The cautious approach

Even at BPAmoco, the move to outsourcing in HR has been a faltering affair.
HR directors would be wise to be ultra-cautious, writes Stephen Overell

The word ‘outsourcing’ is normally followed by the name BP Amoco. The oil
giant’s decision to farm out its transactional HR to Exult in 1999 was heralded
as the spark that would trigger a boom in HR outsourcing.

At that time, many organisations brought in training and development,
employment law experts, selection specialists, and the odd consultant or two.
But compared with the strategic supplier revolution in procurement, outsourcing
something as sensitive as HR operations was exceptional.

Shortly before BP announced its move, the then-IPD came out with an
intriguing survey. Precisely 0 per cent of 153 chief executives had plans to
outsource HR1.

BP’s move was "the deal that changed everything". Exult’s ‘snazzy’
service centres in Glasgow and Houston, Texas, would eventually be dealing with
the panoply of HR needs of 100,000 employees in 80 countries in a deal worth
$600m (£420m) over five years. Pay and benefits, training, recruitment,
relocation, employee data management, redundancy, the lot. It was the then-HR
director Nick Starritt’s breathtaking, eye-catching, dangerous brainchild.

Exult later lured Unisys ($200m over seven years; 36,000 employees) and Bank
of America ($1bn over 10 years; 150,000 employees).

Other suppliers, too, began to find their phone ringing. E-peopleserve, a
joint venture between BT and Accenture, wooed Cable & Wireless in December
2001 in a deal worth £80m over five years. Centrefile won Lloyds TSB, Xchanging
scooped BAE systems, and RebusHR pulled in a clutch of medium-sized firms.

The usual gaggle of seers jumped on board. Predictions of a global market in
HR services of $45m, $58m and even $79m began to fly.

Last year Gartner Dataquest said multi-process deals in the US (by far the
most active market) would account for a third of HR subcontracting by 2005 –
business worth some $11bn2.

Ground-breaking, big-name deals bearing hefty price tags have made HR
outsourcing a significant story in recent years. But beyond the pioneers, do
they reflect a wider desire among HR practitioners to chop out as many
essentially administrative functions as they possibly can from in-house HR?

According to an on-going joint study by Cranfield School of Management and
HR consultants William M Mercer, outsourcing has generally failed to match
expectations of a boom, although it is expected to continue growing.

The most recent report3, published in July 2000, showed far fewer
organisations embarking on outsourcing projects than researchers expected. Out
of nearly 4,000 companies, those which had increased their use of external
providers during the previous three years and those which had not, were split
evenly at 40 per cent each.

Only a third used external providers in at least three of the following
areas: training, recruitment, pay and benefits, and outplacement. Gartner
Dataquest has now revised its prediction of multi-process HR outsourcing deals
from a third of all HR subcontracting down to a quarter4.

Considering the tides of advice that have bombarded the profession about
focusing on core competencies, the outsourcing boom has been a faltering
affair. But then it is still early days.

Kevin Delaney, an HR consultant with PwC, puts it like this:
"Organisations are coming to understand that just because HR is a
headache, giving it to someone else does not make it less so. Outsourcing is
not a practical thing. There is a reluctance among employees to go on to a PC
and call someone up. It is one of those strategic decisions that needs to be
worked at. The odd BP Amocos are still the odd BP Amocos."

Ah yes. What news of brave, mad BP? Nick Starritt left last September. But
in a speech to the CIPD in October, John Melo, vice-president of downstream
digital business for BP, was downbeat. The project was "under
review". There were "teething problems". Setting up the e-HR
software was simple, but getting people to use the system and input their own
data was a different matter.

Melo admitted BP should not have automated all its HR functions, because the
need to standardise policies did not have sufficient flexibility. "The IT
and HR community led this project, but you need to start with the business
wanting to do it, not the other way round," he said. Worst of all, the
move was originally aimed at cutting annual HR costs of $300m, but it had
worked out more expensive.

"Staff were used to operating in a certain way. When we moved to
self-service, we still got people requesting things from our HR team,"
Melo added.

This is a little too melancholic for a company line, so BP and Exult have reappraised
the revision. Chris Moorhouse, Mr Starritt’s replacement as vice-president of
HR, says the company has not achieved everything it set out to, but many good
things have come from the experiment.

Instead of 100 different types of employment contract in the UK, there are
now just 10; Exult is guaranteeing cost savings of somewhere between 10 and 20
per cent a year. Some 50,000 staff (about half) are now covered by the system,
while about £100,000 (about a third) worth of HR costs come under the contract.

Yet some ambitions have not been realised. The company has not managed to
extend the system beyond the UK and US.

Exult has not been willing to build new service centres to serve south-east
Asia, for example, because it needs more clients to be able to shoulder the
risk. Acquisitions of ARCO and Burmah Castrol have also complicated matters, as
have legal headaches: Germany does not allow the processing of employee data
outside Germany. The result is that the project is still, officially, on hold5.

What can the wider world learn from the pioneers? A new report6 from Reed
Managed Services sums it up. The justification for outsourcing is the same as
ever – cut costs, focus on core competencies.

But outsourcing is not for everybody and needs cautious handling. The
biggest problem is "cultural dissonance" between supplier and client;
it requires a totally different method of operating to make it work.

The relationship between client and service partner must be trusting, not
over-managed. The agreement between them must include delivery against clear
goals – measuring the right things – but with sufficient flexibility written
in.

And perhaps the most critical lesson of all is: once you are reliant on an
HR outsource specialist, you really do not want the nightmare of bringing it
all back in-house.

References

1 Survey, IPD, March 1999

2 HR Outsourcing: Time to Deliver Results, Gartner Dataquest, March 2001

3 Trends in HR Outsourcing, Cranet, July 2000

4 FT.com, 27 March

5 Details from FT.com, as above, and Exult press release, 18 March;
www.exult.net

6 Managing Outsourcing: Managing the Working Life Cycle, Reed Managed
Services, 2002; www.reed.co.uk/client

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