Out of This World

Sun Microsystems goes with global HRO.

by Russ Banham

SUN MICROSYSTEMS NEW GLOBAL HRO DEAL SKYROCKETS IT TO THE FOREFRONT OF HRO LEADERS AND PAVES THE WAY FOR GROUNDBREAKING IMPROVEMENTS IN HR QUALITY AND COSTS.

It represents what is arguably the first truly global, comprehensive HR outsourcing deal to datenot that there havent been other global deals announced in the marketplace, Gildner acknowledges. In one fell swoop, Hewitt achieved an enviable global footprint. While that footprint may be paper-thin in some countries that have only a small office with a single person managing the outsourced pieces, the fact is that Hewitt will be on the ground with a single platform, using local language with local expertise, all over the world. Theyre the 800-pound gorilla in the industry. Other vendors prior to this project defined global in their own way, but didnt build what they knew they needed to really be global. This deal forces the issue. It raises the stakes for everyone concerned.

SUNNYSIDE UP

Sun Microsystems, one of the worlds largest technology companies, with more than $12 billion in annual revenues, represents Hewitts first HR business process outsourcing win since the firm merged with Exult, an HR BPO provider whose technology and services complemented those of Hewitts. Ironically, Hewitt did not make the short list of providers that Sun, working with its advisor Gildner & Associates, originally had compiled. Hewitt was out, says Gildner. The feasibility study required the provider to offer global services to meet Suns financial objectives. Only after Hewitt acquired Exult did it meet the criteria and, ultimately, become the right partner.

The acquisition of Exult put Hewitt into the number- one market share spot in the HR outsourcing service provider market, with more than a 30-percent market share based on total contract value and number of clients with more than 10,000 employees. It also is one of the only providers to offer total HR out- sourcing services, including benefits, payroll, and workforce management, with HR consulting expertise comprising talent, health care, and retirement services.

Under the terms of the five-year agreement with Sun, Hewitt will provide a galaxy of services that include workforce administration, recruiting, compensation administration, performance management, and learning to Suns global workforce of more than 30,000 employees. The two companies are not strangersHewitt has been providing health and welfare administration services to Sun in the U.S. since 2000. Sun also is no stranger to outsourcing, having already outsourced 401(k) administration to J.P. Morgan and U.S.-based payroll to ADP.

Sun began investigating HRO in May 2003, when Crawford Beveridge, Suns chief human resources officer, attended a presentation on HRO given by service provider ACS, which had just engineered a breakthrough deal with Motorola. The presentation sparked some interest that this might be something we ought to take a look at, says Ginger Mitchell, director of business process outsourcing HR at the Menlo Park, Calif.-based Sun Microsystems. We previously outsourced most of the HR services that have been commonly outsourcedbenefits administration and special areas such as immigration support so Sun HR has a long history of using outside experts to provide administrative support, notes Bill MacGowan, senior VP of human resources. Pushing this model even further, from both a functional and global perspective, is the future direction for the HR profession.

Mitchell was given the task of leading an initiative to determine the efficacy of HR outsourcing. She attended numerous conferences on the subject in an effort to flatten her learning curve, and passed on whatever she gleaned to Suns senior HR staff. I knew that we needed to start by defining our strategic objectives, clarifying what we wanted to accomplish, and determining whether or not we should even try this, she recalls. I also began to think in terms of consulting help, which I knew we needed. We asked six outsourcing consulting firms to submit proposals. Thats when Scott (Gildner) came into the picture. I met him at the HR Outsourcing Forum Symposium in New York, invited his firm to participate in the proposal process, and ultimately wound up selecting them because we felt they represented the best fit for us in terms of knowledge, process, and style. Scott and his team have done a great job for us.

Gildner assisted Mitchell in phase one of the initiativea feasibility study of HRO to make the business case to senior management. There was a lot of pride in our HR organization and, hence, a lot of trepidation about HR outsourcing, Mitchell confides. We had a very cutting-edge HR model, but it also proved a fairly high-cost model. I dont think it is any secret that Sun has had some financial challenges over the past four years. While we have shown a profit, we werent where we felt we should be. To widen our profit margins, we needed to explore areas in which costs could be pared. To make Sun shine again, the company embarked upon a global sourcing strategy challenging the organization to source how we get our work done in ways that cut cost and yet increased quality, Mitchell explains. An HR outsourcing strategy fit the bill perfectly. While we have various strategic sourcing initiatives going on now throughout the company, HR was the first to finalize a deal of this magnitude, Mitchell says. When youre the pioneer though, you get the arrows. This has been a very challenging process both internally and externally.

HEATING UP

A Sun objective early on was to gain access to cutting-edge technology for HR. While the technology company has some good HR systems, Mitchell says, it would be prohibitive from a cost perspective to have world-class HR systems. So given our financial situation and limited IT funding, as well as our goal to maintain and enhance our HR technology environment over the long run, we felt that outsourcing would provide the best solution. Sun also wanted a more flexible, scaleable HR system with a variable cost structure and access to resources that could scale up or down as needed. Staffing, for instance, was an area that would directly benefit by a scaleable HR model. When I came on board here, we had hundreds of recruiters in the company, Mitchell says. We were growing like crazy and there were all these people on staff doing recruiting. Then, when recruiting fell off, we had to trim staffing to the bone. The problem was that we would have these spikes in hiring activities and not have the resources to handle it, and would then need to have all these contract recruiters working very hard to get up to speed. We wanted to partner with someone who would scale up or down to meet our needs.

A final objective was to standardize and simplify Suns global HR processes. During Suns history of rapid global expansion in Latin America, Europe, and Asia Pacific, the focus was on creating processes and solutions to meet local needs, resulting in differing policies, practices, and systems from region to region. Additionally, Sun has had a culture of customization, where everyone was customizing their own HR solutions. While this approach allowed us to meet the needs of the business quickly and effectively, it created a model of HR service delivery that can be very costly and less efficient. Weve done a lot of things internally over the last few years to address this, but we felt an HRO provider could help us standardize and simplify more quickly than we could do it alone.

Everybody here is smart and everybody wants to do the best job they can on every feature, says MacGowan. But we know that the best-run HR programs are those that are simple and simply administered. Gildner worked with Mitchell to survey the service providers in the HR outsourcing space to see which ones could conceivably service such a wide global footprint as Suns. Many providers Hewitt among them did not have the global breadth required. A list was drawn up and presented in the business case that Mitchell presented to Suns senior HR staff in January 2004. The paper outlined the areas best suited to outsourcing, the money that would be saved by outsourcing those functions, and the IT implications of such an endeavor. Were a technology company with a lot of pride in what we do; consequently, we were wringing our hands if another company could provide technology as well as our own, Mitchell says.

The anxiety was short-lived. Beveridge and the rest of Suns HR senior staff at the time gave the go-ahead on the project. There was an important sound bite that Crawford gave me early on that has been my guiding principle from the beginning Assume we will outsource all of HR and tell me why we cant, Mitchell says. That was so helpful because there is so much resistance and foot-dragging and tree-hugging in a project of this kind that we needed that kind of powerful statement from senior leadership to guide us. It liberated us to be as aggressive as we possibly could.

Gildner soon developed a Request for Information (RFI) that was dispatched to ten vendors in the HR outsourcing space boasting a global presence. The list was winnowed to three companies, one of which pulled its name off the list at the last minuteExult. Unknown to Mitchell and her team at the time, Exult was in deep merger discussions with Hewitt. Suns RFP was sent out in May 2004. In June, when Hewitt and Exult announced their merger, Sun acted quickly to invite them to participate. Without Exult, Hewitt didnt have what we needed, lacking both global presence and key capabilities, Mitchell says. Exult brought to the table what Hewitt was missing, creating a very powerful organization. We essentially invited them at the tenth hour and they scrambled to put together a proposal and do a presentation. Two contenders were now leftACS and Hewitt. Mitchell and her squad made several site visits to the two vendors, where they scored each one on a myriad of factors involving services, systems, and people. This information later was shared and discussed. When there was a perceived gap in service, additional visits followed by probing questions were undertaken. At the end of this process, Hewitt narrowly beat ACSs score and won the assignment.

THE TRANSFORMATION

A major challenge in the deal would be the outsourcing of HR services in the more than 40 countries in which Sun has operations the groundbreaking part of the deal. Sun has great capabilities on the international front in HR, and Hewitt was very interested in partnering with us and expanding their capabilities around the world, says MacGowan. Another plus of the partnership, he notes, is the approach to the transition. Hewitt plans to offer jobs to many of our employees, ensuring continuity of services, particularly outside of the U.S.

Mona Steinberg, who handles the Sun account at Hewitt Associates, explains that they are interested in taking on many of Suns in-scope employees in the U.S. and all in-scope employees outside the U.S. This is absolutely consistent with our goals of providing quality service to Sun and expanding globally. Were very excited about making Sun employees part of the Hewitt team, Steinberg adds, but weve learned that there are some significant complexities involved in transferring employees from one company to another, particularly in E.U. (European Union) countries.

In several E.U. countries, works councils with authority weigh in on plans to transfer employees from one location to another, much less from one company to another. We worked closely with the client to assure the works councils that this was a positive development for employees, Steinberg says. We dont have these kinds of processes in the U.S. To date, we have received full permission to proceed as planned. (See sidebar.)

At present, the HRO project is in the transition phase: Hewitt is in the process of capturing from Sun the knowledge it needs to move its people, services, and systems to its proprietary platform. During this phase, were assuming the responsibility for delivering the services we agreed to deliver, from hiring employees were committed to hire from Sun, taking on the systems they currently use to deliver these services, and documenting everything to ensure Sun is comfortable and we can execute the transition fully and globally by June, Steinberg says. Sun has helped this process along to a great degree by assembling a great team and well thought out governance process to facilitate the rapid timelines.

Following the completion of the transition phase, Sun and Hewitt will embark upon the transformation phase of the project, during which current Sun HR systems will be fully migrated to Hewitt solutions and processes will be redesigned to improve efficiencies and enhance end-user experiences. For example, many processes are expected to become more simplified and centralized. The picture I paint is that a Sun employee, no matter where he or she is located, will have a common experience in how they access and use HR services, Steinberg says. From the employee perspective, Hewitt expects to introduce more self-service tools that employees can utilize through a single portal to make inquiries or changes to their status from an HR perspective. When someone joins Sun, they will be able to access information and take action on all that is important to know and do for a new hire through a single portal. Their manager will also have access to all that they need to ensure the onboarding process from the manager perspective is handled efficiently and appropriately. Steinberg explains.

As for the last phase of the project, what Steinberg calls the end state, she says the destination will always be a moving target. Were expecting everything as planned to be well in place within 18 to 24 months, however this is an ongoing strategy that will evolve as we grow our relationship, she says. This really is all about partnership. While many may view this as a client-vendor relationship, Sun calls it a partner engagement. Theres more to that than just words.   

THE GLOBALIZATION OF HEWITT

Sun Microsystems gives the moon and the stars to Hewitt Associates in terms of a global platform to launch the outsourcing service providers global HRO infrastructure. While Hewitt boasted global deals in the past, by leveraging Sun Microsystems shared services organization and global delivery staff, Hewitts HRO infrastructure is now truly world class. Hewitt looked physically at where the Sun offices were around the world and mapped them against its own global consulting offices, says Scott Gildner, president of Gildner & Associates.

It turned out that Hewitt had offices in 28 of the 36 countries outside the United States where Sun was providing HR servicesmany within 10 kilometers of the current location, he notes. This was serendipitous as the high degree of correlation between the Hewitt and Sun locations eased the discussions with the works councils since the proposed changes did not result in significant numbers of job redundancies or relocations.

Ginger Mitchell, director of business process outsourcing HR at Sun Microsystems, agrees that the HRO deal gives Hewitt the ability to almost immediately create a very extensive global footprint. She adds, they have the opportunity to leapfrog the competition because of this deal.Were glad we can be part of the partnerhsip that makes this happen because we believe well both benefit.Were going to do some very amazing things together.

Gildner believes the Hewitt-Sun deal will redesign the HRO competitive landscape. Competitors will now be forced to clearly articulate where they have capabilities globally and where they do not, he explains. Providers like ACS, IBM, and Accenture have enough global presence that they will be able to describe something, though not on a par with what Hewitt now offers. Still, theyre okay from a competitive standpoint. As for Fidelity, eighteen months ago it may have seemed to them that they could compete without much of a global presence, but now they must realize they need to do some sort of really large global deal or they will lose clients to everyone else. They will have to react and react soon.

Timing is key, he explains, due to an expected fusillade of HRO deals in the near future. The market seems to be starting to froth, Gildner says. The CFO community has largely concluded that they should be looking to outsource non-strategic functions. In terms of HR, most vice presidents of HR departments should leave 2005 having done at least a feasibility study. Otherwise, they will be exposed to CFO questions regarding why they havent examined HR BPO. Nobody wants to be caught naked.