Canadian imperial bank of Commerce executives couldn’t have foreseen how quickly their newly minted outsourcing relationship would be tested.
Terrorist attacks on the World Trade Center on Sept. 11, 2001, left thousands dead and a country in shock. Nearby buildings were evacuated, including the World Financial Center, where 2,000 CIBC employees worked. Another area building that shut down housed an office for Electronic Data Systems Corp., which three months before had taken over payroll, benefits administration and other HR processes for the Toronto-based bank.
After it was clear that employees were safe, officials turned their attention to payday, due just four days after the attacks. EDS’ 35-person New York staff administered payroll for the bank’s entire U.S. workforce of more than 3,000, but hadn’t computerized the process yet. Vital pay documents were sealed inside its abandoned office, along with all blank check stock. To top if off, attempts to use local computer networks to electronically deposit paychecks failed.
With the clock ticking toward Friday, EDS officials figured out they could run payroll figures in Toronto based on the bank’s previous pay period and cut checks there. Then they hired a courier to drive the checks to New York. Come Friday morning, a bank HR employee stood outside another CIBC office in Midtown Manhattan to hand them out. Employees outside New York City had paychecks automatically deposited into their bank accounts.
"It was a good first test of us working together and under crisis," says Hugh MacDonald, CIBC’s vice president of HR operations and knowledge management. "After that we felt confident about things."
MacDonald tells the story to illustrate how good outsourcing can be. When CIBC contracted with EDS in 2001, the bank had 30 incompatible HR systems and hadn’t incorporated the Web into HR operations. Today, midway into the fifth year of their partnership, EDS has overhauled CIBC’s payroll, benefits, executive compensation and human resources IT systems; created a Web portal, called My.HR, that is used by bank managers and employees; and improved call center response times and other service levels.
The best part: It hasn’t cost a dime over the bank’s existing yearly HR budget. By 2003, CIBC officials were so pleased with the relationship, they extended EDS’ original seven-year contract through 2011 for a total of 10 years and $240 million, making it one of the longest and largest HR outsourcing deals to date.
As executives at CIBC and elsewhere can attest, outsourcing has delivered on its central promise to free HR departments from the mundane to focus on strategic issues. When the bank outsourced payroll and other process-intensive services, it cut 200 jobs from its centralized HR staff, leaving a core group that could better focus on strategic issues such as executive recruiting, training and contract negotiations for the approximately 1,000 CIBC employees who belong to unions. Outsourcing also is helping companies to redeploy remaining HR staff to more productive positions, and even improve department morale. Though CIBC didn’t outsource specifically to cut HR costs, many others do for that reason.
The HR outsourcing market in the U.S., including companies that outsource one or multiple HR processes, is expected to grow from $21.5 billion in 2004 to $32.6 billion in 2008, a cumulative annual growth rate of 11 percent, according to an October 2004 report from IDC, a market research firm in Framingham, Massachusetts.
But it’s not a panacea. While the outsourcing trend is still relatively young, some contracts have already ended because of changing circumstances, a bad fit between client and vendor or other reasons.
In April 2004, Gateway closed its underperforming chain of retail computer stores, laid off 4,000 employees and terminated a seven-year HR outsourcing contract with Affiliated Computer Services signed the previous year. At the time, Gateway officials said they were bringing HR functions back in-house as part of larger cost-cutting measures.
After acquiring Fleet Boston, Bank of America in 2004 pulled payroll, benefits and other services from its original partner, Exult, now part of Hewitt Associates. The bank handed the work over to Fidelity Investments’ Fidelity HR Services Co., which had an existing deal with Fleet Boston.
In January, German chemical conglomerate BASF also switched to Fidelity, yanking its HR outsourcing contract with Mellon Financial Corp. shortly after the financial services company put its outsourcing unit up for sale. The division eventually sold to ACS.
Other deals have failed because management pushed too hard and too quickly to shift HR processes to outsourcers that marketed their ability to handle "your mess for less" but then couldn’t fulfill the promise, says Philip Fersht, a longtime industry analyst and research director at New York outsourcing consulting firm EquaTerra.
Those who opt to take the plunge now can benefit from the experiences of pioneers who learned--some the hard way--that the more preparation, the better. Today, major corporations can expect to spend millions of dollars investigating the right course to take even before putting a request for proposal out to bid, Fersht says.
A tangled system
In the case of CIBC, outsourcing human resources was the means, not the end. The company is Canada’s fifth-largest bank, with seven major business units, assets of $278.8 billion, 1,073 branches and 45,000 employees. After CIBC’s chairman and top management changed in 1999, an HR project team spent the next year evaluating the department, finding that the bank’s myriad HR systems and processes were inefficient and outdated.
MacDonald says the team concluded that management wouldn’t give them the estimated $40 million they’d need to make the changes. The initiative was almost dropped--until someone suggested giving the upgrade job to an outsourcer.
The HR evaluation project team morphed into an outsourcing project team and came up with an RFP. The bank negotiated with two potential vendors. In the end it chose EDS, which had virtually no experience in HR outsourcing but had contracted to handle discount brokerage and wealth management services for CIBC for a decade.
CIBC’s March 2001 contract with EDS called for the Plano, Texas-based company to take over CIBC’s $1 billion semimonthly payroll as well as benefits and pension administration, including pension administration for 10,000 CIBC retirees, and handle compensation planning, including stock awards and executive compensation. The contract, which works out to $24 million a year, wouldn’t save the bank money, but that wasn’t the point, MacDonald says. More important, the deal helped CIBC avoid capital expenses it would have incurred updating computer systems on its own, and put the financial burden on EDS to deal with implementation problems as they came up, MacDonald says. Plus, the contract’s fixed price took the guesswork out of the bank’s HR budget, he says.
"Minute by minute, hour by hour, day by day, we measure activities that were never measured before."
Work started in June 2001 and took 18 to 24 months to complete, a fairly typical timeframe for large outsourcing contracts, officials at both companies say. During that time, EDS transferred 30 incompatible HR computer systems onto one integrated PeopleSoft platform. The outsourcer also constructed the My.HR portal, a gateway to self-service applications that employees use for things like selecting benefits and doing retirement planning and that managers use for tasks like processing hires, planning compensation and doing performance reviews.
Today, CIBC’s HR staff has information it wouldn’t have had if the company hadn’t decided to outsource, says Chris Lord, EDS’ senior VP for Canadian financial services clients and head of the CIBC account. "Minute by minute, hour by hour, day by day, we measure activities that were never measured before," he says.
Such audits and greater quality controls helped push the HR department’s customer service to new levels. For example, calls to the CIBC employee call center that EDS runs are now answered within 20 seconds 90 percent of the time, up from 80 percent when CIBC ran the center, according to company officials.
Outsourcing was one of the last steps CIBC took in making its HR staff more strategic. Even before working with EDS, the bank had decentralized HR operations so that each of the seven operating units had a VP of HR on the company’s management committee and HR consultants assigned to smaller divisions within each unit.
A centralized shared-services department run by MacDonald oversaw payroll, benefits, compensation and other HR planning. When EDS took over most of those functions, that department cut about 200 jobs, reducing CIBC’s human resources staff to 500. Today the bank’s HR shared-services department focuses on critical activities deemed too important to farm out, including global executive recruitment, training and labor relations, MacDonald says.
It’s also home to an alliance management team of a dozen or so HR staffers who oversee the technology, finance and day-to-day operations of the EDS contract. Those managers meet with their EDS counterparts every Wednesday morning to go over routine matters, and they also gather on an irregular basis to discuss tactics and special situations, officials at the companies say.
As part of the original contract, EDS offered jobs to the 200 CIBC HR employees whose jobs were eliminated because of the change. They were offered positions at EDS with higher pay, signing bonuses and other perks. EDS leased office space closer to where most of the displaced workers lived so their commutes would be shorter.
For the new office, the company bought all new equipment and hired an interior decorator. The kid-glove treatment paid off. Ninety-two percent of the HR staff took jobs at EDS; the remainder transferred to other CIBC departments or retired, MacDonald says.
CIBC included its remaining HR staff in communications about the transition of those 200 jobs to EDS so they would know what was going on--and to field any questions about the effect of the new structure on the department, says Danielle Kay, a 15-year bank veteran who helped facilitate the HR jobs transfer to EDS and today manages strategies and tools for the My.HR Web portal.
Some HR employees worried that the bank would outsource more functions and cut more jobs, Kay says.
"We tried to get in front of those people with information to address those issues as they came up," she says. "The reality was some people were happy, some weren’t, and some didn’t seem impacted by it. That’s pretty typical" for post-outsourcing arrangements, she says.
The partnership has been good for EDS too. The longtime IT outsourcing powerhouse used CIBC’s former workforce and what it learned working with the bank as the basis for growing its HR outsourcing business. That led EDS this year to form a $600 million HR outsourcing joint venture, ExcellerateHRO, with Towers Perrin, a private HR consulting firm in Philadelphia.
Not just for the big guys
Major corporations like CIBC aren’t the only businesses electing to outsource. Midsize and smaller companies are outsourcing to cut costs and reorganize their remaining in-house staff to be more strategic. In fact, as contracts’ average cost per employee has shrunk, the number of deals covering companies with 25,000 or fewer employees has risen faster than the number covering companies with 25,000 or more workers, according to the Everest Research Institute, a Dallas outsourcing researcher.
One of those small enterprises is the American Stock Exchange in New York, which has 400 employees and 200 retirees and handles employee relations and training for another 1,500 stock exchange members. When Catherine Casey took over as VP of human resources in early 2001, the bulk of HR functions were being performed by the HR staff at NASD in Rockville, Maryland, which owned the exchange. It was an awkward, expensive setup.
"I was paying (NASD) a premium, and from a recruiting perspective I didn’t think they could understand the New York job market from Rockville," says Casey, who was promoted to senior VP of human resources in 2002.
Casey persuaded her senior management to bring HR functions back to the Amex. But instead of expanding her five-person department, she chose to outsource, contracting with Flanders, New Jersey-based Absolute Resource Solutions to handle payroll and benefits administration and with Buck Consulting, a division of Mellon’s HR outsourcing business now owned by ACS, to handle pension administration.
By Casey’s estimate, the outsourcing contracts she signed in 2002 and 2003 are saving the Amex about $2.8 million a year from what the exchange had paid NASD for the same services. The timing proved right too: In 2004, NASD sold the exchange to its membership, so the Amex would have had to take back its HR functions anyway.
Casey used some of those savings to add a benefits coordinator to her staff. "Because we have this invisible support, it’s like having 20 people on staff," she says. And morale has improved. "Everyone’s jobs became more robust," Casey says. "They had complete control over their function, and they could get additional help" from outsourcers to get their work done.
Turning over process-intensive work such as payroll has freed up Casey and her staff to do more forward-thinking projects: They redesigned the exchange’s health care plans in 2004 and are now working on other plan design changes for 2006.
"We’re having two meetings a week on 2006 because we have the time to dedicate to it," she says. "If I had to run an HR and benefits function totally staffed by us, I’d spend 40 percent of my time supervising those groups."
Analysts and consultants who follow the industry say that outsourcing is a tool that all HR professionals should understand. When the first outsourcing contracts were signed in the late 1990s, CEOs, CFOs and other top managers led the push for outsourcing, sometimes over the objections of HR executives.
But that has changed. HR executives now "need to be able to speak knowledgeably about it with their senior management team," says Matt DeLuca, an independent HR outsourcing consultant and adjunct associate professor of management at New York University. "By doing that, they accomplish two things: (Management) will know they’re the knowledge expert, and they’ll be sharper organizationally because outsourcing will force them to be strategic in their thinking.
"Too often, (HR) gets bogged down by labor-intensive issues that take their attention away from things that really matter. Outsourcing should be energizing and allow them to maximize our effectiveness."
Workforce Management, September 2005, p. 51-54 --Subscribe Now!