How To Do the *People* Side of Outsourcing Right

Understanding what this case study is about requires understanding how huge, complex and overlapping the insurance and financial services industry is. The subject of our profile, which we’ve chosen not to name in order to protect the IT professional who provided his inside perspective, is a complex mix of international investment adviser companies that provide advice, investment products and asset management services to clients worldwide. In the late 1990s, the company acquired another firm, a leader in the U.S. retirement savings market. Early in this decade, the company also acquired a leading provider of retirement services, investments, life insurance and consumer loans. Part of that acquired organization was another company — specializing in annuities — which is the subject of this article.

The parent company is the world’s largest international insurance company, with a presence in some 200 countries around the world. The smaller entity — the annuities company — had goals for 2004 that included an ambitious growth rate of 15 percent a year and 2004 revenues of a billion dollars. At the end of the last fiscal year, the annuities firm had contributed over a billion dollars to the parent company — 10% of its total profit. In short, the financial services sector is doing well, and the parent company is doing well right along with it.

Don Cave is a full-time employee working for the annuities subsidiary out of company headquarters in the southwest. He’s a DBA and data administration consultant who has worked for the company over 15 years. Before that he worked for the firm as a consultant, beginning in 1983, when the mainframe system was originally designed. A mainframe expert with many years in the computer field, he now spends about 15 hours a week working as a DBA on the firm’s offshore contract projects.

The structure of IT, like that of the company itself, is complex; but in a nutshell, Mr. Cave is part of a group of about 100 IT people who report up through a local VP to the parent company.

The mainframe, the center of the computing system, processes the money management functions — critical for a financial services company. Other non-mainframe systems replicate that key data outward, providing more history and a data warehouse function.

Outside the mainframe, the subsidiary retains a significant amount of data in a sophisticated data-warehouse-and-more called an information factory. It includes a great deal of online transactional activity, where customers and agents can manage their own accounts online. Incidentally, Mr. Cave says that many of the IT staff operating the data warehouse are former mainframe specialists, retained by the company and retrained. Those computing functions haven’t been outsourced, “or at least not yet,” Mr. Cave says.

The decision to outsource part of the subsidiary’s IT functions to an offshore company was summarily handed down four years ago and came from the highest levels of the company. The obvious driver: The company would save money by outsourcing, thus enabling it to maintain its stated goal of 15 percent growth in profits a year.

Six months after the outsourcing directive was handed down, the period of evaluating various outsourcing vendors began. The subsidiary’s original intent was to outsource all of its mainframe functions to an offshore company, Mr. Cave said, including software development and support. The mainframe supplier functions — basically housing the mainframe and keeping it up and running — had been outsourced years ago to a U.S. company, Affiliated Computer Services, Inc., or ACS, a business process and information technology outsourcing firm in Dallas, Texas. That didn’t change with the new contract; the company’s software and data itself remained in the U.S.

Two large IT services firms, both based in India, competed for the outsourcing bid, Polaris Software and TATA Consultancy Service (TCS) Asia-Pacific. The eventual winner, Polaris, is a global software house with 6,000 employees; it had revenues of $181 million in the fiscal year ended March 2005. According to financial information on its Web site, 89 percent of its revenue in the first quarter of the fiscal year came from work outside India. Its strategic focus is on the financial services industry. TCS, which launched an initial public offering in 2004, had revenues of US$2.2 billion in the fiscal year ended March.

Because of the sheer size of the subsidiary, the outsourcing company also had to be large. Before Mr. Cave and others in the IT group were asked to evaluate the two companies, management above them had already eliminated other competitors, based on size and other factors. Mr. Cave says that while his group participated in evaluating the companies for technical competence, and eventually certified that both were capable of taking on at least a portion of the proposed project, he wasn’t involved in the final decision. Interestingly, Mr. Cave says the parent company had an ownership interest in Polaris — perhaps not surprisingly, the company that ultimately was chosen.

Had he thought either company completely incapable of taking on the technical complexities of the subsidiary’s mainframe development and support, Mr. Cave says he would have spoken up. But he remains ambiguous about the competency of the Polaris staff. While he felt both the project managers and technical staff sent by both Indian companies during the evaluation process were technically competent, he wasn’t overly impressed by either. “Let’s say, they weren’t as experienced or seasoned as I had hoped,” Mr. Cave says. However, he found them “eager, aggressive, bright people. They didn’t understand a lot of what we told them, particularly in the tech area. But they were eager.” Mr. Cave says he personally felt both companies were at about the same level of competence. “They had COBOL experience, [although] not database [experience] in many cases,” he said, “and some project management… The fact is, [software developers from India] are highly trained.”

At some point during the six-month evaluation process, upper management changed the scope of the project and pulled some back in-house, judging Polaris incapable of taking on as much as had been originally planned, at least for now. Instead, the subsidiary decided to retain a critical component, the mainframe database functions — a decision he agrees with. “I would be much more concerned if all of that had been outsourced.”

After evaluating the two companies, Mr. Cave said, there was silence on the issue for almost nine months. People continued to work, albeit nervously. “Then when it came down, it came down fast.” Within a matter of a few months, staff had been selected for the first of three rounds of layoffs. Presumably, management was evaluating bids, negotiating a contract with the winning company, and preparing for the coming layoffs.

Mr. Cave says his company, to its credit, treated its employees well during the layoffs, although the environment they’d enjoyed in the subsidiary made the situation especially difficult. The company had a history of programmer training and career development, and had often over the years recruited its IT staff directly from colleges and trained them on the job. Many employees had worked only at the company, Mr. Cave says, and had been there for many years.

“For the most part,” he says, managers “managed to salvage the majority of what could be salvaged, including the test crew.” Eventually, about 100 people were laid off, half of the IT group Mr. Cave worked with. About 10 more “plum” employees were moved to other places in the company, such as the information store.

Solid severance packages helped ease the layoffs — Mr. Cave estimates that “most people got a handsome severance based on the better of three options, including longevity.” Predictably, first to go were the least senior workers; Mr. Cave himself didn’t think he would survive the layoffs. Mr. Cave estimates that most of the people let go had been with the company from five to 15 years.

Employees with more current skills, such as Internet development, Visual Basic or Java, weren’t affected — it was generally long-time employees with mainframe skills such as COBOL that were laid off. Some were retrained for other positions, such as the information store. “As we got down to the more senior people,” Mr. Cave says, “they began to be rescued and retained.”

And that policy, he adds, also has served as a sort of corporate insurance policy — if the outsourcing contract doesn’t work out or needs technical backup because of a crisis, the subsidiary has enough remaining staff with the expertise to assist.

Because of the amount of training and data transfer involved, and the complexity of the job, Mr. Cave says the parent company is probably in it for the long haul. “I don’t think [we] can re-outsource to another company. The outsourcing is going to be long-term.”

During this process, a new organization was spawned to service this contract and others within the parent firm’s portfolio of companies. It goes by a name that incorporates the parent company’s name as well. The name Polaris is no longer referred to, giving the appearance of a branch operation to the service provider.

More than two years into the project, Mr. Cave grudgingly says he is generally pleased. His team reviews most of the code produced by the service provider and has caught anything that “could cause major data problems.” As in any software development project, he says, following the specifications carefully and knowing the ramifications of a single small change are key — and the offshore programmers are learning. “The more we catch and show them,” Mr. Cave says, “the more they knowÉ Ultimately, one day, they can take over all aspects of the job.”

And that’s the bittersweet reality of a successful outsourcing project. Regardless of the subsidiary’s outward success with its first offshore project, there’s an internal cost that may be hard to gauge. As Mr. Cave puts it, there’s good news and bad news for the 100 remaining IT workers in his group. The good news: the project that they helped with has been a success. The bad news: Management is now encouraged to outsource more. “The fear is back,” he says. “They’re nibbling on other parts now.”

Mr. Cave says management is turning over several projects to the service provider and has frozen most hiring. Also, the IT group is “being forced to use contractors for heavier workloads though they don’t have to be from the same company.”

The group also faces a major new software development project that will start later in the year. Even thought it’ll be done by the offshore service provider, Mr. Cave’s group will remain intact. However, he says, the provider is “still looking to take on that effort.”

Also, his group is involved in a project to bring back mainframe operations in-house — before the company’s long-ago contract with ACS expires. The internal technical company had asked to bid on the project and won the bid last year. Mr. Cave says this makes him happy because “we will become much more state of the art.”

5 OUTSOURCING TIPS

–>TIP #1. One reason that the subsidiary’s outsourcing project has done well, in the opinion of DBA Don Cave, is that the company followed this rule: Retain key people.

“You cannot let the experienced people go out the door,” Mr. Cave says — either because they’ve been laid off, or because they choose to leave in the often-demoralized atmosphere spawned by layoffs. “You need to reassure those people,” he says, by communicating in frequent and forthright conversations on the state of the company and the outsourcing.

Many of the most experienced people were long-time IT professionals. Older workers, Mr. Cave says, aren’t as quick to jump ship as younger staff and can be retained with careful management. “If you offer them some security,” he says, “it’s not that hard to retain your senior people.”

–>TIP #2. Honesty is best.

, Mr. Cave says. If saving money is the bottom line, say so. “Most IT people would rather have [management] just be frank and deal in realities. Don’t just sneak it by them.” This is a role that middle managers may be able to take on, since they often have a much more personal relationship with staff.

–>TIP #3. For the same reasons, he suggests not outsourcing everything.

, and certainly not initially. “Don’t give away the entire farm,” he says pointedly. “Don’t let everything roll out the door at one time.” In an industry such as financial services, catastrophes can occur that require original staff to jump in and help out. “We’ve saved several situations here,” Mr. Cave says, in which people “have to stay all night and save the day. That’s still happening.” Some of those people have been called back from other positions in the company — another reason to treat staff well and avoid alienating anyone.

–>TIP #4. Acting in good faith during layoffs can also pay off.

when you need information — or help with training new staff — from those you’re laying off. “Because of the [generous] layoff package” at his firm, Mr. Cave says employees “felt a little easier about passing on information as they went out the door. They may have held a grudge, but they didn’t take it out the door. They were treated as professionals, and they responded like that. Treat them as a commodity, and they’ll respond [correspondingly].”

–>TIP #5. Finally, Mr. Cave recommends that your company retain testing functions.

. At his company, “we do a very rigorous testing of a number of the [software] components,” he says, which helps his company monitor how the service provider is doing. Losing control of that would mean losing an important metric for measuring your outsourcing partner.

Useful Links:

Polaris Software Lab Ltd.
http://www.polaris.co.in/