Multi-process HRSourcing

The Great Vendor Bender

Exult, then Hewitt, handled BP’s HR for the past decade. It was not always pretty.
 
By Dirk Olin
 
When energy company BP announced in early 2009 that it was signing a new HR outsourcing contract with U.S.-based Hewitt, the news came as something of a shock to the system. It had been only two years earlier that the multinational had declared it would abandon the $600 million, multi-year engagement.
 
The pioneering deal—begun with Exult in 1998 and assumed by Hewitt when it took over the HRO provider in 2004—had long been perceived  by many as unsustainable. Industry observers had opined that neither the provider nor BP really knew what they were getting into at the inception. Exult had won the original contract to provide payroll, severance, benefits, and mobility services for some 100,000 BP employees worldwide, an engagement that was then the biggest of its kind. But BP, furiously making acquisitions at the time, had failed to adequately assess its internal HR system before signing with the provider. Exult, meanwhile, was undertaking what would later be tagged as a “lift and shift” of services under a methodology that PA Consulting Group analyst Neal McEwen labeled simply “making it up as they went along.” By the time the dust settled, Hewitt was overseeing 72,000 employees—no mean feat, but a significantly narrowed scope, and only in the U.S. and U.K.
 
“The international component was more complex than we had anticipated,” recalls Jim Madden, Exult’s founder and CEO who is now a partner with the venture capital firm Accretive. “Privacy concerns were high. Social security and healthcare data could not be taken out of the country without appropriate safeguards, which proved a substantial challenge. We were ahead of where the software vendors were at the time.”
 
Nick Starritt, who was then group vice president for human resources for BP and helped orchestrate the outsourcing, concedes that he and his colleagues also failed to anticipate various dynamics. “First, remember that this was in the context of the late ’90s and early ‘noughts,’ and BP was conducting mega-mergers and acquisitions. There were countless systems in play. It wasn’t Noah with two of everything, it was like inheriting Heinz 57 in processes.”
 
Referring to various actors within BP, Starritt and Madden both described a world in which business unit leaders had not bought into the vision of the C-Suite and resisted the standardizations that needed to take place across formerly independent fiefdoms. That was compounded, adds Madden, by employees who blamed the new provider for every little HR problem, even if it represented, to borrow a phrase from the current healthcare debates, “a pre-existing condition.” Madden said it became something of a rule of thumb at Exult: “The signing of an HRO contract,” he says, “causes amnesia in the client. It’s not that we as providers don’t have issues, it’s just that we have our own, plus whatever we inherit.”
 
Starritt picks up the rearview mirror again: “So both parties, including and perhaps especially me, underestimated the desire within business units for customization, and as a consequence it became very difficult for Exult to push BP into more standardization and cost cutting.” The corporate equivalent of a community’s “nimby” opposition to new development? “Exactly!”
 
This was compounded, adds Starritt, by a failure to react to the reality as it became apparent. “I don’t think we went far enough, fast enough, in being ‘ugly’ with BP management, in surfacing the problems. I had come from finance, where my tactic traditionally had been to name and shame unit leaders on costs, but here, with HR, it just hadn’t been done before.”
 
Dave Ulrich, a professor at the University of Michigan’s Ross School of Business and one of the authors (with Madden) of the seminal  book Human Resources Business Process Outsourcing, has the advantage of distance—both temporal and personal—when reflecting on the history. “It was one of those administrative innovations that sounds great on paper and worked in other settings, then needs to be adapted to this time and setting. I think a success was doing it in the first place, and taking the risk to try a new way to deliver HR services.
 
“Often the first pancakes or first batch of cookies do not come out well. This is not a surprise. This was a complicated deal. They were trying to outsource over 15 HR processes, they were trying to meld three or four major acquisitions, and they were working to implement this through new technology.” (On that, most observers contend that Exult did succeed in advancing BP’s web enablement.)
 
Michel Janssen, chief research officer at the Hackett Group, shares much of Ulrich’s critique, adding a broader philosophical take. “This deal was a victim of being first, for sure, and also suffered from a lack of standards. Not just because it hadn’t been done before. Unlike IT guys who love standards, many HR guys don’t, except maybe if they’ve been dealing with payroll regs. And you also have to remember that as soon as this was done, a whole lot of other people bought into the concept too.”
 
Janssen also echoed Starritt’s point about the practitioner-side’s sense of ownership. “HR is not like payroll, where a standardized, end-to-end code is easier to accept. Why am I, as a business owner, going to let an HR provider tell me how to run that part of my business?”
 
The parallel failing on the provider side, adds Madden, is to forget that “the Achilles heel of any HRBPO company today is underestimating the importance of an integrated solution. That was a shortcoming of Exult, and that led to the merger with Hewitt. In our early days, we just took everything that was operations and tech. In the last five years, it’s become clear that more nuance and thoughtfulness were needed.”
 
Exult’s contractual obligations to deliver cost savings had reportedly become increasingly problematic. And two years after the 2004 acquisition, Hewitt reported a net loss of $115.9 million, citing HR outsourcing as a contributor.
 
Little surprise, then, that BP’s 2009 renewal with Hewitt included significant alterations to the original deal. On the one hand, geographic breadth was expanded from two countries, the U.K. and the U.S., to a jurisdiction that is now worldwide. On the other hand, the renewal narrowed the scope of services; most recruitment responsibilities were reintegrated into BP, where sensitive ex-pat administrative duties already had been returned to in-house oversight.
 
In reacting to the renewal at the time, anaylst NelsonHall’s then-HRO research manager Helen Neale saw it as an historically mixed bag: “[It’s] a good sign for Hewitt and shows considerable faith in Hewitt’s business recovery, even though the contract’s scope is reduced. But it also shows how difficult it is for companies to unpick a deal like this with all its complexities and take something back in-house—which is why that doesn’t happen very often.”
 
As the industry enters its second decade of major HR BPO, observers are taking stock. Call it the great sorting. Gone are naïve dreams of world-changing, end-to-end efficiencies and cost savings. Instead, HR practitioners are carefully weighing which functions can be farmed out (that is, which can essentially be commoditized) and which are so strategic that they should be held close for customization and configuration. Both sides would also do well to train a gimlet eye on adapting deals in real time.
 
“That’s the road from here—what to oursource versus what to insource?” concludes Ulrich. “Beyond that, the challenge is to manage the process of change efficiently by focusing on outcomes of good HR work at both the administrative and strategic levels.”
Coordination challenges continue. At press time, Hewitt, which had been working with BP on joint responses to questions posed for this story, declared that it was “unable to comment specifically on our relationship with BP.”

 

Tags: Multi-process HR, Sourcing

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