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“Sonoco Products Company (A): Building a World-Class HR Organization”

I. Executive Summary

Sonoco Products Company, an international packaging company, began operations in 1899. Originally called Southern Novelty Company when founded by Major James Coker in Hartsville, South Carolina with $6,000 of initial capital. Around 2000, Sonoco became one of the largest packaging companies and was achieving revenues around $2.6 billion. Sonoco amasses a workforce including over 17,300 employees spread across 32 countries and services various customers in nearly 85 countries with consumer and industrial packaging solutions. When Sonoco restructured itself in the late 1980’s into a more divisional organization with a decentralized human resources department it put Sonoco’s HR department in a tactical role versus a strategic one within the company. Sonoco’s HR departments aligned well with their respective divisions. However, company-wide initiatives and strategic plans were hard to implement with unaligned HR departments.

The senior vice president of human resources, Cindy Hartley, was tasked with devising a new HR organization that would be more financially responsible, create corporate-wide consistency, increase the accountability of corporate managers, and provide strategic support to the business. Hartley and her task force are torn between two options, either a hybrid or centralized HR organization. With the implementation of the hybrid HR organization Sonoco will be able to reduce costs by $2.7 million, allow for more flexibility in responses to changes in the market and with competition, become more aligned with both individual divisions and the company as a whole, and address the accountability of managers by clearly identifying division’s needs in terms of employee development. By following the multi-step plan of implementation, Hartley and her task force will be able to successfully navigate the restructuring of Sonoco’s HR department and in turn achieve all of the benefits that will be provided by the hybrid organization.

II. Situation Overview

The packaging industry employed over 5 million people in 100,000 companies worldwide in the late 1990’s. The United States accounted for over 28% of the total sales of the industry. The packaging business experienced growth during the early 1970’s due to the introduction of aluminum cans, and a decade later, the industry benefited by the increasing popularity of plastics. This material was becoming more and more popular and replacing others such as glass and metal, and it was considered beneficial due to their durability, being cost- effective, and its environmental advantages.

Nevertheless, in late 1990’s, the packaging industry was facing challenges presented by the increasing competition and potential growth of opportunities resulting from globalization. The manufacturing process was moving out of the United States to countries with lower labor costs such as India and China. This competitive market was not only characterized by their low prices, but also by their poor quality, value, and service. An increasing number of U.S companies started investing overseas, leading to a large number of plants closing.

The growing popularity of e-commerce and the growing appreciation for the role packaging played in building and enhancing brand value provided manufacturers the opportunities and challenges to tailor packaging to the different demands of various customer groups. The packaging industry was challenged to design high-visibility packaging solutions that would highlight the product, build consumer brand recognition, and motivate shoppers to purchase. Many companies had to focus on placing more attention on the needs and desires of the end consumer.

The packaging company, Sonoco Products Company, founded in 1899 in Hartsville, South Carolina by Major James Coker was originally known as The Southern Novelty Company. They focused on the production of a cone-shaped paper yarn carrier used for winding and transporting yarn for the textile industry. The automated manufacturing process used to produce them led to sales close to $1 million in 1923. The company continued its expansion by mainly acquiring over 60 companies around the world.

The company employed 17,300 employees across 285 operations in 32 countries, reaching to 85 nations. Sonoco’s business was characterized with two segments: industrial and consumer packaging. The manufacture and sales of consumer and industrial packaging resulted in revenues over $2.6 million in 2000. The industrial division accounted for 55% of the revenues and employed 11,000 employees, while the consumer packaging division employed 6,000 employees and accounted for 45% of the total revenue.

Sonoco, in 1995, was highly decentralized, inconsistent in its production process, and unequal in the services that existed among the various businesses. The company had a more divisional structure, which led human resources (HR) to become decentralized. This decentralization allowed the HR to be aligned with the divisions, and focused on being more tactical than strategic. The HR managers’ daily duties were to handle employee relation issues, hiring new employees along with ensuring the employee-employer relationship would not develop any major problems for the company. Each of the company’s divisions (paper, industrial, and consumer) had its own HR department who managed budgets, performance management process, development, and leadership training program.

In 1995, Sonoco hired Cindy Hartley as the Vice President of Human Resources. With extensive experience in the HR field, the newly appointed CEO of the company, in August 2000, assigned Hartley to develop a company reorganization by introducing two new potential HR structures. This restructuring would reduce the function’s costs by 20%, or $2.8 million and additionally would help ensure top-level accountability for talent management and upgrading. This strategy would also contribute to a more even distribution of HR talent and support. Moreover, this restructuring was needed to support the company’s growth, which often meant working across division lines to meet a single consumer’s demand.

Hartley, after a few months of work, identified several aspects of the company she needed to address in order to meet the requirements asked by the CEO. She prioritized the change in performance and compensation management to become more consistent and reward the employee according to their performance. Additionally, she focused on identifying and building the required employee skills for the job and to identify the next generation of leaders that would replace the current employees who have been failing to perform. Lastly, she included in her long-term plan the goal of becoming a more diverse company, which would benefit them by creating competitive advantage while incorporating minority and women representation.

In order to be able to accomplish the requirements asked by the CEO, Hartley recommended two options to the Executive Committee. Firstly, she introduced a centralized HR function in which costs would be reduced by $3.1 million. Under this function, a large group of HR representatives would take control over 10 to 15 plants. On the other hand, she suggested a hybrid organizational plan, which would reduce costs to up to $2.7 million and would generate more direct involvement with staffing, succession planning, personnel programs, compensation, and benefits. There are also some disadvantages that they must take into consideration prior to the implementation of one of these plans. Even though the centralized program would have the largest savings, it would not guarantee the achievement of other objectives; the lack of opportunity to be directly in communication with the HR representatives might fail to meet the individual needs of each department or employee. The hybrid structure would generate the savings suggested by the CEO, but it would also not guarantee an easy implementation of this plan across the company.

Harley’s job was to analyze and decide which of the two structures would best fit the company needs while providing costs savings, standardize and streamline the HR processes related to recruiting and development and to drive more accountability for talent throughout the organization.

III. Problem Identification

1. Decentralization of HR When Sonoco restructured itself in the late 1980s into a more divisional organizational

structure, the HR department followed suit, evolving into a highly decentralized facet of the company. HR managers began reporting directly to general managers of the businesses. HR managers’ roles changed to support day-to-day employee relations issues and hiring within their division. Each division developed its own HR function with separate HR systems, budgets, performance management processes, and employee development programs. As a result of this, businesses across the company were inconsistent in their processes and unequal in the services available to its customers. In addition to driving down costs, HR must be structured to support the company’s growth strategy, improve productivity, and create opportunities for cross-training and talent management.

2. Poor administration of benefits and compensation While this decentralized HR structure enabled HR to be highly aligned with the divisions, it played more of a tactical role as opposed to strategic role. Benefits and compensation administration was separated from the benefits and compensation planning function and reported to a separate vice president. Consequently, when the planning group would devise a program or develop a policy, there was little communication or coordination with administration regarding overall intent or implementation across all of the divisions. In addition, benefits and compensation were viewed more as entitlements rather than costs that the company needed to manage or as a tool to drive performance.

Stemming from the lack of a corporate compensation procedure and guidelines, Sonoco’s merit increases for employees often did not reflect their true performance or contributions to the company. Division managers had free reign over how to determine raises and would often manipulate performance ratings to get larger salary increases for their staff.

3. Lack of employee development process Another deficiency is an employee development process that would highlight and further refine employees’ skills and identify and develop required skills that were lacking. Management skills were an apparent need for Sonoco. A number of employees with 15 or more years with the company were failing once they reached the management ranks, it was believed, because of a lack of preparedness.

4. Company culture negates employee accountability Sonoco was founded in 1899 on the belief that People Build Businesses. It was

considered to be an ethical, team-oriented, collaborative, and family-friendly company. However, there were some negative aspects of having a company culture based on the employee relationship; the company failed to identify and penalize the employees’ underperformance that did not meet company’s expectations and ensured jobs for life. During the times the company had a strong financial position (1980 to 1990s), they did not have the need of changing this company culture. However, when the stock prices started falling due to the globalization and increasing competition, the need to make adjustments to the company culture and structure became evident.

5. Lack of diversity One final attribute lacking at Sonoco was an instilled sense of diversity. Developing a definition of diversity that could be easily communicated and implemented throughout the company was a challenge. Employees would have to see the competitive advantage to diversity in order for it to be accepted as part of the company’s culture.

Hartley was given a mandate of creating a more professional, business-oriented, contributing HR group that would reduce the function’s costs by 20%, or $2.8 million. Hartley’s challenge was to create an HR structure that would create a more strategic role for HR that was most beneficial to the company as a whole and would work towards a more standardized mode of business operations across the entire company. While the restructuring of HR was being done in large part to reduce costs, it was also an opportune time to further streamline HR processes related to recruiting and employee development, to drive more accountability for talent throughout the organization, and to structure an HR that would provide customized, strategic support to the businesses.

IV. Analysis and Evaluation Identification of Alternatives

There are two alternatives identified as plans of reorganization for HR:

1. Implement the Hybrid Plan 2. Implement the Centralized Plan

Criteria The following criteria will be used to evaluate the two alternatives identified above:

1. Flexibility: one of the key requirements in a fast growing industry that constantly needs to adjust to economic and environmental changes. The globalization of the packaging industry, as well as the introduction of e-commerce, are some of the examples of the fluctuations of the industry that the company must easily incorporate in order to stay profitable and competitive in the market. Employees and company divisions must be able to manage and adjust to the changing packaging industry accordingly in order to meet the organization’s targets. This criterion is weighted 0.2.

2. Accountability: the level of accountability placed on general managers in the business for

developing, retaining, and replacing talent. Some of the most talented employees in the business can be easily recruited by other organizations; therefore, it is important that managers and the HR department offer talented employees the opportunity to advance in the company, be rewarded according to their performance and be able to obtain training in this fast growing industry in order to maximize their capabilities of improvement. Retaining talented employees will also assure the growth of the company and thus increase profitability. This criterion is weighted 0.3.

3. Company performance: the ability for the company to meet its financial targets,

production goals, improve productivity and effectiveness and the capabilities of expansion. Company performance determines how well the organization is performing overall, but it also demonstrates how the individual parts are working with each other. Sonoco’s culture was described as “collaborative, family friendly, paternalistic, ethical, and team oriented”. If the company culture is being met, then the company is performing at its fullest as a result of the ethical, collaborative and team-oriented work. This criterion is weighted 0.3.

4. Cost: the cost of implementing one of the two proposed programs can be a determinant

factor for the organization. The main goal for introducing the HR restructuring was to reduce function costs. However, it is important to balance the immediate costs savings against long-term costs that the program may incur. The expenses incurred for the company may include employee costs such as training, salaries, traveling expenses, etc. or company costs to implement a policy, building and equipment investment. This criterion is weighted 0.2.

Analysis

The two alternatives are evaluated on a five point scale, ranging from 5 being “Excellent” to 1 being “Poor”. Each of the four criteria is appropriately weighted according to their importance to the company as described above. Table 1 provides our alternatives and their ratings for each criterion.

Table 1: Analysis of Alternatives

Flexibility (0.2)

Accountability (0.3)

Company Performance

(0.3)

Cost (0.2)

Score

1. Hybrid Plan 5.0 4.0 4.0 2.0 3.75

2. Centralized Plan 3.0 2.0 2.0 5.0 3

Hybrid Plan

The hybrid organizational model is structured so that the company is organized by two sectors: consumer and industrial. Each sector would be led by a VP of HR with a director of employee relations and a director of compensation and organizational development reporting directly to him or her. Field HR reps would be assigned to one or the other sector.

Flexibility: The hybrid approach will allow HR the flexibility in responding to changes mandated by actions of the external competitors, of the labor market, and the need for new products, which all require diversified HR strategies. Hybrid organizational designs allow you to tailor your business reporting and duty structure to the needs of your business. For example, if you have multiple product lines, you may find combining a product and geographic organizational structure allows you to move employees and resources quickly based on changing customer demand. Tying your organizational structure to your product causes your employees to focus on the support and advancement of each individual product you offer. Adding a geographic component to your organizational structure can tailor offers, marketing, and services based on differences in customer price points, packaging and product needs. The dual focus may help you better meet customer needs and, in turn, increase your profits. The hybrid plan was rated a 5.0 for flexibility.

Accountability: HR reps embedded in the business units will facilitate the necessary cultural shift by clearly identifying a divisions’ needs regarding employee development, thus addressing accountability in managing performances. It also ensures ownership of the HR policies and processes to the managers, integrating a more rigorous talent management thus achieving the overall HR alignment across the company. Therefore, the hybrid plan is rated a 4.0 for accountability.

Company Performance: The hybrid plan is structured so that HR works closer with the divisions such that HR will better understand internal processes, working methods, strategic business requirements, and the key competencies the workforce needs to possess to attain the strategic goals. In doing so, HR will be able to adapt its policies and systems to the business context achieving the alignment with the business unit’s needs. This approach will undoubtedly improve company performance and therefore was rated a 4.0 for that criterion. It is not rated a 5.0 for company performance due to the challenge of implementing changes across the entire company.

Cost: The goal for the reorganization of the HR was to reduce the function’s costs by 20 percent, or $2.8 million. The projected cost savings would be $2.7 million for the hybrid structure. Therefore, the hybrid plan was rated 2.0. However, it could be argued that the cost savings of the hybrid structure would be realized over time with the developed efficiencies of talent management and increased company performance.

Centralized Plan

The centralized organizational model is structured so there was a single large group of field HR reps, each handling 10 to 15 plants and an administrative staff of about five people who would operate across all business units/divisions.

Flexibility: In order to meet constantly changing customer demands, it is essential for Sonoco to be able to quickly adapt. The centralized organizational model is centered on a leaner, consolidated, more efficient human resources organization operating at the core of the company. This plan presents a disconnect between the different divisions and the HR reps and provides less opportunity for HR initiatives to be directly aligned with the divisions’ business needs. Although this model makes it easier to implement changes in HR policies and processes company-wide, by not being completely aligned with the individual businesses, the centralized plan presents the problem of not being able to accurately assess the strengths and weaknesses of a division. This oversight will make it difficult to designate new products to the specific plants that can most efficiently manage a change in product lines. Due to the limitations of the centralized plan’s flexibility, it received a rating of 3.0.

Accountability: With the centralized plan, the lack of HR support provided to general managers directly affects accountability. In order for general managers to successfully retain skilled talent and manage employee needs, it is necessary for them to have a good working relationship with HR. The structure of the centralized plan relegates the field HR reps to an “on call” position where they are unable to provide anything beyond basic employee relations tasks. With the field HR reps and the general managers not working together on a daily basis, HR’s ability to mitigate problems and provide support are greatly diminished. Because of its negative impact on accountability, the centralized plan scored a 2.0.

Company Performance: By focusing on administrative goals, human resources leaders in a centralized HR organization overlook the need to develop different services, such as maximizing business time spent on workforce productivity, identifying how business performance is impacted by workforce metrics, understanding the root cause behind first-year and high- performer attrition, and coordinating succession planning and management development activities. Overall there is a general lack of direct support for division leaders and lack of involvement of the field HR reps with core HR functions such as employee development, compensation, etc. Therefore, the company performance was rated a 2.0 for this plan.

Cost: The centralized plan was rated 5.0 for the cost criterion based solely on projected cost savings. The total cost savings for this plan was projected to be $3.1 million, which represents higher cost reduction than the CEO’s expectations of $2.8 million. This structure is the most cost-effective because it trims down costs associated with driving administrative and other types of process improvements. However, the cost savings for the centralized structure can be attributed to the minimal support directly provided to the general managers of each business.

V. Recommendations

Based on the analysis provided, the recommendation for Sonoco is to implement a hybrid HR plan. With the hybrid plan, Sonoco will have the flexibility needed to remain competitive in an ever changing marketplace. Due to the two sector organization of the hybrid plan, the company will be able to quickly implement changes to improve performance and to receive the feedback needed to make informed decisions. By maintaining a presence on the divisional level, HR will have the benefit of aligning its functions with the strategic goals of the division. Although the $2.7 million savings represented by implementing the hybrid plan falls short of the $2.8 million mandate given to Hartley, the plan’s long-term benefits outweigh the additional short-term savings. The problem with creating a leaner, more efficient human resources organization is that today’s business leadership needs something different. Surely, everyone needs to be cost effective and serve their internal customers efficiently, but the changing global business market requires human resources to deliver a different array of services, not the same service for less.

The hybrid organizational structure creates a shared mission and allows for employees to work on different projects and in different sectors. Instead of having a top-heavy, traditional structure of management and employees, a hybrid organization uses a network based structure involving groups of individuals, sometimes in different geographic areas, working together to accomplish shared goals.

As companies embrace globalization and competitive pressures, local labor markets are rapidly evolving and changing, and the skill shortages are pushing human resources into the frontlines of acquiring, developing, and retaining talent. Business strategies are increasingly forcing employees to collaborate across customer segments, regions, and processes, which requires changes to organizational design. Sonoco’s implementation of the hybrid HR plan will cultivate the talent to make this possible and build business knowledge within its teams.

The following are the short-term and the long-term effects resulting from the implementation of the hybrid structure in Sonoco:

Short-term

➢ 3 to 6 months ○ Initial cost savings ○ Talent distribution to smaller divisions ○ HR support to business units

Long-term

➢ 1 year ○ Improved performance ○ Increased returns to shareholders ○ Talent development ○ Cultural shift ○ Higher retention ratio

VI. Plan of Implementation

Step 1: Introduce the HR hybrid model

The first step is to consolidate the HR function adopted since 1995 and introduce the HR hybrid model. Human resources team members must understand the true nature of their business’s competitive environment and the company’s executive strategies to achieve success. This understanding is not simply a responsibility of HR leadership. For processes to deliver their true value, every member of the team has to be ingrained into the business.

Step 2: Implement talent management process

The initial step to implementing a talent management process is detecting the gaps discovered from the performance management systems. A company must identify and align competencies needed to carry out strategic business plans. The next step would be to introduce the new competency framework aligned with recruitment, performance management, incentive programs and promotion processes. The next step is to assess the job training needed to fill in the existing gaps. The design of talent management will be controlled by HR and not delegated to the division managers. To upgrade HR staff, the company would support workshops on organizational strategies, online certifications, and job rotations and cross training. To upgrade managers, the company would provide training on HR principles, mentoring subordinates, team building, change management, etc.

Step 3: Assign accountability to the human resources organization to achieve business goals.

HR will take on an active role in the execution of the business’s strategic plan as part of the hybrid organizational structure. Accountability forces both the division and human resources to collaborate. HR must adapt practices that deliver business through their processes. For example, performance management processes must change from an annual documentation process to a process that progressively develops talent, quantifies skills, and identifies high performance.

Step 4: Evaluation using Key Performance Indicators

It is imperative that an organization measures how effective they are achieving their business objectives, especially after organizational restructuring has been done. One of the most frequent techniques for completing such an evaluation is the use of key performance indicators (KPI). KPI’s are used throughout the company’s division as an evaluation of its success. The following tables summarize some of the KPI’s Sonoco can use in order to measure their performance. These indicators are used to measure its financial, HR, sales and diversification outcomes and are described below:

Table 2: Financial KPIs

KPI Definition KPI Goal

Stock Price Cost of purchasing a single security

Control stock prices stay consistent to the industry average

Net Profit Margin Company profit for every dollar in revenue

Measure the company profitability and make adjustments to the packaging productions as needed to increase sales

Stock price is an important indicator that measures the company’s performance. Because Sonoco is in a changing industry that can be affected by small economic, political, environmental and societal factors, it is determinant that the company has indicators that will quickly demonstrate something has changed. Therefore, by continuously tracking the stock price, this will keep managers, employees and Executive Committees aware of the current market and industry behavior and be able to compare to the company’s stock price and make adjustments accordingly.

Net profit margin is another helpful indicator because it measures the amount of profit obtained by every dollar of revenue. Sonoco, as a sales company, must work hard in order to maximize their profits and their shareholder’s wealth. Therefore, the use of a net profit margin performance indicator will help all parts of the company become knowledgeable of the production and sales amount and how targets should be changed if actual profits exceed the targets.

Table 3: HR KPIs

KPI Definition KPI Goal

Turnover Rate Employee retention ratio Measures the capability of the organization to keep their employees

ROI of Training Compares the amount of money invested for training and the performance of that individual employee

Measures the effectiveness in the use of training program

After the HR restructuring has been implemented, it is important that key performance indicators are used to evaluate how the hybrid program is benefiting (or not) the company. The use of turnover ratios will help measure the capability of Sonoco to keep their employees. The longer those employees stay in the company, the more trained and talented they will be at their job. Additionally, the return on investment of training is a way to measure how effective was the training completed by the employees. This ratio measures the amount of dollars invested in training and compare it to the individual performance. This is a key indicator to evaluate if the training offered to the employees is sufficient or if there is something that must be changed in order to improve individual performance.

Table 4: Diversity KPIs

KPI Definition KPI Goal

Female to Male Ratio Amount of female employees for every male employee

Assures that the company is meeting the minimum requirements of females employed in the organization

Percentage of racial/ethnic designation per division

Ethnicity/race percentage in each division

Evaluates if the company is following the diversification of workforce by hiring employees with different backgrounds

Diversification is another newly introduced idea that the company wishes to accomplish with the implementation of the hybrid plan. KPIs are important to measure the diversification targets at the early stage of this plan and also throughout the life of the company. Two different KPIs are introduced in order to evaluate the diversification plan. Firstly, the female to male ratio will assure the company is meeting the minimum requirements. Secondly, the percentage of racial and ethnic designation per division will be helpful to evaluate if the company is following the diversification of workforce by hiring employees with different backgrounds.

VII. Conclusion

Through the use of our plan of implementation, we believe that Cindy Hartley and her task force will be able to successfully restructure Sonoco’s HR department into a hybrid organization. In doing so, HR will be able to aid businesses strategically and meet the goals of the company that have been laid out for them such as lowering costs, increasing the accountability of managers, and creating flexibility in the ways Sonoco can adapt to changes both internally and those caused by external forces like competition. We have done extensive analysis using meaningful criteria to review the effectiveness of both of the alternatives, hybrid

and centralized organizations, and have no doubt that the hybrid format will meet all of Sonoco’s needs.