Multi-process HRSourcing

As Deal Renewals Come up, Pioneers Reflect on Learnings

As many of HRO’s pioneer deals near the end of their original terms, buyers are renewing in a market that they helped to grow more mature and reflective of their needs.

by Russ Banham

Seven years ago, International Paper Co. (IP) did something few other companies were doing at the time—outsource its HR functions to a provider called Exult. The global leader in paper and packaging products had just installed a fully functioning SAP enterprise resource planning service center to support HR at its Memphis headquarters when Exult came calling.

At the time, Exult was a market leader in HR business process outsourcing (BPO). The vendor, acquired by Hewitt four years ago, had signed a 10-year, $600 million contract with IP to deliver HR services to its 70,000 U.S. employees. At the time, it matched the biggest one signed in the then-nascent HRO field, another $600 million deal Exult struck with petroleum giant BP in London.

“We chose them simply because the scope of their service offering was quite honestly the best,” recalled Paul Karre, vice president of HR at IP, whose annual revenues total $23 billion. “They were able to guarantee cost reductions and service delivery objectives over the long-term, and were willing to invest in an IT infrastructure to reduce our upfront investments. They also would take over some third-party vendor relationships. In turn, we handed over our service center. Both of us wanted a partnership, and that’s what we got.”

Fast forward to today, and with three years left to go on the original contract, which has been modified over the years to include additional services such as learning administration and flexible staffing, Karre says both partners have learned key lessons—chief among them is that the world is not a static place.

“Governance is much more of a concern today than it was in 2001, and even though we had a governance process in place at the time we signed, there was no real discipline around it. Neither party has done a very good job. That said, we’re pretty satisfied with the relationship.”

Knowing what he knows today, would IP still have engaged HRO? “Absolutely,” Karre responds. “If we had to do it over again, we would.”

The IP-Exult deal was one of several forged at the turn of the millennium that resonated within the HR community about the strategic advantages of HRO. Today, many of these pioneering deals are nearing the end of their contract terms, prompting intense scrutiny and evaluation of the aspects that worked well and those that did not live up to original expectations. To be sure, pioneer deals were often fraught with problems, and a number of buyers who signed them and were contacted by HRO Today declined to discuss how outcomes differed from their original vision.

As Karre noted, the world has changed dramatically in this decade. The provider landscape has altered markedly, not only consolidating (most recently, Hewlett-Packard acquired EDS, which owns a portion of ExcellerateHRO with Towers Perrin) but also paradoxically growing in number. There are now numerous outsourcing service vendors offering best-of-breed functional solutions or outsourcing expertise in specific geographic regions. While early providers such as Aon and Mercer got in and out of HRO, new players have emerged, including Lockheed Martin, which inked a $1.2 billion contract in July with the U.S. Transportation Security Administration to manage its Integrated Hiring Operations and Personnel Program. Lockheed Martin, which primarily makes advanced technology systems, won the business from Accenture.

Whereas the great hope in 2000 was for one vendor to deliver comprehensive HR services worldwide, the simplicity of multiple solutions from a variety of vendors has emerged as a compelling alternative. This seems to be where IP is headed.

“One of the chief attractions 7 or 8 years ago was a global platform that Exult was talking about that would match up our services in the U.S. with our HR functions in Europe, Latin America, and Asia,” Karre said. “We’ve determined that this global model for us will not work, given the cost of putting in the infrastructure and connectivity and maintaining all of it. It’s just not as important to us as it initially was, and today we’re looking more at regional solutions and building the interfaces and connectivity we need to get at whatever data we think we have to have. This could involve Hewitt in one place and someone else elsewhere.”

Mix and Match
Canadian banking giant CIBC was another pioneer of HRO. Hugh MacDonald, former vice president of HR operations at CIBC, recalled the thrill of being at the onset of a revolutionary new industry.

“Most of us—the first generation of HR business process outsourcing deal makers, whether buyers or suppliers—were caught up in the excitement of developing a new industry, a new way of doing HR, and really a new way of managing people,” MacDonald said. “We had the rare opportunity to make what would become an historic contribution to changing the value proposition of HR and how business got done in our economy. It was truly revolutionary.”

MacDonald said the marriage between early buyers and vendors was so radical that the honeymoon lasted longer than that of other business processes previously outsourced. In large part, this was due to the good deals the first buyers achieved, the so-called, early-mover advantage that companies today are not likely to leverage in the marketplace.

“The buyers in the beginning that did this for strategic reasons probably accomplished what they wanted to accomplish, whereas the suppliers were more likely to struggle to make it work,” MacDonald said. “First-generation suppliers like IBM and EDS and boutiques like Exult struggled to figure out the formula to make this work, while later generations struggled with trying to figure out how to make a whole bunch of clients work together in a way to produce significant revenue and benefits to the firm.”

The consequence of these struggles, in part, has been vendor consolidation. Once buyers achieved early benefits such as cost reductions, automated transaction processing, and strategic alignment of HR, the emphasis shifted.

“It’s the Cinderella syndrome,” explained MacDonald. “It’s the eleventh hour of the contract, and companies want to know from their vendors, what’s next—where’s the next innovation, the continuous improvements, and today’s benefits to provide HR support to the business as it goes through the next business cycle? Meanwhile, the providers are saying they need to make money to pay themselves back for the investments made in the beginning. Where this will shake out is the $64,000 question.”

Where it will likely shake out, other observers say, is the embrace of best-of-breed providers—one for payroll, another for recruitment, and another for benefits, pensions, and administration (or any combination thereof). In this model, the focus will be on supply chain relationship management, rather than a partner-to-partner model.

“One reason the pioneering deals made such a splash was that they were big, all inclusive, and end-to-end, with everything from soup to nuts thrown in,” noted Monica Barron, vice president of research at Everest Research Institute, an independent IT and BPO research and analysis organization. “This was the great promise of HRO—give everything to one supplier who will take care of all your HR processes. The term that everyone used back then was the ‘one throat to choke’ strategy. If you had a problem, you now had one point of contact to solve it.”

Barron said as contracts come up for renewal, buyers are reconsidering what should be in deal scope. Recruiting and talent management is a perfect example, she said, because a lot of recruitment process outsourcing (RPO) vendors with specialized expertise have cropped up. They can offer value-added services such as employee retention and branding.

During the last eight years, thanks in part to the pioneers, buyers have become more sophisticated about HRO. Barron, who worked at Fidelity 11 years ago and helped create the firm’s payroll outsourcing module, says there wasn’t much if anything to go on back then. “It was all so new and no one knew what it should look like,” she explained. “It was an immature market. Nowadays companies have much more experience under their belts. They’re in a better position to negotiate with suppliers in terms of what they want and how much they will pay. The suppliers also have become a lot smarter and more honest with themselves insofar as what they can deliver and the prices charged, making for a healthier market in the long run.”

She also pointed out that while HRO pioneers sought ways to provide cheaper and faster services, today’s buyers expect more transformative benefits from suppliers with support in areas such as talent management. Meeting these new goals has produced a mixed bag of results. She noted that some suppliers are being innovative but lack the scale that buyers want.

“Look at today’s youngest generation in the workforce—they’re using a variety of electronic devices, from laptops to Blackberries, to receive and deliver information,” she said. “How do you capture this from an HR service standpoint? Will your current provider embrace these changes, or are there other suppliers out there that already do? Do you leapfrog or stay with the status quo and hope they catch up? These are the questions companies are asking.”

Staking the Ground

The statistics on HRO contract renewals paint a murky picture. Data compiled by Everest Research on 33 HRO deals that have come up for renewal indicate that more than 50 percent opt to stay with the incumbent provider. While at first glance this would argue discontent with suppliers, Barron notes that several buyers either went out of business, endured a corporate reorganization, or were acquired. Still, some early providers promised more than they could deliver.

Deal Renewals: Contracts in Various Stages of Renegotiation

“A lot of the providers had come from the IT outsourcing world and assumed that their knowledge of outsourcing extended to HR, but the truth was it hadn’t been done before,” noted Mark Hodges, chairman and co-founder of EquaTerra, a Houston-based HRO advisory firm. “They were out there hiring people with benefits outsourcing expertise or payroll outsourcing expertise, but that is very different than providing outsourcing services across the board. They were overconfident and actually arrogant that HR couldn’t be that hard, thinking—‘It’s just payroll’ when in fact payroll is one of the most complex business processes out there. They went in with swagger and overestimated. Vendors made things sound better than they really were, and the buyers heard what they wanted to hear. That made (reaching) expectations very unlikely.”

Another factor that inflated expectations was the loss of HR leaders to see deals through their full implementation. Hodges pointed out that many of the pioneer HR leaders have gone on to other roles in their organizations or elsewhere. “In some cases, they were recruited elsewhere to do the same thing; in other cases they were hit with so many arrows over the years they decided it was time to move on,” he pointed out.

He also believes that newer deals will likely include more vendors to reduce risk. These vendors will not just manage specific HR processes; they will have expertise in a specific country, for instance. Such is the case with Talent2 International, a vendor that specializes in talent acquisition and management outsourcing services in the Asia Pacific region. “Our goal was to be the leading provider of outsourced recruitment and talent management services in Asia Pacific, and we have become just that,” boasted Chris Rigby, vice president of the Sydney, Australia-based firm, whose revenues have jumped from less than $7 million in 2003 to nearly $75 million this year. The firm has more than 45 offices in 16 countries.

“Our model is not to do all services for all companies in all places,” Rigby said. “That would be presumptive, if not arrogant. Understanding recruitment in Shanghai and how this is different from Malaysia or Western China for that matter is one of our core competencies.”

Outsourcing HR processes across geographies and functions offers other benefits few envisioned eight years ago. Some industry observers pointed out that relying on a number of providers also means faster implementation and autonomous operations that would not jeopardize other HR functions if service in one domain is not going well. However, there is one caveat: All of the outsourced functions still need to be fed into a central database, perhaps managed by a master vendor.

Although they took the early hits, HRO pioneers helped both buyers and providers in the current marketplace to strike deals that are mutually beneficial. For example, some contract terms are more favorable to buyers today; most early deals didn’t have clauses such as termination for convenience, control, or cause, or a right to use third parties.

“Today, if a provider isn’t performing up to snuff, you can go out and seek bids and give the work to someone else, whereas before it was a monopoly. Also, the service levels are better understood because we how have actual empirical data. Consequently, the service level agreements are more mature, reasonable, and fair to both sides,” Hodges pointed out.

IP, while more than pleased with its long relationship with Hewitt, has endured a hiccup or two, Karre acknowledged. “Early on, there were some problems with the transition, but long-term it has really paid dividends for both of us,” he added. “We got what we wanted, which was improved performance delivery and reduced costs. Strategically we’ve benefitted. Fifteen years ago, we had HR folks doing

benefits administration and answering a lot of payroll-related questions; that work now is handled by the service center [which has since migrated from Memphis to Houston]. We’ve disabled the HR organization from doing transactional work, creating time for us to do things that are important to driving business performance and success.”

While the terms of IP’s next HRO contract may differ from those of its original deal, one plain fact will not change: its commitment to outsourcing.

Tags: Multi-process HR, Sourcing

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