Fireman's Fund Insurance Co.'s (FFIC, $11.5 billion in assets) IT personnel were not exactly happy when management let them know that the insurance carrier would likely be outsourcing. Fortunately for management, another emotion the workers lacked was a paralyzing sense of fear.
You see, the Novato, CA-based carrier didn't make the all-too-common mistake of keeping its workforce in the dark and springing the life-altering news on them once the contract had been signed. Rather, "we let them know right up front that we were thinking about getting into outsourcing and got them involved in the RFP process," explains Valerie Williams, human resources consulting, FFIC.
In the end, 350 of its affected employees (less than one-third of FFIC's IT contingent at the time) were transferred in October 2001 to Montreal-based outsourcing provider CGI Group Inc. Although some of the offers were only short-term, employees of the carrier (which experienced zero turnover) were given eight months from the start of the RFP process to the time the deal was signed to plan for their future.
As FFIC found as it planned to outsource IT infrastructure support services, proactive human capital management helped eliminate pre-transition turnover. But that is not all. Companies that practice proper human capital planning and open communication during the sourcing cycle can also expect to minimize the impact on productivity, employee morale and IT's ability to support the business, according to Lisa Stone, vice president and research director, Gartner (Stamford, CT) and author of the study "Human Capital Components of the Sourcing Cycle." So, if letting employees in on an IT organization's often-inevitable means for cutting costs will lead to better productivity results in the long run, why are so many insurance CIOs treating these kinds of plans as their dirty little secrets?
Maria Schafer, program director, META Group (Stamford, CT), suggests that managers sometimes feels lost when it comes to these kinds of personnel-related situations and think, "I can't change it so rather than confront it and get people mad at me, I am not going to deal with it at all." Still, when the alternative is communicating the message: "Surprise, you're fired," it's hard to believe that so many CIOs are keeping their IT personnel in the dark. For executives who are not willing to compromise the value of their cost-reduction measures, "confronting people upfront is important," emphasizes Schafer. "People will take anything that is given to them honestly."
Although open communication and attention to the needs of employees who will be laid off or transferred is necessary during times of change, it is also important to remember that problems aren't going to disappear once the pink slips have been distributed. An often-neglected constituency during these kinds of transitions are the employees who remain-the members of the group on which the IT organization's future is riding.
Ironically, often "more attention (and money) is being spent on those leaving the company than on those staying, even though it is the latter group that is going to have to make the changed organization successful," writes industrial psychologist William Bridges in the The Human Side of Organizational Change (Bridges & Associates, 1993). Bridges is a consultant and lecturer, in addition to being president of William Bridges & Associates (Mill Valley, CA).
If this group is neglected, once the transition dust is settled, you may be left with slow-downs in productivity as the overworked few-"lucky" enough to be retained-try to adjust to their new roles while suffering from "survivor syndrome," which, according to Bridges, is marked by feelings of anxiety, self-absorption, anger, guilt, envy, passivity and competitiveness. If you think that personal feelings will not affect your day-to-day operations, consider that "survivor syndrome can damage productivity and effectiveness just as surely and seriously as can outdated machinery or inept leadership," writes Bridges.
But not all transitions are marked by chaos. By following the tenets of effective human capital management throughout the entire transitional lifecycle, CIOs struggling to reduce their total cost of ownership can achieve optimal results.
Gartner's "Human Capital Components of the Sourcing Life Cycle" divides the outsourcing cycle into four parts. They are sourcing strategy, evaluation and selection, developing and negotiating deals, and sourcing management. According to Gartner's Stone, in each of the four phases, there are specific human capital management activities that need to be completed when creating an outsourcing arrangement.
During the initial phase of an insurer's sourcing strategy, it is important to complete a human risk analysis and construct a human capital strategy and plan. Before an organization does this it must first determine what type of relationship it wants to have with external parties, advises the study. Next, an insurer should determine whether any or all staff will be transferred to the provider. Additionally, an assessment associated with the loss of knowledge capital must be conducted. Gartner's Stone advises that a communication strategy and plan is developed early, and once a message is determined it should be delivered by management. "If you think that the word isn't going to get out you are just kidding yourself," she contends. "People are going to find out about it." The dangers of practicing anything less than full disclosure are great and "if you don't communicate forthrightly then the later messages will be somewhat less trusted."
Shedding Some Light
Allmerica Financial (Worcester, MA, $18 billion in assets) is one organization that has found that open communication can lead to optimal outsourcing results. In 2001, a reduction in the carrier's risk business unit's technology spending led to the elimination of positions. According to Greg Tranter, CIO, Allmerica, the work of 139 employees was outsourced to Boston-based Keane, Inc., and 164 employees were transitioned to the outsourcing provider. As a result of the budget cut, 42 employees were laid off. In order to prepare its employees for the drastic transition, "Allmerica had a comprehensive communication plan that included meeting first with our managers, highlighting the expense challenges, the intended actions to address them and what Keane was offering," explains Tranter. "Essentially, we told them what we knew, when we knew it." The open communication paid off in the long run. "In fact, several of those whose positions were eliminated told us they appreciated the way in which communications were handled."
The determination of which employees' jobs would be terminated or transferred took place during Allmerica's resource management phase. Gartner's Stone says the production of such a plan is an essential part of the sourcing strategy, and during its development the selection of employees who will be outsourced should be determined. Additionally, during this phase, it's important for insurers to map how the transition will be executed. Stone stresses the importance of describing the activities that will prepare staff for the significant changes that they are about to encounter.
Allmerica approached its creation of the plan strategically. "We worked with the business to determine what work they were eliminating as part of the reduction in IT spending," Tranter explains. "Once we determined the core-work that would remain, we looked across the organization for skill sets that would support it." Because work that was deemed non-core would be outsourced, employee skills were matched with those tasks. After realizing that the elimination of positions would be inevitable, the carrier searched for other options.
Although in the end the 42 layoffs were inevitable, according to Tranter, if it were not for some cost cutting alternatives to outsourcing the number of positions that were terminated could have been closer to 250. According to the CIO, "We introduced other levers in response to the expense challenge, such as contractor reductions, reviews of maintenance contracts and unpaid furloughs." As part of the unpaid furlough program, employees could take up to two weeks within the first six months of the year. One week was mandatory for managers, and for non-managers the program was completely voluntary. Eight positions were saved as the result of 75 percent participation.
Twenty-five additional positions were also saved because, at the start of its discussions with Keane, Allmerica made it clear it needed help with the downsizing of employees. Management asked Keane to take on some additional employees for whom Allmerica did not have work. If Keane had refused the additional employees, explains Tranter, the provider would not have been awarded Allmerica's contract.
Taking on Additional Employees
But if outsourcing deals are designed to reduce costs, how can insurers afford to have the provider take on additional employees? According to Keane's Tim Barry, vice president of outsourcing, clients often approach the vendor with a requirement for 100 percent of affected employees to receive offers. "In most environments there is some combination of full-time employees and outside contractors," explains Barry. If there are 150 people performing a job that is to be outsourced, 30 of those 150 might be outside contractors. Keane, relates Barry, could agree to take on the 120 employees who are on the client's payroll. Because of factors such as economies of scale and program management skills, an outsourcing provider can use 120 employees to perform the task that once required the work of 150. Additionally, says Barry, factors like natural attrition come into play.
Also, outsourcing providers are often able to find work for employees in areas that are not related to work done for their former employer. For example, included in FFIC's RFP was a request that employment be found for all of its affected employees. CGI was looking to expand its business on the West Coast, relates FFIC's Williams. But because the vendor was not sure about the rate at which it would gain clients in this region, many FFIC employees were offered only short-term deals by CGI.
Longer-term offers were contingent on CGI's success in building its West Coast-based business. And, as it turned out, the short-term tenures that began with CGI in October 2001 ended in July 2002 because the vendor did not acquire a significant number of clients on the West Coast, Williams relates. FFIC had included in a statement of work (SOW)-a document that outlines the scope of the transition effort-that once these short-term employees' positions with CGI were eliminated, they would receive a severance package based on the number of years they had worked with FFIC.
The importance of drafting the SOW properly can not be underestimated. During the evaluation and selection phase of the sourcing cycle a SOW should be developed so what is expected to happen in terms of human capital is clearly understood by both parties. The SOW should outline the scope of the transition effort, salary and benefit considerations, training requirements and the length of time staff are required to stay with the provider, explains Gartner's Stone. Salaries and benefits received by employees once they are transferred to the outsourcing provider are usually comparable to those previously received by an IT worker at the insurance company.
Before a final SOW is drafted, notes Michael Falik, CGI's senior vice president of business engineering, CGI and the client's human resources department agree upon the financial impact to the transferred employee.
"If employees are losing in one area we adjust up in some way," says Falik. "The carrier's HR department is involved in it so they can go back to their employees and ensure them that it's a true harmonization."
Once the benefits to transferred employees have been outlined, carriers must concentrate on the creation of a roles and responsibility matrix. According to the Gartner report, it should define the handoffs between internal and external roles for each process. Also, the organization should document detailed definitions of all internal processes and create process descriptions for work authorization, problem management, change management, performance management and financial audits. Additionally, in order to facilitate a seamless transition, carriers should plan and execute team building during the transition period to accelerate the assimilation of new process roles and structures in the organization, suggests the study.
The 7 Rules of Transition Management
There are some very basic concepts IT executives need to understand if they are going to effectively manage people through transition. Here are seven essentials that appeared in "The Human Side of Organizational Change" (Bridges & Associates, 1993), by industrial psychologist William Bridges, Bridges & Associates:
- You have to end before you begin. No one can develop a new identity or a new purpose until he or she has let go of the old one.
- Between the ending and the new beginning there is a hiatus. This is a dangerous time when systems don't work very well and people lose heart easily. Build in temporary sources of support and control to get people through this time and make sure that they understand that it is normal to go through a chaotic interim between letting go and taking hold again.
- That hiatus can be creative. The same forces that make the in-between time difficult mean that the normal resistances to change don't work well, either. For that reason the interim is a potentially creative time, when new things can be introduced more quickly and easily than usual.
- Transition is developmental. What ends is often not just a particular situation but a whole chapter and stage of development in the organization's life cycle. Behind the scene, a new organization is taking shape. That's easier to see in retrospect, but it's worth remembering at the time that there is a purpose to all the distress and disturbance. Try to help people to see that the "old way" was fine for its time, but that it belonged to a world which is gone. A new chapter is needed for a new day.
- Transition is also the source of renewal. The leap from one stage of development to another, like comparable leaps in nature, releases energy. That is why organizations so often come out of a painful crisis with new energy and new focus. Renewal for individuals or groups comes from going through transition successfully, not going off for a rest somewhere. Emphasize the need to re-prioritize as a way of unloading no-longer-relevant policies and procedures.
- People go through transition at different speeds. People get strung out along the path of a transition like runners in a marathon. The leaders are often far out of sight ahead. They had a head-start, they feel more in control of their fate, and they probably aren't as personally affected as many of the rank-and-file are. Help leaders understand these things and communicate in terms that make sense from where people presently are, not just where the leaders are.
- Most organizations are running a "transition deficit." Many organizations don't give people a chance to complete the transition cycle. They think that they are saving time by hurrying people, but actually are they are doing is leaving people with still more unfinished business. To keep that from happening, slow down. Listen more and talk less.