Early HRO Adopter Adjusts to Change and Strengthens Provider Relationship

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"While the initial period of transition presented challenges and growing pains, over time our performance results have met our goals in each category."

- Sekhar Ramaswamy, Prudential Financial

Early HRO Adopter Adjusts to Change and Strengthens Provider Relationship
By Beth Ellyn Rosenthal, Editor

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Dan Gutmacher, Client Delivery Executive, Hewitt Associates Debra Floyd, COO, Outsourcing Center Sekhar Ramaswamy, VP, Chief Talent Officer (formerly VP, Planning and HR Services), Prudential Financial

The hallmark of a successful relationship is that it is able to evolve and grow over time. The same holds true for a successful outsourcing partnership. As an early adopter of multi-process human resources outsourcing, Prudential Financial needed to create a roadmap through uncharted territory with its provider company Hewitt (originally Exult, which later merged with Hewitt.) As a result, the relationship between the two organizations has a maturity not often seen in the HRO space. Here are some of their lessons learned.

The business challenge: going public

In 2000 Prudential Financial was preparing to go public. At that time, HR had an internal shared services center supporting a declining customer base. "Going public meant a serious re-examination of how we organized HR. In addition, we knew we had to run HR more like a business," says Sekhar Ramaswamy, who was the lead executive managing the Hewitt relationship from its genesis until earlier this year. (Ramaswamy recently assumed a new role as Prudential's chief talent officer.)

HR had a mandate to:

Become a leaner organization
Reduce unit costs for HR services and move to a more variable cost model
Focus on the programs and services its customers valued most
Measure performance more rigorously and consistently
Adapt quickly to change, including advances in technology as well as mergers and divestitures

"Clearly, it was going to be difficult to achieve these goals within the traditional HR model," says Ramaswamy. "We began to consider various options and ultimately decided upon outsourcing."

Supplier selection

One of Prudential's key factors was cultural fit. "We needed to preserve our customer focus while creating a more nimble HR model. Having a partner that understood this was critical. Exult was focused on both quality and cost effectiveness. So we lined up well," says Ramaswamy.

Prudential, however, understood the risks of being an early adopter. "Frankly, we needed to make sure they could do the work," he says. To that end, more than 100 process experts and key stakeholders from both firms performed the due diligence.

Ramaswamy says Exult's merger with Hewitt brought a new dimension to the relationship. "With Exult, we were working with a start-up. As a larger, more diversified company, Hewitt was more like Prudential," he reports.

One clear advantage Prudential saw when it started working with Hewitt was its capital base, "which was a challenge for Exult," says Ramaswamy. Hewitt's available capital "helped move our relationship forward."

Transition

The schedule was "aggressive," with completion targeted just nine months from deal signing. "The transition put a lot of stress on people because of its speed," says Ramaswamy. In retrospect, "slowing down the pace" is one thing he'd do differently.

Pressing challenges fell into three areas:

Lack of precedence: Since the multi-process HR industry was still new, there were no best practices for managing transition processes without moving over the people, so the partners had to develop plans from scratch.
Internal resistance: "Some IT staffers were skeptical about the outsourcing model," says Ramaswamy. "In areas where we were reducing staff, retained coworkers were understandably concerned about their colleagues. In addition, the HR consultants, who were large consumers of HR services, were worried about losing a direct line to their operations contacts. And there were other skeptics who stood on the sidelines to see if this would work," says the Prudential executive.
Stress on select services: Several services, particularly IT and severance processing, presented special challenges. "For example, the combination of transition disruption and increased volumes exposed flaws in our severance processing," says Ramaswamy. "We didn't anticipate how long it would take to stabilize a process because we didn't know what to expect."

The partners approached this challenge with a lesson they learned during due diligence: give two individuals, one from each organization, responsibility for solving the issue. "They had to bring forth a joint recommendation," explains Ramaswamy, "and we held both accountable for delivering results."

Repatriation of recruiting underscores flexibility

The original scope of Prudential's deal included outsourced support of the staffing function for jobs at entry through manager level. At that time, hiring volumes were at an all-time low.

However, the company's strategy shifted towards growth in subsequent years, and new customer needs emerged. Prudential responded by deciding to repatriate staffing in 2007. The contract did not cover this situation, so it required a unique approach.

Dan Gutmacher, Hewitt's account executive for Prudential, explains that both partners drew from the lessons learned during the original transition. "We said, 'Let's define what is best for the customer and work through the issues jointly.'"

"Prudential wanted to move staffing back in house, but it also wanted some of Hewitt's people to work for Prudential," explains Ramaswamy. In response, Hewitt let key staff interview with Prudential rather than reassign them to other accounts. Prudential then helped Hewitt sublease the space in Prudential's Newark, New Jersey, facility that it had been using to house the staffing function.

"We both demonstrated flexibility in solving this challenge as quickly as we could," Ramaswamy continues. "Hewitt really went the extra mile."

Brian Sansbury, Hewitt business unit leader, acknowledges that this decision "had a material impact" on the supplier. "But at the end of the day, it was the right thing to do."

Hurricane Ike: Going the extra mile

The lesson of putting customers first occurred in 2008 when Hurricane Ike hit Hewitt's processing center in The Woodlands, Texas. The hurricane knocked out essential services like lights and air conditioning, yet Hewitt's employees came in and did the work using flashlights. "We had to monitor the CO levels to make sure the environment was safe," Sansbury recalls. "Nevertheless, our first focus was on getting everyone at Prudential paid on time."

In return, Prudential managed the incoming flow of transactions so that the reduced Hewitt staff could concentrate on high-priority items. "Both organizations pulled together to ensure a positive outcome," says Sansbury.

Business benefits

Prudential realized one of its original drivers was to get its cost model "as variable as possible" so HR's internal pricing methodologies could quickly adjust as volumes scaled up or down. "The Wall Street analysts wanted to see us get our cost structure in line with that of a public company, which we did," says Ramaswamy. "Today's difficult economy further underscores the benefit of the variable cost model," he notes.

He explains that cost savings, which have topped $60 million over the last eight years, have three elements:

Guaranteed price reductions
Paying for consumption only
Gain-sharing

Hewitt is responsible for capital improvements, a "key success factor in this economic environment," adds Ramaswamy. "They continue to upgrade our technology, which has paid dividends for us."

One example: Prudential wanted stronger controls for its employees' sensitive information. "We made a significant investment in new software to monitor the flow of data," says Gutmacher. "Prudential is pleased because we have gone beyond contract provisions to meet their standards."

They realized an additional goal: the company's HR staff has more time to focus on "high value, strategic talent management issues," Ramaswamy notes.

Lessons learned

Another lesson is in the area of governance. Like all HRO models, the Prudential contract puts fees at risk when Hewitt misses agreed-upon performance levels. However, Prudential recently added performance incentives as a motivator. "We have done considerable work to get the right governance in place," says Gutmacher.

A final lesson learned: the partners realized that associates and subject matter experts could not think innovatively if they were only focused on the bottom line. "That mindset was becoming an inhibitor in some cases. So we told employees on both sides to focus on getting the best solution and we will work through the financials later," says Sansbury.

Ramaswamy says the partnership's "day-to-day operating mechanism is to always be in a learning mode." Adds Gutmacher, "We constantly evaluate what's the best thing to do operationally."

Why this relationship works

Ramaswamy recalls he knew he could create a partnership with Exult senior management at their first meeting. "We were both focused on getting results for our customers. We knew we had to do it together; it couldn't be their way or ours," he says.

Today, he says, both parties continue that commitment to open dialogue. "We know how to raise and work through conflicts, which ultimately improves performance."

The buyer is eager to help the supplier succeed. "The HRO industry has transitioned from the notion of building capacity to proving it can make a profit," says the Prudential executive. "That has put stress on every HRO provider."

Ramaswamy goes on to note that Prudential "has a shared interest in ensuring Hewitt meets its profitability goals. We continuously evaluate opportunities to improve Hewitt's margin while maintaining our services and meeting our objectives."

Gutmacher says the partners are making better decisions as their transparency increases. "We don't want to make a decision that is problematic for them," the Hewitt executive says.

Ramaswamy echoes this sentiment. We share key communications with them. Everyone on both sides has the mindset of "working together for one set of customers."

He notes that in the beginning some colleagues questioned why he would invite Hewitt to a Prudential planning session. His answer: "Without Hewitt, we can't deliver. They are our right arm." He adds that his team takes a similar role in Hewitt's planning process.

The Prudential executive goes on to note that Hewitt often "looks to us to vet ideas because they know we're invested in their success and will give them candid feedback. At times, we'll be their guinea pig for a promising idea. It's a strong two-way planning process."

The bottom line: Prudential's HR function "runs like a business," due, in part, to HRO.

Lessons from the Outsourcing Journal:

Keeping the focus on the customer is always the first priority. Whether it's day-to-day service decisions, long-range planning, or crisis management, the impact on customers should be the driver for both provider and buyer.
Apply the lessons learned from one part of the process to similar problems when they surface. For example, Prudential and Hewitt learned during transition that the best solutions to problems emerge when members of the buyer and supplier teams jointly propose and take accountability for a solution.
Buyers and suppliers can make better decisions when they communicate openly and plan jointly. Transparency on both sides is key.

Criteria for Best Applied Learned:

The relationship must have participated in the Awards process in at least one prior year
The parties must have demonstrated they applied lessons learned from their mistakes in years prior to the first nomination
Applying these lessons resulted in improving the relationship and the desired outcomes
Publish Date: August 2009

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Copyright © 2009 - Everest Partners, L.P.

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