High-flying partnership offers future model

Xchanging’s sophisticated partnership deal with BAE Systems has enabled the
aerospace and electronics giant’s UK HR operation to concentrate on its
strategic role while transferring professional and administration services to a
separate entity. Nic Paton reports

One of the more innovative of a spate of HR outsourcing deals is the ongoing
partnership between defence, aerospace and electronics giant BAE Systems and
Xchanging a "pure play" outsourcing provider characterised by its 100
percent BPO focus.

BAE System’s outsourcing journey began back in November 1999, when the then
British Aerospace merged with Marconi Electronic Systems, the defence arm of
the former GEC, to form the current company.

That merger created a company with some 120,000 employees worldwide, with
about 70,000 in the UK dotted around 70 sites. Inevitably, the City, with its
focus on improving shareholder value, wanted to see substantial cost savings
and synergy benefits arising from the merger. A target of £275m was set,
equating to approximately 15 per cent savings across the company.

Suddenly, the group’s merged HR department found itself struggling to cope
not only with the complexities of combining its own function, but managing a
substantial cost-saving and headcount reduction programme. Compounding this was
the fact that there were very few common HR processes in place across the

"There was a lot of duplication. There was a ratio of about one HR
member of staff to 70 employees, whereas the benchmark was around one to
200-plus," says Alan Bailey, head of business development at Xchanging.

Problems included different departments not talking to each other enough and
insufficient investment in enabling technology. "It was focused on
fragmented and reactive administration support. There was also a plethora of
different HR systems that were not integrated," he adds.

In starting to try to tackle the HR issues thrown up by the merger, BAE
Systems drew up a model of shared services that would act as a common
functional template, explains BAE Systems HR director Tony McCarthy. Around 70
per cent of the 700-strong HR team would have worked on providing shared
services, 5 per cent in expert strategic roles and 25 per cent in client facing

However, resistance from the local HR teams to this pooling of resources
meant it quickly became clear that the 15 per cent cost saving was not going to
be met through this route. It would also have meant the need for heavy
investment in HR – including a major investment in IT. This was not attractive
to the company which was interested in investing elsewhere.

An alternative was therefore needed. BAE Systems had already outsourced its
IT services and so it was not a huge leap to look at the idea of outsourcing
some of its HR capability. The difficulty was that with morale among staff low
because of the changes being pushed through by the integration process,
management was reluctant to simply hive off its HR function. A more
sophisticated partnership approach was needed.

"We basically felt there was a lot of growth in this market and if we
could get a partnership with an organisation that was prepared to share the
benefits of HR provision then there would be a business benefit too," says

It was at this point that Xchanging came into the picture. Talks began
shortly after the time of the merger, with the two sides mapping out a
partnership agreement during 2000, and finally going live from May 2001.

In a deal worth £250m over 10 years, some 500 HR staff were transferred in
two batches to a separate enterprise partnership called Togethr HR Services.
Although Togethr is a subsidiary of Xchanging, BAE Systems has a 50 per cent

Xchanging offers BAE Systems a range of services, including compensation and
benefits, development, recruitment and graduate recruitment, pensions
administration, international assignments and all the HR data administration.

BAE Systems has retained ownership of HR policy and strategy and maintains
the HR business partner role for its main business units. Issues still dealt
with in-house include matters such as group policies on pay and relationships
with trade unions.

Unusually for an outsourcing agreement, and further evidence of the
innovative nature of this deal, Xchanging agreed to invest $20m in creating a
brand new e-HR capability IT system for BAE Systems. Innovations have included
technology that allows employees to access their personnel records from their

"We have thrust IT into the hands of all our employees," says
McCarthy. He cites the company’s senior management development programme as a
good example of this policy in action. The programme includes a personal
development plan, a peer recognition system and 360-degree appraisal – all of
which have been linked into the office IT system. "It forces all our 600
senior line managers from North America, Australia and Europe to use the

Through the partnership, BAE Systems is guaranteed ‘substantial’ cost
reductions for the first five years across the different HR functions, meaning
management can factor actual reductions into their business plans, adds Bailey.
However, neither side was prepared to reveal the exact extent of savings made.

Beyond the benefits to the bottom line, the partnership initiative has led
to streamlining of the HR process and freed the in-house team to think more
strategically without having to worry about the day-to-day function.

In such a big organisation, it was also vital to have a partner that could
understand the complexities and different demands of the business, says
McCarthy. "We needed an HR organisation that could be very quick on its
feet. One that could react and push for changes in our different organisations
but without massive bureaucracy," he explains.

Looking to the future, Togethr is currently purely a UK operation. But
McCarthy says: "We are now looking to offer this approach to BAESystems in
Australia and North America."

Other elements, as yet unspecified, could also be bolted onto the
partnership. "It could be that within 12 months we will review the
position and see whether there are other things that we may wish to
transfer," says McCarthy.

And the fact Togethr is a partnership, rather than a simple outsourcing
contract, means the arrangement is extremely flexible. For instance, a further
50/50 partnership with Xchanging on HR procurement was signed in October.

The £800m deal, one of the biggest outsourcing agreements ever signed in the
UK is evidence, if more were needed, of BAE System’s commitment to the concept
of outsourcing, and its belief that taking such a route can benefit the
business in more ways than just reducing bureaucracy or saving money.

The deal will see a raft of issues related to procurement bundled together
under one roof rather than the responsibility for buying in HR services being
split between the various business units.

The 10-year contract will see Pro-cur managing the entire supply chain for
BAE System’s UK subsidiaries in HR-related services such as car fleet hire,
non-technical contract labour, recruitment, training programmes, hiring of
consultants and healthcare. It was very important to BAE Systems to ensure a
seamless delivery of services across the entire supply chain.

For McCarthy, the key to effective outsourcing is much more than simply
ensuring functions are taken off an organisation’s hands and cost savings made,
vital though these two benefits are. By thinking beyond a straightforward
outsourcing deal, BAE Systems has successfully created an innovative
partnership that can expand and grow with the organisation, and add value to
the business. "You have to make sure that it lines up with your strategic
imperatives," he says.

How outsourcing has helped BAE systems cut costs and invest

– Worldwide, BAE Systems employs some
120,000 people. In the UK, there are 70,000 employees, 50,000 of whom work
within the wholly owned company and 20,000 within joint ventures. It has 70
sites around the country

– The HR department is made up of 700 staff, about 500 of whom
were transferred to the Togethr partnership under the outsourcing agreement
with Xchanging

– The key main benefit to BAE Systems has been the guaranteed
cost savings for the first five years of the contract

– On top of this, BAE Systems has been free to focus on
strategy and business partnership, leaving Togethr handling the day-to-day HR
function, including data administration, compensation and benefits, pensions
administration, development and recruitment

– Other benefits include a $20m investment by Xchanging on a
new e-HR capability IT system and the potential for expansion, particularly to
the US and Australian and operations

– Further developments include a recently signed 10-year
partnership on HR procurement, one of the largest ever signed in the UK

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