Setting the Agenda for People

Many managerial choices change people’s lives. The decision to transform an organization and the decision to do it through outsourcing are both examples. Most executive teams need some time to work out their positions in these sensitive areas, and it’s impossible to do so in an open forum. Why? Because when the decision to outsource is announced, employees want to know—in the same paragraph—how it will affect them. If the executive team has not prepared this analysis, they should hold their announcement until they do. If they have no choice but to go ahead without this information, they should be able to state when they will have definitive answers to employees’ questions.

In one U.S. state, for example, a government IT executive tells the story of a previous administration’s abortive attempt to outsource the state’s information-technology function. As a member of the audience, she listened as the IT leadership went through their presentation about how they intended to structure the initiative and what they would be doing. They announced that they would require the winning bidder to hire all of the state’s IT workers and keep them on for at least a year. She recalls that at the end of the presentation, someone in the audience stood up and said, ‘‘I understand the fact that it will take a year to get the contract finalized and that everyone will have one more year of employment after that, but my concern is for the people on my staff who have two more years to go before their pension plans vest. You will be moving them to the private sector just as they would be vesting. How will you be dealing with those people who have put in so much time with us?’’ The answer came back, ‘‘We haven’t really thought about that.’’ She reflected in disgust, ‘‘They did a lot of work behind the scenes, but when they made the announcement, they had not even taken care of the really predictable issues. How could they get this far without thinking these things through?’’

The example underscores the importance of having a complete story to tell when outsourcing is announced. The baby probably won’t live if it is delivered an organ at a time. Executives do need some ‘‘behind the scenes’’ decision making to pull this together. If they are new to the process, they also need a way to bring in expert guidance so they can craft a well-thought-out approach without risking information leakage by soliciting input from employees.

Thomas Cook used its bunker meetings this way. Only the senior leaders in the organization were involved—the CEO, group finance director, group business transformation director, HR director, and corporate communications director. Each week for about eight weeks, this small team spent an entire day or two sorting out what they needed to do to transform the company. They not only agreed to use outsourcing to help accomplish their aggressive objectives but they also designed a new structure for the organization and attached individual names to new responsibilities. As part of this process, they had to determine exactly which roles and functions would remain inside the company and which would be taken on by the outsourcing partner. The implications of this strategic choice—where to draw the line—trickled down through the organization as individual names went on the ‘‘retained’’ side or the ‘‘outsourced’’ side of the ledger.

This process of naming names is full of land mines. Any organization that has integrated an acquisition or conducted a layoff has picked its way through the issues. Setting up transformational outsourcing is no different. Executives begin with an approach for making decisions about who goes and who stays. In Thomas Cook’s case, the principle was to retain the strategic thinking for finance, HR, and information-technology functions in a lean staff. NS&I used a similar principle. It retained strategy, product design, and relationship-management functions. This is a common way to divide internal and outsourced roles. Organizations that retain no strategic capability often find they don’t have the internal expertise to manage their relationship with their outsourcing provider effectively.

Setting the dividing line does not completely solve the problem of who goes where, however. When it comes to deciding about individuals, executives have difficulty following the rules. They tend to protect their favorites. Instead, as these choices are made, the team must ask itself whether the chosen people have the values, the talent, the experience, and the energy to manage the new organization. If they do not, the organization will not benefit from keeping them on either the retained or the outsourced side. Delaying that decision by transferring these individuals to the outsourcing partner simply undermines success.

The leadership team also has a responsibility to the people whose lives will be affected by the decision to transform through outsourcing. That responsibility is to set an agenda for people with the principles and values that will guide how individuals are treated during the change. This is not a responsibility that can be delegated to the outsourcing provider.

I am not arguing for a particular set of principles and values, although I know the choices I would make personally. I am just asserting that the principles be laid out clearly so the employees understand the rules of the game. They are grownups; they can then make their own decisions. For its part, the leadership team should give these principles the weight of commitments—or commandments, if you don’t mind the religious over- tones. If they promise to be open and honest, they should not be caught hiding bad news or rewriting history. It just won’t sit well with those whose trust must be reearned.

Executives should take account of the current economic and business landscape as they decide what terms and conditions will apply to the transfer of people to the outsourcing provider. A government IT executive in Australia, for example, chose what they call the ‘‘clean break’’ model when his organization transferred all of its IT workers to the private sector. With this approach, employees receive a generous redundancy (or severance) payment when they leave their government posts because they are not transferred directly to employment with the outsourcing partner. The alternative approach would have eliminated the redundancy payments, but arranged for the transfer of employment. In this situation, the executive reasoned, the market for IT skills was strong so the workers would have no trouble finding new jobs. Many went to work for the out-sourcing partner immediately, and they pocketed their redundancy checks as well.

The UK’s TUPE laws (transfer of undertakings protection of employment) restrict executives’ choices about the terms and conditions of transferred employees. These laws require that employees of a business sold as a going concern retain their existing employment terms and conditions under the new ownership. This applies to transfers that result from outsourcing as well as from mergers and acquisitions. If it is necessary to reduce the workforce shortly after outsourcing, it becomes incumbent on the employer to consult with the affected employees prior to their transfer to the outstanding provider. The intention of these laws is to protect employees’ rights and to take the fear out of transfer for employees. It also takes the responsibility for setting personnel-transfer principles away from company leadership and encourages them to shuffle the responsibility for these difficult decisions onto their outsourcing partner.

Michel-Marc Delcommune, the CFO and executive director of Magyar Oil and Gas Company, a Hungarian energy company, compensated transferring employees in an unusual way. He recognized that employees were moving from the energy sector to the services sector and that pay scales in the latter were significantly lower. To keep employees from bearing the long-term consequences of this pay gap, he calculated redundancy payments that reflected the net present value of their reduced career-long earnings.

One extremely successful way to address people’s concerns about outsourcing is to deal with them in relevant groups rather than taking a one-size-fits-all approach. And some of those relevant groups may include only one individual. For example, a company might establish three broad groups based on pension-plan vesting. One group contains employees who have no vested pension rights. These employees could keep their years of service when transferring to the outsourcing provider, and could apply toward vesting in the provider’s plan. A second group that is already vested could keep its current pension rights or transfer full vesting to the provider’s plan. Additional years of service would accumulate in the latter. Individuals who are on the cusp of vesting could be retained in the organization until that point, then transferred as above. Executives should apply the same kind of logic to health care benefits, vacation, and every other part of the employment relationship. Further, they should think through these issues at the outset or they risk negotiating a rat’s nest of inequitable, piecemeal arrangements.

Goldsmith’s administration used this approach in transforming Indianapolis, and they added one other feature that gave employees a comforting sense of control in their changing world: They told all employees who were transferred to an outsourcing provider that they had the option to return to government service—not necessarily to their old job, but at their prior terms and conditions. This safety valve allowed employees to put aside their fears and give the new employment arrangements a try. The only individual who ever took Goldsmith up on his offer through 60 outsourcing deals was a union steward.

Establishing a principled structure for transitioning people from one company to another is essential. Extensive and intensive communication helps people step across with confidence.