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The role of human resources in successful outsourcing.

Corporations throughout the world are grappling with issues related to future business focus and core activities. Critical questions for these companies are: What do we do best? Where should we focus our time and resources? What essential, noncore activities should be provided by others who have those activities at their core? For example, Anheuser-Busch announced, apparently after asking similar questions, that the company was selling the St. Louis Cardinals baseball team and the company's snack foods division. It decided that these businesses were outside their core business of beer, theme parks, and aluminum cans (Wall Street Journal, October 24, 1995).

Increasingly, companies are outsourcing noncore activities to world-class providers that make the activities their core competencies. Outsourcing takes a cost center and transforms it into a customer-focused service operation. This trend is not new and is well on its upswing. According to Peter Drucker (Wall Street Journal, March 29, 1995), "In another 10 or 15 years, organizations may be outsourcing all work that is 'support' rather than revenue producing, and all activities that do not provide career opportunities into senior management. In many organizations a majority of the people who work for them might be employees of an outsourcing contractor."

The outsourcing provider traditionally has a core competency in the specific function being outsourced. This includes almost all business processes from maintenance and mailroom to information systems and finance. The outsourcing provider - or outsourcer - can bring specific expertise on an as-needed basis rather than the client corporation staffing the position with a full-time resource. In addition, the outsourcer can provide better career opportunities to employees because they are more likely to invest in training for those skills. The employees' careers are enhanced because they align their personal core competencies with the outsourcers' core competencies and have greater opportunities to work on varied projects and progress toward management.

This article focuses on HR's role in the outsourcing of any business process and recommends best management practices that both the provider and client can implement to ensure a successful transition.


Outsourcing has evolved from delegating only traditional activities, such as security, janitorial services, and cafeteria services, to outside enterprises. Today, as corporate leaders understand the strategic value of outsourcing, they are looking at every function to determine whether it is essential and core to their business. Functions such as internal audit, tax, finance and accounting, human resources, etc., that were traditionally considered "too close" to the core of the business to be performed by outsiders are recognized now as "essential but not core." These functions are being outsourced today to organizations such as Arthur Andersen, whose core competency is tax, internal audit, and finance and accounting. Arthur Andersen pioneered the outsourcing of finance functions and today has over 300 clients who have outsourced these noncore functions.

All business functions have essentially three primary elements: people, process, and tools. When a function is outsourced, the process usually changes (or is reengineered), the tools are enhanced (e.g., with technology), and the people in the function change. Regardless of the specific function being outsourced, the one element that is common is the people element. Every function considered for outsourcing has people performing the work. Ironically, although everyone would agree that people are an integral part of the function, they are often the last consideration.

When functions are outsourced, employees either are hired by the outside provider, move to other parts of the employer's organization, or change employers. Because of the profound change that is occurring to the employees - not only in the outsourced function, but also throughout the client organization - significant attention should be given to the human resources transition.

When a Fortune 100 company was considering outsourcing a finance function, the director of the department invited seven competitors to bid on the work. Each competitor was invited into the company to meet with senior management. After several weeks, during which the potential outsourcing providers were highly visible to the workforce at large, employee morale was poor and productivity was down. Arthur Andersen was the one provider that brought a human resources focus to its diagnostic review. Arthur Andersen's staff spent time with the department management, helping them understand how to manage their employees during this period of anxiety and uncertainty. This counsel was much appreciated, regardless of the outsourcing decision. During this period, the director asked one of the other potential providers how they planned to deal with the human side of this outsourcing opportunity. The response was a classic misunderstanding of HR's role in outsourcing: "We'll deal with HR if we get the work." The director later said that this was the last thing he wanted to hear. He had HR challenges today and they could not be put on hold until an outsourcing decision was made.

Dissatisfaction, anxiety, and even lawsuits can be a result of not considering HR's role early in the outsourcing discussions. Arthur Andersen's HR team has been involved in over 150 transitions with companies involving 3 to 250 employees. Our experience has allowed us to develop some best practices that, when implemented, can have a positive impact on the attitudes of the employees involved in the outsourcing process and consequently increase the success of the outsourcing engagement. These best practices are divided into two categories: (1) the outsourcing provider's HR responsibilities and (2) the client company's HR responsibilities.


Arthur Andersen learned early how important the human element is to a successful outsourcing engagement. The following, therefore, are practices recommended from the outside provider's point of view.

1. Define and communicate a transition plan. When an outsourcing decision is communicated, the employees experience anxiety because the future has suddenly become uncertain. That anxiety can lead to low morale, reduced productivity, and even litigation. The outsourcer should propose a transition plan with defined activities such as the interviewing schedule, employment decision time frame, and the employment start date to reduce much of the uncertainty for employees. Although they won't know specifically how their individual jobs will be affected, the employees will know when they can expect to receive that information.

Recently, a company announced its decision to consider outsourcing. The company was notorious for announcing major projects without giving any time frame for completing the projects. There was much skepticism when the company announced the date that a decision to outsource would be communicated to the employees. Knowing the company's history of communicating change, we strongly encouraged the executives to commit to this date. To the employees' surprise, the executives announced their outsourcing decision by the agreed-upon date. Within two days, the outsourcer announced the transition plan, and one week later the employees knew their employment status.

The employees were happy with the process. Their uncertainty about the future was reduced because company expectations were communicated clearly and a defined transition plan was followed. The result today is that employees are satisfied with the decision and are looking forward to opportunities with the outsourcing provider.

2. Minimize the "unknown." The most difficult period for an employee is the time from announcement of the outsourcing decision to the notice to the employee of whether employment is available with the provider. The quicker the outsourcer moves through this period the better. Based on experience, we have instituted a practice to keep the transition period as short as possible. If the provider's client's HR is involved in the early planning stages, there is no reason, even despite the size of engagement, that a short transition period (e.g., three weeks) cannot be implemented. If the engagement involves many employees, it means the outsourcer will need to bring more resources to the transition to ensure meeting this time frame.

3. Communicate, communicate, communicate! Before any final outsourcing decision is communicated to the employees, human resources issues must be identified. Once an outsourcing decision is communicated to the affected employee group, the employees will have many questions and concerns, including:

* What are my options?

* What is the severance policy if I don't receive an offer?

* If I receive an offer from the outsourcer, but choose not to work for that firm, will I still receive severance?

* How will vacation and sick time that has been "banked" be handled after the transition?

* What job placement assistance will be available for me?

* How will pension benefits be handled?

* What is the culture of the outsourcer's organization?

* How will my job change?

* What will the outsourcer expect from me?

Employees will want to know the answers to these questions immediately following the announcement. They will look for an opportunity to create some stability amidst all of the uncertainty that outsourcing inherently causes. The quicker the provider's HR team can respond to the relevant questions, the better the employees will feel throughout the transition process and the less chance they will have to take legal action against the employer and outsourcer.

At one Arthur Andersen client, a medium-sized law firm, we executed an effective transition in part because these questions were addressed before an official announcement was made. We met with the client's human resources team, reviewed the issues that we knew the employees would have, and prepared answers to questions about severance, employment opportunities, etc. When the announcement was made, we gave the critical information to the employees before they were given the chance to ask questions. The result was that during and after the transition we had a productive group of employees and minimal disruption.

The outsourcer's HR team is only one part of the transition equation. The members of the client's HR team must understand their role and be prepared to implement the transition as quickly as the outsourcer's HR team.


Traditionally, the outsourcing transition begins when the outsourcing decision is announced to the employees. This is too late in the process for the employer's HR to first get involved. At this point, the HR team must play catch-up and fulfill commitments made by line management. Communication and other practices that should be undertaken by the employer's HR team are described below.

1. Get involved early. An effective outsourcing transition actually begins when the company first discusses the outsourcing opportunity with the outsourcer. Using this broad definition of transition means that the client's HR team should be involved in those early discussions with the outsourcer. Some of the questions that HR should ask the outsourcer include those related to:

* employee selection process

* benefits and personnel policies of the outsourcer

* policies related to past service credit

* culture of the outsourcer's organization

* legal exposure as a result of poor transitions in the past

* commitment of the outsourcer to the HR process after the official transition date

* turnover statistics of employees who have transitioned into the organization

* career development opportunities for employees

2. Work with the outsourcer's HR team closely during the outsourcing transition. Everyone wants the outsourcing opportunity to succeed. Employees become a vital part of that success. Employees are more effective during and after the transition when the client and the outsourcer speak with one voice.

Before an announcement is made, the HR teams on both sides should identify early in the process what the key issues are going to be and decide who should address these issues. For example, the outsourcer should not respond to questions that the employees will ask regarding severance policies of the company if the employee does not receive an offer from the outsourcer. Nor should the company respond to questions employees may ask about the number of employees the outsourcer may hire or the skills the outsourcer is looking for in their hiring process.

Discussion of the key issues before an announcement is made will ensure that the outsourcer and the client HR teams speak as one team, supporting rather than contradicting each other during the transition.

3. Actively participate during the transition process. The client's HR team plays two very important roles during the critical time following the outsourcing announcement. The first is the role of a psychologist. A structured meeting with HR immediately following the announcement allows the employees to express their concerns, frustrations, or excitement in what they may consider a safe environment. Expression of these feelings helps to reduce some of the anxiety that they are experiencing because of the announcement.

The HR team's second role is to describe to the employees the important aspects of the outsourcing transition process. These include severance policies, transition of benefits, and employment opportunities.

Beyond these early meetings, the client HR team must be available regularly to respond to questions that employees may not have asked during initial meetings. Depending on the size of the department, it may be appropriate to have a human resources person physically located within the space of the department being outsourced during the transition process so that the employees know that their concerns can be heard and addressed in a timely manner.

4. Continue to participate after the official transition date. Some of the outstanding client HR departments that we have worked with have supported the affected employees throughout and after the transition process. They have provided a level of comfort, encouragement, and support to the employees following the official transition.

It is appropriate for the client's HR team to continue to be available to respond to employees' questions after the transition. During the early stages of the transition, the employees often feel more comfortable approaching the original employer's HR team, even though the employees may be on the payroll of the outsourcer. Some of the employees' questions during this time include clarification on a final paycheck, discussion of the severance policy, transition of severance benefits, and advice on how to succeed in this new outsourcing environment. If the client's HR team accepts this responsibility, members can play a very positive and constructive role assisting the outsourcer in making an effective transition for employees.

We want our employees who have been hired through outsourcing to identify with Arthur Andersen, but not totally lose their identification with their former employer. Maintaining some identification with their former employer allows them to operate more effectively within the culture of the client's organization. It also encourages them to maintain important contacts within the organization that will help us to succeed as a service provider. The client's HR team can help in this integration process by responding to employees' questions, reminding them that the culture can benefit them in their work, and inviting the employees to participate in appropriate social events.


Line executives' attitudes toward human resources must change. No longer should they view it as a staff function whose only role is to assist in a transition once the outsourcing decision has been made and communicated. Instead, line management should accept that human resources is also a line function. This fundamental shift in thinking will ensure HR's early involvement in the outsourcing process, which can significantly increase the chances for a successful transition and productive engagement, both for the outsourcing provider and for the client.

The early success of an outsourcing engagement will hinge on the human resources issues. When the client and outsourcer HR teams work closely together early in the review and decision process, key issues will be identified and addressed, employees will feel fairly treated, and litigation risk will be reduced. The end result will be a strong partnership between the client and the outsourcer, with both parties achieving maximum benefit from the outsourcing relationship.

Grover N. Wray is based in Chicago and is director of human resources contract services for Arthur Andersen, a global professional services firm. Arthur Andersen provides outsourcing solutions in internal audit, tax, finance and accounting, human resources, and other business processes, and is a consultant on the outsourcing decision process itself.
COPYRIGHT 1996 Executive Enterprises Publications Company, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
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Author:Wray, Grover N.
Publication:Employment Relations Today
Date:Mar 22, 1996
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