Author: Ed Frauenheim

G enentech and 3M have done it for years. Google is doing it now. And other companies may find themselves doing it soon.

    The “it” is giving workers a large chunk of time to pursue projects of their own choosing. This may sound like a recipe for wasted employee hours. But there’s a strong case that independent-project policies pay off or are likely to—and not just in terms of new products like the Post-it Notes that came from a 3M researcher’s personal quest. At Google, 3M and Genentech, the programs also figure into recruiting.

    Pet-project policies will take off in the near future, predicts Joyce Gioia, consultant and author of Impending Crisis: Too Many Jobs, Too Few People. She argues that freeing workers to undertake creative ventures makes them more devoted to their jobs and employers at a time when loyalty is becoming precious.

    “This is a great time for such policies,” Gioia says, “because the employment market is heating up.”

    Loyalty in a tight labor market isn’t the only reason companies may want to launch independent-project programs. Research by University of Michigan professor Theresa Welbourne indicates that company performance increases when more time is spent on “noncore job roles”—for example, when leaders focus on roles such as innovator or team member.

    Lots of companies talk a good game about unleashing workers’ talents, but few actually make it safe to devote time and energy to a novel project, Welbourne says.

    “They expect people to spend time on innovation, but they don’t give them time to do it,” she says. “People listen to the message on innovation, but they realize they are going to be penalized if they do it.”

    At a handful of companies, though, employees are effectively guaranteed they can pursue projects they’re itching to explore. Google puts it in writing right on its Web site about life as an engineer at the Internet giant: “Google engineers all have ‘20 percent time’ in which they’re free to pursue projects they’re passionate about.”

    The policy emerged a few years ago and has its roots in the company’s desire to foster innovation, says Stacy Sullivan, Google’s head of human resources. And it applies to all employees. Sullivan herself worked on an initiative a few years back, though she declines to specify what it was. “It is ingrained in our culture,” she says. “It’s really important to the founders and everyone at Google.”

    Sullivan says 20 percent time at Google can take a back seat to looming deadlines on efforts that are crucial to the company. But an employee may make up weeks without any pet-project time by spending several days straight on their personal initiative, she says.

    Biotechnology company Genentech labels its independent-project policy “discretionary time” and limits it to the research division. That group of more than 700 scientists is crucial to a company that depends on new drug therapies for it to thrive. There’s no set formula for how much time researchers can spend on a personal project, says Holly Butler, manager of staffing for Genentech’s research group. “It really ranges from zero to 100 percent,” Butler says. “But everyone seems to find time to pursue their own interests.”

“(Companies) expect people to spend time on innovation, but hey don’t give them time to do it. People listen to the message on innovation, but they realize they are going to be penalized if they do it.” –Theresa Welbourne, University of Michigan

    3M, which makes everything from duct tape to computer touch screens, has perhaps the longest-running policy of preserving time for independent projects. Known as the “15 percent rule,” the practice dates to the 1920s. That’s when an employee disobeyed an order to abandon a project to ease automobile painting and ended up creating Scotch masking tape. The policy is principally for 3M’s research staff, which makes up a little less than a tenth of the 69,000-person company. 3M not only encouraged researchers to devote 15 percent of their time on projects of their own design, but awards “Genesis” grants of tens of thousands of dollars to support the efforts.

    In December, 3M brought on a new CEO, George Buckley. But don’t expect Buckley, who holds a doctorate in engineering, to halt independent research projects, says company spokeswoman Jackie Berry. “That will still be part of the company’s R&D future,” she says.

Guaranteed freedom
    Technology-focused companies have historically given researchers some latitude. What makes 3M, Genentech and Google stand out is the way they’ve codified a degree of employee freedom.

    A wide range of firms beyond tech companies would be wise to explore independent-project programs, says Google’s Sullivan. And to her mind, the practice makes sense for workers ranging from retail clerks to midlevel managers to top executives. “It could be anyone,” she says. “Just give them an opportunity to make a difference to your organization.”

    Consultant Gioia agrees that some version of personal projects can be effective for many kinds of companies and for the entire gamut of employees. But she says frontline workers may need some help to make the independent time meaningful. This might include holding brainstorming sessions with employees, helping them plan their project and then checking in with them on how they are progressing.

    A key to managing pet-project programs is seizing the best ideas and communicating them quickly throughout the organization, says Dr. John Sullivan, professor of management at San Francisco State University. This is a particular challenge at large firms, he says. “That’s what’s killing the HPs of the world,” he says. “Innovation occurs, but it’s not spread.”

    Analysts also suggest keeping close tabs on projects. “Make sure that the goals of the individual are aligned with your goals,” Gioia says. Accountability is also critical, she says, or the programs could deteriorate into a big waste of time. “You can’t just give people carte blanche to laze around,” she says.

    At Genentech and Google, employees generally are expected to get approval for their independent projects from managers. 3M researchers might not seek a green light for all their pet initiatives, but those pursuing Genesis grants have to apply formally.

    For many corporate programs, a study on their return on investment is required. Genentech, Google and 3M, however, do not have figures about the overall costs and benefits of their independent-project policies. Google’s Sullivan suggests the program’s importance is self-evident. “We’re more interested in people having that opportunity” than in measuring its efficacy, Sullivan says.

    On the other hand, the companies can point to concrete products that have emerged from employees’ self-directed efforts. At Google, independent projects led to the Gmail electronic mail service, the Google News service and social networking site Orkut.

    Genentech, meanwhile, cites its anti-cancer drug Avastin. Company researcher Napoleone Ferrara was hired to work on a hormone thought to be related to the reproductive system, but in his spare time he found a gene critical to the spread of cancer. Based on that finding, Avastin works to starve tumors of the blood supply they need to grow. U.S. sales of Avastin more than doubled last year to $1.1 billion. Genentech’s U.S. product sales last year were $5.2 billion.

    3M’s Post-it Notes may be the most famous example of a successful product resulting from an employee chasing a dream. 3M researcher Art Fry was annoyed by the way paper bookmarks in his church choir hymnal kept falling out, and had an epiphany. He realized that a substance developed by another 3M researcher could be used to make reliable bookmarks. After Fry and others overcame internal skeptics, the company launched the product in 1980 and it quickly became a mainstay in offices.

“A big selling point”
    Apart from generating new products, allowing for independent projects also can serve as a talent magnet. Google’s Sullivan says the 20 percent policy is as important to attracting and retaining employees as it is to sparking fresh ideas.

    “We hear people asking about it in interviews,” she says. “It’s a big selling point. It makes people feel the company values the employees.”

    Google declined to provide statistics about its recruiting, but the company has developed a reputation as the company to work for in technology these days. A key ingredient to that success is the 20 percent time policy, John Sullivan says. “Google has changed work itself with 20 percent time,” he has written.

    Genentech’s Butler says that smaller biotechnology companies have been paring back the amount of discretionary time they give researchers as a way to trim costs. Genentech isn’t backing away from its commitment, she says, which helps make the company stand out to job candidates. “That is a huge piece of why they want to work at Genentech,” she says. “It is Disneyland for scientists.”

    Companies would do well to recognize that employees already do personal tasks on company time, sanctioned or not. A survey last year by Salary.com found that the average worker admits to frittering away about two hours per day, not counting lunch.

    “It’s probably very productive to channel some of that energy into experiments for new products that will benefit the company and the individual,” says Robert Fulmer, visiting business professor at Pepperdine University.

    Paradoxically, letting go of employees through independent projects can mean getting more from them, Fulmer argues. “It’s a way to get people to go beyond what’s expected of them.”

Workforce Management, April 24, 2006, pp. 40-41 — Subscribe Now!

The story below about software as a service, written in 2006, still holds mostly true. Delivering human resources and other business applications over the Web has continued to grow in popularity for reasons including ease of installation, lower upfront costs and rapid improvements to the code. But there have been changes worth noting. For one, software as a service has taken on another name. SaaS now also is frequently called “the cloud”—referring to the notion that applications and data reside far away from an organization’s physical facilities. Second, software titans Oracle Corp. and SAP have taken giants strides into software-as-a-service in the past six years. Oracle developed a new line of applications—dubbed Fusion—that is designed to run as a cloud application. And earlier this year, Oracle acquired Taleo Corp., a talent management application vendor that has focused on the software-as-a-service model. That acquisition followed on the heels of SAP buying cloud talent management software vendor SuccessFactors Inc.

Still, software as a service is not a panacea. As mentioned in the article below, installing software—quickly or not—is not an answer for inefficient or misguided business methods. In fact, the shift to the cloud may be exacerbating the problem. That’s because traditional installations of business software on customer computers often prompt extensive conversations about organizational processes and their value. With SaaS, vendors and customers may be so focused on fast implementations that they miss the chance to have important discussions about business process improvement.

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The phrase “enterprise software” leaves a sour taste in the mouths of many business leaders. For years, business applications for workforce management and other tasks typically have meant costly upfront licenses, lengthy installations by pricey consultants and ongoing maintenance issues.

But there’s a newer flavor of software delivery that promises customers a much sweeter experience. So-called “software as a service” involves companies accessing standard business applications over the Internet.

Advocates tout this method as having lower upfront costs and fewer hassles related to managing computer systems. Another benefit, backers say, is rapid changes in features. Frequent upgrades allow businesses to tackle new challenges–say, a tightening talent market–with greater agility, notes Kathy Barton, senior vice president of marketing and product management at Raleigh, North Carolina-based Peopleclick.

Barton, whose firm offers recruitment software over the Web, says the key is that a single software code base can be used by many customers. Up to now, she says, organizations typically have run their own copy of the software and even customized that code, meaning lengthy testing might be required before installing an upgrade. “We can add changes to the system and make those available to our clients much more quickly than you could with the license model,” Barton says.

Software as a service, also referred to as “on-demand” software, is growing in popularity and recently made headlines when tech icon Bill Gates acknowledged its importance. In the world of workforce management, on-demand software poses a threat to dominant traditional vendors Oracle and SAP. But those big guns are developing strategies involving software as a service, and the smaller vendors touting the approach face some hurdles. Among them: the relative lack of flexibility in software that is rented to many clients at once and a recognition that poor customer service can ruin a vendor in short order.

Licensed software over?

For years, organizations have installed most of the business management software they use on their own computers. They typically pay software vendors for a license to use the program, face a one-time cost for installing the software and write another check for yearly fees to maintain it, which can include fixing bugs that crop up.

Altogether, large companies can spend millions of dollars to run HR and other applications in this way. In many cases, however, these massive projects have failed to provide expected results. Stories abound of troubles such as systems that fail to work properly and cost overruns.

With the widespread emergence of the Internet about a decade ago, another way to deliver software became possible: The code and the computers that run it could reside elsewhere, with businesses using the Web to input data such as the health benefit choices an employee makes during open enrollment.

“Multitenancy” is the reason SuccessFactors can upgrade its software each month, similar to the way Google or Yahoo regularly offer users new options. –Rob Bernshteyn, SuccessFactors

Overall, the adoption of software provided over the Web had been underwhelming until the past few years. Things began to change with the success of companies like Salesforce.com, which offers a product for tracking clients, and Google, which has introduced Web-based services such as e-mail and instant messaging and has emerged as a rival to old-guard software giant Microsoft.

In early November, Microsoft chairman Bill Gates effectively endorsed the shift to software as a service by previewing two Internet-based services, including Office Live, which aims to help small companies do business online.

Roughly a third of the $3 billion annual market in so-called human capital management software is currently delivered over the Web, estimates Paul Ha­mer­man, an analyst at research firm Forrester. That ratio could rise to 50 percent by 2010, he predicts. “It’s clearly growing,” Hamerman says. “It’s become a proven, mainstream model.”

On-demand software has evolved over time. In the late 1990s, it was common for a vendor to offer to host a remote copy of an application dedicated to one client–a practice known as the “application service provider” model. Peopleclick, for example, offered this kind of recruiting software from 1997 to 2003. That’s when it switched to what’s generally called software as a service–meaning a single instance of the code runs for more than one customer.

This feature, dubbed “multitenancy,” also is at the heart of software offered by San Mateo, California-based SuccessFactors, which provides a range of workforce management applications over the Web. Multitenancy is the reason SuccessFactors can upgrade its software each month, says Rob Bernshteyn, the company’s senior director of product marketing. He likens the frequent enhancements to the way Google or Yahoo regularly offers vast numbers of users new options, such as making phone calls over the Internet. Customers “can take the upgrade or not,” he says.

Software as a service allows for a dramatic price cut compared with the licensed model. Licensed enterprise software never paid for itself. –Michael Mullarkey, Workstream

Client Quintiles Transnational likes the way SuccessFactors upgrades its software so often, using customer input. Quintiles–which is based in Durham, North Carolina, and offers clinical research, sales and other services to pharmaceutical and health care companies–signed a contract with Success Factors in 2004 for performance-management and goal-setting software. To meet European data privacy requirements, Quintiles needed an option to limit the ability of managers to view the personnel data of lower-level employees. SuccessFactors fulfilled the request in about two months, says Tim Toterhi, director of global learning and development at Quintiles.

Quintiles pays a monthly fee to access SuccessFactors software for some 6,000 employees, a number that is expected to grow to more than 15,000. Toterhi says the lack of upfront license fees was one of the reasons Quintiles signed its three-year contract–a typical length for software-as-a-service agreements. Toterhi declines to state the exact cost of the service, but says that “it was the best bang for the buck.”

Other vendors pitching HR software as a service include Wayne, Pennsylvania-based Kenexa, San Francisco-based Taleo, Orlando, Florida-based Workstream and Waltham, Massachusetts-based Authoria.

The heavyweights of the field also are paying attention to the software-as-a-service trend. Oracle, for example, offers to provide hosted HR software, but clients still pay for a license to the application. Another way the Redwood City, California-based giant is tapping the trend to take software management off customers’ hands is by working with an outsourcer. Oracle says its HR software is used by Gevity to serve more than 8,000 small and medium-size businesses.

Oracle archrival SAP does not directly offer human capital management software over the Web. It also has an outsourcing strategy: SAP has arranged for its HR software to be used by several major outsourcers, including ADP and Convergys.

Smaller vendors argue that SAP and Oracle will have a hard time moving fully to a software subscription model, suggesting that those companies’ quarterly revenues would take a big hit without new license sales. Forrester’s Hamerman, though, expects both giants to come out with additional software-as-a-service products in the coming year.

Using software over the Internet raises red flags. We said, ‘We’re going to have performance reviews online. Can we do that?’” –Libby Sartain, Yahoo

Price points

On-demand software deals often are priced based on the number of people using the application, and may involve some initial setup fees. Workstream, for example, says companies signing a three-year contract to access its complete line of applications for 10,000 employees can expect to pay $1 per employee per month. Combined with implementation costs and a monthly hosting fee, the total cost is about $3 to $4 per employee per month.

Michael Mullarkey, Workstream’s chief executive, says software as a service allows for a dramatic price cut compared with the licensed model. A typical large organization might spend $2 million on a software license, another $4 million to get it up and running, and then another $1.2 million over three years to maintain it. Compared with that price tag of about $7 million, similar software over three years from Workstream would cost a business about $1 million, Mullarkey estimates.

Licensed enterprise software “never paid for itself,” Mullarkey says. “The return on investment made wasn’t there.”

Forrester’s Hamerman, however, says software over the Web isn’t necessarily a better bargain. Renting an HR application may avoid a license fee and save on computer hardware and software maintenance, but big companies especially may end up saving money with the traditional model, he says.

That’s because per-employee pricing can add up when you have tens of thousands of employees using benefits management software or other applications, he argues.

Using software over the Internet raises other potential red flags. Yahoo, for example, questioned whether it could zap employee performance data across the Internet before it signed up with SuccessFactors in late 2005. “The concern was security,” recalls Libby Sartain, Yahoo’s senior vice president for human resources. “We said, ‘We’re going to have performance reviews online. Can we do that?’ ” Yahoo had specialists dubbed “the paranoids” check out SuccessFactors’ security safeguards, which include data encryption.

Yahoo has arranged to have 10,000 employees access SuccessFactors’ software for performance management and goal setting. Yahoo also is looking into tapping the vendor for its succession-planning software.

Even if companies can feel comfortable with sensitive data sent over the Internet, they may find their service pro­vider doesn’t give them exactly the features they’d like. SuccessFactors, for example, offers 15 colors for its Web interface, and companies have to choose one that’s closest to the hue of their corporate portal. Nor does SuccessFactors offer to tailor its software for particular customers who may want a highly specific feature.

“It is very difficult to deliver best-in-class functionality and best-in-class service. We decided, ‘Hey, look, let’s go with the best service providers.’” –Mark Lange, SAP America

Bernshteyn counters that companies can “overcustomize” their software, and says SuccessFactors’ product allows for a large amount of variability on key business matters including job titles.

The more streamlined approach, he says, allows the vendor to keep costs down and frequently churn out upgrades valuable to most customers.

At their service?

Another potential obstacle to a satisfying software-as-a-service experience is embedded in its very name: customer service. Most software companies aren’t accustomed to emphasizing customer support services, says Kevin Dobbs, senior vice president for marketing and business development at Workstream, which offers a range of HR applications over the Web.

But shoddy support spells big trouble to providers that offer their clients contracts as short as one year in duration, he says. “If they don’t renew, the model blows up,” he says.

Mark Lange, vice president of human capital management at SAP America, says the support challenge is precisely why SAP decided to forge partnerships with outsourcing companies steeped in the service field, like Affiliated Computer Services. “It is very difficult to deliver best-in-class functionality and best-in-class service,” Lange says. “We decided, ‘Hey, look, let’s go with the best service providers.’ “

In addition to claiming lower prices and faster upgrades, on-demand pro­viders also say they can get started quicker–meshing their service with a company’s internal systems in a few months rather than the years that on-premise software implementations can take.

Even if the on-demand approach goes down easier than licensed software, some companies still might not be completely happy with what they’re served.

A chief reason given for failures in traditional software installations is customers’ unwillingness to change corporate habits to match the “best practices” coded into the application. To make on-demand software succeed, organizations will probably still have to tackle tasks like improving business processes and training employees.

No matter what flavor of enterprise software a company chooses, that part of the recipe hasn’t changed.

Ed Frauenheim is Workforce Management’s senior editor. Comment below or email editors@workforce.com.

Workforce Management, January 16, 2006, p. 42-45 — Subscribe Now!

Angela Braly might still be writing legal briefs if it weren’t for the succession-planning program at insurance giant WellPoint Inc.

    In 1999, she was the top attorney at a company that was later bought by WellPoint. But she had bigger ambitions. Braly now serves as executive vice president, general counsel and chief public affairs officer for Wellpoint. She reports directly to CEO Larry Glasscock.

    “I credit my success to the succession-planning process,” Braly says of a program that includes computer software for tracking some 1,400 internal candidates as well as daylong conversations among executives about talent.

    WellPoint, an Indianapolis-based firm with more than 42,000 employees, is one of many big companies making succession planning a higher priority and a catalyst for broader talent development. Companies increasingly recognize that preparing for high-level turnover and grooming new leaders are crucial, in part because business conditions in many fields are growing more turbulent.

    The company, formed out of the 2004 merger between Anthem and WellPoint Health Networks, faces challenges such as hard-to-predict changes in health care regulations, potentially costly lawsuits and declining public sentiment toward health insurance companies. In this tough climate, it has outlined an ambitious five-year plan for making health care more affordable and becoming the most trusted partner in the field for consumers.

    As Braly sees it, the same program that helped her achieve personal goals is vital to keeping a steady bead on the company’s overall aims. Succession planning and strategic planning “go hand in hand,” she says.

Work in progress
   Succession planning at larger companies has gotten a shot in the arm in just the past few years, says human resources consultant Jim Walker. Firms have been transforming what in many cases were annual executive replacement plans done on paper into comprehensive leadership development programs that reach down into the ranks of middle managers, often with the aid of computer software.

    “It’s more a talent review,” Walker says. “It’s not so much filling the job as it is about reviewing the leadership talent and helping it progress.”

    Still, there’s room for improvement. Lack of sound succession planning for CEOs in particular amounts to a “crisis,” consultant Ram Charan argued in a 2005 Harvard Business Review story.

    Recent research supports his view. In a 2003 study of succession management involving more than 270 organizations worldwide, the Corporate Leadership Council, a research firm, found that nearly 90 percent of the participants said succession management was “a top corporate priority for 2003.” But just 6 percent said they were confident the systems they have in place “will do the job to build top-flight executive teams.”

    And according to a survey of 20 CEOs at large companies conducted by the authors of a recent Harvard Business Review article, almost half had no succession plans whatsoever for vice presidents and above.

    Board members and CEOs tend to avoid the issue of succession planning, says Jeff Cohn, one of the authors of the Harvard Business Review article and managing partner at New York-based consulting firm Bench Strength Advisors.

    “It can be a tender subject for even a skilled board to bring up,” Cohn says. CEOs “don’t like to plan for their retirement.”

    Charan points the finger at the amount of time boards have been spending on governance and fiduciary duties. “A packed agenda is the chief culprit,” he writes.

    Some companies, though, are putting succession management higher on the corporate agenda. For years, General Electric and IBM stood out as the standard bearers for smart leadership planning and development. Now such practices are proliferating. Energy utility Southern Co., for example, has juiced up its succession planning by identifying and grooming “high-potential” internal talent. In 2006, the company is moving its annual succession planning process from the end of the year–where it can get short shrift amid performance reviews and other tasks–to the spring.

“It’s more a talent review,” Walker says. “It’s not so much filling the job as it is about reviewing the leadership talent and helping it progress.” –Jim Walker, HR consultant

    And auto parts and services chain Pep Boys revved up its succession planning about a year ago with a software service that helps the company standardize performance reviews and share talent across divisions. The software, from provider SuccessFactors, cost about $180,000 in its first year. But in the coming year, Pep Boys expects the figure to drop to $130,000 and for the technology to pay for itself through more hiring from within. External hires cost Pep Boys about $20,000 each, while internal hires cost about half as much.

    The expense of hiring external candidates, combined with increased turnover in the corner suites, is helping to fuel the new focus on succession management. What’s more, a recent study from consulting firm Booz Allen Hamilton concludes that “over their entire tenures, CEOs appointed from the inside tend to outperform outsiders” when it comes to returns to shareholders.

    Succession planning also has become a bigger deal because of anxiety about baby boomers leaving the workforce. At Southern Co., 50 percent to 60 percent of the leaders are eligible to retire in the next five to seven years. A decade ago, that number was closer to 20 percent. “Our business challenge has been to identify who is the next generation of leaders,” says Jim Greene, the company’s director of talent development.

Planning from the top
   Company boards and officers should take planning for the future of the executive management team seriously and set the tone for a process that filters down to supervisors through­out the organization, says Bench Strength Advisors’ Cohn.

    Another key to smart succession planning, experts say, is an integrated program tied to a company’s overall strategy. Ad-hoc approaches to succession management or leadership development–such as unfocused executive training–can add little value.

    Installing software without taking a hard look at internal succession processes can be a wasted effort. On the other hand, companies seeking to extend succession planning to the mid-manager ranks all but require a computerized system with a database, Walker says. In the past, organizations may have wanted to track their lower leaders and create wise career development plans, he says, but with today’s software “they actually do it.”

    WellPoint officials point to software from Pilat HR Solutions as one of the strengths of their program. Before the merger, Anthem lacked such a software system. That meant limited visibility for rising stars, says Judy Wade, who came from Anthem and is now WellPoint’s director for executive development and succession planning. “It was really hard for one of our executives in the Northeast to know who the really talented people in the Midwest were,” she says.

    WellPoint asks its managers at the director level and above to enter into the Web-based system such data as educational background, what jobs they’d like a shot at and whether they’d be willing to move to various parts of the country. Supervisors of director-level and higher positions are asked to assess their direct reports’ potential and approve career development plans. They also consider each individual’s risk of leaving and the likely impact of their departure.

    Armed with such information, the company holds what it calls “talent calibration sessions” that focus on planning for departures as well as the development of up-and-coming leaders. The annual sessions start with CEO Larry Glasscock and his executive leadership team. Results from that review are reported to the board of directors. The sessions–which can last a day or more–then cascade down through four levels of management.

    Key to these discussions is candid talk about the company’s talent, which includes managers contesting ratings given by their peers. “You need honesty,” says Jean Hopper, vice president of talent management and organization development at WellPoint. “Garbage in, garbage out in this system.”

    WellPoint declines to provide details about the overall cost of its succession-planning program or the return on that investment. But the company cites an incident four years ago in which two top-level executive posts were filled internally thanks to the system. The company then “backfilled” each resulting vacancy with internal candidates, and used its succession-planning process to fill the cascading set of openings going down five management levels beneath the president. In part by avoiding external recruiting fees, WellPoint estimates it saved $1 million.

    The program isn’t perfect. About 15 percent of the company’s managers did not complete their online tasks in 2005, though Hopper expects the figure to get closer to the 99.8 percent compliance rate of WellPoint managers before the merger. In addition, Braly says the company can do more to allow people to win promotions without having to leave their home regions.

Maintaining strategic focus
   WellPoint’s succession planning and talent development likely will be tested in the coming years. The company, whose divisions include Blue Cross of California as well as dental and vision units, faces competition from rivals such as Aetna and Cigna. The health care field continues to be plagued by lawsuits. And ever louder calls for more government action on health care could lead to a dramatic business disruption for insurers like WellPoint.

    What’s more, even as it seeks to win the trust of health care consumers, the company is part of an industry viewed with increasing skepticism. In a Harris Interactive study published in 2005, just 40 percent of U.S. adults said health insurance companies do a good job of serving their consumers. That’s up four percentage points from 2004 but a far cry from the 55 percent that said the industry was doing a good job in 1997.

    WellPoint’s succession-planning process is key to keeping it focused amid tumultuous business conditions, Braly says. She also sees a positive side effect to the succession-planning program. Talent-review discussions foster better teamwork overall, she says, because managers build trust as they share frank comments.

    With examples like Braly, WellPoint’s succession-planning and career development efforts also have earned high marks from advocates for women’s advancement in corporations. For the past two years, the National Association for Female Executives has ranked the company in the top 10 firms for executive women. In 2005, it applauded WellPoint as being among the firms where the board of directors reviews succession planning with an eye toward gender equity.

    Without effective succession planning, potential leaders like Braly can be overlooked, and end up leaving. Long-term plans are less likely to be realized. Done well, however, succession planning saves money, furthers strategic goals and builds a firm’s reputation as a great place to work, Cohn says.

    Barbara Lewis, director of training and consultancy at the Institute for Personality and Ability Testing in Savoy, Illinois, says companies often expect leaders to sweep in and save the day even though research shows that companies succeed when a CEO has others to lean on and learn from. That’s what helps companies avoid falling prey to what she calls the myth of the hero CEO.

    Leadership is rarely a solo ride.

Workforce Management, January 16, 2006, pp. 31-34 — Subscribe Now!

Ken Nardoni isn’t alone in thinking that succession-planning software can be an expensive dud. But his view is a bit surprising given that Nardoni is vice president of sales for Pilat HR Solutions, one of several companies pitching such software.

    Nardoni argues that companies buying succession-planning applications are doomed to fail if they don’t take a close look at the way they go about tasks such as nominating possible replacements to key roles, figuring out what data to use in decision-making and ensuring that succession plans are carried out.

    “We really think process is the really important piece,” Nardoni says. “Technology is the easy part.”

    Against a backdrop of rising turnover of chief executives and fears of a coming talent shortage, large companies in recent years have been upgrading succession-planning programs. In the past, these sometimes were little more than annual executive replacement plans done on paper. Now, a number of software companies offer applications designed to make succession planning more effective and widespread in an organization.

    Some observers are skeptical that software products by themselves will aid a company’s succession-management efforts. But as organizations seek to expand their succession-management programs to include midlevel leaders and not just top executives, computerized systems with databases are crucial, says Jim Holincheck, an analyst at research firm Gartner.

    “It’s a significant difference to track 20,000 employees versus 100 people,” he says.

    Succession-planning software typically allows companies to do such things as assess the risk that various leaders may leave the company, list possible replacements for managers and document the strengths and credentials of up-and-coming employees.

    Besides managing succession and career development plans for more employees, software products in this field have other benefits, advocates say. These include more up-to-date information than paper-based plans done once a year and an improved ability to search for candidates from within a company.

    Such searching is appreciated at health insurance giant WellPoint, which uses succession-planning software from Pilat to keep tabs on some 1,400 employees. Jean Hopper, WellPoint vice president of talent management and organization development, says Pilat’s system allows for fine-grain queries–say, for people willing to work in the Northeast who have a master’s degree and a background in finance. In essence, this feature lets WellPoint seek out passive job candidates internally. “Most associates aren’t looking at the job opportunities,” Hopper says. “They’re busy doing their jobs.”

    It’s possible to install succession-planning software on a company’s internal computers or “rent” it over the Internet, where it can be accessed through a Web browser and pass code.

    Nardoni says large clients can expect to pay $150,000 to $300,000 for the installation of high-end, competency-based succession-planning systems from Pilat. Such clients then would face annual software maintenance costs of about $25,000 to $40,000. Smaller organizations–those doing succession management for fewer than 150 executives–can have access to Web-based systems from Pilat for “a few thousand dollars a month,” he says.

    A number of companies offer software for succession management, including industry titan SAP as well as smaller players such as Los Angeles-based Cornerstone OnDemand, Morristown, New Jersey-based Sapien and San Mateo, California-based SuccessFactors.

    SuccessFactors says its succession-planning product can be made more powerful by combining it with software modules for managing performance reviews and compensation decisions. That integration gives supervisors the ability to delve into and compare employees’ track records when considering promotions, says Rob Bernshteyn, senior director of product marketing at the company.

    The Web-based product also will send an automatic alert when a key position suddenly becomes vulnerable. This could occur when an executive notes in the system that an employee is likely to leave the company soon and the people designated as possible successors to that post aren’t immediately ready to assume it, have just taken other jobs in the company or have left themselves.

    About 20 percent of SuccessFactors’ 300 customers use its succession-planning software. But interest in the product is growing, Bernshteyn says. Of those companies thinking about becoming SuccessFactors customers, 25 percent are keen on succession planning, he says.

    Auto parts and services chain Pep Boys is convinced it made a sound investment when it began using software from SuccessFactors about a year ago, says Liviu Dedes, the firm’s director for training and organizational development. The software was part of a broader succession-management overhaul, which included a set of 84 round-table discussions throughout the country on employees’ potential.

    According to Dedes, SuccessFactors’ software helped the company overcome problems it discovered when it reorganized its business in 2004. The chain, with some 20,000 employees and nearly 600 stores throughout the country and in Puerto Rico, wanted to double the number of area directors to 84 in a period of two months. It was a “very painful” event thanks to internal and external talent pools that were “shallow,” Dedes recalls. For one thing, he says, Pep Boys’ paper-based system made it hard to notice quality candidates even in neighboring areas. The company also had inconsistent measures of people’s potential.

    SuccessFactors’ software, which Pep Boys accesses over the Web, has helped the company standardize its employee reviews around a set of competencies and also made it much easier to see the aspirations and abilities of some 2,000 managers throughout the company, Dedes says.

    In its first year, the software cost Pep Boys about $180,000, including implementation fees. The cost will drop in the second year to about $130,000. Given that external hires cost Pep Boys about $20,000 each, while internal hires cost roughly $10,000, Liviu is confident the SuccessFactors technology will pay for itself in its second year.

    Far from being a bust, succession-planning software served as a catalyst for the company to reflect on and improve its approach to succession management, Dedes says. “It was a great opportunity to rethink ourselves and revise the process we were using,” he says.

To help retain new employees in India, software firm Sierra Atlantic uses a variation on the American “take your children to work” tradition.

    The company invites parents of new hires to visit and learn about the company. There’s an introduction from company executives, lunch is provided, and guests–primarily fathers thus far–have a chance to ask questions about the firm and the workplace. Typical questions include: What are the career prospects for their children? What are the company’s plans for growth? And how does Sierra Atlantic support their children’s pursuit of higher education?

    The company is based in Fremont, California, and has about 800 employees at offices in the southern Indian city of Hyderabad. The quarterly “take your parents to work” events are an attempt to recognize the importance of family and parental guidance in Indian culture–and to make Sierra Atlantic stand out in the competition for technical talent there, says Hope Nguyen, company marketing manager.

    “In India, parents have a major say in the career moves of their children,” Nguyen says. “If Sierra Atlantic is able to convince parents about our values, work culture and growth prospects for employees, (it can) increase company loyalty among their children.”

    The cost of the program is minimal, Nguyen says, but it is helping to trim Sierra Atlantic’s turnover in India. Since the initiative began last year, the annual attrition rate for new college graduates hired in India has dropped from 20 percent to 10 percent.

    The program also marks an attempt to ease the cultural strains of tech work in India. With the growth in technology and back-office operations, young Indians are at times required to work at night because of the time difference with the U.S., alter their accents to sound American and even take on Western names when handling customer calls.

    Sierra Atlantic isn’t the only outsourcing company in India sponsoring family days. Progeon, a subsidiary of India-based tech services company Infosys Technologies, hosts family days every three months for new employees and up to three family members. It also tries to help employees adjust to working on clients’ schedules, which sometimes clash with India festival celebrations.

    “To make up for it, we celebrate these at night,” says Nandita Gurjar, Progeon vice president and head of human resource development. She says the on-site festivities might include special food and ethnic dancing.

Workforce Management, November 21, 2005, p. 32 — Subscribe Now!

At semiconductor giant Intel, the notion that a manager wouldn’t know how to conduct business in a different culture just doesn’t compute.

    From its Silicon Valley headquarters, the company reaps 70 percent of its revenue outside the United States. Its 91,000 employees are spread throughout more than 48 nations. In addition, the computer chip maker is trying to become a more customer-focused firm. That means getting a bead on even the emotional needs of potential buyers around the world, making cross-cultural knowledge crucial.

    So when the company set out to create a new leadership program for midlevel managers last year, it made firsthand exposure to different cultures a cornerstone. Under the program, some 800 midlevel leaders during the next eight years will fly to weeklong seminars outside their home region, a plan that will likely cost the company more than $3 million.

    Intel hasn’t yet tried to assess the bottom-line return on this investment, but it’s betting employees come away with a deeper understanding of country-specific differences, Intel’s corporate culture and even the way members of different business units–say, manufacturing types versus sales managers–go about their jobs.

    “People who are responsible for hundreds of millions of Intel’s wealth and prosperity need to be able to understand how to work well on a global basis,” says Kevin Gazzara, who led the development of the Leading Through People program and now oversees it.

    Intel isn’t alone in putting more attention on dealing with cultural differences in recent years. Software consulting firm Sierra Atlantic, headquartered in Fremont, California, recognizes the importance of family and parental guidance in Indian culture with a kind of “take your parents to work” day. The event, in which parents of new hires in India are invited to visit and learn about the company, has helped cut by half the company’s attrition rate for new college graduates hired in the country.

    San Francisco-based software firm Freeborders has adapted to its Chinese employees’ tendency to share salary information publicly by standardizing pay at defined job levels at its facility in Shenzhen, China. Freeborders then varies pay for exceptional performance by reviewing employees at least four times per year, and the company cites this and other human resource strategies as key to its success. Revenue this year is on pace to grow about 70 percent compared with 2004.

    And at KLA-Tencor, a high-tech manufacturer based in San Jose, California, Asian employees were taught to avoid spamming U.S. executives with excessive e-mails using a Web site from consulting firm MeridianEaton Global. With the help of the GlobeSmart site, the employees learned that copying executives on e-mails about local matters may be considered polite in Asia, but it is a nuisance to American execs.

    Thanks to a desire to access emerging markets and manage globally distributed workforces, U.S.-based businesses are ramping up investments in training programs and teaching materials that help employees better comprehend their international co-workers and customers. They’re also taking steps to adapt to the workplace culture in foreign countries. Hard numbers backing up the effectiveness of such programs are hard to come by, but advocates argue that the seminars, courses and other initiatives can result in benefits such as more deals closed, more effective teamwork and new thinking.

Inside Intel’s global program
    Fifteen months ago, Gazzara was put in charge of coming up with a leadership training program for midlevel employees who manage departments and oversee other supervisors.

    One of his reference points was an existing training program for what Intel calls “first-line” managers–those who supervise a team of people. Having led or facilitated more than two dozen of these sessions, Gazzara noticed their tone and content were different around the globe. A key feature of these lower-level manager training programs: Attendance tends to be almost exclusively employees from one country or region. In other words, some 90 percent of those attending a first-line manager leadership program in Bangalore would be from India.

    In Gazzara’s mind, the new program for middle managers had to do more to foster awareness of Intel’s overall culture, the company’s business-unit subcultures and different cultures around the globe. “It’s a matter of how you get all of these cultures to perform well together,” he says.

    Gazzara, who is based in Chandler, Arizona, has extensive expertise in workplace management. Now 50, he joined Intel in 1989, rising through the ranks to manage operations for a video-processing product that eventually was incorporated into today’s Pentium processors. After a sabbatical, he switched gears in 1996 to oversee Intel’s internal university for 10,000 employees in Arizona.

    In 2001, he earned a doctorate in management and organizational leadership from the University of Phoenix.

    Gazzara traveled internationally for Intel and began developing firsthand knowledge of several cultures. In addition, the team that helped him design the new leadership program spanned the globe. Employees in China, Russia, the United States and Israel all contributed to the creation of the program. He says it was a nightmare to coordinate conference calls. Gazzara’s team made a decision that at least 30 percent of the attendees at the midlevel leadership sessions had to come from outside the host region.

    The programs, held thus far in locales including Ireland, Israel and China, don’t explicitly address cultural differences through lectures or reading materials. Instead, seminar content is focused on business leadership skills such as setting the pace and executing business plans. But Gazzara and his team designed the program so participants would be forced to consider cultural differences. At each workshop, the 50 or so midlevel managers attending are divided into geographically diverse teams of six to nine people, and the teams must create a new-product business proposal by the end of the week.

    This crucible setting sparked important learning for Intel marketing manager Dinesh Gohil at a seminar this year in Israel. The key, Gohil says, was an uncomfortable experience beyond the program’s formal structure. Now based in the United Kingdom, Gohil co-led a team as it put together a business proposal. But he noticed that during breaks in the seminar, Israeli members of the team were chatting among themselves about the project in the hallway. “I felt a little left out,” he recalls. So he confronted his Israeli co-leader, told her he felt excluded and asked if he were somehow not doing his job properly. “She said, ‘There’s nothing going on–it’s just a little corridor conversation,’ ” Gohil recalls. “For them, it was entirely natural to have that conversation outside a meeting environment. It was a real eye-opener.”

“The way we’ve done training in the past, particularly in the global environment, may not be the best way to do training in the future.”  –Kevin Gazzara, Intel

    Gohil says it was helpful to learn about Israeli workplace culture because he and other Intel employees work in geographically diverse teams on a regular basis.

    Among the challenges for session facilitators is making sure that Asian members, who tend to be less vocal than their European, American or Israeli counterparts, are heard.

    Gohil served as a facilitator at a seminar in Ireland and found himself stepping into a group’s discussion to elicit comments from a manager from Penang, Malaysia. The quiet Malaysian employee made a helpful remark that put the conversation in a broader context. “It wasn’t that he wasn’t engaged,” Gohil says. “He was going through a very structured thought process.”

Companies taking note
    Although Intel isn’t currently doing a bottom-line assessment of Gazzara’s program for midlevel managers, the company is committed to the project. After a pilot session last year, Intel doubled the number of seminars slated for this year, to eight.

    One of the advocates of the LTP program is Glenda Dorchak, vice president of Intel’s digital home group and general manager of its consumer electronics group. Dorchak spoke at the first session in San Jose, California, last December, and ended up acting as the “banker” for the teams of middle managers pitching business proposals. She was impressed enough by the program to offer to be its executive sponsor. As Dorchak sees it, middle managers at Intel are poised to wrestle with the greatest amount of change within the company, and are critical to the future growth of Intel. “Midlevel managers need to have the tools and experience to work effectively in a global business and development environment,” she says.

    A key to the program’s success, she says, is the way it is tailored to midlevel managers, exposing them to new business roles in a learning environment with colleagues from around the world.

    “The consistent feedback from the session was that participants could apply key learnings in their respective work environments, taking them beyond the classic textbook learning,” she says.

    Gazzara says participants are raving about the workshops in their feedback forms. Recent reviews have scored the seminars at 4.61 on a five-point scale–a higher mark than any other given in the past 15 years to the leadership program for lower-level managers.

    Gazzara suggests that Intel’s new program, with its diverse participant makeup and experiential approach, may mark a new era in leadership development, one suited for a more international business climate. “The way we’ve done training in the past, particularly in the global environment, may not be the best way to do training in the future,” he says.

    One sign of the trend is increased interest in cultural-differences training at MeridianEaton Global. Dave Eaton, co-founder of the firm, says that five years ago just one or two clients asked about such training for their up-and-coming leaders. Now dozens are clamoring for such workshops. “Just about every client is asking us for this,” he says.

    Eaton declined to name specific customers, but his firm serves big guns, including all five of the Fortune 5 and a quarter of the Fortune 500. A group course for about 20 people typically lasts a day and costs $300 to $400 per person. Among the program’s goals are for a leader to learn to accurately “read” their international counterparts’ behavior and understand the rationale behind their actions.

    Given the push for sales abroad and ever-more cosmopolitan workforces, other training programs with a focus on cultural differences are likely to emerge in the near term. Without them, companies run the risk that cross-cultural encounters will be about confusion rather than comprehension–and ultimately a better bottom line.

Workforce Management, November 21, 2005, pp. 1, 26-32 — Subscribe Now!

High-tech manufacturer KLA-Tencor is more serious about cross-cultural education since a manners mishap in Malaysia.

    About a year ago, the company, which makes equipment for the semiconductor industry and is located in San Jose, California, flew a German employee to Malaysia to help a customer with a malfunctioning machine. But the fellow didn’t spend much time getting to know customer employees there on a personal level—a key to doing business in much of Asia, says Lynne Stasi, chief learning officer for KLA-Tencor.

    “Because he didn’t do that rapport-building, they didn’t trust him to fix their machine,” she says. “He was there for a day, and they sent him back.”

    Today, KLA-Tencor uses GlobeSmart, a cross-cultural training product from consulting firm MeridianEaton Global. GlobeSmart is a Web portal that allows a range of employees to learn about the history of a country and to assess their own communication style to determine how they may need to adjust their behavior in a particular country.

    KLA-Tencor has Asia-based employees use GlobeSmart to relate more effectively to U.S. colleagues. For example, the site has wisdom for Asians regarding American e-mail culture, Stasi says. “Asian employees needed to understand that they did not need to copy U.S. executives on local e-mails,” Stasi says. “In Asia, this is viewed as being polite, but in the U.S. it contributed to e-mail overload.”

    Beyond GlobeSmart, KLA-Tencor is putting more attention on helping managers throughout the company deal with other cultures. That’s partly because of the international, “virtual” nature of product teams today, Stasi says. In one case, a KLA-Tencor device is manufactured in Singapore and Malaysia, with software written in India and the team leader located in the U.S.

    “Because that’s the wave of our future, everyone has to think globally,” Stasi says.

Workforce Management, November 21, 2005, p. 30 — Subscribe Now!

American companies are telling it to the judge when it comes to employees who jump ship for a real or potential rival. Take these recent cases:

    Google hires a former Microsoft executive, Kai-Fu Lee, to lead its China operations. Microsoft sues. A judge rebukes Google and upholds Microsoft’s employment agreement with the executive.

    Yahoo hires a group of employees who recently worked at a smaller tech company, which in turn sues Yahoo. But the smaller company fails to win a temporary restraining order that would have kept its former employees from doing the same sort of work at Yahoo.

    Lawsuits like these aren’t confined to the tech industry. And, observers say, the amount of litigation related to employment agreements is on the rise.

    The trend is pushing companies to pay more attention to a still-developing area of employment law. In rough-and-tumble fights over key hires, success can depend on how you’ve written a contract for an employee not to compete with you after leaving, who has the best lawyers and whether your company is in a state that supports such contracts.

    California, for example, frowns on noncompete contracts except in limited circumstances. “California is the toughest on classic noncompetes,” says employment attorney Jonathan Segal of Wolf, Block, Schorr and Solis-Cohen, a Philadelphia-based law firm. “Some of the Southern states are a little more pro-employer.”

    Legal spats over worker departures are rooted partly in what seems to be an intensification of employee poaching in recent years. And these days, workers are quite willing to jump to a competitor. Recruiters rarely come across people with no thoughts of leaving their current position, says Richard Spitz, global managing director for the technology industry at executive search firm Korn/Ferry International.

    “It’s hard to find passive candidates,” he says. “They all have one eye on other opportunities.”

    The Microsoft-Google spat echoes this point. Lee, the former Microsoft executive at the center of the dispute, said in a court filing that it was he who approached Google for a job earlier this year. In July, Google hired Lee, a speech recognition specialist and former head of a Microsoft lab in China, to lead a new product research and development center in China and serve as president of the company’s Chinese operations.

    Microsoft promptly filed suit against both Lee and Google, touching off a bitter court battle between the two tech-world titans. Microsoft’s suit, filed in a Washington state court, claimed Lee’s new job violated the terms of a one-year noncompete agreement.

    In court papers, Google labeled Microsoft’s suit a “charade” really intended to scare Microsoft employees into staying put.

    But in July, Judge Steven Gonzalez issued a temporary restraining order limiting Lee’s work at Google. And in September, Gonzalez barred Lee from a number of activities until a trial slated for January–activities including “participation in setting the budget or compensation levels and defining the research and development to be undertaken at Google’s planned research and development facility in China.”

    Gonzalez also rebuffed Lee, with an implied scolding of his new employer as well. “Dr. Lee began assisting Google while he was still employed at Microsoft,” Gonzalez wrote. “Dr. Lee confused the difference between the discretion given him to disclose Microsoft’s confidential information for the benefit of Microsoft and disclosing Microsoft’s confidential information for his own benefit or the benefit of another.”

    On the other hand, Gonzalez did not prevent Lee from doing things like hiring engineers in China, as long as he does not recruit from Microsoft or use any of its confidential information.

    Nicole Wong, Google’s associate general counsel, says the ruling allows Lee to do what Google hired him to do, “which is build and recruit for our new research and development center in China.”

Careful crafting
   Key to the Lee case is the employment agreement he signed in 2000. Among other things, it bars him from doing work that would compete with projects he worked on at Microsoft for a year after he leaves the company. During that time, he is also banned from inducing other Microsoft employees to quit the company. The contract also has nondisclosure provisions.

    More and more, employers are asking employees at all levels to sign noncompete and confidentiality agreements, says Johnny Taylor, senior vice president for human resources at financial services firm LendingTree.com and chairman of the Society for Human Resource Management. It’s partly a response to the way companies in today’s knowledge-based economy expose more of their workers to valuable, proprietary information, he says.

    Asking employees to pledge not to solicit customers after they leave is another way companies try to protect themselves, Segal says. But when crafting such post-employment agreements, companies can shoot themselves in the foot by pushing too far, he says. Even in states that accept noncompete agreements, they generally have to be “reasonable” in terms of geographic area and duration, and employees are supposed to receive some “consideration” in exchange for signing, he says.

    A new, improved severance package may be grounds for asking existing employees to sign a noncompete, Segal says. Simply threatening to fire them if they don’t sign could backfire–with a judge ruling the pact invalid.

    “It’s always safer to give the employee something real as the lawful quid pro quo for signing the agreement,” he says.

    In the spat between Yahoo and the firm suing it, interactive speech technology maker Nuance Communications, there’s an interesting twist regarding noncompetes. Nuance said it removed a noncompete provision affecting a team of research and development engineers earlier this year in a bid to keep them at the company after it merged with a rival. Even so, according to a Nuance court filing, that team of Montreal-based engineers quit Nuance to join Yahoo.

    Those engineers are among 13 key Nuance employees who have been hired away by Yahoo in a move that “gutted Nuance’s R&D software engineering department,” according to a lawsuit Nuance filed in a California court in September.

    The suit contends that Nuance’s former vice president of R&D told Yahoo about the company’s technology plans, secured a job at Yahoo, then worked with it to raid his department.

    In its suit against Yahoo and former Nuance employees, Nuance claims that it “has taken every reasonable step to protect its proprietary information, including requiring employee confidentiality agreements.”

    Nonetheless, a judge declined in early October to temporarily restrain Yahoo from employing the Nuance R&D engineers to develop interactive speech technology. “At this juncture, the Court is unable to properly assess whether any wrongdoing has occurred,” the judge wrote.

    “We continue to believe the allegations in the lawsuit are without merit, and we plan to continue a vigorous defense,” Yahoo said in a statement after the ruling.

    The case continues, with a hearing set for November 14.

Calling in the lawyers
    Amid all the job switching and litigation, legal help has become more important to the hiring process. It is now common for prospective employers to pay attorney fees for candidates who ask a lawyer to review their existing noncompete contract, Korn/Ferry’s Spitz says.

    Legal strategy over possible court battles also can be critical. Google may have committed a misstep in the Lee case, says Robin Meadow, an attorney with the firm Greines Martin Stein & Richland in Los Angeles.

    Google should have gone to a California court as soon as it hired Lee to ask that the court rule his noncompete with Microsoft invalid, Meadow says. Google did file a suit in California along these lines, but it came two days after Microsoft sued in a Washington court. A California ruling in advance of Microsoft filing its lawsuit might have prevented the company from winning the initial ruling against Lee and Google, Meadow says. “Google just wasn’t fast enough,” he says.

    Google’s Wong suggests that the company hoped to keep the matter out of the courts in the first place. “Our preference is to avoid litigation altogether,” she says.

    Sound legal counsel is becoming essential when it comes to employment agreements partly because the rules governing them vary by state. Along with California, other states that take a dim view of noncompete contracts include North Dakota and Oklahoma, according to employment attorney Arnie Pedowitz. Noncompete agreements in those two states are void unless they involve the sale of a business or breakup of a partnership, says Pedowitz, who co-edited the book Covenants Not to Compete: A State-By-State Survey.

    Pedowitz would like to see more legislation that curtails the use of noncompetes, because he thinks the scales overall are tipped toward employers. Com- panies have a lot of leverage to get workers to sign the agreements even if they would be struck down by a court, he says, and ex-employees are loath to challenge the pacts for fear of legal fees or losing a new job.

    Pedowitz notices a rise in intimidating legal action based on employment contracts. “I’m seeing more companies bringing questionable cases solely for the purpose of sending a message back to the incumbent workforce,” he says.

    Even if the situation surrounding employment agreements favors companies these days, businesses would be wise not to rely on them too much as a retention tool, Segal says. “If you only keep people in chains, that’s not good for the corporate culture,” he says. “You want the noncompete to be an added reason for the employee not to leave, not the sole reason.”

Workforce Management, November 7, 2005, pp. 1, 45-48 — Subscribe Now!

Some observers warn that even if sending higher-level “knowledge” work to countries such as India and China is a good strategy for some companies, it also could harm the United States’ middle class, its tech leadership and even the health of U.S.-based businesses themselves.

    Enlisting outside firms in places like India and Russia can make U.S.-based researchers more effective, says Eugene Kublanov, vice president of neoIT, a management consulting firm specializing in offshore outsourcing. But if the arrangement is managed poorly, he says, it endangers retention efforts in America because key U.S. employees might begin to doubt their future in the firm.

    What’s more, sending too much R&D work to a foreign partner raises the specter of “hollowing out” a business, whereby its creative power erodes, Kublanov argues. “If innovation is core to your company,” he says, “you have to be careful with even the pieces of R&D you send out.”

    While business executives and some economists defend offshoring as being vital to companies and good for the overall global economy, some analysts argue that trade with Asian nations is done on terms unfair to the United States, thanks to undervalued foreign currencies that make U.S. workers less competitive.

    Also of concern to some U.S. officials is the possibility that technological advances by China–resulting in part from American companies’ R&D activities there–could have military implications.

    Then there are questions about the feasibility of tapping foreign engineers for high-level work. A recent report from consulting firm McKinsey & Co. found that while there are twice as many experienced university graduates in low-wage countries as in high-wage countries, “only a fraction of this total labor pool is actually suitable to work for a multinational company’s offshore operations.”

    Among the factors that reduce the potential talent supply in low-wage nations: language abilities and “overall quality of the educational system and its ability to convey practical skills,” according to McKinsey.

    Worker advocates have been the most vocal opponents of offshoring. Marcus Courtney, president of the Washington Alliance of Technology Workers, a Seattle-based labor group, argues that shipping high-level tasks offshore threatens the financial security of U.S. workers and their communities. “The consequence of relentless outsourcing is the driving down of living standards,” he says.

J ennifer Miller was about as permanent a temp as you can be.

    For 10 years, the Boise, Idaho, resident worked continuously at computer maker Hewlett-Packard but got her paycheck from a different employer. She was laid off from staffing firm Manpower in March, and is now the lead plaintiff in a class-action lawsuit accusing HP of unfairly excluding workers like her from benefits including vacation and holidays. The suit seeks more than $300 million in damages.

    “They would treat us as employees,” Miller says, “but not give us the same benefits.”

    An HP spokeswoman says Miller’s suit and a related suit by an alleged whistle-blower “have no merit.”

    The HP suits are among the latest examples of what’s been dubbed “permatemp” litigation. It’s a topic made famous by software giant Microsoft, which agreed to pay $97 million five years ago to settle the claims of workers given labels such as “temporary” employees, “freelancers” and “independent contractors.”

    Whether companies are shortchanging staffing-firm temps and contractors through long-term gigs remains controversial. And workers recently have brought a slew of lawsuits against a division of package delivery giant FedEx. Overall, though, it seems employers are steering clear of legal troubles related to permatemps. When it comes to staying within the letter of the law, some observers say, employers have wised up about how to set up their benefit plans and use contingent workers.

    The number of permatemp suits seems to have decreased over the past several years, says Johnny Taylor, chairman of the Society for Human Resource Management and senior vice president of human resources for financial services firm LendingTree.com. In the 1990s, some companies lowered their headcount, taxes and benefit expenses by calling workers independent contractors in what amounted to a “sham,” Taylor says.

    But companies these days are taking steps to define workers properly and set clear rules, such as no longer giving phone lines to contractors. “In 2000, most companies did a gut check to make sure they were compliant” with the law, Taylor says.

Practice widespread
    The term “permatemp” refers to people working for extended periods in a range of situations, such as through a staffing firm or as an independent contractor. The Center for a Changing Workforce estimates that there are at least 3 million permatemps in the workforce. Critics charge that these workers often are paid lower wages and receive fewer benefits while performing the same jobs as regular employees.

    Ed Lenz, general counsel for the American Staffing Association, argues that problems associated with permatemps have been blown out of proportion. He cites a study from the Employment Policy Foundation think tank several years ago that found that most temp workers who had been in their current assignments for two or more years preferred their status.

    It is against federal law, Lenz says, to shift workers to a staffing firm payroll simply to avoid having to pay them retirement benefits that vest over time. But most employers do not turn to staffing firms to save a buck, he says. “They’re used primarily for labor force flexibility,” he says.

    Perhaps, but a number of permatemps have sued, claiming they’ve been misclassified and deprived of benefits.

    Jennifer Miller’s case against HP has an intriguing twist. A separate suit filed earlier this year by a longtime HP employee alleges that company managers were directed to shred their notes after a meeting in which it became apparent that HP was violating employment law.

    The purpose of the October 2003 meeting, according to the suit, was to learn from an HP attorney how to legally classify workers as contractors rather than employees. But as the attorney reviewed Microsoft’s permatemp case, “it was apparent to those assembled that HP was violating the law in a manner that was virtually identical to the Microsoft case,” the suit says.

    HP representative Brigida Bergkamp says the company’s legal team abides by the profession’s rules of responsibility and HP’s standards of business conduct.

    Microsoft’s famed permatemp case hinged on the fact that the software giant didn’t explicitly bar its staffing-agency and casual workers—temps employed by Microsoft—from its employee stock-purchase plan, says one attorney whose firm has represented Microsoft. That allowed longtime temps to make the case that as “common law” employees, they were entitled to the same benefit, he says.

    Whether a worker is a common-law employee may not be easy to assess. An Internal Revenue Service publication related to employment taxes tries to put the matter succinctly: “Under common-law rules, anyone who performs services for you is your employee if you have the right to control what will be done and how it will be done.”

    Yet the same publication indicates there is no simple test for figuring out whether someone is an independent contractor or an employee: “In any employee-independent contractor determination, all information that provides evidence of the degree of control and the degree of independence must be considered.”

    On the other hand, companies may have found an unambiguous solution to the problem of permatemps and benefit plans. In the wake of the Microsoft settlement, employment attorneys say, companies have rewritten benefit plans explicitly to include only regular employees.

A solution for Verizon
    Such a plan seems to have made a difference for Verizon Communications in a court battle with staffing-firm employees who claimed that the phone giant wrongly denied them benefits. In August, a federal appeals court upheld a ruling against the employees, noting that the benefit plans in question specifically exclude employees not “paid directly” by the company.

    In defending itself against Jennifer Miller’s lawsuit, HP may be able to rely on a similar argument. HP’s U.S. benefits policy “is that benefits are provided only to eligible active HP employees in the U.S. who are on the HP payroll and who are regularly scheduled to work 20 or more hours a week,” Bergkamp says.

    Attorney Judith Bendich of Bendich, Stobaugh and Strong, the Seattle-based law firm that led the suit against Microsoft, wishes that the federal Employee Retirement Income and Security Act were much tougher on employers when it comes to requiring equal distribution of benefits to common-law employees. Federal legislation sponsored by Democrats to revise ERISA along these lines has stalled in recent years. Permatemp cases against government bodies, like a suit Bendich’s firm is leading against the city of Seattle, are more promising because public agencies aren’t governed by ERISA but may be subject to other rules, she argues.

    A factor that may be limiting new permatemp lawsuits is their long duration. The Microsoft case took almost 10 years before it reached a settlement, and only in September did the court approve distribution of most of the money. “There are very few attorneys that have the resources to go after cases like this,” says David West, executive director of the Center for a Changing Workforce.

Drivers cry foul
    One employment lawsuit in which plaintiffs’ attorneys recently prevailed is a class action against a unit of FedEx. A group of drivers for FedEx Ground, the company’s division focused on overland shipping, claimed they were employees rather than independent contractors and should be reimbursed for business expenses such as the trucks they furnished and FedEx uniforms they wore. Last year, a California trial court judge ruled that drivers who operate a single route for FedEx Ground were in fact employees. FedEx Ground “not only has the right to control, but has close to absolute actual control over” the drivers, the judge wrote in his opinion.

    The damages phase of the case is not complete, but the initial ruling seems to have triggered a host of related suits against FedEx. In the past year, roughly 30 suits have been filed by drivers around the country, says FedEx Ground spokesman David Westrick.

    Westrick says the company intends to appeal the California judge’s decision, and that FedEx Ground’s treatment of drivers as independent contractors has survived the review of various state and federal agencies, including the IRS. “We are protecting the business model and the livelihoods of 14,000 contract drivers around the country,” he says.

    FedEx isn’t the only company in the shipping field to face worker-status litigation. In September, a group of drivers sued freight transport company EGL, alleging that it misclassified them as independent contractors. The suit, filed in a California Superior Court, seeks damages including business expenses and, for a subclass of the drivers, unpaid overtime. EGL’s legal department did not return requests for comment.

    Lorrie Grindstaff, an attorney representing plaintiffs in both the initial FedEx Ground case and the EGL case, says she sees more companies mislabeling employees as independent contractors, which ultimately strains government coffers when workers get hurt or lose their jobs and turn to public agencies for help. “Not only are employees subsidizing the employer, so is the taxpayer,” she says.

    Ultimately, the issue isn’t about the employer of record but how the U.S. promotes decent benefits for workers, suggests American Staffing Association attorney Lenz. We are moving toward a “freelance nation” without appropriate public policies, he says.

    “The problem is with the whole model,” Lenz says. “It’s not just with temp workers; it’s with the traditional employer-based benefit system.”

Workforce Management, October 24, 2005, p. 53-55 —Subscribe Now!