The Road Less Traveled: Merrill Lynch & Co.By Jeffrey Rothfeder | Posted 03-01-2004
The Road Less Traveled: Merrill Lynch & Co.
Sept. 11 was the great divide. Decisions companies made about technology infrastructure, personnel, security, business resilience and supply-chain protection took on a much more urgent cast. At the same time, questions had to be answered about how to face the new New Economy, already wobbly and listing further south.
For Merrill Lynch & Co., the terrorist attacks had personal overtones. The financial giant's headquarters at the World Financial Center, in the shadow of the World Trade Center, was damaged by the incident, and three Merrill employees perished.
Merrill faced tough choices not just about how to turn around its deteriorating financial fortuneswhich had been flagging for months, threatening more downsizing and cutbacksbut also about how to make sure its employees had the resources and support they needed to weather future crises and wholeheartedly engage in improving the company's prospects.
Merrill took a number of steps to turn its fortunes around during that time, laying off 4,500 employees and cutting advertising, sales, travel, entertainment and marketing budgets by 15 percent or more. But one of its least known efforts also has been among the most successful: In early 2002, with demands for deep budget cuts from top brass getting louder, Merrill's human resources executives made the radical decision to slash HR costs not by taking the outsourcing routea predictable strategy that might have reduced expenses by perhaps 20 percentbut by building from scratch an HR call center of its own to provide quick answers to personnel concerns and handle routine administrative chores, such as processing new hires.
"Especially after Sept. 11, our priority was to make sure our employees remained well served," says Terry Kassel, Merrill's senior vice president and head of human resources. "Budgets were under pressure, but we felt we shouldn't do something that might help us in the short term but hurt us in the long term through employee dissatisfaction and the inability to retain future leaders."
Out of Order
There was nothing ordinary about Merrill's decision. Business process outsourcing of basic HR services wasand isa hot trend. Worldwide, it generated $24 billion in revenue in 2002 and $28 billion in 2003, according to Gartner Inc., which expects BPO sales for human resources to climb to $30 billion in 2004. Many Merrill competitors, including American Express Co., Bank of America Corp. and Washington Mutual Inc., have farmed out portions or all of their HR services.
But HR outsourcing has faced some notable problems. There's nothing new about outsourcing such purely transactional processes as payroll and pensions management, and it almost always saves money. Establishing remote operations to support the individual needs of employees, however, is a much more difficult undertaking, akin to using an assembly line for a job that requires personal attention.
Accustomed to in-house service, employees too often neglect the new system, turning instead to their managers for answers to personnel questions, and thus adding another layer of work for supervisors. And those who do use outsourced call centers often wonder if they can trust the responses the faceless outsiders answering the phones and responding to e-mails are giving them.
"You can't outsource your problems," says Ian Ruddle, a principal at Deloitte Consulting LLC with 35 years of experience in large IT systems who worked with Merrill on the project. "If you don't have an HR service model that supports staff well enough, and you don't have a culture that will be comfortable and well prepared for outsourcing, passing HR support off to someone else will only compound your troubles."
The most public failure of HR outsourcing has involved the project that launched the trend. In December 1999, BP Amoco signed a five-year, $600 million pact with Exult Inc. to supply HR services to more than 50,000 employees in the U.S. and U.K., with plans to expand to 100,000 employees in 80 countries.
After a brief period of optimism, the deal quickly found itself in trouble. By October 2002, the oil company's human resources budget had actually risen by a third, John Melo, then BP's vice president of downstream digital business, told the media at the time. That's in sharp contrast to the $300 million in annual savings the outsourcing arrangement was supposed to provide.
Reluctance among oil company employees to use the system, and the sheer scope of coordinating the dozens of HR databanks that had ballooned at an outside site, made for redundant services and dragged down attempts to increase efficiency. By the end of 2001, the HR chief at BP who championed the effort had left the company and executives were describing the program as "under review." More than two years later, the outsourcing project is still in operation, but it's no longer a companywide effort, and it has failed to provide the anticipated savings.
In contrast, Merrill's in-house call center, which opened in October 2002, has exceeded expectations.
The new service center, which handles about 3,000 e-mails and 3,000 phone calls a month from 40,000 employeesmore than 80 percent of the company's workforcehas run nearly flawlessly, according to Merrill officials. More than 80 percent of the time, basic questions about benefits, compensation and corporate policies are answered in the first call or e-mail, taking just minutes. New hires are processed electronically, eliminating much of the paperwork that used to hinder employees from settling into their positions quickly.
Having streamlined the call center's operations and exiting several businesses, Merrill was able to cut its worldwide human resources staff almost in half, to fewer than 600 from about 1,100. With these pink slips, as well as real estate savings and productivity increases from remaining HR positions, Merrill has slashed its human resources budget by 50 percent during the past year. That's more than double the savings the company would have realized from a pure outsourcing approach.
Equally important, the service center has become the sturdy first leg in a restructuring of Merrill's HR business model.
Before the call center, Merrill relied for its HR support on teams of relationship managers stationed in individual business units. These "high-touch" human resources expertsseveral senior and junior staffers might be assigned to a single departmentwere called upon frequently to resolve issues large and small.
Because every employee naturally viewed his or her concerns as an emergency that needed an instant response, relationship managers operated in permanent crisis mode, without the ability to prioritize tasks. The result: low productivity.
By building an in-house call center to handle administrative and routine functions, there's a far smaller number of relationship managers still attached to the business units. But they are now free to work directly with department management to tackle critical corporate strategic issues like recruiting, employee training, identifying executive talent and maintaining morale, key jobs in the financial services industry, where there is always a rough-and-tumble to find and retain star players.
Not an Option
Considering the pressure in early 2002 from then-CEO David Komansky and his successor-in-waiting, Stanley O'Neal, now CEO, to cut costs throughout Merrill, the actions of the HR group took more than a bit of courage.
In 2001, the market was in a free fall and ethical questions were swirling around financial services companies, Merrill included. The company would eventually have to pay fines of $200 million to settle accusations of dubious analyst recommendations and another $80 million to resolve allegations that Merrill executives played a role in securities fraud at Enron Corp.
Meanwhile, Merrill's 2001 revenue fell 16 percent, to $38.8 billion from $44.9 billion the year before, and another 37 percent in 2002, to $28.3 billion. Net income in 2001 nose-dived more than fourfold, to $573 million from $3.8 billion. And while earnings rebounded to $2.5 billion in 2002, that's still more than 50 percent below the results of two years earlier.
In this sticky environment, the possibility of not delivering expense cuts that management demanded while pursuing a strategy that went against the grain of what many other companies were doing, was the corporate equivalent of playing chicken. "Failure was not an option," Kassel freely admits.
At first, though, outsourcing was an option. In early 2002, when the HR team began to consider reorganization to meet financial goals, Merrill's initial inclination was to do as other companies did. So the firm invited three major outsourcersExult, Mellon Financial Corp. and IBMto present their bona fides on the project.
But after watching the presentations, it became clear to Merrill's executives that outsourcing wasn't for them. There was something disturbing about giving the task of resolving personnel matters to people who didn't work for the company, particularly in the aftermath of Sept. 11.
And when it came time to review the thousands of steps required to link Merrill's 100-plus separate client-server systems containing HR data and applicationsmany of them rogue systems built randomly over the yearsinto an outsourcer's network, Merrill's HR executives could not pinpoint any sure savings. At the same time, even without any guaranteed returns, Merrill would still have to pay the outsourcer millions of dollars to make the diverse connections fit.
"There was no synergy in Merrill's systems," says Ruddle. "Merrill's operations had grown so complicated that no one was in a position to predict scalability from outsourcing."
That sealed the decision to set up the call center in-house. Some questions needed to be answered quickly. Location, for one. Merrill decided on a campus the company had just built in an isolated corner of tiny Hopewell, N.J., where real estate costs were relatively low.
By the fall of 2002, the hard part was just beginning. First, there were staffing issues. Together with Deloitte, Merrill decided to place about 60 people in the Hopewell call center to begin serving almost all of the firm's U.S.based employees. Plans were also developed to bring similar call centers online in the U.K. and Tokyosince completedas well as a site in Singapore this spring. Ultimately, Merrill intends to keep the call centers live all day and all night, providing services to all of its 50,000 employees worldwide.
For greater efficiency, Merrill officials broke down the Hopewell team into three groups: Tier 1 consisted of the first-line advisers who answer questions, usually about benefits, payroll and general HR policy. Tier 2 responds to more complicated concerns, such as individual queries about tax withholdings or immigration matters. Tier 3 tackles the more ticklish problems, such as performance issues and disputes between employees.
Most problems, however, are resolved in Tier 1, not only making it easier for employees to get quick answers, but also streamlining the process for correcting HR problems before they escalate.
Last September, during Merrill's annual benefits enrollment period, for instance, some employees who had shifted from part-time to full-time status found that their medical and other insurance deductions were higher than expected. So they called and e-mailed the Hopewell office.
Within a day, a report of call-center activity alerted Merrill HR staff that a persistent issue was arising and should be addressed. Checking with the benefits group, HR discovered a coding glitch in a computer that spit out the incorrect deduction for newly classified employees. The system was reprogrammed and the mistake wiped out within a day.
"It was a wonderful demonstration of how the system is supposed to work," says Robert Kiely, Merrill's first vice president for human resources, who oversees the Hopewell site. "We don't have four people chasing their tails anymore, trying to figure out what's wrong when the same thing is going wrong multiple times throughout the organization." Tying that example to expense reductions, Kiely adds: "We require fewer people to solve problems; there's a huge link between that and improved productivity."
In the past, the people spinning in circles would have been relationship managers in the business units. With fewer routine tasks sent their way after the Hopewell site opened, fewer relationship managers were needed. As a result, some of the company's nearly 400 relationship managers were reassigned to Hopewell and other call centers, but more than 100 were let go.
The remaining relationship managers were linked again to the business unitsthis time not in teams, but as individualswith instructions to make themselves relevant in personnel issues such as talent development and retention.
"There was initial resistance to the HR program," says Joseph Casey, Merrill's chief operating officer for human resources. "It was a complete cultural change for the company. The business units were skeptical of the model," particularly the idea of working closely with HR specialists as strategic allies. That relationship is still being fine-tuned.
In most business units, department heads view the human resources managers in their midst as a place to offload jobs corporate executives usually aren't prepared for, such as recruitment and ongoing training. But that's not enough to make the reorganization worthwhile.
The true value of the connection between relationship managers and business units is about to be demonstrated by the next crop of executive talent at Merrill, says Kassel.
"We're about to begin a rigorous program of hiring as well as an internal search for management talent," says Kassel. "We're going to bring on thousands of people, and a thousand of them will be at the senior vice president level. The burden of determining who these people are and placing them in the appropriate business units is very much on the shoulders of relationship managers. We could never have even dreamed of doing that before."
Perhaps the biggest challenge faced by Merrill's HR team involved the technology used to serve the call center. The problem wasn't the routing and switching systems required to funnel the thousands of calls and e-mails to the right people in Hopewell. Merrill is a company awash in customer service technology, because so much of its business is directly with consumer and institutional clients. As a result, Siebel CRM software used throughout much of the company was migrated to Hopewell to "answer" the phones and distribute the e-mails. "We configured Siebel to address the tasks that are handled by service center personnel," says David Kelley, Merrill's chief technology officer for the corporate technology group.
Database managementmaking sure the call center staff could access the personnel files, benefits material, corporate policies, tax records and other relevant information quickly and easilywas more problematic.
Because of the highly decentralized HR system that pre-dated the call center, data was stored on nearly 150 separate human resources applications that had been installed at the company based on the preferences of relationship managers and business units. Most of these were PeopleSoft programs, customized systems with no attempt at consistency throughout the organization.
"HR was changing its operating model, and the applications supporting HR wouldn't fit the new model of a centralized call center," says Kelley.
Building an über-HR application to meet Merrill's short self-imposed deadline of the end of 2002 to complete the call center was not realistic. What's more, the cost of a new system would likely wipe out the savings that Merrill was counting on from the HR reorganization, putting the entire program in jeopardy. As a result, Merrill executives took a leap of faith that was probably their greatest gamble during this project: They decided to leave the technology as is and build a rudimentary set of links from the call center to all of the relevant databases and applications throughout the organization.
To do so, Kelley and his team installed Merrill's homegrown security layer between call-center desktops and the many client-server networks that housed the HR programs and data, giving rights of access to desktops based on the types of queries being addressed at each one.
In addition, the IT staffers used the basic Microsoft toolset to design and develop the call center interface inexpensively and quickly. "It worked," says Deloitte's Ruddle. "Many companies depend on new technology to improve ROI on a project. But many companies fail at that, finding that it costs more at first to tackle systems, and the savings they want never materialize. For Merrill, the initial savings were huge because the company didn't change the technology."
Using the same technology put Merrill in the comfortable position of being able to use some of the initial 18 months of savings to subsidize a new HR system. To that end, Merrill is shelving its PeopleSoft applications for an Oracle ERP that will integrate the data from all of the disparate information sources and store it in a standardized format with a Web-based interface. From that, says Kassel, additional savings should be generated from deep cuts in maintenance and support costs as 150 systems are melded into one.
Although they are delighted with how successful the reorganization has worked out, Merrill's HR executives still view the outcome with some wonder. They know that any misstep along the wayand there were plenty of chances for thatcould have been their undoing. And it hasn't hurt that the market has been strong the last year or so, relieving some of the parsimonious budgetary pressure at Merrill. But even with failure so real a possibility, Merrill executives note that what looks like good fortune was culled from carefully crafted decisions and a thoughtful response to an unfathomable attack that they wish had never happened. Luck is, after all, the residue of design.
Site of the Outsourcing Institute, a professional association that offers information and advice about outsourcing.
The Outsourcing Center offers an outsourcing portal with research and numerous links.
A series of white papers on outsourcing from Wipro Technologies.
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