohen, Harvard Business Review, June 2001, pp 86-93

124 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

useful to know the exact implicit power one has on the provider in order to have done what exactly needs to be done.

9.3.2. Spin-off structure 1 Of course, as already seen, the solution of creating a spin-off allows the company to keep quite an entire control on the service. There might indeed be a contract between the two organizations, but it is nevertheless not of decisive value comparing to a strong common stakeholder.

On the other hand, it

seems that the spin-off solution does not offer the best performance results (unless the activity becomes a core business), as the same stakeholder will privilege the performance of its core competencies; that is to say, in the activities that have the best ROI.

9.3.3. Interest acquisition The acquisition of equity by the client-company in the company providing the outsourcing services is a good solution to have a control on it without being its main stakeholder; in other words, it gains influence but it is limited enough not to interfere with core business focusing investments.

9.4. Problems Likely To Occur 2 9.4.1. Bad start In 10% of the cases, during the six months before the forecasted starting date, it may happen that the transition period during which the two companies proceed to the transfer of assets from one to another is not enough well managed. Most of the time, they suffer from the loss of key-collaborators on the one hand and from the difficulty for the provider to build new efficient teams on the other hand.

1

“IT outsourcing: finding from an empirical survey in France and Germany”, Jérôme Barthélemy and

Dominique Geyer, European Management Journal, 2001 2

Dictionnaire de l’infogérance, Pierre Laigle, Hermès Science Publication, 2000

125 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

9.4.2. Maladapted services In 30% of the cases, during the first year of outsourcing, it may happen that the provider did not succeed in meeting contracted expectations. Most of the time, the client-company has to do the job simultaneously, which is really not a satisfying situation.

9.4.3. No respect of pricing In 20% of the cases, during the first year of outsourcing, pricing sometimes goes drifting off. When the provider has previously underestimated the prices of services, it does not take too much time to do pressure on the client-company in order to obtain a better deal; this has for sure a negative impact on financial forecasts.

9.4.4. No evolution perspectives In 50% of the cases, during the first three months, whereas the whole outsourcing operation seems to be a success, it appears that the possibilities of service evolution are very weak. In fact, the provider in this type of cases has a valuable know-how in a certain kind of service, but unfortunately it has hardly any possibility or will to focus on change management skills. In other words, it has a too stable or rigid service offer, whatever the price its clients would be ready to pay.

9.4.5. Overlapping legal framework An additional critical aspect is that while the former outsourcing company's employees would frequently go above and beyond the call of duty to make sure that problems are resolved and impact minimized, the provider’s employees do not necessarily have the incentive to do that, and so perceived client service degrades. Thereby, if the outsourcing company tries to get them to work harder by offering them some extra incentives such as stock-options, etc., it probably has destroyed that essential dividing line between the provider’s employees and them becoming its agents and employees in the 126 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

eyes of the law. At that point, of course the outsourcing company had better get ready to pay them the full package of fringe-benefits its regular employees get - and which it had hoped to not pay by outsourcing in the first place.1 As seen before in 5.3.1., illustrated by the law case opposing Vizcaino to Microsoft in the U.S.2, legal framework can sometimes overlap and even while the outsourcing contract is drafted, written, and implemented properly, not all legal HR issues can be easily anticipated. Insurance like the EPLI (Employer Practices Liability Insurances) for example, can therefore be purchased in certain countries, to add further security. This means allocating the risk to other parties, but still, the key is a proper management.

1

“Common Problems, Legal and Otherwise With Outsourcing Deals and How to Avoid Them”,

Attorney at Shaw Pittman, 2003, http://www.chiefofficer.com/particle.php?t=25 2

Vizcaino v. Microsoft Corp., 173F.3d713 (9th Cir 1999)

127 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

PART IV. CASE STUDIES After having understood how to define, position and implement HR outsourcing, we found it very useful to give a little overview of today’s best practices. We describe in the last part several business partnerships between HRO providers and HR outsourcing companies. In the end, we focused a little more on IBM’s case in Europe. A case that is quite indicative of the origin, the current evolution, and the promising future of the whole Human Resources outsourcing industry.

128 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

Chapter 10. Human

Resources

Outsourcing

Experienced Customers 10.1. Companies

That

Have

Outsourced

Their

Transactional Activities 10.1.1. Externally outsourced A] Credit Suisse First Boston Group a) Company overview Credit Suisse First Boston is the investment bank of Credit Suisse Group, which is a leading global financial services company headquartered in Zurich. It serves global institutional, corporate, government and individual clients in its role as a financial intermediary. Its around 73,000 employees operate in more than 69 locations across more than 34 countries on five continents.1

b) HR outsourcing deal Credit Suisse Boston decided to outsource most of its transactional HR functions, including employee record keeping, investment advisory work and pensions to its former benefits group, which spun off to form Black Mountain Management.

c) Results According to an AON’s report2, Credit Suisse First Boston estimates its savings at $115 million since 1994.

1

http://www.csfb.com/about_csfb/company_information/about_csg/index.shtml

2

The Beat Goes On: Outsourcing Your Human Resource, Knowledge@Wharton in collaboration with

Aon Corporation, AON Human Capital Consulting, 2002,p 5

129 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

B] Other

outsourcing

companies

that

applied

this

model British Telecom signed an outsourcing contract with Accenture HR Services. In 10 years, BT transformed its in-house HR capability from 14,500 people to under 650 HR Business Partners with HR transactional needs now provided by Accenture HR Services. “Our in-house Business Partners provide strategic HR input and facilitate the delivery of the world's-best people management

consistently across

the

company,"

said

Denis Reay,

BT

Wholesale's HR Director. “As a result, we have been able to achieve rapid organizational change and demonstrate that this commercial focus helps HR deliver real value to the bottom line. It is a fundamental part of our reputation as the employer of choice in our industry.”1 Telecom Italia signed with Accenture HR Services, a 7-years ($200 million) business process outsourcing agreement, under which Accenture will provide outsourced payroll processing and administration services to Telecom Italia.2

10.1.2. Internally outsourced through the shared services center model A] Global shared services Center example: Boeing a) Company overview The Boeing Company is the world's leading aerospace company, with its heritage mirroring the history of flight. It is the largest manufacturer of satellites, commercial jetliners and military aircraft. The company is also a global market leader in missile defense, human space flight and launch services. In terms of sales, Boeing is the largest U.S. exporter.3

1

http://www.accenture.com/xd/xd.asp?it=enweb&xd=services%5Chp%5Chrservices%5Ccase%5Chrs_bt.xml 2

http://www.accenture.com/xd/xd.asp?it=enweb&xd=_dyn%5Cdynamicpressrelease_560.xml

3

http://www.boeing.com/companyoffices/aboutus/brief.html

130 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

b) Implementation overview The Boeing Company1 implemented a new business unit called “The Shared Services Group”, providing the company’s other business units and World Headquarters with innovative and effective common services, which are: • Information Services (Computing resources, Telecommunications, E-commerce, Information-management security); • Facilities and Logistics Services (Transportation, Facilities); • Supplier Management and Procurement; • Safety, Health and Environmental Affairs; • Security and Fire Services; • Boeing Travel Management Company (Comprehensive Travel Services). And as far as HR functions are concerned: • Hiring; • Training; • Compensation and Benefits, Health and Retirement Benefits (1 million retires, dependents, inactive employees, and employees); • Employee programs: ~

Part-time opportunities;

~

Virtual offices (work from home or from other locations);

1

~

Educational opportunities;

~

Child and elder care referral programs;

~

On-site child-care and fitness centers;

~

Recreation clubs;

http://www.boeing.com

131 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

~

Employee discount;

~

Community involvement opportunities.

The Shared Services Group employs 18,600 employees worldwide. It is based in Bellevue, Washington, and has employees in forty-five U.S. cities, and six international cities. Concerning the HR Services provided, • On an average day, 16,129 hours of training is delivered to employees; • More than 35,000 employees, retirees and family members in the company’s 300-plus recreational clubs.

c) Results According to the Shared Services President1, the Boeing Company has successfully removed more than $1 billion from the infrastructure over the three years 1999, 2000 and 2001. They plan to make some more economies of scale, working on another $500 million in 2002, and at least $250 million more in 2003. If the Shared Services Group were a stand-alone company, it would rank in the top 300 on the 2001 Fortune 500 listing.

B] European shared services center example: DuPont Europe a) Company overview DuPont delivers science-based solutions that make real differences in people's lives around the world in areas such as food and nutrition, health care, apparel, safety and security, construction, electronics and transportation. It employs 79,000 workers, of which approximately half work outside the U.S., and

1

“The evolving Role of Managers and Leaders”, Laurette Koellner (Shared Services President), National

Management Association Boeing Space Coast Chapter, The Boeing Company, February 2002

132 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

operates in 70 countries worldwide, generating $24 billion revenue in 2002.1

b) Implementation overview DuPont Europe, for example, aligned and consolidated its HR services inhouse before outsourcing. 2 It created indeed a new business unit called “DuPont Global Services”3 that provides to internal businesses and external selected clients all over Europe from a single solution to integrated programs. These shared services centers, are available by phone and are organized into six divisions, each one focused on an expertise domain: • Asset Productivity Processes; • DuPont Consulting Solution; • Value Chain Processes; • Business Services; • Legal Services; • People Managing Processes. The last division, “People Managing Processes” offers: • Compensation and Benefits Consulting and Delivery; • People and Organizational Development Consulting; • Staffing and Relocation Services; • Work environment Services (Diversity, Work/life, Health and Personnel Relations).

1

http://eu.dupont.com/NASApp/dupontglobal/eu/index.jsp?page=/content/EU/en_US/overview/glance.html 2

The Beat Goes On: Outsourcing Your Human Resource, Knowledge@Wharton in collaboration with

Aon Corporation, AON Human Capital Consulting, p 4 3

http://eu.dupont.com

133 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

The People Managing Processes team is committed to creating unique HR offerings that will help clients’ employees to reach higher levels of productivity.

C] French shared services center: France Telecom a) Company overview France Telecom is the French national telephone company, with a worldwide headcount of 240,145 employees. It provides services to about 100 million customers within more than 20 different countries, especially in Europe. Finally, 41% of its revenue is generated outside the French borders.

b) Implementation overview France Telecom, decided in October 1999, through a project called “DRH demain”, to set up 10 HR platforms in France, hot lines dedicated to all questions connected with personnel management. Its goal was to decrease its HR staff-to-employee ratio. This one was in 2001 of 2.4%, as there are 2,900 HR employees for a total amount of 120,000 employees. The next step is to reduce it to 1.9%, without dismissing but by dividing up HR tasks between HRSC (HR Services centers and managers, and of course with the help of new technologies, as some HR processes are indeed directly provided on line).

c) Results This new organization led to strikes and discrepancies between direction and trade unions, as employees’ representatives argue that there is overwork, and a lack of HR employees. According to them, the quality of service is worse than before and the employees’ population is too “special” to operate the same ratio than in the private sector; indeed, 80% of them are civil servants.

D] Other

outsourcing

companies

that

applied

this

model

134 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

City Group Business1 Services set up three shared services centers in Europe, the Philippines and in the U.S. in 1997 to manage HR in the 92 countries in which it operates, with HR as a key component. “After twelve months the cost base was reduced by 30 percent with no loss of services or control”2 reports Leo Bartie, European Head of the company. In the early 20003, oil giant Shell has rejected the option of externally outsourcing its HR function and set up an HR shared services center in Europe, which includes HR expertise, diversity specialists, and transactional processes such as payroll services. “Shell People Services”, as it is called, employs 550 people globally, including 300 workers in Europe. Borden Chemical signed in 2003 a five-years HR outsourcing contract with Accenture HR Services will help Borden Chemical accelerate and improve the accuracy of the processing of its benefits eligibility and qualified life event management, annual benefits enrollment, and benefits payroll interface services. It will also provide Borden Chemical employees with access to a call center for payroll- and benefit-related questions and will administer Borden Chemical’s payroll processing activities, including administration and reporting, check processing and distribution, year-end processing, tax-filing services, and call center support.4 Thomson also implemented one different shared services center for each geographical area (Europe, Asia, America, etc.). Other large companies also applied this model, as Lockheed Martin, Warner Lambert, Hewlett-Packard, Sears, Usinor, etc.

1

“Oil giant flies the flag for keeping HR skills in-house”, Catriona Marchant, Personnel Today, 26th

September 2000 2

“Oil giant flies the flag for keeping HR skills in-house”, Catriona Marchant, Personnel Today, 26th

September 2000 3

“Oil giant flies the flag for keeping HR skills in-house”, Catriona Marchant, Personnel Today, 26th

September 2000 4

http://www.accenture.com/xd/xd.asp?it=enweb&xd=_dyn/dynamicpressrelease_563.xml

135 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

As noticed before, shared services centers are a good first step for companies that are looking to externally outsource.

10.2. A Company That Has Outsourced Some Of Its Human Resources Processes: Kellogg Foods 10.2.1. Company overview Kellogg Foods is the world's leading producer of cereal and a leading producer of convenience foods, including cookies, crackers, toaster pastries, cereal bars, frozen waffles, meat alternatives, pie crusts and cones based in Battle Creek, Michigan. Its products are manufactured in 19 countries and marketed in more than 160 countries around the world.1

10.2.2. HR outsourcing deal Kellogg Foods decided to outsource all its recruitment functions in 1999. Its goal was: • To reduce headhunter fees and improve efficiencies for the company; • To reduce the headcount and obtain better candidates; • To guarantee a flexible recruiting resources in order to answer the uncertain changing environment and hiring needs of the company. It decided to outsource the department (keeping the strategic aspects internally) to RES (Recruitment Enhancement Services, Houston), a division of Bernard Hodes Group.2 A team of RES recruiters works only for Kellogg; some of them are based in RES’ Houston Headquarters and some others are based in

1

http://www.kelloggs.com/company/

2

“How Outsourced Recruiting Saves Time and Money – and Gets Quality Hires”, HRFOCUS, September

2002

136 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

Kellogg’s HR department in Battle Creek. RES advertises open exempt jobs, handles all related recruiting work except for relocation, and uses Kellogg designs and standards for recruiting. The program also included an efficient maximization of recruiting and hiring program, thanks to the use of technologies. Kellogg implemented a Webbased recruitment management system, including online internal job posting and employee referral programs.

10.2.3. Outsourcing implementation results The outsourcing arrangement succeeds thanks to the strong partnership between Kellogg and RES, but Kellogg encountered resistance from hiring managers who preferred their outside agencies, and there were many calls for customizing features in the technology program that caused problems in implementation. Kellogg’s efforts to establish a more efficiency system with an outsourcing provider and with internal technologies are paying off. There are indeed savings in costs and time. The Director of Recruiting and Staffing at Kellogg1 announced at the 2002’s annual conference of the Society for HR Management in Philadelphia2 some of her outsourcing results. Outsourcing had in the end positive results for Kellogg: • The provider filled 52% of available jobs in 2000, and 96% in 2001; • Outside agency fees were $1,946,163 in 2000 and 202 jobs were filled. In 2001, agency fees were just $294,375 and 389 jobs were filled; • The cost per hire was cut in half, from $7,905 in 2000 to $ 3,784 in

1

Cydney Kilduff, Director of recruiting and staffing at Kellogg

2

“How Outsourced Recruiting Saves Time and Money – and Gets Quality Hires”, HRFOCUS, September

2002

137 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

2001; • In 2000, it took an average of 67 days to fill jobs. In 2001, that has dropped to 39 days.

10.3. Companies That Have Outsourced All Of Their Human

Resources

Business

Processes

Except

Managerial Ones 10.3.1. BP Amoco (British Petroleum Amoco) A] Company overview BP is the holding company of one of the world's largest petroleum and petrochemicals groups. Its main activities are exploration and production of crude oil and natural gas; refining, marketing, supply and transportation; and manufacturing and marketing of petrochemicals. BP has well-established operations in Europe, North and South America, Australasia and Africa.1

B] HR outsourcing deal BP Amoco outsourced in December 1999 a major part of its global HR functions to one exclusive HR outsourcing provider: Exult Inc. They agreed2 on a 7-year relationship for HR Services to over 50,000 U.S. and U.K. employees. Exult support BP through its own services centers and will act as a service integrator, managing any contracts with other third party suppliers on behalf of BP. The programs’ center of operations is located in Glasgow. At the time, the BP-Exult agreement was the largest HR outsourcing contract in history. BP’s goals, according to Exult Inc., were:

1

http://www.bp.com/company_overview/profile/index.asp

2

http://www.exult.net/clients/contract_bp.html

138 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

• Access to further economies of scale; • Need to free up its own HR function to focus at a more strategic level on people management, enabling a closer alignment of company strategy and organizational capability; • International consolidation efficiencies; • Ability to deliver HR innovation to all employees; • A desire to improve workforce satisfaction with BP as an employer; • Cost reduction; • Speed of deployment of new services; •

Build a collaborative partnership to deliver services.

C] Comments This deal has been done through the introduction of redesigned global HR process. Under the title of “The Atlas Programme”1, the outsourcing deal would see the creation of “myHR.net”, a personalized web-based portal through which every employee could access HR information and services (career service, information for foreign placements, etc.). “The Atlas Project Team”, composed by subject matter and functional experts from BP and Exult (50 members), was in charge to drive the programme. The team was organized by region with functional team responsible for their specialties in all areas (myHR.net, etc.).

D] Outsourcing implementation observed results a) Positive ones A step-by-step implementation rather than the full Big Bang treatment has helped the program to be accepted by employees, even if there have been

1

“BP”, Personnel Today, 17th October 2000

139 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

pockets of resistance, as it is reported in Personnel Today1. During the first year, the HR staff-to-employee ratio fell from 1/60 to about 1/50. The myHR website became the first year already the company’s second most visited Internet site after the BP homepage. BP Amoco’s Vice President of HR for U.S. operations2 reports in the Aon’s study3 savings of $50 million in the first two and half years of BP’s outsourcing contract. Moreover, the results4 have included cost reduction in excess of 20%, avoided capital, provision of data and metrics to drive strategic change, delivery of information and web-enabled HR services.

b) Negative ones Some ambitions have not been achieved, as to extend the system beyond the U.K. and the U.S., as the company has not achieved everything it set out to5.

10.3.2. Other main companies which applied this model An AON study6 reports that some companies like BP Amoco, but also AT&T, BASF Cable & Wireless and Bank of America decided to outsource all their Human Resources functions, keeping only strategic activities internally. AT&T signed in May 2002 with the HR outsourcing provider AON a 7-year

1

“The odd couple produces model for HR outsourcing”, Personnel Today, 26th June 2001

2

Vice President of HR for US operations: Don Packham

3

The Beat Goes On: Outsourcing Your Human Resource, Knowledge@Wharton in collaboration with

Aon Corporation, AON Human Capital Consulting, p 5 4

http://www.exult.net/clients/contract_bp.html

5

“The cautious approach”, Personnel Today, 23rd April 2002

6

The Beat Goes On: Outsourcing Your Human Resource, Knowledge@Wharton in collaboration with

Aon Corporation, AON Human Capital Consulting, 2002

140 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

agreement to provide “end-to-end” HR services (and payroll, and other administrative services) for 70,000 of its employees. It chose AON, in part, because of its willingness to offer jobs to all of its HR employees1. Cable & Wireless signed with Accenture HR Services in 2001, a 5-years outsourcing contract (£80 million2) including all the HR transactional functions as well as the non-transactional ones. Bank of America signed with Exult Inc. a 10-year contract3 ($1billion4), covering the predominance of the bank’s back-office HR and affiliated financial processes that support the needs of over 130,000 employees. Following the success of this first agreement, the contract has been extended to include regional staffing and recruiting functions. Key accomplishments5 to date have included a complex payroll conversion, a successful annual benefits enrollment, and an achievement of target cost reductions. International Paper signed, in 2001, a ten-years HR outsourcing agreement with Exult Inc. ($600 million) for its almost 70,000 U.S. employees.6 Prudential Financial signed, in 2002, a ten-years contract with Exult Inc. To outsource HR processes for approximately 47,000 U.S. employees.7 Some other companies also chose this model, as Colgate-Palmolive, General Electric, Unisys (with Exult, $200 million contract over seven years, including 36,000 employees8), BAE Systems (with Xchanging), etc.

1

“How to succeed at HR outsourcing – by really trying”, Linda Rosencrance, Computerworld, 14th

February 2003 2

“The cautious approach”, Personnel Today, 23rd April 2002

3

http://www.exult.net/clients/contract_boa.html

4

“The cautious approach”, Personnel Today, 23rd April 2002

5

http://www.exult.net/clients/contract_boa.html

6

http://www.exult.net/clients/contract_ip.html

7

http://www.exult.net/clients/contract_pru.html

8

“The cautious approach”, Personnel Today, 23rd April 2002

141 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

Chapter 11. Human

Resources

Outsourcing

Experienced Providers In the U.S. primarily, but the trend is also noticeable in Europe, HRO providers are increasingly forming partnerships and acquiring resources in a bid to get contracts from big business. They work on filling gaps in their array of services so they can better compete for big-volume and big-money outsourcing contracts. As it is underlined in HR Magazine1, clients are in a recession period interested in access to technologies without the large implementation costs, and then the author concludes that any company that would want to get into HR Outsourcing successfully needs to make some sort of alliance with a technology outsourcer. As main HR outsourcing deals have just been described, the main HR outsourcing providers have also been quoted. This part will give through the Exult Inc. example an overview of this industry.

11.1. HRO Providers Specialized In Some Human Resources Functions Outsourcing Services 11.1.1. Staffing and Recruiting 2 The main providers are: Manpower, Spencer Stuart, Spherion, Adecco, KornFerry Futurestep Americas, Dice.com, Robert Half, Careerbuilder, Bernard Hodes/RES, and Monster.com.

11.1.2. Payroll and Benefits 3

142 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

The main providers are: ProBusiness, Paychex, TALX UC Express and ADP.

11.1.3. Employee health and Pension benefits 4 The main providers are: AFLAC, Definity Health and VSP/Vision Service Plan.

11.1.4. Specific providers in specific countries In Belgium (with “Secrétariat social”) and in Italy (with “Consulenti di lavoro”), some providers are specialized in HR transactional activities, in social security contributions, and employee relations.

11.2. HRO

Providers

Proposing

An

Integrated

Solution Including The Whole Range Of Human Resources Processes 11.2.1. Exult Inc. A] Company overview This Irvine (California) HRO provider is pursuing aggressively this market5. It promises clients a “comprehensive solution” of HR outsourcing services. To date, it has signed with BP Amoco, Unisys, Bank of America, International Paper and Prudential Financial contracts over $100 million.

1

“ Bigg fishing for business: HR outsourcing firms are forming partnerships and acquiring resources in a

bid to get contracts from big business (Outsourcing)”, Steve Bates, HR Magazine, April 2002 2

“ The 100 Superstars of HR Outsourcing”, Human Resources Outsourcing Today, www.hrotoday.com,

November 2002, pp 53-54 3

“ Bigg fishing for business: HR outsourcing firms are forming partnerships and acquiring resources in a

bid to get contracts from big business (Outsourcing)”, Steve Bates, HR Magazine, April 2002 4

“ The 100 Superstars of HR Outsourcing”, Human Resources Outsourcing Today, www.hrotoday.com,

November 2002, p 58 5

“ Bigg fishing for business: HR outsourcing firms are forming partnerships and acquiring resources in a

bid to get contracts from big business (Outsourcing)”, Steve Bates, HR Magazine, April 2002

143 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

This provider describes itself1 as assuming broad responsibility for the management of its clients’ HR people, processes, technologies and third-party providers and being designed to deliver these services in a more efficient and productive manner.

B] Activities Exult Inc.2 proposes a Service Delivery Model, including a broad spectrum of process management services grouped into four major categories: • Record and Support; • Reward; • Acquire and Staff; • Retain and Grow. To provide such services, Exult Inc. concluded partnerships with thirdparty HR service providers, even if it stays the only point of contact for outsourcing companies: • Ceridian; • Deploy Solutions; • Docent; • Hire Right; • IQ Navigator. Each year, Exult Inc. proceeds to: • Over 11 million employee payments; • Over 21 million employee transfers, promotions and pay changes; • Recruitment of over 21,000 professionals;

1

Creating value through HR Outsourcing, Strategies, Opportunities, Pitfalls, Dave Connaughton

(Director Business Development Asia Pacific Region Exult), Sourcing Interests Group, Melbourne, February 2002 2

http://www.exult.net

144 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

• Relocation of 2,500 expatriate assignees; • Administration of 250,000 learning enrolments.

C] Key facts • In 1998, General Atlantic Partners founded Exult Inc. with $50 million; • Exult closed BP Amoco HR outsourcing in December 1999, for $600 million; • Exult completed in June 2000 an IPO (Initial Public Offering) reaching $300 million; • Exult

concluded 2001 with 7 clients, representing 400,000

employees; • Exult reached $270 million in revenue and cash flow.

D] Strategy Exult Inc. targets global Fortune 500 corporations as clients and to establish with them long-term relationships. Its value proposition is to provide broadly integrated process management services and improve its efficiencies by sharing resources over a broad client base and standardizing practices. Its strategy is to use its e-HR solution set of applications to enhance HR performance.

11.2.2. Other

main

providers

proposing

an

integrated solution So far, in 2003, Exult is the most meaningful provider, since it signed the deal with BP developed earlier. As seen, most of the HRO providers increasingly tend to offer integrated

145 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

solutions, as for the main other ones on the market1: • Accenture HR Services. Accenture is one of the world's leading management consulting and technology services company. With more than 75,000 people in 47 countries, the company generated a net revenue of $11.6 billion for the fiscal year ended August 31, 20022; • ACS (Affiliated Computer Services), Inc. ACS is a premier provider of diversified business process and information technology outsourcing solutions to commercial and government clients worldwide. It is a Fortune 500 company comprised of more than 40,000 people in multiple locations around the world, and it delivers today BPO, IT outsourcing, and systems and integration services to hundreds of clients worldwide3; • AON Consulting HR Outsourcing Group. AON is a Fortune 500 company that is a world leader in risk management, retail, reinsurance and wholesale brokerage, claims management, specialty services, and human capital consulting services. It operates in more than 125 countries with over 55,000 employees in more than 600 offices4; • Convergys. Convergys serves top companies in communications, financial services, technology, employee care and other industries in more than 40 countries. It employs more than 44,000 people in their contact centers, data centers and offices in the United States, Canada, Latin America, Europe, the Middle East, and

1

“ The 100 Superstars of HR Outsourcing”, Human Resources Outsourcing Today, www.hrotoday.com,

November 2002, pp 56-57 2

http://www.accenture.com/xd/xd.asp?it=enweb&xd=_dyn\dynamicpressrelease_560.xml

3

http://www.acs-inc.com/about/index.html

4

http://www.aon.com/about/aon_corporation/history_facts.jsp

146 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

Asia. Its revenue in 2002 was $2.3 billion1; • EDS (Electronic Data Systems) BPO. EDS is also one of the leading global IT services company. It employs approximately 137,000 in 60 countries. It has more than 35,000 business and government clients around the world. Its revenue: $21.5 billion in 2002; 45 percent non-U.S.2; • Hewitt Associates. Hewitt Associates’ client roster includes more than half of Fortune 500 companies and more than a third of Fortune Global 500 companies. As the largest multi-service HR delivery provider in the world, it handles more than 53 million HRrelated customer interactions a year from more than 13 million participants3; • Mellon HR Solutions. Mellon HR Solutions is the fourth largest HR services provider and one of the largest financial services companies in the world. It employs 2900 professionals in nine operating locations and administers over $150 billion in retirement plan assets. It provides service over 4 million participants4; • Spherion. Spherion provides staffing, recruiting, outsourcing, HR consulting & technology. It employs more than 310,000 people worldwide, with an average of 59,000 on assignment daily. It provides services to more than 33,000 companies, including 85% of the Fortune 100. Its annual revenue was $2.1 billion in 2002. It reaches 9 countries with its more than 800 locations.

1

http://www.convergys.com/company_overview.html

2

http://www.eds.com/about_eds/en_about_eds.shtml

3

http://was4.hewitt.com/hewitt/about/overview/index.htm

4

http://www.mellon.com/hrsolutions/aboutus/

147 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

Chapter 12. IBM (International Business Machines) 1 Is there any valuable business book that does not mention at least once IBM as an example to follow? As we have to confess, we did not read all valuable business books available, we of course cannot be absolutely sure of the previous affirmation, but it seems that the answer is close to “no” anyway. When one considers IBM, one may (wrongly) think it is a multinational elephant, where everything is being slowed down, in fact completely the opposite of the reactivity we generally attribute to start-ups. But on the other hand, one may be totally fascinated by the idea of making that huge elephant dance2, as Louis V. Gerstner Jr. seems to have done. Finally, the purpose of this last chapter is to discuss IBM’s role as an actor in the field of HR outsourcing throughout Europe and determine what are its contributions and positioning.

12.1. Company Overview 12.1.1. Facts and figures IBM is responsible worldwide for operations in 160 countries, with more than 325,000 people working in about 1,000 locations.3 IBM EMEA operates in more than 124 countries, with 149 different languages spoken, and 293 dialects. To have a clear idea, nearly 60% of revenue is generated outside the U.S., where IBM works with homogeneous strategies, values, skills, and processes; it also has global standards and levels of services.

1

2

http://www.ibm.com Who Says Elephants Can’t Dance? Inside IBM’s Historic Turnaround, Louis V. Gerstner Jr., Harper

Business, 2002 3

“ Crisis Survival Tactics for HR”, HRFOCUS, April 2002, p 12

148 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

IBM is ranked 9th among all companies ranked and 1st among IT companies in the Forbes Magazine annual “Super 100” (ranking of sales, profits, assets, market value). Moreover, it is ranked 8th among all companies ranked and 1st among IT companies in Fortune Magazine “Fortune 500” (fiscal-year revenue). In July 2003, BusinessWeek and Interbrand Corp., ranked IBM the third best global brand after Coca-Cola and Microsoft.1

12.1.2. Activities A] IBM IBM is the world’s largest IT company, as it is: • 1st in hardware; • 1st in IT Services; • 1st in IT rental and financing; • 1st in research and development; • 5th in PC; • 2nd in software.

B] IGS (IBM Global Services) IBM Global Services is the largest business and IT services company in the world, helping customers managing IT operations and resources and capitalizing on IT to improve performance. It hires almost 175,000 professionals, consultants, project managers, architects, and specialists. There are four main lines of business: • Business Consulting Services; • Integrated Technology Services;

1

http://famulus.msnbc.com/FamulusCom/reuters07-24-140033.asp?sym=msft#body

149 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

• Strategic Outsourcing Services; • Learning Services. For the 10th consecutive year, IBM received the most U.S. patents with almost 3,000 in 2002.

12.1.3. Strategy As Samuel J. Palmisano, IBM CEO, explains it in the “Chairman’s letter” of the IBM 2002 annual report, IBM’s core business is “e-business on demand”. That means that the strategy focuses on providing e-business “on demand” for clients,

which

implies

“sense-and-respond”

or

“real-time”,

an

extreme

responsiveness to the needs of clients. IBM allows its clients to convert fixed costs into variable costs, and to reduce inventories. To this purpose, IBM helped its customers to become “on demand businesses” by integrating business processes and operations, applications and the underlying IT systems, and by helping them to focus on their core competencies and to outsource or to tightly integrate with strategic partners to supply their non-core competencies. To serve its strategy, IBM also made the computing model evolve to an “On Demand Operating Environment”, because the increasing complexity of systems is making them extremely costly to manage and maintain. The last work IBM did to make “e-business on demand” a reality is “establishing utility computing – computing on demand – as a viable and attractive alternative for accessing and paying for IT” so that clients acquire computing and applications and pay only for what they use.

12.2. Major Outsourcing Provider IBM Global Services has been pointed out as the 1st “Worldwide Professional Management Services Provider”.1

1

“2000 Outsourcing Services: Market Share and Forecast”, Gartner, March 2001

150 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

12.2.1. Strategic Outsourcing Services 1 IBM Strategic Outsourcing Services is the management of companies’ applications and IT Systems. It helps its client to assess its operational objectives, determines which IT processes and activities should be outsourced for a better competitiveness, and offers human and technical means without equal in the market. Indeed, one can say IBM is a major outsourcing provider, but also an industry pioneer thanks to its experienced methods and tools that are: • Its very large size and its wide range of clients around the world; • Knowledge capitalization (Knowledge Management database available by 138,000 IBMers); • 133 Data Centers and 73,000 servers worldwide for maintenance or development; • A wide range of solutions on different trademarked products, systems, and softwares (90% of IBM’s outsourcing deals). Finally, as will be developed in the next point, IBM Strategic Outsourcing manages human and social dimensions of an outsourcing operation, as being completely part of its core competencies.

12.2.2. IBM EMEA 2 Strategic Outsourcing Team IBM EMEA implemented a strategic outsourcing team widespread across Europe, even if a majority is based in the UK, because of the different employments laws and variation of the Acquired Rights Directive (TUPE in the UK, or Art. L 122-12 in France for example) developed in part three. Most of the time, IBM outsourcing deals are at the EMEA or global level, and are coordinated by an HR outsourcing specialist in the country where the

1

http://www-1.ibm.com/services/stratout/

2

IBM EMEA (IBM Europe Middle-East Africa)

151 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

deal is pursued. These specialists are responsible for proposals on how the staff can be transferred and treated to increase their comfort level with the transfer operation, and will also guide the outsourced employees towards a better integration. These Specialists are advised by an outsourcing engagement and alliances manager who ensures that the HR solutions for the staff transfer are appropriate and can be managed by IBM. Finally, the IBM EMEA strategic outsourcing team looks after human and social aspects of the outsourcing operation thanks to: • Corporate

culture

and

internal

experience

concerning

outsourcing operations (more than 80 operations in France for example); • Strict

transfer

and

integration

processes

realized

by

HR

professionals; • Skills development and career opportunities management.

12.3. Competitive Human Resources Organization 12.3.1. IBM U.S. Example IBM U.S. already outsourced some of its Human Resources activities.

A] U.S. HR Service Center IBM created an Employee Service Center in 1994 to consolidate the delivery of all its HR processes across the U.S. But IBM decided to go to the next level, keeping its quality programs and becoming more efficient. As Peter J. Smail, President of FESCo, said: “Their choice were clear: either make a significant investment over the next three years or more to upgrade systems, or find a partner who could provide

152 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

excellent services and had the technological advancements IBM requires”.1 As developed later, the decision has been taken to sign a partnership with Fidelity Employer Services Company, which provides the technology and people required by IBM. Moreover, FESCo can leverage its investments, because it serves many large companies, and has experience and capabilities to offer a wide range of services and products.

B] Deal with Fidelity Employer Services Company a) Company overview i/ FESCo (Fidelity Employer Services Company) FESCo, founded in 1998, provides2 retirement, Human Resources and benefits strategies to more than 200 companies (including Shell Oil, Monsanto, Philip Morris, and Ford Motor Co.), 11.2 million American workers through the administration of more than 11,100 retirement, health and welfare, Human Resources administration and payroll programs. FESCo is a division of Fidelity Investments Institutional Services Company, Inc.

ii/ Fidelity

Investments

Institutional

Services

Company, Inc. Fidelity Investments3, based in Boston, is one of the world’s largest providers of financial services. It offers investment management, retirement planning, brokerage, HR and benefits outsourcing services to 17 million individuals and institutions, as well as through 5,500 financial intermediaries. The company is the largest mutual fund company in the U.S., the first provider of workplace retirement savings plans, one of the largest mutual fund arrays, and

1

“Substantial Benefits, Inside the IBM-Fidelity outsourcing partnership”, Fidelity Investments, 20th

December 2002, http://www.fidelity.com 2

http://www.fidelity.com

3

http://www.fidelity.com

153 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

a leading online brokerage company.

b) HR outsourcing deal IBM outsources to Fidelity Employer Services Company (2nd July 2002) the administration of its benefits1: pension and health & welfare plans, along with a broad range of HR services. IBM’s pension plan is the 12th largest in the U.S., with assets of $56.5 billion last year.2

c) Tangible transfers i/ Staff transfer As a whole, 4503 IBM Employee Service Center workers, who provided HR transaction and administrative support to IBM U.S. employees and retirees, became FESCo employees (1st August 2002) and continue to provide HR support to the same IBM population. Towney Kennard, Vice President of Alliances, IBM Global Services, announced4 that another 2,500 or so IBM personnel workers would remain with IBM “to handle hiring, firing, discipline, pay, promotions and other issues.”

ii/ Equipment Transfer FESCo leases a call center in Raleigh, North Carolina, that IBM opened in 1994 (see 12.3.1.A]) to handle questions from its 140,000 workers in the U.S. and 120,000 retirees about retirement, health, charitable giving, and other benefits. FESCo said that it plans to expand the Raleigh, N.C., service center to

1

“Fidelity to oversee IBM’s pension plan”, Boston Business Journal, 2nd July 2002

2

“Fidelity to oversee IBM’s pension plan”, Boston Business Journal, 2nd July 2002

3

“Substantial Benefits, Inside the IBM-Fidelity outsourcing partnership”, Fidelity Investments, 20th

December 2002, http://www.fidelity.com, “ Fidelity and IBM in Venture To Handle Worker Benefit Plans”, David Cay Johnston, The New York Times, 3rd July 2002 4

“ Fidelity and IBM in Venture To Handle Worker Benefit Plans”, David Cay Johnston, The New York

Times, 3rd July 2002

154 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

accommodate growth in its HR payroll and outsourcing solutions. FESCo will also use IBM’s former facilities in Endicott and White Plains, New York.

d) Business opportunity At the same time1, Fidelity Investments and IBM announced that they form venture to market HR payroll and benefits outsourcing services to other companies. Executives of both companies said indeed they saw “a promising business in selling payroll and benefits services to large employers, including government agencies and major non-profit organizations”.2 Fidelity Investments provides benefits expertise, experience and capabilities and IBM provides computers and databases.

e) Benefits expected by both parties The two parties said, according to the New York Times that they expected in 2005 “benefits to grow into an industry with $43 billion to $45 billion of annual revenue. The industry takes in about $12 billion today”.3

i/ IBM According to Towney Kennard4, IBM Global Services, “this agreement enhances our e-HR portfolio and leverages IBM’s expertise in process change management as customers automate more business processes”. As mentioned in 12.3.1.A], IBM wanted to go to the next level after the service center becomes more efficient, without losing the level of quality. FESCo was a solution for them to achieve this target.

1

“Fidelity to run IBM pension and health plans”, Reuters Company News, 2nd July 2002

2

“ Fidelity and IBM in Venture To Handle Worker Benefit Plans”, David Cay Johnston, The New York

Times, 3rd July 2002 3

“Intel’s No Bargain”, The Motley Fool, 5th July 2002

4

“Fidelity Investments And IBM Sign Benefits And Human Resources Outsourcing Agreement”, Fidelity

Employer Services, 2nd July 2002, http://www.fidelity.com

155 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

ii/ FESCo According to Peter J. Smail1, President of FESCo, “we believe that combining our significant HR experience with IBM Global Services, recognized consulting and technology expertise, will accelerate our clients’ benefits outsourcing plans. As companies evaluate outsourcing options, we think they will seek trusted providers such as Fidelity and IBM to provide end-to-end solutions”. Moreover, FESCo integrates 450 of the “best Human Resources and payroll people in the business”2, as “IBM-trained Human Resources staff with a high level of expertise and professionalism”.3 Not only FESCo gains the best practices and professionals, but also IBM’s former facilities. As Peter J. Smail claimed: “[…] we’ll now have locations in Raleigh, North Carolina, as well as in Endicott and White Plains, New York. Including Raleigh, Fidelity will have phone centers in 6 regional locations altogether. With this expansion, we can serve even more large corporate clients efficiently.”4

12.3.2. IBM EMEA HR Organization A] Self-Service As Martin Stockton, e-HR Practice Executive at IBM EMEA, said “By creating a collaborative “self-service” environment for the majority of issues, employees have the latest available information at their fingertips and the HR function is able to concentrate on critical strategic activities”.5

1

“Fidelity Investments And IBM Sign Benefits And Human Resources Outsourcing Agreement”, Fidelity

Employer Services, 2nd July 2002, http://www.fidelity.com 2

“Substantial Benefits, Inside the IBM-Fidelity outsourcing partnership”, “Substantial Benefits, Inside the

IBM-Fidelity outsourcing partnership”, Fidelity Investments, 20th December 2002, http://www.fidelity.com 3

“Substantial Benefits, Inside the IBM-Fidelity outsourcing partnership”, “Substantial Benefits, Inside the

IBM-Fidelity outsourcing partnership”, Fidelity Investments, 20th December 2002, http://www.fidelity.com 4

“Substantial Benefits, Inside the IBM-Fidelity outsourcing partnership”, “Substantial Benefits, Inside the

IBM-Fidelity outsourcing partnership”, Fidelity Investments, 20th December 2002, http://www.fidelity.com 5

“Web HR frees up time for strategy”, Personnel Today, 31st October 2000

156 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

The EMEA HR Service Center implemented by IBM EMEA, and developed below, is supported by a customized e-HR system for HR staff, employees and managers. Almost all HR administration and paperwork are now electronic and self-service. The employees and managers have access to formula, holidays management, working hours management, HR managers’ manual, process description and execution, personnel data maintenance, etc., as developed in a more general way in 3.1.2. This e-HR is developed in IBM through the Intranet, but also through e-learning (more than 40% of internal training) and erecruitment (70% of applications in France for example). Moreover, this is quite a competitive advantage for IBM, because it allocates flexibility to a growing business. Indeed, as Martin Stockton explained: “Because IBM’s new e-HR solution is based on web technology and best-ofbreed HR solutions, it is easy to adapt as the business grows.”1

B] EMEA HR Service Center a) Presentation IBM launched an internal centralized HR Service Center called “AskHR” in June 19992, based in Portsmouth, in the U.K., to provide HR services (direct help and information) to all IBM employees and managers across Europe, the Middle-East, and Africa. This center supports over 100,000 employees across 40plus countries3, speaking many languages. Concerning European countries only, it supports about 98,000 employees in 20 countries4, and speaks 15 different languages.

b) Objective

1

“Web HR frees up time for strategy”, Personnel Today, 31st October 2000

2

“Les RH au bout du fil”, Entreprises & Carrières, 28th March 2000

3

“IBM HR caters for over 40 countries”, Letter of the week, Personnel Today, 10th July 2001

4

Austria, Belgium, Czech Republic, Denmark, Finland, France, Germany, Ireland, Israel, Italy,

Netherlands, Norway, Portugal, Slovakia, South Africa, Spain, Sweden, Switzerland, Turkey, U.K.

157 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

The primary goal is to maximize HR support for all employees and managers and to ensure that clear and consistent information is available from the intranet and by phone. Of course, the aim of such centralization is a reduction of costs and a higher value work and workload. Moreover, as Tim Stevens, IBM EMEA Employee Relations and IBM France HR Leader said: “its creation followed a major reorganization by a new Chief Executive who also believed that HR had a leading role to play in IBM’s success”.1 He also claimed: “the aim of the service centre at Portsmouth is to ensure HR professionals in each country are not burdened with routine administrative functions”. Indeed, EMEA employees and managers can now get help directly by accessing the intranet, sending e-mail or calling the EHRSC.

c) Organization The center is composed of about 120 employees2, providing different levels of service responding to different requirements, from the extensive information on the IBM Intranet, through first level (HR Generalists) to HR Specialists. The HR specialists form three teams: compensation and benefits, workforce management and staffing, and skills, learning and executive resources.

1

“Service center creation”, Personnel Today, 6th June 2000

2

“IBM takes a more general view of global HR delivery”, Personnel Today, 6th March 2001

158 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

Illustration 16: IBM European HR Service Center

C] Results Even while the Employee Service Center experience had already been applied in the U.S. (see 12.3.1.A]), IBM was not sure this would be so feasible and successful (efficiency and service quality improvements) with a group of so many different countries. Finally, the implementation of this service center combined with the e-HR solution allowed IBM to save in 2000 over 57%1 of its previous HR costs, and allowed HR managers not to answer all calls or e-mails now handled by the EHRSC (in 2000, it fielded 190,000 calls and 46,000 e-mails2). The customer satisfaction was of 90%3 in 2000.

12.4. Human Resources Services Provider 1

“IBM takes a more general view of global HR delivery”, Personnel Today, 6th March 2001

2

“IBM takes a more general view of global HR delivery”, Personnel Today, 6th March 2001

3

“IBM takes a more general view of global HR delivery”, Personnel Today, 6th March 2001

159 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

12.4.1. IBM Business Consulting Services IBM

acquired

in

August

2002

the

consulting

branch

of

PwC

(Pricewaterhouse Coopers) for $3.5 billion and formed this new entity: BCS (Business Consulting Services). The purpose was for IBM to combine business expertise with the technology leadership in order to accelerate its clients’ business performance. BCS is composed of more than 60,0001 consultants and employees located in 160 countries worldwide; professionals ranging from financial services to healthcare, with business process expertise in areas such as supply chain, CRM (Customer Relationship Management), human capital solutions and business transformation outsourcing. It answers to client’s strategic needs by offering a complete offer, from advise until services implementation.

A] Human Capital Solutions HCS (Human Capital Solutions) aims to help clients achieve business through: • Gaining more from people (people strategy, performance leadership, learning & development); • Implementing

better

HR

(HR

delivery

and

process,

HR

management systems, operating HR); • Delivering dynamic workplace. And doing so in the most cost-efficient manner. Indeed, organizations require always more from their employees, but employees expect in turn ever more from their organizations. To find the optimum point, HCS defined its key drivers as following: • Developing an efficient and effective organization;

1

IBM 2002 Annual Report, p 16

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• Reducing costs; • Downsizing painlessly; • Aligning people and business strategies; • Ensuring workforce flexibility.

B] Business Transformation Outsourcing BTO (Business Transformation Outsourcing) provides superior business value by an outsourcing multiple business process strategy, transition and long-term support. Its value proposition includes a suite of offerings that can provide a foundation for continuous strategic change in: • Finance and administration; • Customer Relationship Management; • Procurement; • Human Resources. BTO helps its clients to build a strategic transformation agenda, to set new directions and reduce risks by identifying and delivering future market positions and providing capabilities to capitalize on them (win in existing markets and enter new ones); its aim is also to make its clients’ processes run more efficiently. Concerning the HR activities, IBM accompanies its client to transform its HR in order to manage continuous improvement in people, process, and technology development.

12.4.2. IBM HR Technological Services IBM Global Services offers new IT solutions to help the Human Resources department to be integrated in the whole company politics in a more efficient way, at lower costs, and no longer to be reduced only to Personnel Management (that is administrative and transactional activities, etc.). These services help clients to construct efficient HR strategies and to focus on new HR priorities. 161 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

A] Services overview

Illustration 17: IBM HR technological services1

IBM HR technological services offers: • HR Management Consulting and Coaching, Strategic advice, and Knowledge Management; For this purpose, IBM HR technological services has unique process analysis methods, based on optimized procedures like Electronic HR (e-HR) or HR portals for employees. • Products advice; IBM HR technological services helps its clients to choose the adequate software and recommends adapted IT solutions. • Support and implementation. IBM HR Practice has built up, thanks to more than thousands worldwide implementations, methods and experience in this field.

1

http://www-5.ibm.com/services/de/pdf/erp_hr-practice.pdf

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Beside this support and implementation services, IBM HR technological services provides several kinds of outsourcing solutions, certified project managers, and training for clients’ employees via “Train the Trainer” or “Computer Based Trainings” (IBM Learning Services), and also financing possibilities thanks to IBM Global Financing.

B] Services description IBM HR technological services allows decreasing the time and the money spent in dealing with employees’ data, and on the other hand increasing the level of employee services.

a) Human Resources management consulting The goal is to optimize HR processes and to make them more competitive and efficient. To this purpose, IBM masters the flowing services: • Electronic Human Resources Management; IBM HR technological services works on the whole IT strategy for its clients HR departments. It not only takes into account the employee

self-service

opportunity,

but

also

anticipates

requirements for a future partnership with an outsourcing provider, like online job offers or online job applications to optimize the workflow or data warehouses and other decisional tools, to take HR decisions better and faster. • Knowledge Management; IBM HR technological services has a large experience in knowledge management thanks to its numerous clients’ projects in teams. Its performance in successful knowledge management methods and tools implementations, but also a successful know-how transfer

to

clients

has

been

proved.

It

indeed

sets

up

organizational measures like culture diagnostics or communities of practice, but also tools like competencies management tools. 163 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

Knowledge management is reinforced by the context of globalization of transactional activities and of virtual teams (composed by members everywhere in the world who almost never concretely meet). • Organizational Change Management; This

service

is

increasingly

gaining

importance

as

factors

influencing companies through rethinking organizational structures multiply: ~

Change in skills requirements;

~

Outsourcing;

~

Reduction of locations number;

~

Processes automation;

IBM HR technological services proposes a large array of services in organizational change management, like for example coaching, organization analysis and redesign, support in communicating important change projects, learning programs including design and implementation of new processes.

b) ERP (Enterprise Resource Planning) services IBM HR technological services offers the administration of a large range of HR ERP, including: • HR Access; • Peoplesoft; • SAP HR.

c) Support and implementation • Learning Services; • Outsourcing; • ASP with mySAP.com; 164 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

• ASP with HR Access; • Global Financing.

12.4.3. IBM Learning Services IBM is the 1st e-learning (training technologies and services on line) provider worldwide. IBM Learning Services helps companies to design, develop, and implement training programs to optimize their employees’ potential. IBM offers, thanks to its very advanced teaching technologies, web solutions that enlarge the diversity of training proposed, without increasing costs (travel costs and loss of productivity are reduced compared to classic training), improving efficiency, and rapidity. As an example, in 2000, IBM opened its pool of applicants and its learning services to its business partners network: an excellent way to encourage their loyalty and to improve their efficiency.1

12.5. Conclusion IBM is worldwide famous for being a major actor of the computer industry. Through this chapter we have been able to demonstrate that IBM could not be reduced to this computer industry. IBM is now evidently focusing on “e-business on demand” in general, and not on the only technology industry. IBM in Europe, as we saw, counts more than 100, 000 brains organized in a dense network. It has chosen to manage its Human Resources with the help of the most modern tools ever imagined so far, accumulating one of the greatest experience as far as a successful Human Resources management is concerned. In the end, we all know that IBM is still unquestionably one of the global leader as far as technological services are concerned and has pioneered in this area the best outsourcing practices. To sum up, IBM Europe consists in a huge network of efficiently organized

1

“IBM recrute et forme pour le compte de son réseau”, Les Echos, 1st February 2000

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knowledge workers that stand among the best in technology and outsourcing services. We do not know if IBM will take the lead of the HR outsourcing industry in Europe, but we affirm that IBM has a great potential in this industry and would probably succeed if it choose to get involved in the future. Finally, in the long term, we believe that IBM will offer an even wider range of business services with a slogan that could say something like: “you focus on your core competencies and we perform the rest on demand”.

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CONCLUSION In conclusion, we would like to reaffirm that we strongly believe that outsourcing Human Resources activities will soon be the best way for small, medium, and large European multinational companies to reinforce their competitive advantage in an increasingly demanding environment. It is absolutely evident that the Human Resources outsourcing industry still needs some time to position its offerings in a market that is only on its infancy, but it seems to us even more evident that the market, however wild it may be, is nonetheless the most profitable terrain, provided that it has been well tamed. The market is changing and the “take it or leave it” approach is headed to extinction. Individual opportunism is no longer as profitable as brains networks; since no company fully owns its intellectual capital, they should immediately start to share it efficiently. This is the core of the challenge we propose to confront head-on by outsourcing Human Resources activities. The only valuable asset of a company is the path it builds to achieve continuous success.

167 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

AFTERWORD After about six months of research, readings, meetings, and writing periods, we finally reached the end to this thesis. Of course, we could never be completely satisfied with our work, but we will probably never forget the good (and also the bad) time we had working together. They are actually one of the most unexpected rewards of the experience. Writing a thesis alone is already a tough exercise, writing it in couple is incredibly more demanding than anticipated. But it also has positive aspects, such as complementarities, constant support, and critical feedback. This thesis period helped us tremendously to determine with greater precision the idea we have of what we want to do next: if it indeed sounds the death knell for our initial education, it prefigures most of all our professional future. It is in fact a real starting point. We are now more than motivated to apply our knowledge at the service of our future employers in exchange for ambitious, exciting, practical, and enriching new experiences.

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TABLE OF ILLUSTRATIONS Illustration 1: The four types of outsourcing situations ....................................15 Illustration 2: European outsourcing practices in 1998 ..................................21 Illustration 3: HR Organization ............................................................................27 Illustration 4: Activities crossing HR functions ...................................................30 Illustration 5: Unemployment in the EU, % of workforce in December 2002 and December 2001, seasonally adjusted .......................................................31 Illustration 6: Fixed-term work in E.U. member States .....................................32 Illustration 7: Average collectively agreed pay increases, 2001 and 2002 (in %) ........................................................................................................................33 Illustration 8: Average collectively agreed normal weekly hours, 2002 .....34 Illustration 9: The four processes that are mostly managed by Self-Service in Europe .................................................................................................................39 Illustration 10: HR Self-Service: resource reallocation on higher addedvalue activities .......................................................................................................39 Illustration 11: Shared services model ...............................................................41 Illustration 12: French HR outsourcing market shares in 2000........................47 Illustration 13: Porter’s Value Chain...................................................................54 Illustration 14: Customer Relationship Management evolution ...................58 Illustration 15: The Cone of Core Competencies ...........................................62 Illustration 16: IBM European HR Service Center.......................................... 159 Illustration 17: IBM HR technological services............................................... 162

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DETAILED TABLE OF CONTENTS A CK N O W LE DG MEN TS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 G EN E RA L TAB L E OF CO N T ENT S . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 F O RE WO RD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 IN TR OD UCT I ON . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 P A R T I. S CO P E & DE FIN I TI ONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1 CHAPTER 1. OUTSOURCING OVERVIEW ...................................................... 12 1 .1 . Ou t sou r c in g Defi n i ti on A nd Ob j ec tive s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 1 .1 .1 . Out sou rc in g de fin it ion ....................................................... 12 1 .1 .2 . Ma in ob ject ives of a n out sou r c in g st r at egy ...................... 13 1 .2 . Ou t sou r c in g Si t ua t io n s A nd A pp r oac he s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 4 1 .2 .1 . D iffe rent k in ds of out sou rc ing ope rat ions .......................... 14 A] Different outsourcing situations ................................................. 14 a) Traditional outsourcing ........................................................... 15 b ) T r a d i t i o n a l o u t s o u r c i n g wi t h d i s i n t e g r a t i o n . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 5 c ) S t r a t e g i c o u t s o u r c i n g wi t h d i s i n t e g r a t i o n . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 5 d) Strategic outsourcing ............................................................. 16 e ) O u t s o u r c i n g wi t h a s s e t s l e a s i n g . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 6 B] Different outsourcing approaches ............................................. 16 C] Different uses of outsourcing .................................................... 17 a) Automotive and administrative/operative outsourcing ........... 17 b ) B P O (B u s i n e s s P r o c e s s O u t s o u r c i n g ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 8 i/ Selective BPO ............................................................................. 18 ii/ Total BPO .................................................................................. 18

c) Total outsourcing .................................................................... 18

1 .2 .2 . Out sou rc in g adv a nt ages ................................................... 18

182 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

1 .2 .3 . Out sou rc in g r isk s ............................................................... 19 1 .3 . Ou t sou r c in g T ren d s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 9 1 .3 .1 . Gl ob al ev olutio n of out sou rc in g ........................................ 21 1 .3 .2 . Fa ctor s fav or ing t hese boom in g out sou r c in g t ren ds .......... 22 A] Internal factors ........................................................................ 22 B] External factors ........................................................................ 22 a) Supply pressure ...................................................................... 22 b) Development of information technology ................................ 22 c) Benchmarking......................................................................... 23 d) Mimicry .................................................................................. 23

1 .3 .3 . Ma in B PO p r ov ide rs ........................................................... 23 CHAPTER 2. HUMAN RESOURCES DEPARTMENT OVERVIEW ................................ 25 2 .1 . H um an R e so u rce s De p a rtm en t Ro les . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 5 2 .1 .1 . O rga n iz at ion al role s .......................................................... 25 2 .1 .2 . Oper at ional r oles .............................................................. 26 2 .1 .3 . Huma n Re s ource s or gan iz at ion ......................................... 26 2.2 . S t ructure Of Hum a n R e source s Organiz a ti onal Ac tiv i ti e s . . . . . . . . 28 2 .2 .1 . Ke y Hum an Res ou rce s fun ct ions ........................................ 28 2 .2 .2 . Act iv it y t ypes c r os s in g HR funct ions .................................. 29 2 . 3 . H um an R e so u rce s I s s ue s O f T he Mul t i na ti o na l C om pa ny I n E u ro pe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 0 2 .3 .1 .

The

Eu ropea n

labor

m a rket

and

int er cult ural

m ana gement issues .................................................................... 30 A] Figures ..................................................................................... 30 B] Trends ...................................................................................... 32 C] Challenges .............................................................................. 34

2 .3 .2 . An ev er more or gan ized s oc ial dia logue in Eu r ope ........... 35 A] The European social integration process ................................... 35

183 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

B] European Works Council ........................................................... 36

CHAPTER 3. HUMAN RESOURCES OUTSOURCING OVERVIEW ............................. 38 3 .1 . H um an R e so u rce s O u t so u rc i ng De fi ni t io n . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 8 3 .1 .1 . De fin ing Huma n Re s ource s a ct iv ities ou t sour c ing.............. 38 3 .1 .2 . Huma n Re s ource s out s ou rc ing levels ................................. 38 A] Self-Service (e-HR) ................................................................... 38 B] Transactional HR outsourcing, shared services centers, or HR services center............................................................................. 40 a ) D e f i n i ti o n . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 0 b) Objectives .............................................................................. 41 C] HR processes outsourcing ......................................................... 41 D] Totally HR department outsourcing ............................................ 42

3 .2 . H um an R e so u rce s O u t so u rc i ng S pec if ic i tie s A nd T re nd s . . . . . . . . . 4 3 3 .2 .1 . Gl ob al ov erv iew ................................................................ 43 A] HR outsourcing expenses trends ................................................ 44 B] HR outsourcing trends ............................................................... 44 C] Reasons to outsource trends ..................................................... 44 D] HR outsourcing future ............................................................... 45

3 .2 .2 . U.S . ov e rv iew .................................................................... 45 A] HR outsourcing expenses trends ................................................ 45 B] HR outsourcing trends ............................................................... 45 C] HR outsourcing future ............................................................... 46

3 .2 .3 . Eu r ope ov erv iew ............................................................... 46 A] HR outsourcing trends ............................................................... 46 B] HR outsourcing future ................................................................ 47

3 .2 .4 . F rance ov erv iew ............................................................... 47 A] HR outsourcing trends ............................................................... 47 a) Small and medium-sized companies ....................................... 47 b) Large companies .................................................................... 48

184 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

c) New market companies .......................................................... 48 B] HR outsourcing future ................................................................ 48

P A R T I I . S TR A TE GI C A P P R OA CH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 0 CHAPTER 4. HUMAN RESOURCES OUTSOURCING AND THE NEW COMPETITIVE ENVIRONMENT .................................................................................... 51 4 .1 . On go in g C om pet i t io n . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 1 4 .2 . B o rd erl e s s O r gan i za t io n s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 3 4 .2 .1 . The v alue ch a in ................................................................ 53 4 .2 .2 . The v irt ual or ga n iz at ion ..................................................... 55 A] Clover leaf ............................................................................... 56 B] Alliances .................................................................................. 56 C] CRM......................................................................................... 57

4 .2 .3 . C ore c ompet en c ies a nd c ore bus iness ............................. 59 A] Definition ................................................................................. 59 B] Segmentation of activities......................................................... 60

4 .3 . K now le d ge w o rke r s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 3 4.4 .

N TIC

(New

T e c hn ol o gi e s

of

I nfo rma t io n

an d

C om mu n ic a ti on ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 4 CHAPTER 5. HUMAN RESOURCES OUTSOURCING AND THE NEW CHALLENGES ........ 66 5 .1 . Two Fa s t - Mov ing T re nd s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 6 5 .1 .1 . Temp ora r y empl oyment in dust r y dev elopment .................. 66 A] Figures ..................................................................................... 66 B] Trend ....................................................................................... 67 C] Threatened flexibility................................................................ 67

5 .1 .2 .

H RO

(H u ma n

Res ou rce s

Out sou r c in g)

in du st ry

dev elopment .............................................................................. 68 5 .2 . S co pe Exp a n si on s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 9 5 .2 .1 . Temp ora r y w or k s c ope ex p ans ion ..................................... 69

185 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

5 .2 .2 . H RO p r ov ider s s c ope ex pans ion ........................................ 69 5 .3 . Ex p ansi o n s Ex p la n a ti on s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 9 5 .3 .1 . Flex ib il it y ........................................................................... 69 5 .3 .2 . C osts re duct ion an d t ime ga in s ......................................... 70 A] Costs reduction ........................................................................ 70 B] Time gains ................................................................................ 70

5 .3 .3 . Mana ging kn owle dge wor ke rs ........................................... 71 5 .4 . I s s ue s Fo r T he Ou t s ou r ci n g Co mp a ny . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2 A] Temporary workers motivation and management ....................... 72 B] People development ................................................................. 72

5 .5 . H um an R e so u rce s N ew Ob j ec t ive s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 3 5 .5 .1 .

Meet

st o ck hol de rs

ex pectat ions

t hr o ugh

cost s

r e duct ion ................................................................................... 74 5 .5 .2 . Ge ne rat in g v alue for t he c omp an y ................................... 75 5 .5 .3 . Seven que st ion s t o ch allen ge ob ject iv es .......................... 75 CHAPTER 6. HUMAN RESOURCES OUTSOURCING STRATEGIC APPROACH .............. 77 6 .1 . Ou t sou r c in g Dec i s io n Th eo r y . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 7 6 .1 .1 . Ba ses................................................................................. 77 A] The transaction costs theory ..................................................... 77 a) Principles ................................................................................ 77 b) Fundamental hypothesis ......................................................... 78 c) Transaction attributes ............................................................. 78 i/ The assets specificity .................................................................. 78 ii/ The uncertainty ......................................................................... 79 iii/ The frequency .......................................................................... 79 iv/ The difficulty to measure the provider’s performance ................. 79

d) Governance structures ........................................................... 79 i/ Insourcing .................................................................................. 80 ii/ Outsourcing with classical contract law...................................... 80

186 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

iii/ Outsourcing with neoclassical contract law ............................... 80 iv/ Outsourcing with relational contract law .................................... 80

B] The resource-based theory ....................................................... 81 C] Conclusion of the two theories .................................................. 81

6 .1 .2 . The dec is ion itsel f ............................................................. 81 A] The belonging of the activity to the core business ..................... 82 B] The level of performance .......................................................... 82 C] The level of transaction costs ................................................... 83

6 .2 . Wh a t S ho u ld Be O u t so u rc ed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 3 6 .3 . A dv an t a ge s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 5 6 .4 . D r aw ba ck s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 6 6 .4 .1 . Qu al it y dec rea se an d l os s of cont rol ................................ 86 6 .4 .2 . H igh une xpe cte d c ost s ..................................................... 87 6 .4 .3 . Secu r it y is sues ................................................................... 87 6 .4 .4 .

H ig h

c omm it ment

r equ ired

du r in g

o ut sou rc in g

impleme ntat ion .......................................................................... 87 P A R T I I I . I M P LE ME N TA TI ON . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88 CHAPTER 7. MANAGING THE HUMAN RESOURCES FUNCTIONS OUTSOURCING PROJECT ........................................................................................... 89 7 .1 . P ro j ect Te am . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 9 7 .2 . P ro j ect D ef in it ion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 7 .2 .1 . Pr oject pla n ...................................................................... 90 7 .2 .2 . Risk a sse ssment ................................................................. 90 7 .2 .3 . C ost a nal ys is ..................................................................... 91 7 .3 . I n te rna l I s s ue s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 1 7 .3 .1 . Mana geme nt c omm it ment ................................................ 91 7 .3 .2 . O rga n iz at ion’s ab il it y t o a bs orb ch an ge ........................... 91 7 .3 .3 . St a ffin g re or gan izat ion ...................................................... 92 187 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

7 .3 .4 . C ommun icat ion ................................................................ 92 7 .4 . Ex te r na l I s s ue s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 3 7 .4 .1 . C ommun icat ion ................................................................ 93 7 .4 .2 . Pr ovide r’s select ion issues ................................................. 93 A] Three different selection processes ........................................... 94 a) The ordinary invitation to tender ............................................ 94 b ) T h e i n v i t a t i o n t o t e n d e r wi t h p r e s e l e c t i o n s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 5 c) The direct provider’s selection ............................................... 96 B] The selection criteria ................................................................ 96

7 .4 .3 . Asset s t r ans fe r ................................................................... 97 A] Assets leasing .......................................................................... 98 B] Equipment transfer .................................................................... 98 C] Staff transfer ............................................................................ 98 a) Transfer perception ................................................................ 99 b) Staff transfer: a good bargain .............................................. 100

7 .5 . Fa ct o rs de te r mi ni n g t he s uc ce s s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 0 0 7 .6 . P ro b lem s Li ke ly T o Oc cu r . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 0 1 CHAPTER

8.

LEGAL

ASPECTS

OF

A

HUMAN

RESOURCES

OUTSOURCING

OPERATION ....................................................................................... 102 8 .1 . Ou t sou r c in g L ega l A c to r s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 0 2 8 .1 .1 . Le ga l pr ofe ss ion al ........................................................... 102 8 .1 .2 . Out sou rc in g ne got iat or ................................................... 103 8 .2 . Le g al F r a mewo rk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 0 3 8 .2 .1 . G ove rn in g l aw ................................................................ 103 8 .2 .2 . Rel oc at ion of se rv ice loc at ion s ....................................... 104 8 .2 .3 . St a ff t ra ns fe r ................................................................... 104 A] European context ................................................................... 106 B] French context ....................................................................... 107

188 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

a) Individual transfer ................................................................ 107 b) Collective transfer ................................................................ 107 C] English context ...................................................................... 108

8 .2 .4 . D is put e res olution ........................................................... 108 A] Informal dispute resolution ..................................................... 108 B] Formal dispute resolution ........................................................ 109

8 .2 .5 . D ata issues ...................................................................... 109 A] International data flow ........................................................... 109 B] Data security .......................................................................... 110 C] E.U. Directives ........................................................................ 110

8 .3 . Ou t sou r c in g Con t r ac t s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1 1 8 .3 .1 . Ov erv iew ......................................................................... 112 8 .3 .2 . Ke y c ont ra ct is sues ......................................................... 113 A] Structure of the agreement ..................................................... 113 B] Scope of services ................................................................... 113 C] Service level agreements ....................................................... 113 D] Term/Effective date ................................................................ 114 E] Transition ................................................................................ 114 F] Staff transfer ........................................................................... 115 G] Assets transfer ....................................................................... 115 H] Integration of methodologies/technologies ............................. 115 I] Roles and responsibilities......................................................... 115 J] Governing agreement ............................................................. 116 K] Intellectual property ............................................................... 116 L] Confidential information .......................................................... 116 M] Data flow ............................................................................... 117 N] Data security ......................................................................... 117 O] Reports and documentation.................................................... 117 P] Pricing / Method of payment ................................................... 117

189 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

Q] Currency risk ......................................................................... 117 R] Taxes ..................................................................................... 118 S] Audit ...................................................................................... 118 T] Business variability .................................................................. 118 U] Governing law ........................................................................ 118 V] Dispute resolution................................................................... 119 W] Indemnities ........................................................................... 119 X] Termination ............................................................................ 119

8 .4 . P ro b lem s Li ke ly T o Oc cu r . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2 0 CHAPTER 9. MANAGING OUTSOURCED HUMAN RESOURCES ACTIVITIES .............. 121 9 .1 . E le men t s T o K e ep I n te r na l ly . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2 1 9 .1 .1 . Mana ge r ial act iv it ie s ...................................................... 121 9 .1 .2 . P ilot in g c omm itt ee .......................................................... 121 9 .2 . R eq u i re d Sk il l s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2 3 9 .2 .1 . St rat e gic v is ion s k ills ........................................................ 123 9 .2 .2 . Out sou rc in g impleme nt ation s k ills ................................... 123 9 .2 .3 . I n fluen c in g a nd c on fl ict m ana gement sk ills .................... 123 9 .2 .4 . All ian ces ma na geme nt sk ill s ........................................... 123 9 .2 .5 . C han ge ma nagement s kills ............................................. 124 9 .2 .6 . S oc ia l ca p it al dev elopment sk ills .................................... 124 9 .3 . Ot he r S ol u ti on s To K ee p Con t r ol . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2 4 9 .3 .1 . Trans fe r of specific assets ............................................... 124 9 .3 .2 . Sp in-off st ructu re ............................................................. 125 9 .3 .3 . I nt erest ac qu isit ion .......................................................... 125 9 .4 . P ro b lem s Li ke ly T o Oc cu r . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2 5 9 .4 .1 . Ba d st a rt ......................................................................... 125 9 .4 .2 . Mala dapt ed se rv ice s ...................................................... 126

190 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

9 .4 .3 . N o res pect of p r ic in g ...................................................... 126 9 .4 .4 . N o ev olut ion pe rs pect iv es ............................................... 126 9 .4 .5 . Ov er la pp in g le gal framew ork .......................................... 126 P A R T IV. CAS E S TU DIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2 8 C H A P T E R 10. H U M A N R E S O U R C E S O U T S O U R C I N G E X P E R I E N C E D C U S T O M E R S . . . . . . . 1 2 9 1 0 . 1 . Com p an ie s T h a t H av e O u t so u rc e d T h e i r T r a n s ac t io n al A c t iv i ti e s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2 9 10 .1 .1 . E xte rn all y out sou r ced .................................................... 129 A] Credit Suisse First Boston Group .............................................. 129 a) Company overview .............................................................. 129 b) HR outsourcing deal ............................................................. 129 c) Results .................................................................................. 129 B] Other outsourcing companies that applied this model.............. 130

10 .1 .2 . I nte rn all y out sou r ced t hr ou gh t he sh ared se rv ices ce nt er m odel ........................................................................... 130 A] Global shared services Center example: Boeing...................... 130 a) Company overview .............................................................. 130 b) Implementation overview ..................................................... 131 c) Results .................................................................................. 132 B] European shared services center example: DuPont Europe ....... 132 a) Company overview .............................................................. 132 b) Implementation overview ..................................................... 133 C] French shared services center: France Telecom ...................... 134 a) Company overview .............................................................. 134 b) Implementation overview ..................................................... 134 c) Results .................................................................................. 134 D] Other outsourcing companies that applied this model ............. 134

1 0 . 2 . A Co m p a ny Th a t H a s O u t so u rc e d S o m e O f I t s H um an R e so u rce s P r oce s s e s: K e ll og g Fo od s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 3 6 191 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

10 .2 .1 . Comp an y ove rv iew ....................................................... 136 10 .2 .2 . H R out sou rc ing de al ...................................................... 136 10 .2 .3 . Out sou r c in g impl eme ntat ion re sult s .............................. 137 10.3 . Companies That H ave Outsourced A ll Of Their H uman R e so u rce s Bu s i ne s s P ro ce s se s Ex ce pt M an a ge r i al On e s . . . . . . . . . . . . . . . 1 3 8 10 .3 .1 . BP Am oc o (B r it ish Pet r oleum Amoc o) ............................ 138 A] Company overview ................................................................ 138 B] HR outsourcing deal ................................................................ 138 C] Comments ............................................................................. 139 D] Outsourcing implementation observed results ......................... 139 a ) P o s i ti v e o n e s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 3 9 b) Negative ones ...................................................................... 140

10 .3 .2 . Othe r ma in c om pan ies w h ich ap pl ie d t h is m odel .......... 140 C H A P T E R 11. H U M A N R E S O U R C E S O U T S O U R C I N G E X P E R I E N C E D P R O V I D E R S . . . . . . . . 1 4 2 11.1 . HR O P rovi de rs S p ec ial ize d In Som e H um an R e so urce s F u nc t io n s O u t so u rc in g Se rv ic es . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 4 2 11 .1 .1 . St affin g an d Recru it ing .................................................. 142 11 .1 .2 . Payr oll an d Bene fit s ....................................................... 142 11 .1 .3 . Empl oyee hea lt h a nd Pen s ion bene fit s .......................... 143 11 .1 .4 . Specific p r ov ide rs in spe c ific count r ie s ......................... 143 1 1 . 2 . H R O P rov i de r s P ro po s i ng A n I n te g ra t ed So l uti o n I nc l udi n g T h e Wh ol e Ra n ge Of H um an Res o u rc e s P ro ce s se s . . . . . . . . . . . . . . . . . . . . . . . . 1 4 3 11 .2 .1 . E xult I nc . ....................................................................... 143 A] Company overview ................................................................ 143 B] Activities ................................................................................ 144 C] Key facts ............................................................................... 145 D] Strategy ................................................................................. 145

11 .2 .2 .

O t her

ma in

p r ov ide rs

p r opos in g

an

int e grated

s olut ion .................................................................................... 145 192 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

C H A P T E R 12. IBM (I N T E R N A T I O N A L B U S I N E S S M A C H I N E S ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 4 8 1 2 .1 . Comp a ny Ov e rv iew . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 4 8 12 .1 .1 . Fact s a nd figu res ........................................................... 148 12 .1 .2 . Act iv it ie s ....................................................................... 149 A] IBM ........................................................................................ 149 B] IGS (IBM Global Services) ....................................................... 149

12 .1 .3 . St rat egy ........................................................................ 150 1 2 .2 . Ma j or O ut s ou r ci n g P r ovi de r . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 5 0 12 .2 .1 . St rat egic Out sou r c in g S erv ices ...................................... 151 12 .2 .2 . I BM EME A Str at egic Out sou r c in g Te am .......................... 151 1 2 .3 . Comp e ti t ive Hu m an Re so u rc e s O rg a n iz at io n . . . . . . . . . . . . . . . . . . . . . . . 1 5 2 12 .3 .1 . I BM U.S . E x ample ........................................................... 152 A] U.S. HR Service Center ............................................................ 152 B] Deal with Fidelity Employer Services Company ........................ 153 a) Company overview .............................................................. 153 i/ FESCo (Fidelity Employer Services Company) ............................. 153 ii/ Fidelity Investments Institutional Services Company, Inc. .......... 153

b) HR outsourcing deal ............................................................. 154 c) Tangible transfers ................................................................. 154 i/ Staff transfer ............................................................................ 154 ii/ Equipment Transfer .................................................................. 154

d) Business opportunity ............................................................. 155 e) Benefits expected by both parties ........................................ 155 i/ IBM .......................................................................................... 155 ii/ FESCo...................................................................................... 156

12 .3 .2 . I BM EME A HR O r ga n izat ion ............................................ 156 A] Self-Service ........................................................................... 156 B] EMEA HR Service Center .......................................................... 157 a) Presentation ......................................................................... 157

193 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

b) Objective ............................................................................. 157 c) Organization......................................................................... 158 C] Results ................................................................................... 159

1 2 .4 . H uma n Re s ou rc e s S e rvi ce s P rov id er . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 5 9 12 .4 .1 . I BM Bus iness C onsult ing Se rv ices ................................... 160 A] Human Capital Solutions ......................................................... 160 B] Business Transformation Outsourcing ....................................... 161

12 .4 .2 . I BM H R Te chn ol ogic al S erv ices ...................................... 161 A] Services overview .................................................................. 162 B] Services description ............................................................... 163 a) Human Resources management consulting .......................... 163 b ) E R P (E n t e r p r i s e R e s o u r c e P l a n n i n g ) s e r v i c e s . . . . . . . . . . . . . . . . . . . . . . . . . 1 6 4 c) Support and implementation ................................................ 164

12 .4 .3 . I BM Le a rn ing Se rv ices .................................................... 165 1 2 .5 . Co nc l u si on . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 6 5 C ON C LU SIO N . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 6 7 A FT ER WO RD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 6 8 R EF EREN CES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 6 9 T A B LE O F IL L U ST RAT IO N S . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 8 1 D ETA I LED TAB L E OF CO N T ENT S . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 8 2 D EC LA RA TIO N S . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 9 5

194 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY

DECLARATIONS Mathilde RENAUX

I herewith declare that I completed the thesis submitted on my own and that I applied only those resources as indicated. I marked as such all quotations I used from published and non-published writings. This paper has not been submitted in the same or a similar form to another examination authority.

Crach’, 31st July 2003,

Eloi MALTA-BEY

I herewith declare that I completed the thesis submitted on my own and that I applied only those resources as indicated. I marked as such all quotations I used from published and non-published writings. This paper has not been submitted in the same or a similar form to another examination authority.

Crach’, 31st July 2003,

195 OUTSOURCING HUMAN RESOURCES ACTIVITIES OF A MULTINATIONAL COMPANY IN EUROPE Mathilde RENAUX & Eloi MALTA-BEY