June, 1995

To Hire (or Lease, or Outsource, or Whatever):
That Is the Question

Companies face a bewildering array of optionswhen it comes to making staffing decisions. Hiring, contracting, leasing and outsourcing are among the many choices that exist today; but which choice to make? And why?

Acme Widgets, we'll say, is a $125-million manufacturing company with seasonal production peaks. Its founder is famous for having said, "Let's stick to our knitting," which current management interprets as making widgets. He is equally famous for having declared, "If we stick by our employees, they'll stick by us," which employees have long interpreted as a no-layoff policy.

Profits, however, have declined the past three years, and management has placed several important issues on the table.

First, depending on the order cycle, plant workers are alternately drowning in overtime or idling away their hours. Second, the existing computer system isn't providing management the information it needs to track orders, schedule production and otherwise run the business. And, third, why does the company employ such people as a mailroom supervisor and a travel coordinator; when it should be sticking to its knitting?

 

Acme Formulates an Action Plan

After many hours of discussion and debate, Acme's management team makes a number of important organizational decisions:

Both the manufacturing and MIS departments need new leadership. This will require highly confidential outside searches for the best talent that Acme's budget can afford.

The labor force needs to be brought in line with non-peak requirements, then augmented by temporary workers during peak production periods.

If the new MIS Director decides to revamp the company's computer system in order to meet requirements, this will not be a license to add staff; the new guru should either lease contract workers to implement the conversion or should turn the project over to an outside consulting firm.

Both the mailroom and travel functions will be "outsourced" ; i.e., turned over to external specialists, in one case a facilities-management firm (which will take over duplication and faxing in addition to the mailroom) and in the other to a travel agency.

 

Costs vs. Benefits

 

Acme's decisions illustrate that no single personnel decision is necessarily right for every personnel problem. And in today's world of multiple staffing options, the wise employer will put pencil to paper and calculate the costs and benefits associated with every possible option.

For example, even the seemingly obvious "no-brainer" of reducing Acme's full-time labor force may carry with it a number of obstacles and costs. If the company is unionized, does the existing labor contract allow reductions in force or will concessions need to be negotiated? With or without a labor contract, how dependent are existing workers on the massive amounts of overtime during peak periods? How readily available are capable temporary workers in Acme's manufacturing locations, and at what cost? How complex are the tasks they will need to learn? How much will organizational morale suffer from this violation of the founder's dictum to "stick by our employees," and can the right kind of educational campaign head off the morale problem?

Different issues are raised by the company's intention to use a higher form of temporary worker to perform any necessary computer installation. (In the personnel services business, "temp" generally refers to a lower-level, short-term worker, while the terms "contractor" and "consultant" are generally used to describe mid-level engineers, computer specialists and others engaged over weeks or months to complete a project of fixed duration. "Interim executives," meanwhile, are generally engaged to guide an organization through some period of transition, ranging from a corporate relocation to a major downsizing ; unless brought in on a "try before you buy" basis.)

For the use of contract workers in the MIS Department, Acme will pay a substantial premium to their supplier but will incur no separation costs or lawsuits when it comes time to say good-bye. The knowledge base connected with the computer conversion will also walk out the door once the project's over, so the new MIS Director will want to make sure there are adequate regular employees to carry on. (One possibility is to offer employment to one or more of the contractors as the project ends.)

 

Outsourcing Considerations

Outsourcing, another of Acme's decisions, goes beyond the engagement of contractors or consulting firms by turning over the management of a function, as well as its execution, to an outside provider. It tends to work best if the function provides a tangible benefit for measurable cost (e.g., travel reservations), has relatively little to do with the company's business purpose (e.g., making widgets) and does not rely on the company's proprietary knowledge base ; three tests that Acme's decisions met. Since each outsourced function becomes a vended service, the company should satisfy itself that substitute vendors are available if the first one fails to work out.

A few companies have even tried to outsource entire departments on a lease-back type of arrangement. While this may reduce the company's employee benefits, pension and legal exposure, affected employees rarely greet the loss of job and income security with good cheer. Organizations considering this kind of outsourcing should factor in the probable departure of key personnel.

 

Executive Replacement

"Hiring and firing isn't as much fun as it used to be," says the chief executive of a major American corporation. And he's right.

Acme's last remaining decision ; to replace its heads of manufacturing and MIS ; may be fraught with considerable risk, although careful planning can mitigate this risk. Two important participants in "doing it right the first time" will be the company's legal counsel and its executive search firm.

Corporate counsel will want to review the company's obligations to the soon-to-be-departed executives, whether contractual or otherwise; determine any exposure to wrongful-termination claims; and assist in the preparation of a severance package that is fair to all concerned. Once the terminations become public, the way in which the executives are treated will have ramifications throughout the company ; positive or negative.

Since Acme has no intention of signaling its termination plans before replacements are in sight, it needs to seek the advice and counsel of a trusted executive recruiting firm that can conduct the two highly confidential searches. Quite likely, Acme's CEO or chief lieutenant will want to stay in personal contact with the search firm, minimizing the involvement of unnecessary staff personnel.

Reduce the workforce, outsource peripheral functions, replace deadwood executives . . . it all seemed so simple that day in the boardroom. If Acme rushes headlong into execution, catastrophe may well occur. Conversely, with sophisticated planning, careful attention to detail and an awareness of the myriad pitfalls in tinkering with a well-entrenched organizational structure, Acme will achieve its goals.

If you work in a large, multi-unit organization, others – including the corporate Human Resources and MIS Departments – might appreciate copies of this issue. These can be ordered from your Sanford Rose Associates search consultant.

©1999 SRA International, Inc. All rights reserved, including electronic reproduction or alteration. This SRA Update is published for the clients of Sanford Rose Associates.