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Technology Outsourcing’s Next Level

On a dusty, tree-lined road in a suburb of Kolkata (formerly Calcutta), you’ll find Tata Consultancy Services.

    It’s easy to miss this West Bengal outpost of Tata, which houses one of many IT services units belonging to one of India’s largest conglomerates. The company’s facilities—two inconspicuous, dark brown towers shoehorned between what look like residential buildings—go almost unnoticed amid the clatter of food hawkers and rickshaws.


    But to many U.S. business executives, Tata Consultancy Services is anything but anonymous.


    The company is one of India’s best-known vendors to technology outsourcers, along with Infosys Technologies, Cognizant and Satyam Computer Service. Tata’s client roster reads like a who’s who of U.S. corporations, including Alcoa, Chrysler, Motorola and Prudential.


    And the list continues to grow.


    Despite the demonization of offshoring by politicians and labor leaders, there appears to be little chance of U.S. corporations weaning themselves off of Indian outsourcing anytime soon. This year alone, American companies will send some $24 billion worth of IT business to cities such as Kolkata, Chennai, Hyderabad and Bangalore.


    Although American companies initially made the passage to India to tap into the country’s vast reservoir of low-wage workers, that’s hardly the big attraction now. Seeking out the lowest-price outsourcers comes with a full set of pitfalls and trapdoors.


    “One, you may only see very short-lived savings, because as technology changes, all the stuff you’re doing needs to be reinvented,” says Shaun Coyne, who served as chief information officer for Toyota Financial Services and works now as a private consultant. “Two, your IT operations will constantly be moving to the lowest-cost country, for the simple reason [that] that place is going to be changing over time.”


    What’s more, other locations—including Eastern Europe and Latin America—often offer better value for simple tasks such as data processing.


    Even those in the India outsourcing sector concede it’s hard for them to compete on price alone these days. Part of the problem stems from the remarkable success of these companies. Buoyed by its technology sector, India’s gross domestic product, pegged at $1 trillion last year, is soaring, up 9 percent a year.


    With that robust growth, however, the rupee has strengthened mightily versus the U.S. dollar, making India more expensive for American firms. At the same time, local wages have risen sharply—up 15 percent annually over the past three years.


    The result? India’s IT workers come cheap, but they no longer come dirt cheap.


    “If it’s just about costs,” says Coyne, “India is not the place to go.”


    To fend off lower-priced rivals, India’s outsourcers have reinvented themselves. No longer low-margin, data bucket shops, they now bill themselves as full-service technology providers—”moving up the value chain,” as India’s National Association of Software and Services Companies put it.


    Assignments from clients can include writing software code that builds core business applications, as well as hardware diagnostics and managing entire business functions.


Looking for ideas
   Outsourcing to India is about acquiring brain power rather than cutting costs, says Allstate’s Anthony Abbattista.


    Tata Consulting’s 10-year contract with AC Nielsen is typical of the full-service model that India’s outsourcers are now touting. The company handles a variety of technology tasks for the ratings specialist, enabling the company to centralize multiple systems and technologies.


    Says Sridhar Bakshi, who oversees one of Tata Consulting’s delivery centers: “[Our] whole strategy is centered around a fully integrated services play that looks at a combination of IT services, BPO, infrastructure services and consulting as the key focus area.”


    BPO, short for “business process outsourcing,” is fast gaining in popularity with corporate clients. BPO now accounts for nearly 30 percent of India’s IT outsourcing revenue—with U.S. companies among the biggest customers.


    In some cases, American businesses are outsourcing business processes work after shutting down their own company-owned operations in India (known as captives). In others, they’re simply expanding the amount of work they farm out to their outsourcers.


    Either way, research firm Gartner believes India’s outsourcing market is growing by as much as 40 percent annually among the U.S. companies it services.


    It’s hard to say how the current economic downturn might ultimately affect that projection. But managers at India’s top outsourcing vendors see real possibilities in the current problems in the U.S.


    Ashutosh Vaidya, head of Wipro’s global practice for business process outsourcing, says business executives typically do two things during a downturn. “They will look for opportunities to help them take out costs, and areas where they can add value. If we can take out one-third of their BPO costs, that’s a big deal. If I [demonstrate] areas where Wipro can add business value, that is icing on the cake.”


    Existing customers will no doubt zero in on the value-add proposition. Take Allstate.


    The insurance company began outsourcing 10 years ago, setting up a captive operation in Ireland to deal with “Y2K” issues. It began sending IT work to India in 2003.


    “Cost was not what made us look at India seriously,” says Anthony Abbattista, vice president of enterprise technology, strategy and planning for Allstate Insurance. “The real reason we looked at India was … getting other people’s ideas and brain force.”


    The carrier, which sold $37 billion worth of insurance policies last year, now uses three outsourcing vendors on the subcontinent: Syntel, Wipro and Infosys. Although the Indian outsourcers do handle some simpler tasks for Allstate, such as IT maintenance, they also work on higher-value—and more crucial—functions.


    One example: the processing of premium payments.


    Allstate receives millions of these checks each month. Once that flood of cash is applied to groups within the company, Allstate must reconcile accounts—no small task. Outsourcers in India handle much of the work flow.


    Equally important, Abbattista says, the company’s Indian vendors have figured out ways of making the monthly reconciliation chore run more smoothly. “We use them for process innovations, things making us stronger and better at IT procedures.”


    Nevertheless, Allstate “co-sources” some of the work to U.S.-based vendors such as IBM. “We’ve not handed over the whole responsibility to anyone,” Abbattista says.


    Indeed, outsourcing veterans say that projects with global applications—a billing and communication system for a multinational bank, for example—may be better suited to a U.S. outsourcer such as IBM, Hewlett-Packard or others that have a strong global presence.


    “They can set up a center for you in South America or Africa,” says Coyne. “The Indian companies are just now learning to do that.”


    Co-sourcing also lessens the risk of sending sensitive company data or projects out of house. That should be important to finance managers.


    “Any CFO should be concerned with outsourcing. Fiscally, there are savings opportunities, [but] the CFO is in the spot of making sure you don’t mortgage the future of the company by making the wrong decision,” says Abbattista. “[My] job is to maintain the right amount of control over our IT. Co-sourcing rather than only outsourcing it all gives you a higher level of control and quality; that’s why we do it.”


    Certainly, getting locked in to an offshoring arrangement with a single vendor can be risky.


    “It depends on the culture of your company and how comfortable you are giving up various aspects of control,” says Abbattista. “For Allstate, co-sourcing to make sure that we have high quality in these arrangements is a value that we feel very strongly about.”


    It may not be the cheapest way to work, but he says that, for Allstate, outsourcing to India isn’t about cost arbitrage.


    “What outsourcing lets us do is keep the strategic work with us.”


    That seems to be the modus operandi for scores of U.S. companies—even as they ship increasingly complex work to the subcontinent. “Most companies have found over time that the best method is to “outsource your context and keep your core,” says Coyne.


    The idea was likely first hatched at General Electric.


    In the mid-’90s, GE was keen to generate more of its income from outside the U.S. To do that, then-CEO Jack Welch decided that the company would need to acquire and integrate other businesses—and to do that, GE needed standards and sets of processes that could be applied to all the acquisitions.


    So the U.S. conglomerate established company-owned centers of excellence around the globe, placing them under the corporate banner of GE Capital International Services (GECIS).


    Eventually, General Electric spun off a 60 percent share of GECIS for $480 million, selling the stake to two private equity firms, Oak Hill Capital Partners and General Atlantic Partners. The outsourcing specialist, headquartered in India, was renamed Genpact and went public last year in an initial public offering on the New York Stock Exchange that raised nearly $500 million.


    Not all American businesses have been as successful with their Indian captives.


    Dell shut down its hardware R&D center in Bangalore last year. The computer maker relocated that high-end operation to its facilities in Taiwan and Austin, Texas. The year before, Apple shuttered its technical support center in Bangalore—a month after opening it. Citigroup is reportedly shopping all or part of its India-based captive, Citi Global Services.


    Expect others to follow suit. A recent Forrester Research study found that the cost of the average employee working at a captive center in India is $4,944 a month. That number dips to $4,231 for a worker at a third-party supplier. Forrester concluded that more than 60 percent of the current captive BPOs in India are in bad shape.


    Ken Brame, who until recently served as CIO for auto parts retailer AutoZone, believes captive operations make sense only under certain circumstances.


    The size of the operation tops the list. The greater the scale at the captive, the better the chance of reducing selling, general and administrative expenses and operating in the black. If an IT project requires several hundred people or more, setting up an offshore captive in India might be the way to go, says Brame.


Communication still difficult
   If a job can be done by fewer than 100 workers, however, an outsourced development team may well be a better choice. Even in the age of digital connections, Brame says, communicating with employees working halfway around the world can be frustrating. “You can’t just jump on a plane.”


    He speaks from experience.


    In 2004, AutoZone began outsourcing some of its software development to India—albeit on an extremely small scale.


    He kept his IT design team in-house in Memphis, but began sending some generic software application development to about 10 workers in India, through Infosys. That operation has grown to include some BPO functions, but it is still comparatively small, with just 50 programmers.


    For more sensitive projects, like developing inventory indexing and automation software, Brame set up a “captive near-shore” practice in Chihuahua, Mexico.


    “It was so easy for me to go down there to check on our guys, since we were in the same time zone.”


    The time difference between Memphis, Tennessee, and Bangalore, on the other hand, is 10 ½ hours.


    This can complicate things mightily. To keep mix-ups to a minimum, an outsourcer will often assign staff to a client’s facilities. Brame says Infosys “sent a few guys to Memphis who stayed at the office late every night to be the communication link between my employees and the outsourcers in India.”


    But the joys of proximity cannot be overstated.


    “When we’re doing application design [at home], we can hand a project spec to someone in the next cubicle and they’ll ask questions,” he says. “But if you’re sending it off to India, you’ve got to do a much more thorough job of documenting what you want those vendors to do. That is something that a lot of companies struggle with.”


    They’re also struggling to find enough IT talent at home.


    There are more technology jobs in the U.S. now than there were at the height of the dotcom boom in 2000. Yet enrollment in IT courses is half what it was eight years ago. Despite a recent rise in the number of engineers graduating from American universities, Brame sees a 20 to 40 percent shortage for tech talent.


    Given the gap, U.S. firms will continue to throw more work to companies in India like Tata—no matter what the headaches.


    “We can’t find enough people with the skills we need here, so we have to tap the world economy,” says Abbattista. “This is a race for talent.”


    Back in Kolkata, they’re getting ready for that race. In the farmland beyond the outskirts of the city—in the complex that houses Tata’s buildings—construction crews are working feverishly to keep up with the demand for space from technology outsourcers in India. Cranes dot the skyline, with builders putting up steel frames that will soon tower over the landscape.


    The days of blending in appear to be over.

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Pink Slips Coming to Wall Street, but Other Sectors May Avoid Layoffs, UBS Strategists Say

Outside the financial sector, employment at large companies may hold up better than some expect, UBS strategists are suggesting.


Based on a survey of industry sector analysts at UBS, more than half of large companies in the Standard & Poor’s 500 stock index are not likely to reduce staff.


Companies in the energy, materials, nuclear utilities, engineering and construction sectors are even understaffed—and have aging workforces to boot. Thus, those businesses may need to hire people, UBS strategists including Thomas Doerflinger and David Bianco wrote Wednesday, September 24.


The strategists noted one important caveat: Employees of the S&P 500 companies make up only 13 percent of the American workforce, and smaller businesses may indeed be hurt by the credit crunch. Still, the strategists wrote, “to the extent analysts are correct … this is positive for profit margins because it implies companies do not have headcounts that are out of line with future revenues.”


The U.S. unemployment rate has been rising and hit 6.1 percent in August, and UBS economists expect it to reach 6.9 percent in the second quarter of next year. If unemployment were to go much higher, though, to the “harrowing highs” of 9 percent seen in the early 1970s and 10.8 percent from 1981 to 1982, they said, “this would depress GDP and severely compound the woes of the financial sector.”


Judging from the analysts’ responses to the survey, only larger companies in 15 industries—including financials, restaurants, autos, machinery, paper and tobacco—may have to downsize soon.


Other companies, those that analysts say have just the right number of employees, have already taken steps to trim the ranks. Home builders and airlines top that list.


Indeed, years of restructuring and downsizing by U.S. businesses may help mitigate unemployment during the latest economic downturn. “Corporate America is much leaner and meaner after 25 years of intense foreign competition,” Doerflinger and his associates wrote, citing higher productivity growth. That leanness is a “key difference from 1974 and 1982.”


Filed by Hillary Johnson of Financial Week, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.



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Assessing Depression Via the Web

Cisco Systems Inc. is testing an outreach program that includes a Web-based assessment to help employees suffering from stress, anxiety, depression and related problems that reduce productivity.


The program relies on WebNeuro, a Web-based tool that helps outreach workers and the employee’s doctor provide appropriate treatment, speakers told the Disability Management Employer Coalition’s 2008 conference.


WebNeuro replaces the common approach of assessing and treating depression, said Roy Sugarman, director of behavioral solutions in Sydney, Australia, for Brain Resource Ltd., which owns WebNeuro.


Typically, doctors treating depression ask a limited number of questions and then prescribe an antidepressant, Sugarman said at the August 10-13 gathering in Denver.


However, by using a 30- to 40-minute WebNeuro screening, which measures general and social cognition, brain-function markers for behavioral-health issues such as depression and anxiety can be determined and shared with the employee’s doctor, Sugarman said.


It helps determine which prescriptions or psychotherapies will best treat specific problems. It can also help establish when a patient does not need medication but would benefit from other assistance, such as wellness coaching, to make them more resilient to stress and anxiety, the speakers said.


WebNeuro, drawing on a database of brain-function tests, is also used to measure how a patient is progressing and whether treatments are helping them.


Cisco’s WebNeuro test follows from health-risk assessments that the San Jose, California-based network technology company began in 2005, when it sought to address rising medical costs by helping employees engage in their health care, says Lisa Jing, human resources manager for integrated health at Cisco.


Cisco’s strategy includes rigorous measurement of factors such as employee health risks, medical-cost drivers, health outcomes and employee presenteeism—or employees who are on the job but not functioning efficiently because of physical or mental health reasons, Jing says.


“We are looking at a broader employee engagement strategy and a broader view of human capital management metrics that give us an indication of how our population is doing and how engaged they are in their work,” Jing says.


Health-risk-assessment data on Cisco’s medical costs revealed that overall company employees are healthy, but their stress is rising and depression drives a substantial amount of health care spending as well as productivity losses, Jing says.


Related problems such as anxiety, sleeplessness and fatigue are issues, she says.


“The big surprise was what we found in the presenteeism area,” Jing says. “The total loss to presenteeism was absolutely startling.”


Nearly 10 percent of Cisco employees complained of anxiety and depression, says Dr. David Whitehouse, chief medical officer for strategy and innovation at OptumHealth Behavioral Solutions, which is based in Golden Valley, Minnesota. Those employees accounted for 40 percent of Cisco’s total lost productivity in 2005.


To help its employees, Cisco partnered with OptumHealth, which in turn partnered with Brain Resource, the speakers said.


OptumHealth, a unit of UnitedHealth Group Inc., trained outreach workers in interviewing skills so they don’t alarm employees whose health-risk assessments reveal they could benefit from help such as that available through the optional WebNeuro tool kit, Whitehouse says.


OptumHealth is also learning lessons along the way, such as it’s best for its outreach workers to make their first contact with employees through e-mail rather than by telephone, allowing employees to decide whether they want to talk about what is bothering them, Whitehouse says.


Cisco’s effort will have final outcome data from its intervention program next spring, Jing says. But so far, the WebNeuro tool has been well-received by Cisco employees who have participated in the outreach program.


Cisco intends to offer the WebNeuro resource to employees at an onsite health center scheduled to open this year, Jing says.

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Exec Pay Curbs Likely to Be Part of Bailout

Congressional leaders and the Bush administration are continuing to hammer out a deal on a bill that would provide $700 billion for the purchase of bad assets from financial companies and would also include provisions designed to curb executive pay.


Proponents of the massive rescue point to the link between Wall Street and Main Street. If credit dries up because of the collapse of the former, consumers, small businesses and students around the country will suffer.


But Main Street is pushing back. Members of Congress are getting an earful from constituents who are angry about the exorbitant salaries and golden parachutes of  Wall Street titans.


In response, the final package is likely to contain a version of executive pay reforms along the lines of two Democratic proposals.


Rep. Barney Frank, D-Massachusetts and chairman of the House Financial Services Committee, and Sen. Christopher Dodd, D-Connecticut and chairman of the Senate Banking Committee, both want to limit compensation for executives who take excessive risks, implement “claw-back” procedures for companies to recoup pay based on performance measures that later turn out to be inaccurate, and limit severance payments.


Frank goes further than Dodd, according to Steve Seelig, executive compensation counsel at Watson Wyatt Worldwide in Arlington, Virginia. Frank would put an absolute prohibition on severance payments and require that companies participating in the bailout hold nonbinding shareholder say-on-pay votes regarding C-suite salaries.


It’s not clear how the final bailout legislation will look. As of late afternoon Thursday, September 25, a final agreement had not been announced. Earlier in the week, there was some question about whether companies would participate if doing so restricted their latitude in setting executive pay.


Now the White House and business groups are acknowledging executive compensation will be part of the deal.


“I think we all understand the sentiment that executives should not have a windfall based on something that was a failure,” said White House Press Secretary Dana Perino at a briefing Thursday, September 25.
 
She spoke in advance of a bipartisan meeting between President Bush, congressional leaders and the presidential nominees—Sens. John McCain, R-Arizona, and Barack Obama, D-Illinois.


The key to addressing executive pay is formulating legislation that punishes culpable executives “yet enables [companies] to attract the best and the brightest to deal with the situation,” said R. Bruce Josten, executive vice president of government affairs for the U.S. Chamber of Commerce.


Seelig cautions that previous attempts by Congress to limit executive pay have led to unintended consequences like a big increase in the use of stock options.


If severance is prohibited, for instance, companies might boost fixed pay and signing bonuses or enrich executive pensions.


“Companies that try to attract talented individuals will have to put money into something else,” Seelig said.


Many Americans are telling Congress they don’t want their tax dollars spent feathering the nests of leaders of failed financial companies.


“It’s probably the No. 1 thing we hear about [in] calls from back home,” said Rep. Brad Ellsworth, D-Indiana. “People in Indiana shouldn’t be held accountable for poor decisions made by Wall Street executives who are making millions of dollars.”


In order to educate voters about the financial bill, Ellsworth emphasizes that its impact goes beyond Wall Street to Main Street.


“It’s not just Congress bailing out four or five companies,” Ellsworth said. “This has implications in all of our homes, no matter what congressional district we’re in.”


That argument will have to prevail if congressional leaders are going to line up enough rank-and-file members like Ellsworth to approve the bill to save the financial markets.


—Mark Schoeff Jr.


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Boeing, Union Strike Talks at ‘Standstill’

Talks between Boeing Co. and its 27,000 striking machinists are “at a standstill,” the U.S. aircraft maker’s CEO said Wednesday, September 24.


“We’re at a standstill now,” said Jim McNerney. “We’re unable to find the common ground we need to find to have the discussion we need to have to solve the problem.”


The workers are set to get their first weekly strike-pay check of $150 on Saturday, September 27. That will be the 22nd day of the strike that began Sept. 6, over machinists’ concerns that more of their work might be outsourced. The most recent machinists strike, in 2005, lasted 24 days; the one before that, in 1995, lasted 69 days.


The current strike, involving electricians, mechanics, painters and other hourly workers, has shut down production of Boeing jetliners, including the new 787, which was already delayed nearly two years. Boeing usually delivers more than 40 planes a month.


Analysts estimate that Boeing is missing about $100 million in revenue per day during the strike.


The International Association of Machinists and Aerospace Workers represents about 25,000 Boeing production workers in the Puget Sound area; 1,500 in the Portland, Ore., area; and about 750 in Wichita, Kan.


Filed by staff of Crain’s Chicago Business, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.


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Nation’s Economic Woes Likely to Spur Climb in Fraud

A senior manager of a national fraud survey says tough economic times in the next three to five years will contribute to a rise in corporate fraud in coming years.


“We’ll see a marked increase in fraud,” said Blake Coppotelli, senior managing director of the business intelligence and investigations division of Kroll, a New York-based risk consulting company.


Kroll released its annual the Kroll Global Fraud Report on September 15.


“Corporations, because of the state of the world economy,” Coppotelli said, “are going to have to get into higher-risk opportunities in order to make their bottom lines.”


Companies with high employee turnover and weak internal controls are more vulnerable to fraud, he said, while high-risk business ventures also lead to more business fraud. And the burgeoning fraud problem, he predicted, will lead to more government regulation to get a handle on it.


As that happens, Coppotelli said, company human resources departments will have to be sure they’re in compliance with internal ethics policies and external regulations to protect themselves.


Bruce Dravis, a Sacramento attorney who has written and lectured extensively on corporate governance issues, said getting a handle on corporate fraud through government regulation is typically a reaction to specific types of fraud. He points to the federal Sarbanes-Oxley Act, which was passed in reaction to the management fraud at Enron that led to the company’s collapse.


Regulations aimed at curbing specific fraud may or may not be effective, he said. “The question is, how do you know you’re asking the right questions” when forming regulations to crack down on a specific fraud, Dravis said.


“Fraud is a very difficult problem because it involves someone actively doing something bad,” he said. “Even audits don’t always detect fraud. If someone has structured fraud to avoid detection, it can be a long time before it comes to light.”


Dravis said that as long as there are crooks, there will be fraud. “Can you ever prevent run-of-the-mill fraud from occurring in all cases? I kind of doubt it,” he said.


The Kroll survey found that corporate fraud this year—mainly information theft and regulation noncompliance—continues to be on the upswing. Eighty-five percent of companies surveyed by Kroll have been hit by corporate fraud in the past three years, up from 80 percent in last year’s survey. And 90 percent of larger companies surveyed were plagued by fraud.


Meanwhile, the average company loss to fraud has increased by 22 percent, a trend blamed on the credit crunch and tough economic times. Companies on average lost $8.2 million to fraud in the past three years. That compared with a loss of $6.7 million in last year’s survey.


Industries with the most instances of fraud have been construction and natural resources. That has been blamed on higher oil prices and an industry shift to higher-risk areas.


Health care, pharmaceuticals and biotechnology saw increases in corruption and theft of stocks and assets. The travel, leisure and transportation categories reported increases in regulation noncompliance and information theft or loss.


Only two of 10 types of fraud tracked in the survey—money laundering and contracting fraud—declined from last year, but by only 1 percent each.


Regionally, the survey found less widespread fraud in North America and Western Europe and more fraud in the less economically developed areas of the Middle East and Africa.


Kroll commissioned the survey from the Economist Intelligence Unit to conduct its second global survey on fraud and its effect on business during 2008.


Some 890 senior executives were surveyed worldwide. A third of them were based in North and South America, 30 percent in Asia Pacific, more than a quarter in Europe and 11 percent in the Middle East and Africa.


Ten industries were covered, with no fewer than 50 respondents from each industry.


Sixteen percent were from the professional services industry, 13 percent from financial services and 11 percent from technology, media and telecommunications companies. Forty-two percent of the companies polled had global annual revenue of more than $1 billion.


—Mark Larson 

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Treasury Secretary Does About-Face on Executive Compensation

Treasury secretary Henry Paulson on Wednesday, September 24, told a House committee that he was open to considering limits on executive compensation in the Bush administration’s proposed $700 billion bailout package for the nation’s financial institutions.


But in a statement before the House Financial Services Committee the same day, Paulson did not explain how the provision would work.


Many lawmakers have called for limits in the compensation of executives whose companies benefit from a federal bailout. Paulson opposed the proposal as recently as Tuesday, September 23, but in opening remarks to the House panel Wednesday, Paulson said he had changed his mind.


“The American people are angry about executive compensation, and rightly so,” Paulson said. “Many of you cite this as a serious problem, and I agree. We must find a way to address this issue in this legislation without undermining the effectiveness of this program.”


Among the other legislative changes that lawmakers are seeking are those that would roll out the Treasury’s spending authority under the program in stages, with an initial authorization of $150 billion, and requiring large financial institutions to contribute premiums to a new federal agency similar to the Federal Deposit Insurance Corp. in the banking industry. The premiums could be used to help with any future bailouts.


Also Wednesday, Federal Reserve chairman Ben Bernanke warned Congress’ Joint Economic Committee of “great threats” to the U.S. financial system and economy, which required extraordinary measures.


Various money market rates continued to rise as banks shied from lending amid uncertainty about the U.S. rescue plan. But markets got some comfort from billionaire Warren Buffett’s decision this week to invest $5 billion in Goldman Sachs Group Inc., which is planning to convert into a bank holding company. Buffett described the current situation as a financial “Pearl Harbor.”


Filed by Doug Halonen and Isabelle Clary of Pensions & Investments, a sister publication of Workforce Management.


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Fannie, Freddie May Need More Than Bonuses to Keep Talent

Although government officials are rushing to provide retention bonuses to keep key employees at Fannie Mae and Freddie Mac, it might not be enough.

On September 7, the Federal Reserve announced that it was taking over the two mortgage finance companies to prevent them from collapsing. To ensure that key employees stayed with the agencies, the Federal Housing Finance Agency, which is overseeing the two companies, is developing a retention plan that includes bonuses.

Retention bonuses are a good place to start, but it’s a tactic that is easily replicated, says Richard Smith, senior vice president at Sibson Consulting, a New York-based consulting firm. “If the bo¬nuses are really good, it’s just a matter of time before other employers come to these employees with the same offer,” he says.

Fannie Mae and Freddie Mac should create long-term incentive plans that provide employees with cash or stock if they meet three- or five-year performance goals, he says.

Observers note that the two companies have differentiated themselves by offering competitive benefits and perks.

For example, both offer backup dependent-care services and adoption reimbursement. Freddie Mac has an on-site fitness center and concierge ser- vices, and Fannie Mae offers seminars on work/life issues and paid time off for employees to do volunteer work, their Web sites say.

Such benefits and perks are going to be more important for the companies going forward, experts say.


“Companies shouldn’t underestimate the value of the total rewards package, which consists of benefits, work/life balance, and training and development,” says Jim Stoeckmann, compensation practice leader for WorldatWork. “If they cut back on those programs, it sends a message to people that they are not valued as much as they were in the past.”

Stress is the top reason that people leave their employers, according to Watson Wyatt Worldwide. And it’s likely that the 4,700 employees at Fannie Mae and 5,000 employees at Freddie Mac are feeling stress about the transition, says Jamie Hale, practice leader of workforce planning at Watson Wyatt.

“If as employers they can do anything to alleviate some of that stress by continuing to emphasize work/life balance, then that would help them retain people,” she says.

Shawn Flaherty, a spokeswoman for Freddie Mac, says as of now, there are no plans to change benefits or perks.

“The director of the Federal Housing Finance Authority and our new CEO told us that they feel that keeping talent at Freddie Mac is a priority,” she says.

Fannie Mae spokeswoman Amy Bo¬nitatibus declined to comment. Stefanie Mullin, a spokeswoman for the FHFA, didn’t respond to e-mail requests for comment by press time.

Fannie Mae and Freddie Mac need to tell employees about the opportunities the transition presents, says Peter Cappelli, director of the Center for Human Resources at the University of Pennsylvania’s Wharton School of Business.

“These businesses aren’t going to fail,” he says. “The restructuring is going to create some likely opportunities for advancement for many employees, and it’s up to the companies to get those messages across.”


—Jessica Marquez

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Workers Shift Loads of Retirement Savings to Fixed-Income Funds

It takes a lot to scare workers into making sudden changes to their 401(k) plans, yet droves of participants moved their retirement assets around last week as the volatile equity markets became too much for many to stomach.


Participants in 401(k) plans fled from equity funds and moved investments into safer fixed-income investments last week as manic market conditions and an uncertain economy rattled many workers, said Pam Hess, director of retirement research at Hewitt Associates.


The firm, whose 401(k) index tracks the activity of 1.5 million plan participants, estimates that these workers moved at least $411 million out of equity investments and into fixed-income funds over the course of several days. In particular, stable-value funds saw inflows of about $320 million last week.


The Hewitt index represents a fraction of the overall 401(k) participant population, which the Department of Labor now puts at roughly 65 million workers. Yet, if the Hewitt index is used as a proxy for how 401(k) participants behaved, then nationwide, all participants would have moved a combined $18 billion out of equity funds and into fixed-income vehicles last week.


“By and large, most participants didn’t panic and stayed put,” said Hess. “But on a couple of occasions last week, transfer activity was much higher than usual.”


And how. On Thursday, September 18, before the federal government unveiled plans for its $700 billion financial industry bailout, more than three times the usual amount of money moved around in 401(k) plans, as every form of equity fund experienced outflows. The Hewitt index registered last Thursday as the second most active day of the year for participants.


The most active was Jan. 22, when the Fed cut interest rates by 75 basis points and the Dow Jones dropped more than 500 points.


Thursday wasn’t the only day last week when 401(k) participants were skittish. Workers transferred 401(k) assets at about three times their usual rate, according to Hewitt, as the Lehman Brothers bankruptcy filing September 15—and the threat of AIG’s demise—prompted participants to trim their large-cap equity funds and company stock holdings.


Filed by Mark Bruno of Financial Week, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.


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Companies Brace for the Office of Federal Contract Compliance Programs’ List of Compliance Evaluations

October 1 marks the beginning of a new annual enforcement cycle for the U.S. Office of Federal Contract Compliance Programs as the agency unfurls a long list of companies selected for compliance evaluations.


The last cycle, which covered nearly 5,000 employers, ended with a series of million-dollar settlements against companies that could not adequately defend their hiring practices against charges of systemic discrimination.


Companies selected for the new round of evaluations may see nothing more than a desk audit of their hiring procedures. But such an audit could evolve into a highly invasive on-site investigation, with federal agents conducting face-to-face interviews with hiring managers who must defend their selection criteria.


Agency staff have consistently rejected any criteria that may be subjective or “tainted” by the potential for systemic discrimination. In fiscal year 2007, systemic-discrimination charges accounted for 98 percent of the agency’s record $51.7 million in back-pay collections.


The Office of Federal Contract Compliance Programs defines systemic discrimination as a pattern or recurring practice of discrimination against a protected group.


“The OFCCP is now focused on becoming the premier agency for systemic discrimination,” says Julia Judish, counsel, employment and labor law, at Pillsbury Winthrop Shaw Pittman in Washington. “The EEOC’s [Equal Employment Opportunity Commission’s] focus is on individual charges. By contrast, the OFCCP is looking to put its limited resources to the best use by concentrating on federal contractors with systemic discrimination.


“The OFCCP has made it clear that it wants to pursue big cases.”


Self-audit protection
 Employers on the OFCCP compliance list receive a letter stipulating that the agency will conduct an evaluation. The list is based on a mathematical analysis of the Employer Information Report (EEO-1) forms that companies submit as part of their federal contract obligations.


“You can’t predict whether you will receive a letter, so aim as if you might and attempt to limit the impact to a desk audit,” Judish advises.


Every federal contractor should conduct regular self-audits in anticipation of a compliance review.


“The goal of a self-audit is to position the company so that if a letter comes, the company will be ready to respond,” Judish says.


A self-audit need not be as elaborate and expensive as the multiple regression analysis of compensation data that the OFCCP recommended in its 2006 Voluntary Guidelines for Self-Evaluation of Compensation Practices, Judish notes. “Attention to a few key areas can go far in avoiding OFCCP actions, even without professional statisticians.”


The self-audit for hiring procedures should cover three key areas: evaluating technical compliance; identifying any sign of adverse impact; and reviewing compensation data for any evidence of discrimination that can be traced back to hiring.


“The OFCCP will look for technical compliance with applicant tracking and recordkeeping on race, gender and ethnicity because it affects the agency’s ability to monitor employers,” Judish says. “The company must have the right infrastructure in place. The agency also sees technical compliance as a sign of a contractor’s overall attitude and willingness to comply.”


To determine if recruiting and hiring policies and practices have had an adverse impact on a protected group, Judish advises employers to look at the numbers in the company’s annual affirmative action plan.


“Determine if there is a job group that is underutilized for females or minorities,” she says. “If you see a disparity, you have an obligation to determine its cause.”


The disparity may originate in the applicant pool or the selection process.


“Attempt to spot the areas that the OFCCP might see as problem areas and take steps to remedy them,” Judish says. “The OFCCP appreciates steps to remedy any disparity. This can make the difference between a desk audit and a full on-site audit.”


The final step in the self-audit is reviewing compensation data.


“The two big money areas for the OFCCP are hiring discrimination and compensation discrimination,” Judish says. “Generally, compensation discrimination is a separate issue, but compensation can tie into hiring if the disparities in pay are based in hiring decisions.”


If pay disparities exist, the agency will look for possible explanations.


“One explanation that the OFCCP is not receptive to is starting salaries,” Judish says.


When an employer capitulates to a male candidate who demands a higher starting salary than an equally qualified female candidate, the potential for discrimination claims appears.


In addition, if a new hire from a protected group received an artificially low and potentially discriminatory salary in a previous job and the current employer perpetuates that pay level, the employer may be open to OFCCP charges.


“A company cannot rely on an argument about starting salaries to get out from under its compensation obligations,” Judish warns. “Hiring must be nondiscriminatory and starting salaries must not set off compensation claims down the road.”


On-site actions
 If self-audit precautions fail to head off an OFCCP on-site investigation, employers can still take steps to prepare hiring managers and protect hiring information to mitigate the potential for formal charges.


OFCCP officers may interview hiring managers, compensation directors and executives at corporate headquarters or at specific facilities.


“Typically, the compliance officers will start with the HR department and staffing manager,” says Robert Smith, partner in Morgan Lewis’s labor and employment practice, Washington.


If the OFCCP suspects discrimination, its agents will attempt to identify the exact point at which female or minority candidates are eliminated in the hiring process.


“If the elimination occurs with the hiring managers, they will sit down with the hiring managers,” Smith says. “The compliance officer will ask hiring managers to describe the hiring process, including the labor market for the jobs, the applicant pool, all pre-employment testing, the application process and the selection procedure. They will also ask the managers to produce hiring statistics.”


Companies can survive hiring-manager interviews with proper preparation.


“The employer’s attorney, whether it is in-house counsel or an outside attorney, should go in ahead of time to meet with the hiring managers,” Smith advises.


The employer’s attorney should also be present during the interviews. The OFCCP, however, can and will meet with employees without the presence of management attorneys.


The largest OFCCP compliance problems occur at companies with multiple facilities and decentralized hiring, where managers may or may not follow company policy and maintain crucial records.


“For example, a facility may accept applications on an ongoing basis but limit the actual pool to only the most recent applicants,” Smith notes. “Too often, candidate selection occurs on a ‘proximity to hire’ basis. The last warm body that walked in the door gets the job, regardless of the number of applicants that have applied for the position over the past months.”


Recordkeeping is essential for a defense against discrimination charges, but managers often fail to document each step for every hire.


“The company may have a list of the basic requirements for the job, but the hiring manager must be able to establish the actual reasons for the selection, and the criteria used must not be ‘tainted’ as biased with respect to gender or race,” Smith explains.
“For example, if a hiring manager states that a rejected candidate was simply ‘not sufficiently aggressive,’ the OFCCP will view that rejection as based on tainted gender-biased criteria.”


Employers should give recruiters and hiring managers lists of acceptable and unacceptable criteria. In addition, the job requisition should distinguish between basic requirements and preferred qualifications, all of which must be job-related.


“It can’t be emphasized too much that companies must be able to define ahead of time the entire recruiting and selection process and memorialize that process with full documentation,” Smith says.


At many facilities, troublesome habits linger on, Smith notes. Employers continue to use credit and arrest records in candidate screening, although federal enforcement agencies have long held that these records can adversely affect minorities.


“Employers cannot look at arrests and can look at convictions only in relationship to specific job criteria,” Smith says. Some state laws are even more restrictive than federal law in the use of conviction records.


Smith also notes that problems often arise when internal applicants, online applicants and those who apply in person at the site are not treated in a consistent manner.


“The documented applicant pool must contain all three groups,” he notes.


He advises employers to post positions online by requisition number so all applications can be attached to the pool for a specific job.


Also, when recruiters tap an applicant database, they must keep a record of the search terms used to find candidates.


“This becomes your pool and you must retain the results to show how the candidates were selected,” Smith says.


Smith counsels employers to test selection criteria for adverse impact and carefully analyze applicant-to-hire statistics. However, he cautions that employers must run the analyses under the direction of an attorney to ensure that the results are privileged information.


“Most large companies have their HR departments run these tests and then the results are open to discovery by the OFCCP and plaintiffs’ attorneys,” Smith warns. “It must be documented that the tests and analyses were conducted under the direction of counsel for internal purposes. The OFCCP and plaintiffs’ counsel will demand these test reports and they are discoverable unless the legal department or counsel takes control of them and they become privileged legal documents.”


An on-site audit is very invasive, Smith notes. But self-audit protections can help fend them off, and proper preparation can mitigate the risks when agents come knocking.