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1 50 MORE things you need to know: The science behind best people practices for managers & HR professionals. VOLUME TWO David Ulrich Robert Eichinger John Kulas Ken De Meuse

2 50 More things you need to know The science behind best people practices for managers & HR professionals. Volume Korn Ferry All rights reserved. David Ulrich Robert W. Eichinger John Kulas Ken De Meuse No part of this work may be copied or transferred to any other expression or form without a license from Korn Ferry. For the sake of linguistic simplicity in this product, only the masculine form is used. However, in each case, the feminine form should always be understood to be included. ISBN Item number More things you need to know: The science behind best people practices for managers & HR professionals. Volume 1st Printing February 007 nd Printing March 011 3rd Printing March 01 4th Printing October 01 5th Printing November 013 6th Printing September 014 7th Printing September 015 8th Printing February 016

3 . Outsourcing What are the two most deadly reported mistakes associated with outsourcing efforts? SELECT ONE: A. Outsourcing activities not suitable for outsourcing and selecting the wrong vendor. B. Overlooking the hidden costs of outsourcing and failing to plan a cost-efficient exit strategy. C. Overlooking internal personnel issues and selecting the wrong vendor. D. Failing to plan an exit strategy and writing a loose contract. E. Writing a loose contract and not actively managing or losing control over the outsourced activity. Korn Ferry All rights reserved. 9

4 . What are the two most deadly reported mistakes associated with outsourcing efforts? The correct answer is E: Writing a loose contract and not actively managing or losing control over the outsourced activity. HOW SURE ARE WE AT THIS TIME? 1 Hint Suggestive 3 Trending 4 Substantial 5 Solid Discussion Evidence to date suggests that carefully crafted outsourcing increases the overall performance of a firm (Gilley & Rasheed, 000). Although only a few studies have been done, loose arrangements on the front end (#3 below) and failure to monitor the quality of the process (#5 below) appear most likely to harm outsourcing efforts. Additionally, five other factors should be considered. Selected research In a study examining 91 outsourcing efforts performed by European and North American firms, Barthelemy (003) identified a set of seven common mistakes that plagued most of the failed outsourcing efforts. Thirty-three percent (33 of 91) were considered failures. This was determined by asking senior managers how satisfied they were with the results of the outsourcing efforts. These are the seven deadly sins and a description of each. 10 Korn Ferry All rights reserved.

5 1. Outsourcing activities that should not be outsourced. Although there are some exceptions, activities that are intimately tied to a company s core business should generally not be outsourced. An exception might be when a firm experiences seasonal fluctuations in its business and must enlist contract support to deal with the increased workload. Outsourcing core activities makes it more difficult to control and monitor the work. However, outsourcing noncore activities may allow a firm to focus on their competitive-edge activities and can result in reduced operating costs if an external firm can do the outsourced activity more efficiently.. Selecting the wrong vendor. Firms must perform adequate due diligence in selecting a vendor. Such things as experience and financial strength of the vendor should be considered. In addition, intangible factors such as cultural fit and shared values should be taken into account. One approach to identifying the right vendor is to outsource a few pilot activities to several vendors and monitor their performance. A less costly way is to identify and interview former and/or current clients of the vendor. 3. Writing a poor contract. Contracts must be well-thought-out and written with precise language. Be sure to determine if there are extra fees involved, which fees are fixed and which are variable, and make sure there is an option to get out of the contract should the relationship go south. Finally, some companies make the mistake of thinking that a soundly written contract is not as important when the firm-vendor relationship is based on trust and a sense of partnership. This is not a safe assumption. On the contrary, a well-written contract can form the basis of building a strong and lasting relationship between a firm and its vendors. Korn Ferry All rights reserved. 11

6 4. Overlooking personnel issues. Outsourcing activities can sometimes lead to costly counterproductive behaviors, such as absenteeism, sabotage, and quitting. To the extent that it is crucial for the firm to retain key personnel and maintain performance levels, steps should be taken to actively communicate with the workforce and to identify those employees who may deserve special attention in such uncertain times. Managers and HR should be prepared to offer increased salaries and more training to those who may be crucial to retain but who may have to assume different responsibilities. 5. Losing control over the outsourced activity. The loss of control associated with outsourcing an activity should not be overlooked. The work, and the quality of that work, must be managed through a contract rather than through direct control. Managing a contract or a vendor may actually require more effort, and certainly implies a different skill set, than that of managing the activity directly. Firms may even need to hire talent from the outside to manage the vendor relationship, which adds to the cost of the outsourcing. In the end, vendors must be actively managed and contracts vigilantly enforced in order to realize the full benefits of an outsourced activity. 6. Overlooking the hidden costs of outsourcing. Hidden costs of outsourcing include those associated with researching and selecting a vendor (see # above), writing the contract (see #3 above), and managing the contract and work to be performed (see #5 above). Ironically, while selecting the right vendor, writing a good contract, and adequately overseeing the work are essential elements to any successful outsourcing effort, these elements can also be the undoing of an outsourcing 1 Korn Ferry All rights reserved.

7 effort should the costs run rampant, especially the ongoing costs of managing the contract. Perhaps the best way to minimize the ongoing costs of managing a contract is to select the right vendor and to write a good contract. The right vendor will be responsive to your needs and a good contract will allow you to hold them accountable with minimal negotiating. While the benefits of involving legal experts is obvious in any contracting situation, the benefits of utilizing technical experts to establish the performance parameters of the contract are less obvious. 7. Failing to plan an exit strategy. It must be considered up front that an outsourced activity may eventually be brought back in-house, or it may be desirable to switch vendors after a period of time for one reason or another. Failing to plan for such possibilities is a mistake and one that can often be mitigated by writing a good contract in the first place. Consider a scenario where there are many qualified vendors for a particular activity; in such a case, it might make sense to include a clause in the contract that allows for an annual review of the relationship and the option of terminating the relationship. Korn Ferry All rights reserved. 13

8 In a summary of the benefits of outsourcing, the Corporate Leadership Council identified the reasons why people approached outsourcing: Outsourcing outcome Provide high-quality HR services to organization Percent marking important 93% Reduce and control HR operating costs 89% Gain access to skills and expertise not available inside 88% Free HR staff from administrative duties 85% Gain access to technologies not available inhouse Off-load activities that are not contributing to competitiveness Share risks of investing in technology with external environment 84% 83% 54% 14 Korn Ferry All rights reserved.

9 The Corporate Leadership Council also identified the challenges from outsourcing: Challenges with HR outsourcing Benefits capture: Maintaining consistent high-quality level of service; ensuring cost savings achieved vs. promised; determining costs associated with outsourcing Change management: Managing transition in HR function; educating organization about HR outsourcing; deciding which activities to outsource Vendor governance: Having vendor accountability; setting vendor performance standards; ensuring value and goal congruence of vendor; providing direction to vendor; lack of internal skills to manage vendor contract Vendor selection: Identifying suitable vendor; comparing vendors service and price policies; understanding HR outsourcing market Percent marking important 69% 59% 53% 51% Korn Ferry All rights reserved. 15

10 So what difference do these findings make? Until further research is done, follow the seven recommendations from Barthelemy: 1. Outsource the right things.. Select the best vendor. 3. Write a good contract. 4. Create a plan to retain key internal talent at the initiation of outsourcing. 5. Create and follow a plan to monitor and manage the outsourcing activity and vendor. 6. Anticipate variable costs. 7. Plan ahead for an exit if necessary. Some key sources Barthelemy, J. (003). The seven deadly sins of outsourcing. Academy of Management Executive, 17(), Corporate Leadership Council. (003). Strategic HR outsourcing. Washington, DC. Gilley, K., & Rasheed, A. (000). Making more by doing less: An analysis of outsourcing and its effects on firm performance. Journal of Management, 6, Lawler, E. E., III., Ulrich, D., Fitz-enz, J., & Madden, J. (004). Human resources business process outsourcing: Transforming how HR gets its work done. San Francisco, CA: Jossey-Bass. 16 Korn Ferry All rights reserved.

11 50 MORE things you need to know: the science behind best people practices for managers & HR professionals is a compilation of research-based critical HR and people process related facts you need to know. Can you answer these questions? What is the best way to get employees more engaged? What effect do subcultures have on an organization s overall culture? Do men or women make better leaders? Which recruitment practice best attracts minority applicants? What role does a leader s character play in a company s performance? What will the training & development of the baby boomer generation look like going forward? Test your knowledge! About Korn Ferry Korn Ferry is the preeminent global people and organizational advisory firm. We help leaders, organizations, and societies succeed by releasing the full power and potential of people. Our nearly 7,000 colleagues deliver services through our Executive Search, Hay Group and Futurestep divisions. Visit for more information on Korn Ferry, and for thought leadership, intellectual property and research. ISBN Korn Ferry All rights reserved. Item number >