Project watch: HR BPO in action

By Patrick O'Brien

 

Business process outsourcing is becoming as ubiquitous as IT outsourcing, as companies look to improve efficiency. Patrick O'Brien looks at how three companies dealt with the complex process of moving their human resources functions to a third party.

 

Choosing an outsourcing vendor is one of the most difficult decision-making processes a company can undertake, and it is getting harder. There are more vendors to choose from than ever, and as global sourcing becomes a must-have, clients must also prepare for the management of offshore delivery.

 

Buyers in the rapidly growing business process outsourcing market have it even harder. It is less mature than IT outsourcing, and there is less knowledge of how to go about the task within the client organisation. While BPO operations are typically seen as non-core to the business, they are still critical functions, such as payroll management or collecting debts, so the risks involved are great.

 

In human resources BPO, the process has been further complicated by some major shifts in the way the industry works. Vendors such as ACS, Convergys and most notably Hewitt Associates, have struggled to make money on long-term contracts and are now only signing deals that they are confident will generate solid profits, as well as encouraging customers to move onto standardised platforms, with limited customisation.

 

Many vendors have accepted that they did not realise just how complicated and expensive it would be to implement major HR BPO deals. While the contracting phase is considered difficult, many deals have faltered in implementation.

 

The largest HR BPO deal signed last year was a global $1bn, seven-year contract that Unilever awarded to Accenture. The outsourcing giant will eventually provide services to approximately 200,000 Unilever employees worldwide from delivery centres in India, the Philippines, China, Romania, the Czech Republic and Brazil. The deal covers recruitment, payroll administration, performance management, workforce reporting and third-party provider management, as well as a range of learning services such as content sourcing and development, program planning and delivery and learning system hosting.

 

Unilever's head of global HR transformation, Reg Bull, organised the process of finding a vendor, after deciding that the disparate HR systems in use needed to be swept away.

 

Speaking at the HR World Europe event in Brussels, he told delegates: "Back in 2001 Unilever said 'we've got to do something' because our benchmarks were crap and still are - in fact they have got worse in the last three or four years. What we tried to do over the next few years were some half-arsed implementations the old insourcing way in the UK, the Netherlands and Germany. Frankly it wasn't very joined up. Did they have single processes? No. Did they have single case management tools? No. Did they have one implementation of Peoplesoft? No. There were lots of people doing really good jobs but with really bad governance."

 

In what could be interpreted as a reference to its archrival Proctor & Gamble, which signed a major HR BPO deal with IBM in 2003, Bull said: "We were watching other people come to the market doing what we were trying to do internally, but much better than we were doing and getting the business benefits."

 

Bull said that Unilever was very clear on what it wanted in the RFP: a global deal, with consistent services across territories and a transformational approach.

Unlike some smaller enterprises, which might have a hard time sorting through all the various possible candidates, the sheer scope of the deal meant that Unilever did not have a wide choice. "There were very few providers who could deliver. There wasn't an off-the-shelf solution out there. The scope was challenging for all the people we spoke to," said Bull. Even the eventual winner could not do everything itself, and has brought in Belgium-based Arinso for payroll services.

 

While Unilever may not have had many vendors to choose from, the decision to enter into exclusive negotiations with Accenture preceded the actual signing of the contract by nine months. "I look back and see that we made some mistakes. We should have really done it in around six," admits Bull.

 

Part of the reason for the delay was that it wanted the deal to be truly global. This meant working through what to do about HR in countries with only relatively few Unilever employees. In the end the company decided on two delivery models: the majority of staff will be served through Accenture's regional delivery centres; while those in some countries will have in-house Unilever HR staff that will be supported by Accenture, who will also advise on process and technology improvements.

 

The implementation process for Unilever will be a long one: it is phasing the systems in country-by-country, but the rewards of a successful execution are clear. It plans to reduce its HR staff from 3,200 at the moment down to 900, and a ratio of one HR employee to every 213 staff. "We estimate that that is competitive but by the time we have implemented it, we might have expected the market to have moved," said Bull.

 

Not everyone has the luxury of being able to take all the time they need in the contracting and implementation phases of major HR BPO agreements, however. For Marriott Hotels UK, the decision to outsource its HR was down to the fact that it changed ownership in 2005, when Whitbread placed its 46 hotels into a joint venture with Marriott International, which operates 2,300 hotels in North America alone.

 

The plan was to sell the UK hotels to investors over the following two years, subject to long-term Marriott International management agreements. Under such a business proposition, transforming the back-office functions of the joint venture and immediately realising the economies of scale of Marriott International was essential to its success.

Marriott International had already signed an HR BPO agreement with Hewitt Associates (worth an estimated $350m) just months earlier in February 2005, so the decision was made to negotiate an add-on agreement with the provider for services to the joint venture's 12,000 staff.

 

Karim Rasched, business change manager at Marriott Hotels, says that it used the US contract as a baseline for the UK agreement, which itself became an amendment to it.

 

Time was critical, so Rasched says that it gave Hewitt a deadline of 5 May 2006 for the most essential services such as payroll to be implemented, with other HR services going online sometime afterwards.

 

Rasched lists a number of key requirements for such tight deadline projects: "You need clear governance and you need to define clear roles and responsibilities for those involved. You need to delegate and empower people to enable rapid decision making."

 

Rasched also says that you should focus on the minimum requirement. "We were very aggressive in throwing over anything you don't absolutely need at that specific moment in time. You need to agree a plan and stick to it: decide what are the 'must deliverables' and don't have a discussion about anything else until after you go live." He also suggests making the contingency plan a little uncomfortable, in order to focus minds. "There's no harm in saying there is a contingency plan but it's going to cost you X and the risks are Y."

 

Tight deadlines cannot be achieved without acknowledging some risks, but these should be worked into the plan: Rasched says he used the '80/20 rule'. "We were prepared for up to 2,000 employees to be unpaid in May [first payroll run on the new system]. In the end it was less than 200."

 

While Marriott's choice of provider was decided by the need to transform its processes as quickly as possible, and Unilever's decision by the need for a truly global provider, UK bank LloydsTSB's decision was was built on its experience with one vendor over a number of years.

 

The bank signed a five-year deal with Xansa in August 2006, which the provider says is the first multi-process HR BPO deal in the UK financial services sector. While payroll is still handled by Ceridian, Xansa is taking on most of the administrative systems, and will handle all HR-related staff contact, much of it from its centres in India. The deal followed on from a finance and accounting deal the two parties agreed four months earlier, but LloydsTSB chose Xansa for HR services after having established a relationship over a number of years, beginning with an agreement for offshore medical underwriting services, which began about three years ago.

 

The process of outsourcing HR services began in late 2004. "We did fact-finding trips around all the potential providers, some that we were already working with, and some that we were not," says LloydsTSB's HR services director Bernard O'Driscoll. "The first trip triggered our interest in Xansa because of certain senses of partnership with them that we felt matched our ambitions for pace and scale, and by the fact that they were already well established [at LloydsTSB], and had been assessed as a credible provider."

 

The bank did not rush in, it took about a year to talk through the process of outsourcing, collating the facts and selling the proposition internally. Two things made Xansa an added risk: it provides services predominately through an offshore delivery model; and prior to LloydsTSB it had not won a major HR deal.

 

"It was all very non-committal until the turn of this year when we were sure there was something worth looking at in a very serious contractual way. The breakthrough came when we took a significant group of the senior HR directors to India last year. They came back surprised by the potential and were very much persuaded. After having been quite rightly protective of their own interests to make sure that nothing was going to affect service delivery to their line customers, they felt much more confident for having seen it for themselves."

 

"We saw within their operation the way they were already doing [offshore delivery] with their own employee base. Other providers gave an almost overwhelming proposal, where they wanted basically for you to go with them completely, lock, stock and barrel, and accept their model, and the scale was almost too big for us to culturally take on. As well as a strategic fit, it was felt that there was a good cultural fit between the two companies and their approach."

This cultural fit, along with other soft issues such as ability to form a genuine partnership, and nurture trust, are continually upheld as critical factors by companies that have outsourced.

 

"I think it matters particularly with an HR delivery function," says O’Driscoll. "There is something about how you deliver HR to your people that goes to the very heart of who you are as an employer. Therefore, we were particularly sensitive to people doing that on our behalf. They have to share our values in terms of customer service, their approach to their employee base, and even their attitude to the community."

 

One of the most sensitive parts of outsourcing is the communication of the plans to staff, especially as such contracts almost always include a reduction in jobs. Both Unilever and LloydsTSB have come under fire for the way in which they have handled the issue. Unilever's HR transformation is part of a wider cost-cutting programme which has led to industrial action, and unions expressed their disappointment with LloydsTSB, although the bank has agreements in place that offer workers jobs in other parts of the business, and guarantees extra training.

 

This contrasts somewhat with Unilever's Bull, who advocates a more ruthless approach to employees. "We have been brutal [with our HR staff] and said, 'We don't think all of you will survive... because on the basis of the skills which are required, we don't think you've got it, and we also think you are full of all the old bad habits of the past', so we've been very honest and said 'Around 20% to 30% of you won't make it'."

According to IDC, the BPO market is set to grow by a compound annual growth rate of 10.9% from $382.5bn in 2004 to $641.2bn in 2009. IDC's definition of the BPO market is very wide and includes human resources, procurement, finance and accounting, customer services, logistics, sales & marketing, product engineering, and training. CBR's parent company Datamonitor has a narrower definition which classifies BPO as a subsection of IT services and estimates it to be worth $123bn in 2006, and increasing by around 8.5% a year to $145bn in 2008. Gartner also uses a much narrower definition of BPO than IDC, and estimates the market to be worth around $134.7bn in 2006, an increase of 8.3% on 2005. However, Gartner has continually had to scale down its forecasts of the market.