Human Resource Problems with Outsourcing Option and solutions

A Case Study of PepsiCo

Prepared by Ali Ahsan

Submitted to: University of Karachi

CONTENTS
Contents Introduction Literature Review Conclusion & Recommendations References 5 10 12 Page numbers 3

Introduction
This paper examines an HR issue related to the fast rising trend of outsourcing of HR activities. The findings and discussions are based on published research and form the basis for analytical discussion that takes place in the paper. To outsource or not to outsource is the contention in the present corporate world worldwide. Given the competitive nature of business today, an increasing number of companies are more than willing to outsource, at least when it comes to HR functions. According to a survey conducted by Buck Consultants (anon., 2000), since 1996 the number of employers outsourcing HR and/or benefits activities has risen by a dramatic figure of 23%. Among the commonly mentioned advantages of outsourcing are that it directly cuts the corporate costs and augments its efficiency, enabling internal employees to staying more sharply focused on core organizational activities and goals. But despite a rising trend, questions still abound as to what HR functions can and should be outsourced and so as to add net benefits to the organization. What are the advantages and disadvantages of doing so and what issues and resolutions are available and have been employed by those who opted for outsourcing? This paper addresses these issues. Central to the discussion is PepsiCos case study depicting its global outsourcing experience involving the issues that it faced and how ere they resolved and what experience and learning it leaves for the rest of those who are keen on outsourcing. The discussions will take place within contextual settings of outsourcing experience of other companies in the contemporary times. The contextual settings are based on a discussion of the reasons companies outsource, the challenges they have faced in doing so, and what they have learned, provide the frame of reference for this model for others to emulate and copy from. PepsiCo is the worlds largest beverage companies with annual revenues of over $30 billion. Its principal business domains include: Frito-Lay snacks, Pepsi-Cola beverages, Gatorade sports drinks, Tropicana juices and Quaker foods. Its portfolio comprises 16 brands that each generates $1 billion or more in annual retail sales. Consistent with its mission, PepsiCo hires and trains the best of the human resources possible in every country and produces and delivers the high quality products for its consumers. PepsiCos legendary super success testifies its understanding of its customer needs and expectations. PepsiCo is alive to its employee needs as much as it is to its customers needs. Mindful of its duties, PepsiCo has a large team of experts at its disposal in different departments such as manufacturing, accounts, finance, distribution, logistics, administration, sales and marketing and it has always served them with the best of HR policies.

PepsiCo signed a ten-year agreement with Hewitt Associates to provide end-to-end human resources administration. Hewitt was to provide comprehensive HR business process outsourcing (BPO) services to PepsiCo. Under this ten-year agreement, Hewitt will provide HR BPO services in the U.S. and HR application development in the U.S. and 67 other countries. HR services provided for the U.S. include workforce and benefits administration, payroll and contact center support amongst others. The HR application development and hosting will support PepsiCos approximately 64,000 employees in the U.S. and approximately 38,000 of PepsiCo's employees in 67 countries worldwide. At PepsiCo, everything we do is marked by a commitment to results, superior quality, and high standards of performance, including the HR services we deliver to our employees, said Peggy Moore, Senior Vice President, Human Resources, and PepsiCo. For that reason, we chose Hewitt as our HR partner to drive and deliver world-class HR services. This partnership signifies two industry leaders coming together to deliver great results, said Bryan Doyle, President, HR Outsourcing, Hewitt Associates. We look forward to serving PepsiCo and its employees with their global HR needs. Hewitt has more than 60 years of experience, and it is the worlds foremost provider of human resources outsourcing and consulting service provider. As HR outsourcing trends continue to grow this signifies one important consideration. There must be more benefits than to the costs in this venture which underlines the importance of HR outsourcing to these big blue chip companies. In other words when multi-national companies opt to outsource its Human Resources Operations, they intend to go for cutting costs. They decide to outsource end to end HR operations to third party and today it has become the greatest of revelations in the business process reengineering.

Literature Review
While PepsiCos outsourcing arrangements with Hewitt is not unique in nature as outsourcing human resource services is not a new concept. In fact multinationals are more inclined to outsource their HR operations. Companies of all sizes and shapes and line of activities have been involved in outsourcing their human resource needs and its management. In the modern era, however, outsourcing human resource can be the key to achieving a more influential and strategic role for the HR function. Just as a new executive briefing from the CIPD also concludes that: the decision to outsource needs to be carefully considered, will not be right for all, and considerable effort needs to be devoted to ensuring a smooth transfer of responsibilities.

Professor William Scott-Jackson, Tim Newham and Melanie Gurney write in the report HR Outsourcing: the key decisions draws on the experiences of 17 organizations that are either outsourcing HR services or have considered the possibility and rejected it. Nonetheless, the outsourcing of HR is seen as a lucrative and more profitable venture. Just as The Yankee Group, a US research and consulting firm, estimated that the worldwide HR outsourcing services (HRO) market will grow to $80 billion by 2008, at a compounded annual growth of 12 per cent, with noncore transactional duties such as payroll and benefits administration increasingly outsourced (particularly in the US) rather than conducted in-house. These findings point towards a growing market and underlying trend in favor of outsourcing not only within US but a general trend within the business community. Although outsourcing may be a growing trend a, it has it benefits and its own pitfalls. What benefits can HR outsourcing can offer. To answer this questions, we reckon that there are many circumstances in which outsourcing HR services can deliver tangible benefits to the organization, for example freeing HR professionals to devote more time to a strategic role in supporting organizational performance is one of the key advantages that outsourcing offers. There are a number of strategic drivers of outsourcing HR services such as:

Cost Cuttings: Certainly one of the most important considerations in HR outsourcing decisions is the cost. But it should not be considered in isolation from other costs/ benefits. The companies who opt for this decision are attracted by the cost cutting it offers.

Improving HR efficiency/delivery: Secondly it is considered that experienced outsourcing providers can often deal with HR processes more effectively. For example, recruitment may be undertaken more quickly, reducing employee turnover costs and speeding up the pace of growth internally.

Leveraging Greater expertise: Thirdly it is believed that external providers usually offer greater levels of specialist knowledge or experience than is affordably available in-house. Anchoring HR with the value chain: Fourthly, it is also believed that outsourcing HR administration can lead to a shift in HR focus towards policy and decision making internally.

Despite the above benefits that are usually considered in deciding in favor of HR outsourcing, the practice is not free from certain pitfalls. Management executives normally consider this an option, but they are not unmindful of its disadvantages. For examples Vanessa Robinson, organization and resourcing adviser at the Chartered Institute of Personnel and Development (CIPD), holds that: "People management plays a crucial role in delivering organizational performance. In today's modern, knowledge economy this is more true than ever before. The decision to outsource HR services is therefore not to be taken lightly. Therefore the key potential pitfalls of outsourcing include: Risking Off-the-shelf placements: In the area of recruitment and training, the organization may have to accept off-the-shelf replacements that are not specifically geared to their needs Limited Cost Cutting: Since the greatest financial benefits of outsourcing often come from using sophisticated software. Therefore, if effective IT systems already exist in-house, cost savings may not be achieved from an external provider to whom the HR outsourcing has been rendered Staff relationships remain un-outsourced: The employee management practices remain essential even when after the key relationship between staff and their line managers remains inhouse, leaving plenty of work on manager / staff relationships that still has to be handled despite the outsourcing relationship; Ownership Issues: Local knowledge and ownership of human resource processes could be lost

In the face of potential pitfalls, the decision to outsource is a complicated one to make,. Vanessa Robinson continued: "The decision to outsource HR services is a complicated one. Cost reasons alone are not sufficient to drive the decision. Decision makers need to ask whether there is a need to change the way the HR department operates and review existing provision. This review needs to consider cost,

administrative efficiency and HR policy strategy and expertise. Where gaps are identified, organizations need to consider whether these are best solved by minor tinkering or major transformation"It must also not be forgotten that a transition from in-house HR provision to the use of an outsourced provider is a significant change for the organization, and must be managed accordingly. If significant time is not devoted to the process of change, with unequivocal top-level support, there is a danger that staff / line manager relationships and other aspects of people management policy may be neglected."

Issues and Concerns:

PepsiCos outsourcing experience was an end to end arrangement with Hewitt, it started to sour fairly quickly because of the employee expectations that Hewitt as an outside HR service providers were not expected top deliver as did PepsiCos in-house HR department. Any Outsourcing arrangement may go through a rough initial phase, and there may be mismatch of performance to expectations. It is not true just in food and beverages industry, it is true in other lines of business as well. For example, in the media giant BBC went through similar derangements in their Outsourcing experience. "Any outsourcing contract has its challenges," he said. "But both the BBC and Capita are absolutely committed to addressing these and we have a big program in place to change and simplify our processes, taking out duplication and overlap." The BBC signed the 10-year outsourcing deal with Capita in 2006. The objective was to save 50m and streamline HR services such as recruitment and pay administration. But there were ongoing reports about poor service, and union complaints that the deal is not working for staff. Both staff and the union preferred HR was done in-house as you could build relationships with the HR team. It was believed that the deal had its teething problem, they did not believe they should bring it back in-house. They thought that they could make it work and were committed to making it work. Outsourcing decisions also affect employee morale. Depending on whether employees view outsourcing as a positive or negative decision can have a profound effect on their relationship with the organization and thus on the outcomes of the envisaged benefits of outsourcing agreement. Kessler, Coyle-Shapiro, and Purcell (1999) found that several factors influence employees' attitudes about outsourcing, including their views on whether the organization made the decision to outsource carefully. If in-house management of the function was poor and the decision to outsource is seen as providing better opportunities for employees, they may well view the decision to outsource positively. However, if the outsourcing agency fails to meet expectations, reactions are likely to be more negative.

Key issues of the PepsiCos deal with Hewitt were reported in the recruitment and employee training areas in which Hewitt did not live up to the expectations of PepsiCos expectations. Then there were operational and functional issues related to line management whereby most of the day to day line management issues were still being dealt in house by the PepsiCos HRF department. As regards recruitment issues, the strategic business unit (SBUs) heads had reservations and apprehensions about the confidentiality in the recruitment area. The arrangements were not running smoothly enough. Secondly the SBU heads also felt concerns about the training need assessment and in-house training and employee training as not living up to the expectations. In house employee training programs were deemed as more pertinent and befitting to the organizational needs as they provided the necessary context and relevance. Outsourcing decision may affect the company culture as well. It is important to maintain the company's ethos, values and culture, especially when considering outsourcing services for employees who are or will be relocating. The likelihood that employees will be far removed from the company's cultural mindset and values appears to increase the more control over a function a company relinquishes to an outside provider via outsourcing. Especially so for the expatriates, in particular, need a first line of touch with the home office or in-house HR. In the following sections, we address issues that need to be taken into account when outsourcing several specific HR functions, including training and development, recruiting, benefits, and relocation. Thirdly the management also felt that employee expectations were not being met as per expected. It was indicated by the higher than expected employee turnover in the case of certain distribution and logistics department in Europe and US. Marie Howard of Procter & Gamble notes that retirees want to discuss benefits and such with someone who understands how things were done when HR people in the organization handled benefits. Many retirees also want reassurance that the corporate culture they knew has not totally disappeared. By way of summarizing this concern, Howard noted that "at P&G, our employees want to have a P&G person that they can talk to if they have an issue or concern. They want someone who knows the P&G culture. To overlook this is a huge mistake."

How the issues were resolved:

After several meetings with Hewitt management and the revaluations of the outsourcing agreements, it was decided to resolve as follows: PepsiCo should retain the recruitment and training as in-house HR roles. Other peripherals like payroll and benefits administration should form the key part of the HR outsourcing agreement. It was agreed that the aspects of HR that were thought as most amenable to outsourcing, were payroll and benefits administration; help lines and the answering of queries relating to HR policies; recruitment by large hirers; training; and performance appraisal. It was resolved and decided that the core HR processes -- such as career development, for example will be retained in-house. Recruiting for large global players like PepsiCo is considered more strategic than tactical function affecting the very growth and progress of the organization. In most parts of the world, recruiting is by PepsiCo is carried out in line with the benchmarks of the best practices companies. This is required to keep their strategic pace with the nearest and distant competitors. Not true to the food and beverages sector alone but more dynamic industries like IT and software share similar mindset. Some large software companies that hire in the tens of thousands every year, debate on whether recruiting is a strategic function or can be outsourced. So far they are reluctant to outsource high end recruitments, staff training at least for the strategic roles. As Cost savings and better focus on employee control and management internally stand out as key benefits that out weigh the risk nature of outsourcing business, more and more global conglomerates are inclined to outsource their HR bulk. As the trend continues, in about half a decade from now it will be a completely different landscape.

Conclusion and Recommendations

The research on why companies outsource leads us into one key reason which outstands the others. It saves time and money for the company. As Jeffay, Bohannon put its: A time - and money saving strategy, as a way to obtain better services at cheaper rates (Jeffay, Bohannon, & Laspi sa, 1997). Yet, what we have seen is that despite its lucrative benefits, outsourcing has potential pitfalls which can land a company into a sliding HR disaster. As learnt from PepsiCos experience, it is essential to maintain a clear understanding through detailed analysis of each department's function and worth to the organization. This analysis should reveal which functions are at the core of the organization's strategic objectives and, consequently are not fit for outsourcing. Deciding the key drivers or intended goals of outsourcing is also critical in making the outsourcing decision. When considering outsourcing the focus should be on keeping core activities that affect the strategic substance of the human resource strength of the organization in-house and outsourcing non-core tactical and operational activities only. This will help to ensure that focus is retained on the company's most vital functions (Byham and Riddle, 1999). Companies should also consider outsourcing individual activities rather than the duties of an entire department. Employee benefits and payroll could be outsourced, for example, but training and relocation services handled by HR staff. By shifting responsibility for some of these operational and tactical functions to an external service provider, employees will have more time to focus on core activities and help the company gain competitive advantages.

Recommendations to PepsiCo:
PepsiCos outsourcing decision faltered partially due to the fact that it outsourced the HR activities in an end to end fashion which was a literal lay off or shift of the entire HR work to its service provider Hewitt via outsourcing. In a bid to be smart in HR outsourcing, PepsiCo should have considered keeping core activities that affect the strategic substance of the human resource strength of the organization in-house and outsourcing non-core tactical and operational activities only. By shifting responsibility for some of these operational and tactical functions to an external service provider, employees could have more time to focus on core activities and help the company gain competitive advantages.

Secondly, outsourcing also affects the morale of the employees as they deem themselves devoid of their natural right to be taken care of by their own employer they are serving. Many employees prefer to speak to the own company staff HR staff about their benefits, service issues etc. rather than speaking to an outsider service provider, no matter how polite and concerned he may be.

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