Comprehensive HR Outsourcing by the USA’s Largest Defense Contractor

John Dierkes

When outsourcing portions of the Human Resources function became a key option in transforming Lockheed Martin Corporation’s HR service delivery model, choosing the right outsourcing partner became a priority. At a time when most vendors were focused primarily on benefits delivery, LMC was looking for someone who could also demonstrate expertise in HR outsourcing.

As an industry leader and the largest defense contractor in the United States, Lockheed Martin Corporation (LMC)'s success is contingent upon meeting all business commitments and attaining total customer satisfaction. Maintaining this level of success begins at the very heart of the company: its employees. Creating an environment that facilitates employees' ability to stay focused on their primary job responsibilities is dependent on effective Human Resources support. Consequently, when outsourcing portions of HR became a clear choice in transforming LMC HR service delivery, the complexities unique to a company formed from 20 acquisitions made choosing the best partner for this task a major undertaking. Early on, it was evident that LMC's partner needed to be an expert in both large-scale benefits and HR outsourcing at a time when available vendors were focused primarily on benefits delivery.


One Sunday in 1998, the top Lockheed Martin HR executive picked up the job classified section of The Washington Post and saw that many Lockheed Martin Washington area business units had individual recruitment ads for people with the same skills. Realizing the possible projection of a poorly integrated image of Lockheed Martin, the executive moved to regionalize the company's recruiting efforts. The first Regional Recruiting Center (RRC) was opened to service the Washington Metropolitan Area in 1998.

The RRC concept was the foundation that started the company's journey toward common HR policies and processes across the "life cycle" of an employee's career – paving the way for organizational redesign and what became known as the Lockheed Martin HR Transformation. In September 2000, after an extensive, eight-month, competitive bid process, Mellon HR Solutions – now part of Affiliated Computer Services, Inc. (ACS) – was selected to outsource group insurance and pension administration. The key decision factors were its full-service benefits, actuarial, consulting and administrative services, and track record with other large companies, complex benefit programs and diverse populations. Another advantage was the firm's experience with HR outsourcing, which enabled LMC's eventual expansion into that service area. All those elements yielded a probable "cultural fit" with LMC.

Prior to LMC's outsourcing, all group insurance, pension and HR activities were handled in-house. With more than 650,000 active, retired, vested terminated and other participants, 69 group insurance plans and approximately 115 bargaining agreements, the decentralized operations had become too complex, redundant and costly. As a company that grew through acquisition of other defense contractors, many active and retired employees are enrolled in grandfathered pension plans with provisions dating back to the 1940s. As a result, HR professionals were tasked with managing more than 45 different pension plans from multiple locations. LMC was at a strategic crossroads; stay in the business of benefits delivery and make the required infrastructure investments or outsource this function to another organization whose business it is to deliver high quality services and administration.

In addition to all of these challenges, the many thousands of employees and retirees and their dependents participating in the medical, dental, life insurance and disability plans required ongoing customer service, and the various plans posed a challenge in terms of maintenance and administration. Specifically, one project that was key to overall success was the consolidation of benefits information. The extensive imaging project transferred more than 1,600 boxes of Benefits records obtained from more than 50 field sites and containing over 6.8 million pages of records to electronic format. These images were joined with 188,000 images from legacy benefits systems as they were consolidated within one ACS system to service LMC. The storage of quality data was central to the effectiveness of the transition to the outsourcer.

"As a result of the transition to LMPeople, other opportunities for consolidation became apparent. The three-phase, two-anda-half year rollout of group insurance, HR, and pension outsourcing overlapped with the LMPeople transition – leading to numerous challenges and accomplishments."

Innovation and Transformation

Capitalizing on the development of common policies and technology, an HR Shared Services organizational structure was created. This new organization developed innovative HR service delivery models for transactions and subject matter expertise in areas such as Compensation, EEO and Learning Services, as well as handling routine HR inquiries. Meanwhile, there was a clear linkage to the remaining field HR business partners whose roles changed.

Economies of scale were achieved as business units now had common systems, reporting and customer service. This new HR service delivery model led to cost and quality improvements and a leaner organizational structure. A key planning feature associated with the model was to consider outsourcing non-strategic, transactional work to companies that specialize and invest in this work where significant cost and quality improvements would result. Benefits administration was the first area that was evaluated and approved for outsourcing.

The transition team was composed of Lockheed Martin and ACS professionals. The team managed the implementation of each phase and their combination of experience and technical knowledge helped to make issue resolution a more seamless process.

One significant area addressed early on was the creation of a more user-friendly and centralized HR system. Leveraging the Oracle-based Peoplesoft technology, a solution was developed to replace more than 100 disparate HR and payroll systems, and "LMPeople" was born. Over a four-year period, eight waves of implementation phasing brought LMC business units onto the LMPeople system.

As a result of the transition to LMPeople, other opportunities for consolidation became apparent. The three-phase, twoand- a-half year rollout of group insurance, HR, and pension outsourcing overlapped with the LMPeople transition – leading to numerous challenges and accomplishments.

Positive communication and change management was integrated from the onset by forming customer advisory groups to allow field HR leaders to co-design and approve the new service delivery model – paving the way for many successes. First, senior business leaders were engaged early and supported the outsourcing effort, including LMPeople, for a total investment of US$130 million with an estimated, steady-state savings of US$80 million. By combining outsourcing with other HR transformation initiatives, the company anticipated a reduction in operating costs in its HR function of 26 percent. Ultimately, that goal was exceeded, with actual cost savings of more than 27 percent and cost reduction of at least US$87 million, exceeding the original US$80 million commitment.

While there were associated employment reductions, the long-term plan and change management communications led to fewer layoffs. People were absorbed into redesigned jobs within the HR functions or transferred to other functional groups, as well as through normal attrition.

Expanding the Scope of Service

In June 2001, the relationship with ACS was expanded to provide HR and Payroll customer service and Leave of Absence administration. By integrating ACS's contact center, named Lockheed Martin Employee Service Center (LMESC), and ACS's employee case management applications directly with LMPeople, support for HR and Payroll were significantly streamlined. Employees and managers now make full use of LMPeople and "self service" web tools for information and to execute data changes and inquiries. Employees now see information that is standard across an integrated LMC enterprise.

Following the fall 2001 annual enrollment period for all active participants of the group insurance plans, ACS began ongoing benefits administration for active employees and retirees. As Lockheed Martin has relationships with more than 80 benefits carriers across group insurance plans, it was more efficient to have ACS act as the single point of contact with each of the carriers for all eligibility-related matters, including premium payment reconciliation.

ACS also began ongoing pension payroll administration and management for active, terminated and terminated-vested employees in January 2002.

Continued Teamwork

When ACS took ownership of more than one million participant contacts a year, Lockheed Martin HR managers and specialists were increasingly able to focus on more strategic issues. As the new HR service delivery model matured, business units completed planned reductions and redeployed the remaining portion of the strategic HR staff.

Today, the relationship with ACS is maintained with weekly, monthly, quarterly and annual governance meetings and resultsoriented measurements. Although our service center handled well over one million calls in 2004, with 87 percent of cases handled within same day they are received and meeting other key performance indicators, there is a constant push for process improvement based on "voice of the customer" feedback. This approach includes year-round opportunities for process improvements. The combined efforts of Lockheed Martin and ACS demonstrate an example of outsourcing success.

Lessons Learned

  • Develop a teaming relationship with your outsource partner.
  • Ensure buy-in from corresponding business areas, HR and Line Management.
  • Designate an executive champion to ensure buy-in at the top levels of the organization.
  • Focus on necessary scope. Decreasing scope or planned process automation to meet short-term schedule can hurt long-term performance and customer satisfaction.
  • Use full program/project management rigor for cost, schedule and implementation.
  • Ensure there are multiple cycles of parallel testing and remediation before delivery.
  • Allow time for change management and communications planning across HR and with affected participants, especially "special populations" (e.g. bargained employees, executives, retirees, etc.)
  • Develop, communicate and transition HR employees to new roles resulting from HR service delivery transformation.