Author: Michelle Rafter

The days of new mothers returning to work while still nursing and needing to hide out in a bathroom stall to pump breast milk are going, going, almost gone.

Three states—Oregon, New Mexico and New York—passed laws that took effect at the beginning of 2008 to protect a woman’s ability to breastfeed or express breast milk at the workplace. That brings to 14 to total number of states with such protections. Similar bills are pending in 12 others, according to the National Conference of State Legislatures, a Denver organization that tracks state-level legislation.

At the conference, interest in the subject is popular—so popular that a listing of state breastfeeding laws is the most visited page on the group’s Web site, “and we have hundreds of other pages,” says Megan Foreman, a health research analyst for the conference.

Though state laws differ on minor details, most require that companies provide a private space—other than a bathroom stall—for women to breastfeed or pump breast milk, and the time to do it. In Oregon, the new law requires that companies offer employees a 30-minute unpaid break to express breast milk for every four hours worked, and gives employees the option of using paid accrued sick, vacation or other leave to cover that time.

To help companies comply with workplace breastfeeding laws, the federal Health Resources and Services Administration is partnering with local advocacy groups on a national pilot project of a federally developed workplace breastfeeding information kit. The kit, called “The Business Case for Breastfeeding,” includes research on the financial benefits to companies of workplace breastfeeding, instructions for creating nursing spaces, and promotional literature for human resources departments and employees.

Advocacy groups in Oregon and other states currently are seeking companies to test the kit. “We’re going to be selecting 20 employers who’d like to be inspired and supported in implementing the law,” says Amelia Psmythe, executive director of the Nursing Mothers Counsel of Oregon. “We’ll work intensively with them. Beyond that we’re figuring it out,” she says.

While the laws are great news for working mothers, they’re good for business too, says Oregon state Sen. Ginny Burdick, who co-authored that state’s law along with a coalition of employer organizations and breastfeeding advocacy groups. Studies show that breastfed babies are healthier than bottle-fed babies, which means moms won’t miss as much work to stay home with sick kids, Burdick says. And happy working moms are happy employees, she says.

“Whether or not they’re in states with workplace breastfeeding laws, many companies have already implemented policies, according to breastfeeding advocates and others. But putting laws on the books takes the burden off an individual working mom to request accommodations, “so she doesn’t feel so alone,” says Chris Mulford, workplace breastfeeding support committee chair for the U.S. Breastfeeding Committee, a Washington lobby group.

In addition, laws force companies that might never have had a nursing mother on staff to come up with a plan for when and if they do. Small employers or companies with multiple small branch offices or remote sites might not need a dedicated space, “but they have to have a plan,” Mulford says.

Instead of being a burden, supporting workplace breastfeeding can be a company selling point. Two years ago, when Ken Stempson was human resources director at Virgin Mobile, a wireless carrier in Walnut Creek, California, he helped implement a workplace breastfeeding plan after the California state law was passed.

The 150-employee company created a private lactation room out of a small office with a comfortable chair, phone, wireless computer access, locking door and a “Do Not Disturb” sign that could hang from the door handle.

“It had a viral impact,” Stempson says. “We didn’t need to promote it or advertise it. It was instantly received as a benefit.” It also made Virgin Mobile attractive to prospective job candidates, and pregnant employees went on maternity leave knowing that their nursing needs would be met when they came back to work, he says.

Helene Wasserman, a Los Angeles labor attorney with Ford & Harrison who works exclusively with corporate clients, says she hasn’t represented any businesses that have challenged workplace breastfeeding laws for being a hardship, nor does she know of cases where an employee sued their employer for failing to comply.

Topgrading runs on a set of fairly straightforward rules:

►Understand exactly what the open job entails, including responsibilities and salary, so candidates know precisely what’s being offered.

►Interview job candidates using a set of rigorous, in-depth questions to plumb information on past job history, competencies, successes and failures. The higher the position, the greater the number of questions, the longer the interview.

►Always have two people—typically an HR manager and hiring manager—conduct job interviews in order to eliminate subjectivity or personal bias.

►Request multiple references and thoroughly check all of them. To get around potential corporate roadblocks, ask candidates to provide contact information for previous direct supervisors.

►For CEOs and other big hires, bring in an outside expert for a second opinion.

►Rate information collected during an interview using a comprehensive assessment scorecard to evaluate how a candidate measures up to the demands of the job.

►Use the same interview and scorecard process for internal promotions and performance reviews as well as external hires.

Workforce Management, March 3, 2008, p. 26 — Subscribe Now!

Brad Smart has spent a career teaching companies a better way to hire people.

Not just any people. Smart people. Top performers. The best and the brightest. He calls them “A” players.

Fill your company with best and you’ll be the best, Smart counsels. Specifically, keep the employee roster filled with 90 percent “A” players and your company can accomplish anything.

That mantra lies at the heart of the hiring method Smart conceived of more than three decades ago and dubbed “topgrading.” In it, he espouses rigorous in-depth interviews, meticulous reference checks and other hiring techniques to identify top players, redirect or retrain “B” and “C” players and dump deadbeats who don’t or can’t fit, perform or change.

In the ensuing years, Smart has brought the concept to Fortune 1,000 stars like General Electric, Barclays and Lincoln Financial as well as other companies large and small that have used it to navigate national expansions, mergers and acquisitions, bankruptcy reorganizations and other challenges.

Those successes have helped turn topgrading into a familiar phrase in business circles, and created a cottage industry.

Through his Smart & Associates Inc., in the northern Chicago suburb of Wadsworth, Illinois, Smart runs training sessions—at $35,000 a pop—for multinational companies incorporating topgrading into their executive hiring practices. The same companies retain him to personally interview CEO and other high-level job candidates, paying him as much as $16,000 a day. He also runs topgrading seminars and sells DVDs, books and forms through his Web site, SmartTopgrading.com.

Smart’s son Geoff, a fellow Ph.D. and industrial psychologist, runs a separate topgrading consultancy, Chicago-based ghSmart & Co., that has been featured in The Wall Street Journal and BusinessWeek and specializes in topgrading for financial institutions and venture firms looking for executives to run startup companies. Both Brad and Geoff Smart have published books on the subject, and both have new titles due this year. Father and son have taught their topgrading methods to about 200 consultants, who in turn work with companies around the world.

Brad and Geoff Smart decline to discuss annual revenue for their respective companies, both of which are privately held. However, they believe total annual revenue from topgrading-related enterprises could run into the hundreds of millions of dollars, including revenue from their affiliated consultants as well as sales of topgrading books, seminars, training materials and in-house corporate trainings.

It’s a number that’s extremely difficult to confirm, or even put into perspective given the amorphous nature of the assessment industry. Insiders peg the global assessment industry at close to $1 billion, but admit that it’s hard to say exactly because of recent merger and acquisition activity, privately held companies that don’t share revenue data, and assessment companies that make money selling related products.

Regardless of the figure, it’s a hot space, says Charles Handler, president and founder of Rocket-Hire, an online training and assessment business. “It’s becoming more productized and tied to other offerings, and evidence for the power of assessment is growing, which is spurring uptake at an increasingly faster rate,” he says.

Against that backdrop, Brad Smart hopes to introduce topgrading to a wider audience and is negotiating partnerships with HR technology and outsourcing companies to that end. One affiliation is in the works with Taleo, the Dublin, California, talent management technology vendor.

Through it all, Brad Smart, 63, remains topgrading’s head cheerleader and globe-trotting chief practitioner. He typically spends two nights a week on the road. In the latter part of 2007 alone, he traveled to see clients in Turkey and London before spending the holidays with family at his vacation home on Bonaire in the Caribbean.

An unabashed self-promoter who’ll talk about his latest project at the drop of a hat, Smart is also sincere about bringing better hiring practices to the masses. Most companies still have a very superficial approach to hiring, Smart says. But “topgrading companies become magnets for ‘A’ players,” he says. “Word gets out. Successful topgraders are emulated; everyone wants to know what the Kool-Aid is they’ve been drinking.”

Fans like Fred Harding, Taleo’s vice president of global alliances and HRO practice, say Smart’s “distinctive confidence” helps separate him from the 15 or 20 other companies or consultants offering similar services. “He’s a brand name,” Harding says.

Not everyone’s a fan. The most common criticism is that topgrading interviews are too long. Other critics claim topgrading doesn’t account for people’s ability to grow and change in a job, that it doesn’t work in some fast-paced industries, and that it’s no better than the so-called “rank and yank” system some companies routinely use to rid themselves of underachievers.

“There are power vacuums all over companies pulling down performance standards. The head of HR is important to maintaing high performance, but if the CEO doesn’t [help mantain performance standards] it’s difficult for topgrading to succeed.” —Brad Smith

Competitors say they’ve taken away as many clients as Smart has taken from them. “I truly believe our assessment is more job-relevant and more objectively valid,” says Matt Paese, executive solutions vice president at Development Dimensions International, a Pittsburgh-based HR consulting firm and Smart & Associates competitor.

Such criticism doesn’t faze the perennially upbeat Smart, who maintains that his methods continually beat out his rivals for improving the quality of candidates hired. “Who cares if jobs get filled quickly and inexpensively if 75 percent of those turn out to be mis-hires?” he says.

Topgrading 101
The secret of topgrading is that there’s nothing really secret about it. In fact, the topgrading formula is built on basic hiring rules Smart outlined in his book Topgrading, published 10 years ago and updated in 2005.

Those rules include pinpointing the specifics of the job being filled; using a rigorous, in-depth interview, tandem interviewers and a rating scorecard to match a candidate to the open position; and thoroughly checking references. Smart espouses the same methods for internal promotions and performance reviews. According to him, if employees go through topgrading and are identified as “B” or “C” players, management should move them to jobs where they can become “A” material and train them if necessary—or, if they doesn’t look like they’ll ever get better, fire them. If companies strictly adhere to the topgrading regimen, they’ll end up with 75 percent high achievers, and in many cases, up to 90 percent, he says.

It’s pretty simple stuff. So why pay Smart tens of thousands of dollars for something you should have learned in Hiring 101?

Because simple can be deceiving. As easy as it sounds, hiring can and does go wrong, and when that happens, costs quickly add up. A 2006 survey of 444 North American companies conducted by Right Management, another talent assessment firm, found the average cost of a bad hire was 2½ times the person’s salary, including recruiting, training and severance costs and lost productivity.

The costs of a bad CEO or C-level executive hire could be even greater, though a lot depends on individual circumstances, says Lisa Aldisert, president of Pharos Alliance, a New York business and assessment consulting firm. “Everything from the size of the company, the predetermined exit package of the outgoing CEO to the degree of desperation to hire a new CEO will factor in,” Aldisert says.

Bad hires happen for lots of reasons, Smart says. Companies undermine their own efforts by conducting interviews for jobs they haven’t clearly defined. Or ill-prepared interviewers ask off-topic questions, spend more time talking than asking questions, or like a candidate so much they decide not to check references. Managers eager to fill open positions will hire someone they know doesn’t meet all the qualifications and cross their fingers that things will work out.

As a newly minted Ph.D. starting out in the psychological assessment business more than 30 years ago, Smart saw it all. Frustrated by the shortcomings of existing assessment tools, he set out to build a better mousetrap—one that would remove much of the guesswork from the process. He eventually came up with the heart of his system: an in-depth interview covering the previous 10 years of a pros­pect’s job history. To cover everything, interviews take two hours, and sometimes three or four hours for C-level positions.

Smart had some successes. But other early adopt­ers quickly reverted to their old ways. He deduced that companies weren’t good at creating their own interview questions, so he constructed the detailed interview template he still uses. Eventually, he also created a comprehensive scorecard for rating informa- tion collected in an interview. Topgrading took off.

Jack Welch calls
In the early 1990s, Smart got a once-in-a-lifetime call. Jack Welch, the hard-driving CEO at General Electric, had heard about topgrading and wanted to try it. Smart worked with Welch and other GE managers in a variety of areas, and found that topgrading fit in nicely with other hiring and performance review tools Welch championed, including tandem interviews and 360-degree reviews. As GE’s status as a management dynamo took off, it sealed topgrading’s reputation too. In his book, Smart calls Welch “a one-man topgrading hurricane,” and although Welch doesn’t mention Smart in the two management books he has written, over the years other GE managers have praised Smart’s techniques in published testimonials.

The experience gave Smart an “in” at other major corporations. Today, Smart claims to have worked with a who’s who of Fortune 1,000 enterprises, although some of those have simply attended his workshops.

One longtime practitioner is Philadelphia-based Lincoln Financial Group, a $251 billion-asset insurance and financial services conglomerate that merged with Jefferson Pilot Financial in 2006 and used topgrading to choose which executives from the two companies would be slotted into top management positions after the merger.

Using topgrading for those assessments helped hiring managers make quick decisions while under pressure, in many cases about people they didn’t know, says Karen Ruef, who until recently was Lincoln’s vice president of talent management and strategic staffing. When Lincoln’s CEO and COO reviewed and signed off on the hiring decisions afterward, “it really resulted in a lot of credibility of the process,” Ruef says.

Of Lincoln’s 10,000 employees, about 6,000 have gone through the topgrading process, a number that represents most of the corporation’s white-collar staff. Of those, Ruef ranks 75 percent as “A” players, a number that’s slightly below the company’s historic average of 90 percent because of the merger, she says.

Lincoln officials wouldn’t comment on the company’s topgrading costs. “We’re in that enviable position of having a leadership team that believes in the effectiveness of the process because they look at the talent and see they’re [better] than competitors, so don’t ask us to prove it,” she says.

However, officials confirm that the effect on turnover has been significant. Voluntary turnover runs 10 percent to 12 percent a year, plus 4 percent to 5 percent a year for layoffs, Ruef says.

Both Ruef and Elizabeth Reeves, Lincoln’s senior vice president of human resources, worked at topgrading companies before coming to Lincoln, and they wouldn’t have it any other way. “You spend far less money on blowout hires that don’t make the grade. It makes a huge difference,” Reeves says.

To work, topgrading can’t just be an HR mandate; it has to come from the top, Smart says. “There are power vacuums all over companies pulling down performance standards,” he says. “The head of HR is important to maintaining high performance, but if the CEO doesn’t [help maintain performance standards] it’s difficult for topgrading to succeed.”

One CEO who swears by topgrading is Curt Clawson, president, chairman and CEO of Hayes Lemmerz International Inc., a $2 billion maker of wheels and other automotive components based in North­ville, Michigan. Clawson joined Hayes Lemmerz in 2001; shortly after, he discovered accounting irregularities hidden by the 100-year-old company’s former executives. At the same time, the U.S. auto industry was tanking. The company filed for bankruptcy. Two years later, rising gas and steel prices walloped the company again.

Clawson had used topgrading before in executive positions at Allied Signal and American National Can, and believed it could help. With Smart’s assistance, he deployed it to reshape Hayes Lemmerz’s top management, and they in turn topgraded management within their divisions. As a result, Hayes Lemmerz restructured its core business, selling off some product lines, closing some U.S. plants and opening foreign ones. In a short time, the company’s overseas business grew from less than 20 percent to 55 percent, a change that has helped rejuvenate its finances.

“[By topgrading], you spend far less money on blowout hires that don’t make the grade. It makes a huge difference.” —Elizabeth Reeves, senior VP of human resources, Lincoln Financial Group

Clawson credits topgrading for much of the success. “Most people thought we would go under,” Clawson recalls. “Here we are two years later with a 1-to-1 debt-to-equity ratio and a new balance sheet. That would have been impossible without an outstanding team. Had we stuck with the previous management, we would have disappeared.”

Smart’s own business and his family life have served as living topgrading laboratories. Everyone on the staff of his four-person consulting firm went through topgrading interviews before being hired. Smart even used some of his methods raising Geoff, 35, and daughter Kate Smart Mursau, 32, who sprinkles anecdotes about life with her topgrading dad in a parenting book called Smart Parenting: How to Raise Happy, Can-Do Kids, which she co-wrote with him in 2006.

Smart hopes partnerships will help topgrading reach more companies. Taleo is considering incorporating topgrading techniques into its talent management suite, says Harding, the company’s global alliance and HRO vice president. The partnership is in the product development stage, and as of mid-February, the companies were selecting beta testers, according to Smart.

Not everyone’s a fan
For all its fans, topgrading also has its critics.

Paese, the Development Dimensions International vice president, says his company’s assessment system is superior because job candidates submit not only to in-depth interviews but also screening tests and full-day job simulations. The combination is critical at a time when major corporations are performing more due diligence on candidates for top jobs and are placing more importance on a good culture fit, he says. “If you look at a résumé and past accomplishments, you don’t get a good sense of how they’ll fit. But if you look at their personal characteristics, work values and what caused them to be motivated, you can reduce risk around culture fit,” Paese says.

Jim Estill, CEO of Synnex Canada, a 900-person technology reseller just outside Toronto, routinely writes about management and hiring issues on his business blog, Time Management. Estill follows some of Smart’s hiring tenets, but takes exception to the idea that bad people can’t be retrained, and that certain jobs require certain characteristics.

“I have a great salesperson who’s a total extrovert, and a great salesperson that is quite introverted,” Estill says. “They’re both equally good, and in many cases I need both of them because some of my customers relate to one and some to the other.” If he made the assumption that there was only one best way, he could be in trouble, he says.

Smart hopes such criticisms will be quelled by new research that could quantify how well topgrading works. In summer 2007, the American Productivity & Quality Center, a nonprofit benchmarking and best-practices research group in Houston, tapped Lincoln Financial to study for its standard-setting strategies for recruitment, selection and talent retention, including topgrading procedures. APQC documented those practices and is compiling the results in a study of Lincoln and five other companies that’s due to be released early this year.

Topgrading is also the subject of a case study on Geoff Smart’s ghSmart & Co. that is being compiled by Harvard Business School graduate student Ashraf A. Haque. According to Haque, the report will be added to the university’s business case studies library.

Such reports, plus the partnerships Brad Smart is pursuing and the books he and son Geoff have coming out next year, could propel topgrading toward that much sought-after tipping point of wider recognition. Meanwhile, as long as people will listen, Brad Smart will bend their ears about his quest for hiring perfection. When it comes to promoting topgrading, he’s the ultimate “A” player.

Workforce Management, March 3, 2008, p. 1, 20-28 — Subscribe Now!

Sales reps hate spreadsheets.

More specifically, they hate the spreadsheets that compensation managers create to determine sales commissions. Companies have used Excel spreadsheets as their No. 1 tool for determining sales commissions for about as long as the program has been around. But the practice is rife with miscalculations and other problems.

Salespeople have a special name for it: “Excel hell.” Come payday, it’s not uncommon for them to spend hours doing a shadow accounting of their commission checks to make sure they got what they deserved, according to compensation managers and others.

The alternative to those dreaded spreadsheets is sales incentive management software, a specialized program that manages a reward system for meeting sales quotas and goals. The software typically includes tools to create, document and allocate incentive plans, as well as a Web-based portal that administrators can use to access the information, generate reports and integrate data with other HR systems.

The software has been around for about six years, and until recently has had a loyal, if small, fan base.

However, it’s starting to take off now that startup companies and other vendors have begun to offer “software as a service” and hosted solutions that are priced lower than the original high-end, on-site version.

Executives at companies that use sales incentive software claim to have reduced or eliminated common mistakes on spreadsheet-based commissions. They also say it has dramatically decreased the time they spend on the process, and the time reps spend second-guessing commission payouts, leaving more time for making sales calls. “We’re extremely pleased and excited,” says Gary Lawrence, Waste Management’s senior manager of sales compensation, who is supervising a sales incentive software rollout at the major garbage hauler.

In addition to Waste Management, other Fortune 1,000 fans include Aetna, Liberty Mutual, Wachovia, Verizon, Novell and Johnson & Johnson. Thousands of small and midsize businesses also have become converts.

Interest in sales incentive software pushed sales up 15 percent in 2007 to $250 million, according to technology researcher Gartner, which predicts a similar increase in 2008.

That’s a relatively small amount of money compared with the number of companies using spreadsheets, says Michael Dunne, the Gartner analyst who tracks the subject. But companies that have switched have discovered they were overpaying commissions anywhere from 3 percent to 10 percent, “so it’s real money,” Dunne says. Once a company gets to more than 100 salespeople, or if it starts selling product bundles with complicated commission structures, it’s too hard to track all the possible variables in spreadsheets. “It becomes a nightmare,” Dunne says.

The first generation of sales incentive software from vendors such as Callidus, Synygy and Oracle were installed on-site with a client, and cost $200 to $300 per person, making them attractive mainly to major enterprises, according to analysts and experts. “Between the software and implementation, it was hard to get anything under $2 million,” says Bob Conlin, Centive’s chief marketing officer and an industry veteran.

Software-as-a-service vendors such as Centive and Xactly entered the business offering solutions for a fraction of that, $20 to $50 a month per user, according to several analysts’ calculations. But many such vendors still are small companies with limited financial backing and marketing muscle, which has made it difficult for them to make major headway with customers, analysts say.

To change that, vendors are taking steps to broaden their appeal. Callidus, for example, retooled its technology so it’s available both as an on-premises or on-demand solution. Centive recently signed a deal with ADP, which will market the software and host it for its small and midsize business customers. Centive, Callidus and Xactly have partnerships with Salesforce.com. Other vendors, such as Varicent, are looking to gain market share by offering sales incentive management as a subset of a comprehensive sales performance management software package.

Large and small applications
Waste Management is a sales incentive software convert.The nation’s largest trash collector has 1,200 inside and outside salespeople who sell the Houston-based company’s collection services to new businesses and construction sites, and are compensated in one of a dozen different incentive plans. Tracking all those reps and plans in Excel spreadsheets was time-consuming, prone to error and didn’t give management enough feedback about whether commission structures were enticing salespeople to sell the most profitable products, says Lawrence, the compensation manager.

In late 2006, Waste Management struck a $3 million deal to license sales incentive software from Varicent. The software was installed in one test market in July 2007, expanded to four in February and should be in place in all 48 sales territories by early 2009.

So far, the only glitch was one that Waste Management brought on itself. The company had to delay a beta test after managers realized they needed to standardize some processes that individual territories did differently, and fix problems with the existing billing system and pricing tools so data fed into the new software was error-free, Lawrence says.

Despite the snags, Lawrence and the Waste Management senior leadership that approved the project are pleased with the results. Lawrence estimates that when commissions are completely automated, it will save administrative staff the equivalent of 15,000 workdays a year, which is the time it once took to enter commission data into Excel spreadsheets and then re-enter it into payroll software.

Also, by cutting the time that sales reps were spending on bookkeeping, it has given the sales force extra hours “without adding people,” Lawrence says. Since the weak economy has cut into Waste Management’s construction-related business, Lawrence is using the software to tailor commission plans to motivate sales reps to go after new business. Reports that the software generates give instant feedback on how well reps are meeting those goals. “We don’t want all the business we can get; we want profitable business, so we’re looking at every customer and every order to see if it fits that,” Lawrence says.

Executives have already expanded their Varicent contract to cover incentive plans for trash haulers, who earn commissions when they exceed daily quotas, drive safely and bring in new business, among other things. Waste Management initially will put commission plans for 5,000 to 7,000 garbage haulers on the software, but eventually could use it for all of its 25,000 drivers. The company is also using the software for its 110 national accounts and special waste salespeople, and in the future, could use it for customer service representatives.

Large enterprises such as Waste Management were among the first to use sales incentive software, but software-as-a-service solutions have brought it to small and midmarket companies that don’t have the budget or IT staff for on-premises software.

One of them is Speakeasy, a 330-person Seattle company owned by Best Buy. It provides “voice over Internet protocol” voice and data services to 50,000 small business customers across the country. Speakeasy uses a software-as-a-service incentive software program from Xactly to calculate commissions for about 35 sales reps. That’s not a lot of people, but between a direct sales team, in-house salespeople and sales reps who work with solution partners, Speakeasy runs four or five different incentive plans and they’re all complicated, Speakeasy CFO Andrew Hyde says. A Speakeasy employee who previously worked at Microsoft built Excel spreadsheets to manage the plans. But after he left in January, chaos ensued. Hyde calculated commissions the next month, and was up until midnight one evening figuring things out.

“It’s not something I ever want to do again,” he says.

Before joining Speakeasy, Hyde worked at Salesforce.com, the software-as-a-service pioneer, so he didn’t need convincing that it was the way to go. He tapped Xactly because the company’s software is integrated into Salesforce.com and Speakeasy was already a Salesforce.com customer. Implementation was fast—just 30 days. The fee Speakeasy pays falls within the industry average of $20 to $50 per user per month, Hyde says.

Figuring commissions has been easy, and sales reps use the software to see how close they are to trigger points that would bump up their commissions, “and if they care, they get back on the phones,” Hyde says.

Selling systems in a downturn
Corporate concerns about a recession are curbing corporate HR and IT spending, which could result in fewer software purchases of any kind, including sales incentive programs, according to industry experts, analysts and company managers.

“This will be a challenging year for any back-office technology that doesn’t have a direct effect on the bottom line,” says Jacqueline Kuhn, chair of the International Association for Human Resources Information Management (IHRIM) and senior director of corporate and administrative services at OfficeMax.

But some sales incentive software users believe their best defense against an economic downturn is a well-motivated, well-compensated sales force, and they’re willing to pay for the software that makes that happen.

Also, companies are enthusiastic about anything that’s branded as employee self-service, pay for performance or software as a service. Sales incentive software is all of those, says Christa Degnan Manning, research director at AMR Research, a Boston HR technology research firm.

For now, providers of on-premises software remain the market leaders. Callidus, for example, handles a total of 1.8 million payees from 150 companies, including a who’s who of Fortune 1,000 customers, according to Steve Apfelberg, the company’s vice president of marketing and business development. To stay competitive, Callidus started offering a hosted version of its software, and recently partnered with IMS Health to resell Callidus’ software to IMS’ pharmaceutical and health industry customers.

Experts believe software as a service will take off once vendors come up with a technology platform that companies can configure to their particular needs, without having to do a lot of software customization, IHRIM’s Kuhn predicts.

Pure software-as-a-service vendors are the best-positioned to do well in the future “because they don’t have a lot of boring old technology around their necks” that they have to transition to a new delivery model, Manning says.

However, don’t count out Oracle, analysts say. It could be a big contender if it chooses to put its substantial investment dollars into the sales incentive software market.

There’s more to buying a sales incentive management solution than writing a check. Before committing the time and money, consider your company’s needs and which product will come closest to meeting them, say industry analysts and compensation executives who have been there and done that—like Gary Lawrence, senior manager of sales compensation at Waste Management. Other advice:

    Know what you’re after. Do you want a stand-alone sales incentive management program or a complete sales performance management solution? There are different vendors for each, so it pays to know what you’re looking for from the outset.

Review existing processes and correct what’s broken. Switching from a spreadsheet to a sales incentive management solution won’t fix glitches in how you calculate commissions or other errors in the plan. Failing to address such problems beforehand will only add to implementation time because you’ll have to stop and deal with them along the way, Lawrence says.

Understand how a sales incentive solution will fit into existing HR systems. If you’re upgrading existing core HR software, consider waiting until that is up and running before adding a sales incentive management program. That way you avoid double trouble should the larger implementation hit a snag.

    Consider available IT resources. Does your company have the servers and personnel to commit to an on-premises solution? The answer will determine whether you license on-site software or use a hosted or software-as-a-service solution.

    Hire a consulting firm. At Waste Management, Lawrence hired a consultant to draw up a request for proposals and evaluate vendors. “It was such a large purchase we wanted to dot all our i’s and cross our t’s before we asked senior leadership for funding,” Lawrence says.

    Ask for demos. Ask vendors to demonstrate how they would handle a few of your current incentive plans to see if what they provide matches or bests your present program. Other things to look at: the level of detail in reports, and how flexible programs are, in case you want to customize something.

Demand support. If you’re spending big bucks on a solution for thousands of users, make sure you’ve got adequate vendor backup. At Waste Management, Lawrence’s project team has a standing Tuesday morning conference call with their counterparts at Varicent to discuss strategies and problems.

It’s the stuff of nightmares.

A week before Christmas 2007, a North Carolina professional employer organization abruptly shut down, leaving 3,000 workers it managed for close to 100 clients wondering if they’d get paid or still had health insurance. Days later, the company, the Castleton Group of Raleigh, North Carolina, filed for bankruptcy protection. Now the state’s Bureau of Investigation is looking into the company’s finances, and the North Carolina Insurance Department alleges, among other things, that the company owes $8 million in back federal payroll taxes.

As the Castleton case makes painfully clear, companies large and small must thoroughly vet the outsourcers they hire or leave themselves open to unexpected disruptions, sometimes with dire consequences.

“Oftentimes when these things happen it’s sad and there are hurt folks,” says Gray McCaskill, president of an insurance company that took over the workers’ compensation contracts of some Castleton clients after the company shut down. “You have to look before you leap.”

Professional employer organizations such as Castleton are often likened to HR outsourcers for smaller companies of up to several hundred employees. But there’s one big difference. Unlike HR outsourcers, PEOs act as co-employers, handling HR functions like payroll, health benefits and workers’ compensation while the client company manages workers’ day-to-day activities.

In the past 20 years, PEOs have mushroomed into a $61 billion industry with more than 400 companies covering 2 million employees, according to Milan Yager, executive vice president of the National Association of Professional Employer Organizations, an Alexandria, Virginia, trade group.

From the outside, Castleton was a pillar of the community. During 2007, the 10-year-old business made it onto Inc. magazine’s list of the 5,000 fastest-growing private companies, was named the year’s top woman-owned business by a local business weekly, and moved into a new 32,000-square-foot office complex near downtown Raleigh.

Castleton owner Suzanne Clifton, 64, held a seat on the state PEO association’s advisory council. According to local news reports, Clifton and her husband owned three homes with a combined tax value of $4.2 million, including one in the Virgin Islands.

But trouble was brewing behind that successful façade. Since 2005, the North Carolina Insurance Department had denied Castleton’s license requests because of concerns about the company’s solvency. In court filings, William Brewer, the Raleigh lawyer representing Castleton in the bankruptcy proceedings, called the company’s financial dealings “voluminous but inscrutable.”

After Castleton shut its doors on December 18, clients scrambled to replace employees’ benefits. Castleton attempted to transfer employees to another PEO without disrupting benefits, but it didn’t work out “for reasons outside of Castleton’s control,” according to Terry Carlton, a former Castleton attorney.

McCaskill, president of insurer Senn Dunn in Greensboro, North Carolina, says he was contacted by several Castleton clients and ultimately took over workers’ comp for a number of businesses.

To avoid catastrophe, anyone who wants to outsource or enter into a PEO arrangement should perform due diligence on prospective vendors, NAPEO’s Yager says. Companies can start by determining whether their state is one of 29 that, like North Carolina, have PEO licensing or registration laws. NAPEO is lobbying other states to follow suit and recommends that regulations include financial audit requirements so that even if PEOs are privately held, customers can find out if they’re fiscally stable. “The truth is many still aren’t [audited], and consumers aren’t asking for it,” Yager says.

As a further sign of their trustworthiness, some PEOs choose to become bonded by passing a financial accreditation process administered by a nonprofit industry group called the Employer Services Assurance Corp. that NAPEO started in 1995. About 25 PEOs representing 30 percent of the industry’s total revenue are bonded, Yager says. While Castleton was an NAPEO member, the company wasn’t bonded.

Yager also suggests that prospective clients check in with a PEO’s existing customers to find out what the company is like to work with, whether they meet contractual obligations, if their benefits package is acceptable, and whether there have been any problems.

To Yager, Castleton’s failure proves that state PEO regulations work. “It’s only because there was a statute with an audit provision that this whole situation came out,” he says. “The state had the company under observation, the public was aware of it, but the clients trusted them so much they didn’t leave.”

Are midmarket companies the new center of the HRO universe?

It’s true that the number of U.S. companies with 3,000 to 15,000 employees with multi-process HR outsourcing deals is still small, and activity at that level remains relatively uncharted.

However, company executives, industry analysts, deal makers, vendors and other observ- ers agree that a confluence of factors could drive the midmarket HRO business to new heights during 2008, outpacing activity at the troubled large-market level.

Here’s why: The cost of doing a midmarket multi-process HR outsourcing deal is dropping, as is the time vendors need to get outsourcing contracts up and running. Many midmarket companies appear willing to accept the standardized technology platforms midtier vendors are offering if it means they don’t have to take on the dual headaches of transforming processes and upgrading technology themselves.

At the same time, more vendors are targeting midmarket customers, and a couple—Ceridian and Northgate/Arinso—are receiving infusions of private equity funding for that purpose.

The list of vendors now includes some top-tier players who’ve dipped into the midmarket for customers while larger buyers hold off signing huge deals as they reassess outsourcing strategies.

The Human Resources Outsourcing Association is even getting into the act, forming a special interest group for midmarket companies to satisfy the demands of members who’ve felt underserved until now.

“I’ve seen it, I know it works,” says Lisa Knutson, the HR executive who’s chairing the HROA midmarket special interest group and who previously helped orchestrate a large-market outsourcing deal at Fifth Third Bank. “It can work for the middle market as well.”

But there are some clouds on the horizon.

For one, midmarket companies need to have a better handle on the internal processes that they want outsourced. At the midmarket level, “a good half of the RFPs that come out are garbage,” says one longtime industry insider who currently plays matchmaker between HRO clients and vendors and who asked not to be identified.

Second, because so little research has been done exclusively on midmarket deals, and because many deals are still so new, there’s little industrywide data on whether outsourcing is helping companies cut costs and transform their HR practices.

Also, some industry watchers believe growing interest in “software as a service” as a delivery method for HR applications could put a damper on the outsourcing business model. Others, though, maintain that in the long run, software as a service will complement rather than compete with outsourcing.

Finally, a substantial number of midmarket companies still want to simply “lift and shift” their existing HR processes to an outsourcer rather than convert to a standard platform. “They want the status quo and someone else to do it. I think that’s why we haven’t seen any huge breakout,” says Lisa Rowan, HR and talent management services program director at market researcher IDC.

Whether outsourcers can convince them lift and shift isn’t a viable outsourcing strategy “is the million-dollar question,” she says.

Midmarket Ramping Up
Whatever the future holds, there’s no denying that HRO activity at midmarket companies is increasing, thanks to lower costs and faster implementation times.

Since 2002, the average price of midmarket multi-
pro­cess HRO deals has declined 40 percent, to $600 per employee, according to Everest Research Institute, an HRO market researcher and consulting firm. That’s good news for buyers because it means suppliers are getting more efficient and can deliver at a better price point, says Everest Research vice president Monica Barron.

Implementation times are down too. ADP, for example, is implementing midmarket multi-process HRO contracts in four to six months, half the time it took two years ago, says Terrence McCrossan, ADP’s vice president of vertical markets. At Ceridian, implementation cycles have dropped 25 percent over the past couple years, to between six and nine months, says Keith Strodtman, senior vice president and HRO general manager.

As a result, more deals are getting done. ADP signed 30 multi-process HRO deals with midmarket U.S. and overseas companies in 2007, while Ceridian inked eight and Northgate/Arinso signed one. From the outsourcing industry’s inception in 2000 through mid-2007, the total number of midmarket deals for three or more HR processes rose to 102, compared with 105 total large-company deals, Everest’s Barron says.

Although top-tier deals still account for 86 percent of worldwide HRO contract values, midmarket contracts are being signed at a faster rate, she says.

Phil Fersht, a longtime HRO analyst who recently joined AMR Research and blogs about the industry at “The Outsourcing Blog,” puts the total value of midmarket contracts signed since the industry’s 2000 inception somewhere between $750 million and $1 billion. That’s just the deals people know about. Getting a true picture of midmarket HRO activity has been tricky because so few midmarket contracts are announced. “We all shake in our boots when so-and-so signs so-and-so and it’s a multinational, hundred-thousand [employee] company,” IDC’s Rowan says. “But when it’s a 10,000-employee company, they don’t announce it. It’s not as sexy, so it doesn’t get assessed.”

“We all shake in our boots when so-and-so signs so-and-so and it’s a multinational, hundred-thousand [employee] company. But when it’s a 10,000-emploee company, they don’t’ announce it. It’s not as sexy, sot it doesn’t get assessed.” —Lisa Rownen, HR and talent management services program director, IDC

Even when vendors are willing to talk, clients aren’t. After Ceridian publicly unveiled its new midmarket clients in 2007, customers like ACCO, an office products supplier, and Johns Manville, a building materials maker, declined to discuss details, saying they didn’t want to reveal data on internal company operations.

The vacuum created by such unwillingness to share experiences is one reason HROA member Knutson felt compelled to help start a midmarket special interest group for the association.

Knutson and representatives from 14 other association members have worked since summer 2007 to craft membership benefits, meeting dates, research project proposals and other goals. The group, which also includes HR executives at Catalina Restaurant Group and Teradata, plans to officially launch sometime in March and hold its first meeting at the HRO World conference in New York in April. A daylong seminar could follow in the fall, according to Knutson.

One of the group’s priorities is establishing standards for midmarket HRO service-level agreements and other benchmarks that haven’t existed before now, says Knutson, who is vice president of human resources operations at E.W. Scripps Co. in Cincinnati.

“Being able to do a survey like what [HROA] has done in the large-market buyers group to tell us about buyers’ experiences, how satisfied they are with outsourcing” would be beneficial, Knutson says. “We’ll get there eventually.”

Knutson has an ulterior motive. Scripps, a media company with 9,200 employees, is expected to split into two publicly traded entities this year, and is researching HR outsourcing options. “We’re hoping in the next couple months to make a decision and have some type of announcement,” Knutson says.

Vying for Market Share
When they start looking, companies like Scripps will find more vendors competing in the midmarket.

Front-runners such as ADP, Ceridian and Northgate/ Arinso are being joined by vendors like Accenture, Fidelity, Hewitt and IBM—companies that traditionally limited their efforts to large-company customers.

Those vendors are seeking the midmarket’s attention because their large-market customers are tapped out, IDC’s Rowan says. Large companies are shying away from big multi-process deals following the bad experiences of outsourcing pioneers who failed to garner expected cost savings or ran into implementation problems. As a result, some are switching vendors, renegotiating contracts or, in a few cases, taking HR back in-house, according to Rowan and other analysts.

That was the case with NiSource. In December 2007, the $7.5 billion Merrillville, Indiana, energy company said it was taking back in-house the HR functions it had originally outsourced to IBM in 2005 as part of a $1.6 billion multi-tower outsourcing deal.

But analysts question how successful Hewitt, IBM and other large-market vendors will be in the midmarket space. Vendors used to working with large-market customers that demand highly customized outsourcing packages might not be able to develop the type of one-to-many technology platform it takes to turn a profit on midmarket deals.

Plus, there’s not as much money to be made on smaller customers. “Salespeople who do large HRO deals don’t want to do small ones. They make their money on big ones,” says Mark Robinson, CEO of Emportal, an HR technology provider.

Some vendors have already pulled away from the multi-process business. Aon Consulting, for one, retreated from multi-process HRO deals after failing to make much progress. The company is now refocused on selling its core pension administration outsourcing services and is actively seeking partner- ships with other HRO suppliers, says Josh Trent, vice president of business development for Aon’s employee benefits outsourcing practice in Minneapolis.

“We know that we do some things better than anything else and we’ve decided to stay true to that,” Trent says.

By contrast, midmarket specialists Ceridian and Northgate/Arinso are poised to make substantial investments after going private. In November, Ceridian closed a $5.3 billion private equity deal with Thomas H. Lee Partners and Fidelity National Financial, a Jacksonville, Florida, insurance claims handler.

“Our mantra has been ‘business as usual,’ ” says Strodtman, Ceridian’s HRO general manager, who notes that growth in the company’s multi-process outsourcing business is outpacing the industry.

In mid-December, buyout firm Kolberg Kravis Roberts & Co. made a $1.1 billion offer for Northgate, which itself acquired Arinso in August 2007. The deal is expected to go through this year.

“It’s an excellent time to be privately held, where we have reliable access to significant financial resources to execute our plan without the sensitivity to quarterly earnings announcements and the volatility of today’s credit markets,” says Treat Hull, Northgate/Arinso’s vice president of marketing. According to Hull, the buyout gives the company, which is strong in Europe and Canada, more muscle to enter the U.S. HR outsourcing market, where it’s now “a well-kept secret.”

Outsourcing Meets Web 2.0
Other vendors continue to enter the market. Among the newest are companies seeking to become an alternative to pure outsourcers by offering technology through a software-as-a-service delivery model, where HR applications are maintained by the supplier and accessed by clients via the Web.

Some midmarket companies have shied away from outsourcing because they didn’t want to lose control over processes. Software as a service gives them another option because they don’t have to outsource and they don’t have to maintain an IT structure either, IDC’s Rowan says.

Aon, for one, has introduced an HR portal that integrates the company’s pension benefits administration services with HR technology from other partners in one Web-based front end. Whether employees are enrolling in their health plan, using online education tools or looking at internal job postings, the portal supports them all regardless of the supplier, “so employees don’t have to go to another site,” says Trent, the Aon business development executive.

Emportal, the Walnut Creek, California, startup, also uses software as a service to provide a single interface to merge separately outsourced HR processes. Robinson, the company’s CEO, wouldn’t name his first two clients, but he says one is a European company with 10,000 employees, including 3,000 in the U.S. for whom Emportal has begun providing HRMS, talent acquisition applications and benefits administration.

Robinson makes no bones about Emportal’s status compared with other HRO vendors. “Right now they view us as a flea on the dog,” he says. “At some point, I hope they view us as a friend, and I think sometimes it’s OK to compete with your friends.”

While some industry watchers believe software as a service will pose a threat to outsourcing down the road, others believe the two will complement each other.

Warnings of an upcoming recession give midmarket companies yet another reason to consider outsourcing. Companies that face economic pressures from a changing business climate or offshore competition are looking for ways to shave costs off their operations, and outsourcing can do that, analysts say.

So while oil and gas companies are so cash rich right now they don’t have to worry, companies in industries like manufacturing, chemicals and pharmaceuticals are on the hot seat.

“There’s not a major pharmaceutical company that’s not looking at this,” says Lowell Williams, executive director of HR advisory services at EquaTerra, the outsourcing consulting firm that works with large and midmarket companies.

Banks are in the same boat, Williams says. The subprime meltdown means banks are looking for radical ways to cut their costs, and “outsourcing is where you turn.”

With 2008 being a presidential election year, candidates will inevitably raise the issue of outsourced jobs moving offshore, but Williams doubts anything will come of it. “It happened four years ago, it’ll happen again, and it’ll come to nothing,” he says.

The potential for multi-process HR outsourcing at midmarket companies is wide open. Midmarket companies are starting to understand how outsourcing can help them transform their HR processes, upgrade to state-of-the-art technology and possibly weather economic downturns, according to analysts and other industry watchers.

The provider community is working hard to mature, and as a result there will be better vendors out there in the next three to five years.

Customers will mature too, says Naomi Bloom, an independent outsourcing consultant in Fort Myers, Florida, who works with vendors, software makers and end-user companies. “No one expects magic,” Bloom says. “We need this business model. It is important. It is going to make a difference.”

Workforce Management, February 18, 2008, p. 26-32 — Subscribe Now!

As companies cope with the aging of the workforce, many are implementing flexible workplace initiatives to hang on to valuable older employees. But one tool that seemed like a natural—implementing a formal phased retirement program—is turning out to be easier to talk about than to do.

    Federal pension reform laws passed in 2006 were intended to ease restrictions on retirement-age employees who wanted to work a reduced schedule but still be able to collect payouts from defined-benefit pension plans.

    In reality, the reforms have raised more questions than they’ve answered. On top of that, the same pension reform laws included mandates unrelated to phased retirement that companies are required to make right away, leaving them little time or incentive to work on anything else.

    At many companies, that’s put formal phased retirement programs on the back burner. Until things get sorted out, companies appear content to stick with informal arrangements.

    The most common of those are ad hoc deals with executives or other employees who are close to retirement age and valued because of their position, experience, skills or customer relationships, according to company managers, retirement experts and HR industry consultants. In these situations, if the valued workers are over 62, they can remain working in some capacity and start collecting pension benefits.

    As an alternative, some companies encourage employees to retire completely, wait for a period of months to pass, and then return as independent contractors, allowing workers to collect their full pension benefits and the company to retain their brainpower.

    Other businesses are contracting with contingent worker organizations like YourEncore Inc. or staffing agencies like Kelly Services to manage retiree workers on their behalf. In the past few years, an increasing number of Fortune 1,000 companies have established relationships with such outside organizations, including the Principal Financial Group, Procter & Gamble, Boeing and General Mills.

    Still others haven’t even started to address the issue. “It’s like a ballgame,” says Jeri Sedlar, author of Don’t Retire, Rewire and a senior advisor on mature workforce issues for the Conference Board. “Some companies are at the bottom of the first, some are in the second. But some don’t even know there’s a game going on; they haven’t bought a ticket.”

    Retirement and industry experts question whether formal phased retirement programs will ever materialize. A common concern is that if a company establishes a formal program, it must be available to everyone.

    That might not be feasible, says Lynn Dudley, retirement policy vice president at the American Benefits Council, a Washington lobbying group for major U.S. employers.

    “Not every job lends itself to being a phased retirement job,” Dudley says. Companies “want workers to be happy, but they’re in business, and if it doesn’t help them succeed in business they won’t do it. You’d have an issue with your shareholders if you did.”

    One piece of good news is that pension reform regulations did not affect defined-contribution plans, which more companies are using. Under defined-contribution plans such as 401(k)s, employees can begin withdrawing funds after age 59½ without penalty—whether or not they continue to work. But even that arrangement doesn’t help employees who want to cut back on full-time work and start collecting benefits before they turn 59½.

Working after retirement
    There’s no question more people are continuing to work after retirement. According to a December 2007 report from the Employee Benefit Research Institute, job-related earnings accounted for 23.7 percent of annual income for Americans over 65 in 2006, with the balance coming from pensions, annuities, Social Security and assets.

    Younger retirees are even more likely to rely on a paycheck to boost their annual income. In 2006, job earnings accounted for 39.1 percent of annual income of retirees ages 65 to 69, a 69 percent increase from two decades ago, according to the EBRI report.

    The Pension Preservation Act of 2006 sought to help more people retire, work if they wanted and collect their pensions by allowing companies to offer a phased retirement program to employees at 62.

    In reality, many companies offer some type of early retirement option to employees at age 55, a policy held over from the days when they needed then-older employees to retire early to make room for baby boomers, according to retirement experts, industry analysts and consultants.

“Companies aren’t going to be successful in offering phased retirement if their plan design adversely affects those nearing retirement.” —Deborah Russell, director of workforce issues, AARP

    That’s no help for employees between 55 and 62 who want to start receiving pension benefits in order to supplement decreased hours, says Tonya Manning, chief actuary with Aon Consulting’s U.S. retirement practice.

    Because of that catch, some employees would be better off leaving their current employer, starting to collect pension benefits and going back to work at a competitor, Manning and other experts say.

    At some companies, the design of the pension plan itself is a barrier to phased retirement. If pension benefits are calculated on a person’s last three to five years of employment, a reduced work schedule during that time would negatively affect their benefit payout, according to Deborah Russell, director of workforce issues at AARP.

    In those cases, implementing a phased retirement program might also mean amending a plan, so benefits are calculated on an employee’s three to five highest-paid years, Russell says. “Companies aren’t going to be successful in offering phased retirement if their plan design adversely affects those nearing retirement,” she says.

    Major questions also remain over how to put federal reform regulations into practice. The Treasury Department issued guidelines for interpreting the regulations in May 2007, but was silent on such issues as how to treat early retirement subsidies. The IRS, which approves the tax consequences of changes companies make to their defined-benefit pension plans, collected public comment on the matter last year but hasn’t issued any rulings, experts say.

    In the absence of such guidelines, it’s difficult for a corporation’s benefits manager to make decisions that could affect defined-benefit plans, says William Miner, a consulting actuary with Watson Wyatt’s retirement practice in Chicago. “Benefits managers and directors don’t get paid for taking legal risks,” he says.

Informal programs prevail
    Meanwhile, many companies are hedging their bets with informal programs.

    Deere & Co. is one. Since 2001, the $6.1 billion agriculture and outdoor equipment manufacturer based in Moline, Illinois, has made part-time work available if it’s appropriate for an employee’s position, approved by the supervisor and “in keeping with business needs,” says Glenn Huston, Deere’s employee benefits manager.

    Deere is a good example of how complicated it can be for a company to track the effects of phased retirement programs on pension benefits.

    The company maintains two defined-benefit pension plans. One is closed to new hires, and in it, pension benefits are calculated based on the five highest-earning years in the last 10 years someone works. For these employees, going to phased retirement wouldn’t affect a person’s pension as long as they didn’t go to part-time status for more than five years, Huston explains.

    Deere employees hired after 1996 are enrolled in a separate defined-benefit pension plan. For it, benefits are calculated based on career earnings. “So if you reduced your schedule, you’d reduce your career average but you would keep growing your service, so the specific impact couldn’t be quantified without looking at the individual’s situation,” Huston says.

    Deere also offers all employees a defined-contribution 401(k) program, with a 6 percent company match. If an employee goes to part-time hours, they’ll make less money in their 401(k), but it’s comparable to what they’re earning, Huston says.

“Benefits managers and directors don’t get paid for taking legal risks.” —William Miner, consulting actuary, Watson Wyatt

    Huston doesn’t know how many Deere employees have taken advantage of the company’s staged retirement program.

    Huston is working to ensure that his phased retirement offerings comply with final interpretations of federal regulations. But because Deere’s fiscal year doesn’t end until October 31, he can wait to see how the dust settles. “We’ve got the luxury of time, so we’ll evaluate those as they become more clearly defined,” Huston says.

    In addition to its informal phased retirement program, Deere brings hundreds of its approximately 25,000 U.S. retirees back to work through a contingent worker management company, Volt Services Group, a Rosemead, California-based division of Volt Information Sciences. In the past year, 503 Deere retirees worked at the company in some capacity, according to AARP, which included Deere in its 2007 list of best employers for workers over 50.

    AARP has also recognized First Horizon National Corp., a Memphis, Tennessee-based banking and mortgage company with locations in 40 states, as a top employer for workers over 50 for the past four years. About 23 percent of First Horizon’s 10,000 employees are over 50, according to company and AARP data.

    To hang on to valued older employees, First Horizon created an informal phased retirement program that allows people to work a “prime-time,” or part-time, schedule and retain their pension and health care benefits.

    One employee who has taken advantage of the program is Betty Goodpaster, who four years ago left her full-time operations manager job at one of the company’s First Tennessee Bank branches in Franklin, Tennessee, and switched to a prime-time position as a bank teller in another branch in the area. At the time, Goodpaster was 56, selling her house and about to become a first-time grandmother, so cutting back seemed like a good idea. Then a tornado struck the area, damaging the house she and her husband were selling, which made the move to part time “a real blessing,” she says. “It was very emotional. I was lucky to find this position.”

    Today, Goodpaster works three days a week and one Saturday a month. She contributes to a 401(k), which First Horizon matches at 50 percent. Goodpaster plans to work until she’s 65, when she’ll be eligible to start collecting pension benefits, which are based on her average income.

    “With not as many hours worked, I won’t have the income average that I would have if I had worked full time,” she says. “But in this day and age, any amount will help with expenses. If you’re on a fixed income, every $100 makes a difference.”

Industry Task Forces
    Some industries that anticipate being hit hard by the retirement of the baby boomers have organized coalitions to determine the value of offering formal phased retirement programs. One such group was formed in 2007 by a coalition of aerospace and defense companies including IBM, GE, Ball Corp., Boeing and BAE Systems, in conjunction with the HR Policy Association and the American Benefits Council. According to spokespeople for two trade organizations, the study group is developing a white paper on the topic but is still in the information-gathering stage of the project.

    If they haven’t already, individual companies can take a cue from such study groups and perform workforce assessments to see how many near-retirement-age workers they have and how that could affect their future talent management needs, according to retirement consultants and HR industry experts.

    “You have to know where your population is, where you have retirement risks, and then figure out how you’re going to address them,” says Sedlar, the author and senior advisor for the Conference Board. “Sometimes companies are hesitant to see where their risks are because they may be so great, but then they do an assessment and it’s not so bad.”

    At some companies, phased retirement proposals have bubbled up from line managers faced with losing some of their best talent to retirement, says Anna Rappaport, an expert on retirement and aging and a senior fellow on pensions and retirement with the Conference Board.

    In other places, phased retirement programs have been team efforts. They involve business unit or department managers; finance, which calculates the financial aspects of putting a program into place; and HR, which bears the final responsibility for putting a program in place, Rappaport and other experts say.

    While phased retirement programs might not cost anything to start, companies could incur costs related to them. For example, if certain employees switch to part-time status and other people have to be hired to make up the difference, a company could end up with higher administrative expenses, says Manning, the Aon Consulting actuary.

    Another potential cost: holding employee seminars to outline the financial consequences of participating in phased retirement programs. Companies aren’t legally bound to explain what early payouts could mean to an employee’s pension down the road. But it’s a good idea to do it anyway, Manning says.

    “Ultimately those are retirement benefits, and if you get too much of them in years where you could be working, you could have insufficient income as a retiree,” she says.

Workforce Management, February 4, 2008, p. 27-31 — Subscribe Now!

It’s 2:30 a.m. on October 31, and handful of tired Convergys executives watch as a fax machine spits out a contract in the works for 14 months. They call their client counterparts and make a champagne toast. Forty-eight hours later, the news is out: Convergys, which had been considered a second-tier outsourcing industry player, has won a 13-year deal with DuPont worth an estimated $1.1 billion. It’s called the biggest HRO contract ever.

    The deal, brokered by a team led by senior vice president Morris Applewhite at the company’s Jacksonville, Florida, office, signaled the expanding stature within Convergys of the company’s HR operations. Though the newest of the $2.6 billion corporate outsourcing specialist’s three main businesses, it is on a fast track toward becoming a big driver of profits and revenue.

    The DuPont contract capped a year in which Convergys’ HR outsourcing operation, called the Employee Care Group, signed three other significant deals–with Whirlpool and two companies that haven’t publicized the pacts but are known to be Boston Scientific and Solectron. The new business brings the number of Convergys HR outsourcing contracts to 13, covering a total of 3 million employees. According to estimates from Convergys executives and analysts, that makes the Cincinnati company the No. 2 HR outsourcer in the country, second only to Hewitt Associates.

    DuPont’s decision to outsource is the latest testament to corporations’ expanding interest in turning over noncore HR operations to professionals in order to focus on more critical business enterprises. Though outsourcing hasn’t picked up as quickly as prognosticators originally estimated, early indications suggest that 2006 could be a breakthrough year. Today, less than 5 percent of Fortune 2,000 companies and less than 1 percent of midmarket companies have such arrangements, according to a December report from NelsonHall, an HR industry consulting and research firm. However, NelsonHall predicts in its report that worldwide HR outsourcing expenditures will increase 20 percent this year to $4.3 billion.

    As for Convergys, critics have chided the company for hiding the HR outsourcing division’s financial results within a larger division, making it difficult to determine how big or successful the business is–an issue the company is addressing. Critics agree the company’s 2005 performance proves it has perfected its sales pitch, but they wonder whether the company has the management depth to implement its new deals while continuing to service contracts with existing clients such as Avaya, Fifth Third Bank, Bristol-Myers Squibb and the state of Florida.

    “Their success with DuPont in particular, and to some extent other contracts they’ve won recently, will make or break their HR outsourcing offering,” says Derek Smith, research director at Kennedy Information, an HR industry research firm. “They’re either going to execute successfully or struggle.” If the latter happens, it will hurt the company’s ability to get other contracts, Smith says.

    Convergys Employee Care Group president Karen Bow­man brushes off such concerns. “I’m confident in our ability to execute on what’s in front of us,” she says.

Unlikely beginnings
    There’s a lot riding on Bowman’s shoulders. When Cincinnati Bell spun off its billing and customer care departments in 1998 to form Convergys, those two businesses became the publicly traded outsourcing specialist’s bread and butter. Convergys still earns the bulk of its money running call centers and providing customer billing for cable TV, telephone and cell phone businesses, with Cingular, DirecTV and Sprint Nextel its top three customers in 2005.

    But telecommunications industry shake-ups have affected some long-standing contracts. Spring Nextel said this month that it will wind down its billing contract with Convergys over the next two years.

    In recent years, Convergys has trimmed its U.S. workforce and other overhead costs several times to reduce operating expenses, and has turned to its HRO operation to drive future revenue and profits. It’s a far cry from the genesis of Convergys’ HR business, which began as an afterthought.

    Before Cincinnati Bell spun off Convergys, the company’s call center division acquired a business called American TransTech from AT&T that included a small HR outsourcing operation in Jacksonville. After the spinoff, Convergys executives asked Bowman, then a company general counsel, to investigate which TransTech corporate assets to keep or sell.

    That was 1998, the dawn of the HR outsourcing industry. According to Bowman, the more she delved into the business, the more opportunity she saw. Instead of recommending selling the business, she urged Convergys chairman and CEO James Orr to keep it–and let her run it. He agreed.

    It was slow going at first. Most of the contracts Convergys inherited, such as with General Electric, were for single HR functions, not the type of multiprocess deals corporate HR executives now favor. Clients were skeptical. “They weren’t very excited about being acquired by a call center business,” Bowman recalls.

    Predicting that corporate buyers would someday want more bundled services, Convergys picked an enterprise resource planning system as a technology platform. “It wasn’t a market that used an ERP; it was a market that used proprietary systems,” Bowman says. “People thought we were a little nuts because we picked one that wasn’t well-known in HR: SAP. But they had the stronger global platform.”

“Our experience is when suppliers have growth spurts, more often than not they suffer from delivery problems down the road.” –Michael Janssen, Everest Group

    Due at least in part to that groundwork, in 2002 Convergys won a nine-year, $350 million contract with the state of Florida’s Department of Management Services. The deal, covering 200,000 state employees, was among several privatization efforts championed by Gov. Jeb Bush, and ultimately the only one to survive. It remains one of the largest personnel outsourcing contracts ever signed by a public agency.

    Like other early outsourcing vendors, though, Convergys ran into trouble. At least two early clients, Pfizer and Toys “R” Us, are no longer under contract. Convergys representatives don’t comment on former customers.

    The Florida contract quickly got messy. It called for moving HR functions for 33 different agencies onto a state-of-the art technology platform and creating Web-based self-service tools. But the process was more difficult than anticipated, leading to well-publicized glitches and delays. When the Management Services Department eliminated 800 jobs because of outsourcing, Convergys was lambasted by local politicians for moving state jobs offshore, though company officials insist that didn’t happen.

    Portions of that deal have now been up and running for more than two years, and Convergys and Florida state representatives say they’re satisfied with how things are working. “The good news is we made it through and demonstrated there was good value in the value proposition the lawmakers originally envisioned,” Bowman says.

    Employee Care Group executives say they’ve learned from those early mistakes. For one, they won’t do “lift and shift” contracts, where a provider simply takes over a company’s HR functions whatever their condition. Instead, they help clients simplify and standardize processes to be outsourced before technology transfer begins, a strategy company officials say ultimately means bigger cost savings for clients and greater profit margins for them. Convergys also distinguished itself by creating a network of shared service centers around the world, in some cases piggybacking on centers and labor pools the company operated for its other divisions.

    Today, 30,000 of Convergys’ 62,000 employees work outside North America, including workers in India and the Philippines, though not all of them support the Employee Care Group.

    The strategies appeared to pay off in July, when Whirl­pool signed a 10-year deal with Convergys, passing over ACS, IBM, Accenture and Arinso. “We were confident Convergys was more of a global player. They could offer a whole platform of services,” says Abbe Luersman, Whirlpool’s vice president of total rewards and HR solutions, speaking at a Convergys-sponsored conference for Wall Street analysts in late November.

    Then Convergys snagged DuPont–reportedly beating out IBM and Hewitt–in a deal that analysts say could set a new standard for future contracts. In addition to being one of the longest and most expensive ever, the DuPont contract is also one of the broadest, covering 60,000 employees and 102,000 retirees, operations in 70 countries and 30 languages, and everything from payroll and benefits administration to compensation management, recruiting and online learning.

    At the time DuPont signed the deal, officials at the $23.7 billion chemical conglomerate said they expected the partnership to reduce HR operating costs by 20 percent initially and up to 30 percent after five years. DuPont also picked Convergys because the company had service centers in regions and languages that matched its operations, says Ernie Lareau, DuPont’s director of HR portfolio and program management, who is overseeing the outsourcing transition.

Closely guarded business
    Convergys executives say that revenue from new HR outsourcing contracts takes up to two years to show up on the company’s balance sheet, so results from DuPont and other contracts signed last year could begin appearing late this year or in 2007. They expect the new deals to double HR outsourcing revenue from 2005 to 2007, with profit margins eventually growing into the midteens.

    But the size of Convergys’ HR business remains something of a mystery. Despite Employee Care’s newfound prominence within the company, Convergys has reported the group’s results within its larger Customer Management Group, which also includes its call center operation. In 2005, “other” revenue for the Customer Management Group, including revenue from Employee Care, was $482 million, about 27 percent of the group’s total sales. Earnings weren’t broken out. By comparison, Hewitt Associates, the country’s top HR outsourcer, reported revenue of $2 billion for its HR outsourcing business in its fiscal 2005 ended September 30, 2005, with segment income of $253 million.

    As recently as November, Convergys officials publicly admitted that the company had kept its HRO results under wraps for competitive reasons despite calls for more transparency from Wall Street analysts and other company watchers. But in connection with releasing fourth-quarter results in late January, Convergys CFO Earl Shanks said financial results for Employee Care will be broken out beginning in March, when the company issues its 10-K report for 2005.

    Convergys’ financial results aren’t the only thing some industry observers wonder about. They also question whether Convergys has the management depth to run all the new business it won last year. “Anyone who signed four or five deals, you have to ask how many ‘A’ teams they have to (run) those deals,” says Michel Janssen, president of supplier solutions for the Everest Group, a Dallas HR industry consultant. “You need a very good person to run a DuPont-sized deal, and usually those people aren’t just lying around. Our experience is when suppliers have growth spurts, more often than not they suffer from delivery problems down the road.”

    One key manager, Steve Rolls, a Convergys executive vice president and Bowman’s boss, is leaving at the end of January to pursue other interests. But Bowman and her supporters in the industry express confidence in other managers.

    “Karen Bowman is one of the most competent service delivery managers of all,” says Phil Fersht, a NelsonHall HR analyst and author of the firm’s recent industry report. Fersht and others also give kudos to Applewhite, senior vice president of global business and head of Employee Care’s sales organization, who acted as the point man on the DuPont deal for most of 2005; Debbie Ashley, operations lead during negotiations, who will administer the contract; Peter Hirano, Employee Care senior vice president of product management; and Bonnie Tichman, Convergys’ vice president of marketing.

    Bowman expects to spend 2006 getting DuPont, Whirlpool and other new clients up to speed and closing in on some “targeted pursuits” she won’t talk about.

    Some of that new business could fall into the category of multitower outsourcing, where one provider assumes responsibility for multiple business operations, such as HR, IT, supply-chain management, and finance and accounting. Convergys took a step in that direction in August when it paid $5 million for Deloitte Consulting Outsourcing’s finance and accounting outsourcing unit. Bowman says she is “absolutely looking into the strategic benefits of offering multitower outsourcing,” though she won’t reveal whether the company is in contract talks with anyone.

    Rumors of a buyout have swirled around Convergys for at least a year, brought on by its close working relationships in its other divisions with companies that are also competitors, such as IBM, as well as a stock price that some observers and shareholders believe is undervalued. In late January, Convergys was trading at $16.81 a share, off a 52-week high of $17.90 in mid-December.

    But officials are confident Convergys will continue as a stand-alone company. “We think there’s lots of opportunity for our existing shareholders to get good returns over time,” CFO Shanks said at the Wall Street analysts conference in November.

    It’s a sure bet the industry will be watching Convergys during the next year or two to see whether HR outsourcing contracts with DuPont, Whirlpool and other new clients turn into those good returns.

 

Workforce Management, January 30, 2006, p. 1, 22-28 — Subscribe Now!

If you thought outsourcing was big, you ain’t seen nothin’ yet.

    That sums up NelsonHall analyst Phil Fersht’s predictions for 2006, which he dubbed “a watershed year” for HR outsourcing in a recently published industry report.

    In 2005, a number of multinationals signed major HR outsourcing contracts, led by DuPont, which closed a record-breaking 13-year, $1.1 billion deal with Convergys late in the year.

    But the bigger story was the deals that weren’t signed, according to Fersht, NelsonHall’s executive vice president for BPO research, and other HR industry observers. As the initial hype wore off and companies realized how complex and time-consuming it is to institute an outsourcing plan, many put the brakes on contract talks, resulting in far fewer deals than prognosticators had anticipated.

    The good news is that plenty of deals in the works last year should close during 2006, Fersht says. That’s one reason he expects a 20 percent uptick in worldwide HR outsourcing spending this year, to $4.3 billion. “It’s going to be the biggest year for HRO yet in that it’s going to become real and workable; it’s no longer a dream,” Fersht says.

    The turning point? Service providers such as Hewitt, Convergys, ACS and others have gone a long way toward standardizing contracts, implementation procedures and technology platforms. They’re also building regional service centers around the world to accommodate multiple clients. All those steps should result in cost savings for both clients and vendors, industry analysts say. For a while, “it was all about selling, selling, selling,” says Michel Janssen, president of supplier solutions for the Everest Group, a Dallas HR industry consultant. “Now suppliers are absorbing the deals they’ve sold and making sound business decisions around them.”

Other 2006 predictions:
4More companies will strike deals that go beyond typically outsourced HR functions like payroll and benefits administration to include activities such as compensation management and e-learning.

4As corporations go global, outsourcing will too. More deals will cover a corporation’s worldwide workforce, not just employees in English-speaking countries. Also, expect more outsourcing deals between corporations and outsourcers based outside the United States—in areas such as Europe and Asia.

4More companies will sign so-called “multitower” deals, handing over responsibility not just for HR but also IT, supply-chain management and finance and accounting to a single outsourcer. IBM and Accenture are primed to handle such mammoth projects, and Convergys made several key acquisitions in the past two years to do likewise.

4More companies will rely on third-party consultants to help craft outsourcing strategies, write RFPs, pick partners and oversee contract governance, leading to a rise in the number of middlemen such as NelsonHall, which merged with EquaTerra last year to improve its standing as an outsourcing matchmaker.

4Analysts expect mergers and acquisitions among outsourcers to continue, albeit more slowly, as rivals position themselves to take advantage of these trends. “Some (acquisitions) will happen, and some won’t because of price or timing or just incompatibility at some level,” says Lisa Rowan, an HR industry analyst at IDC. “But (outsourcers will) never say ‘never’ to any of it.”

Workforce Management, January 30, 2006, p. 24 — Subscribe Now!