Outsourcing for a French Multinational: Michelin and its Service Providers
© 2008 William B. Bierce. All rights reserved.
Licence en Droit, with Honors, Univ. of Grenoble Law School; J.D., NYU School of Law.
On July 18, 2008, the Michelin tire group in France announced some wide-ranging IT outsourcing contracts. It entered into a three-year contract to outsource all software development and maintenance functions to a European IT services provider Logica, commissioning a broad scope that includes finance and accounting for the purchasing department, supply chain management, marketing and sales including customer relationship management and cash flow management ("demand to cash") accounting support. It also entered into a three-year outsourcing contract with a team of Accenture and Atos Origin to manage Michelin’s applications in its core business: R&D, manufacturing and business intelligence. The deals follow other sourcing deals including a 2003 U.S. logistics outsourcing to TNT Logistics North America.
In light of France’s employee-oriented labor laws, these transactions reveal some best practices in developing a global supply chain that embraces both the social needs of a domestic labor pool and the corporate needs of multinational enterprises.
French Labor Law
French labor law ("Code du Travail") serves as the basis for extensive governmental intervention and ongoing participation of a "comitê d’entreprise" of labor representatives to have a role in the design, implementation and modification of the human resources and human capital management of French enterprises. Individuals are protected from unilateral termination of employment, effectively eliminating incentives to recruit employees for low-value jobs and imposing a high social cost on the back of French employers. Further, under Article 122-12 of the French Code du Travail (implementing the European Union Directive on Acquired Rights), French employees retain their acquired rights when they are "rebadged" after a merger, an acquisition or an outsourcing and they are transferred to a new employer doing substantially the same job. The transfer of a functional group (des "services") or activities with the in-scope employees is permitted only if such services or activities are economically autonomous entities, namely, "an ensemble organized with persons and physical or intangible elements permitting the conduct of an economic activity pursuing its own specific business objective." As an example, the water producer Perrier’s contract to transfer 52 employees to a wooden palette manufacturer was invalidated because the manufacture of palettes was not a separate "entity", resulting in the re-integration of the in-scope personnel into Perrier’s pool of employees.
This extensive regulatory regime purports to protect employees from outsourcing. Yet it also promotes outsourcing, particularly for new business functions, new R&D and new projects (such as software development) that can be sent out without having to hire permanently. Outsourcing is advantageous to French employers to enable long-term projects and tasks. Compared to hiring permanent employees, such project-based outsourcing has substantial benefits for French companies since it does not force employers to hire individuals for projects that could end in any period longer than the 2 to 4 month "trial period" for new employees in which the employer may terminate for no reason and at no particular cost. See Loi no. 2008-596 du 25 juin 2008 portant modernization du marchê de travail, Journal Officiel de la Republique Franèaise, art. 1, sec. 4 (26 June 2008).
French Governmental Study on Outsourcing. In 2004-2005, the French Ministry of the Economy, Finances and Industry issued a report on the economic, legal and social issues arising from the emergence of multi-service outsourcing providers. Rapport Final, "Externalisation des Services a` l’Industrie: Enjeux du Developpement des Groupes Multiservices" . The report addressed the strategic, organizational and social dimensions of new outsourcing practices by "multi-utility" service providers. It formulated several recommendations to the French governmental authorities on adopting policies adapted to the reconfiguration of the borders of industrial groups with a focus on future changes and setting out a dialogue by sector.
The resulting recommendations addressed two segments in the French economy: small-to-mid sized business (SMB) needing to compete effectively with multinational multi-service providers, and large employers (such as Michelin).
- Adaptation of the Domestic "Business Services" Sector. The accessibility of cost-efficient services yields a more attractive environment for attracting private industry just as much as solid educational, technical research, R&D centers and other economic and social infrastructures. For the domestic business services sector, the report recommended that economic research develop and disseminate to domestic businesses statistics on the evolution of individual trades and skills over time. Such analysis would translate into economic indicators to enable enterprises to identify and adapt to emerging changes in the global equation of skills. Employers and enterprises would thus be able to chart their own courses for human capital redesign, training and the mobility of employees and work functions. In short, every enterprise will need tools to identify its unique value proposition within its supply chain and define how to train, redeploy or outsource to adapt to rapid changes.
- Acquired Rights of Transferred Personnel. Increasingly, French enterprises that engage in outsourcing experience increasing difficulty in adapting their Master Services Agreements to the legal constraints applicable to the transfer of personnel under the European Union Acquired Rights Directive as implemented under Article 122-12 of the French Labor Code (Code du Travail).
- Human Capital Management. In addition to improving compliance with the Acquired Rights of transferred employees in an outsourcing, outsourcing also presents a greater challenge for developing programs to ensure the employability of the transferred employees. Large employers (having more than 300 employees) are already required (under a Law on Social Cohesion of 19 January 2005) to adopt long-range HCM forecasting and planning ("un dispositif de gestion prêvisionnelle des employs et des competences", or "GREC"). While this might be an obvious business practice in many countries, French law now mandates it. The process plays out by a mandatory negotiation, every three years, between management and the "comitê d’entreprise" (labor representatives) on the company’s strategy and its consequences on employment and salary levels. Under this 2005 law, the negotiations likewise relate to the establishment of an internal code for management based on forecasting of the number of employees and the skills and profiles of the company’s future employment pool. The law forces management to negotiate (but not to agree on any one outcome) on the profiles of the future workforce, identifying skill sets that will be in demand and those that will become obsolete, training commitments, the "validation of acquired knowledge from experience," a balance sheet of skills across the enterprise and some plan to achieve professional and geographical mobility of salaried employees. Art. 72(1) of Loi No. 2005-32 du 19 janvier 2005 de programmation pour la cohesion sociale, Journal Officiel de la Republique Francaise, 19 Jan. 2005. Such a plan will enable management and labor to pilot the shoals of change including detailed plans for re-skilling and re-deployment.
- Beyond WARNing: Counterproposals for Restructuring. The 2005 French Law on Social Cohesion goes beyond the simple duty of an employer to give substantial advance notice of termination. The U.S. WARN Act requires employers terminating 100 employees due to a mass layoff or plant closure to give at least 60 days’ prior notice. The 2005 French law requires employers with over 300 employees who are terminating 10 or more employees for economic reasons to give at least 30 days’ prior notice and notify the comitê d’entreprise which may come up with a "restructuring plan" that the employer must negotiate in good faith. Art. L. 320-3, French Labor Code, as amended by Art. 72-I of the Law on Social Cohesion. For certain enterprises with 50 or more employees, similar negotiations are required. Art. L. 321-3, French Labor Code.
As a critique, statistical analyses of demand for a panoply of skills sets is a slow process, based on hindsight. Historical analysis takes time and will not protect again severe cataclysm (e.g., new entrants into markets who can compete based on the offshore outsourcing model, or the U.S. sub-prime mortgage crisis in 2007-2008 or radical changes in terms of trade due to currency fluctuation).
Best Practices from the French Governmental Study
The 2004-2005 governmental study recommended a number of best practices for French companies engaged in outsourcing:
The need for planning to overcome the risks of an outsourcing:
- the statistical risk of strategic changes of a particular function from non-core to core (and back again), which can result in inflexibility if the enterprise customer fails to plan using appropriate rights to control scope and duration of the outsourcing;
- the risks and costs of terminating a contract;
- the legal risks relating to the transfer of personnel to the service provider (or a jointly owned entity) who might not be validly transferred to the service provider under the French legal principle that employees cannot be transferred, or rebadged, unless their operations are a viable separate economic entity under Article 122-12 of the Code du Travail; and
- the risks of losing key competencies by assigning personnel.
To resolve these risks, the report claims that maintaining a strong internal operational governance team is essential to risk management. The enterprise customer must retain key competencies to achieve a balanced contract (or contract renewal), to contribute to the re-absorption of experience and expertise for an "insourcing after the outsourcing" (if desired) and to implement any re-integration of personnel or business processes.
Best Practices from Michelin Outsourcing
Michelin’s announcements of its outsourcing initiatives do not mention any of these policy issues or best practices. Rather, they disclose the minimum and, to that extent, may reflect classic best practices in outsourcing:
- diversification of service providers to create a microcosm of qualified competitors;
- customer-mandated teaming of service providers in a single area so that there will be both cross-fertilization but also internal competition and duplicative backup;
- a retained management team to supervise the work of the service providers; and
- adoption of co-terminus contracts with identical expiration dates, so that renewals can be submitted to one incumbent service provider, another incumbent or a third service provider.
In conclusion, outsourcing by French multinationals faces both generic and local legal issues that are unique to its local legal system. The impact of such legal system depends on the location of the impacted personnel and thus the mandatory application of French law. Anticipating the triennial consultations with the comite d’entreprise on forecasting of HR requirements, French multinationals, more than others, need to plan their strategy for effective global sourcing that take into account evolving changes in a statutorily mandated commitment on a long-term HR plan. As a result, workforce planning and strategies have a greater impact in France than they do in the United States, and the company has limited autonomy to outsource existing internal functions.