BPO Bandwagon

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Workforce Author(s): Rafter, Michelle V

Companies of all stripes-from global conglomerates to small and midmarket players-are choosing to farm out back-office personnel processes, fueling bullish business forecasts for HR outsourcers.

Whirlpool's 10-year outsourcing deal with Convergys is aimed in part at modernizing the company's personnel processes, many of which are still done manually.

WHIRLPOOL MAKES a front-loading washer that cleans 16 pairs of jeans at once. It offers a refrigerated oven that keeps food cold until it's time to be cooked. But the home appliance maker's personnel department is far from high-tech.

Many tasks are still done manually. Aging computer systems can't crunch basic numbers on a global scale. To get a corporation-wide headcount, for example, the HR staff at company headquarters in Benton Harbor, Michigan, must phone their counterparts in divisions around the world.

Executives knew things had to change. This year they mapped out a mission to modernize, creating a "to be" list of what they wanted HR services to look like. Then they hired an outsourcer to make it happen.

Per a 10-year contract signed in July, outsourcer Convergys will take over payroll, benefits and pension administration as well as aspects of recruiting and performance management for Whirlpool's 68,000 employees worldwide and 14,000 U.S. retirees and their spouses. The deal's financial terms weren't disclosed.

Whirlpool's story has become common as more companies opt to outsource back-office personnel processes to improve service levels and refocus on more strategic endeavors. By shifting the responsibility of upgrading and maintaining technology to an outsourcer, companies also cut capital expenditures and financial risk, executives and analysts say.

For all those reasons, industry experts believe HR business process outsourcing will continue to pick up through the remainder of the decade. While companies that are outsourcing multiple HR processes remain in the minority, their numbers are increasing. The U.S. HR BPO market is expected to grow 16 percent annually through 2009, to $16.5 billion, according to a March report by industry researcher IDC.

If all goes as planned at Whirlpool, an executive for the $13 billion company says, the partnership will create a more efficient, cost-effective global HR delivery system-on a state-of-the-art SAP technology platform-that benefits Whirlpool's employees and shareholders.

"We're going to significantly change the way we do our work," says Abbe Luersman, Whirlpool's VP of total rewards and HR solutions.

Besides Whirlpool, Fortune 1,000 companies that have signed HR BPO deals in the past nine months include BASF, NiSource Inc., Pepsico and Wachovia Corp. Mega-deals involving companies with 25,000 or more employees are on track to jump 30 percent this year, according to Everest Research Institute, an HR industry consulting firm in Dallas.

Major corporations were first to embrace outsourcing, but as time goes on, small and midsize companies with 10,000 or fewer employees are joining the ranks. Outsourcing is attractive to mid-market companies looking for any advantage they can muster over larger competitors, says Mike Hogan, divisional VP of comprehensive outsourcing services at ADP, a small-business payroll provider that has jumped into the HR BPO business.

THE HR OUTSOURCING BOOM

"They're competing on a global scale but don't have the (same) large capital budgets, so they're looking for ways to manage their human capital as efficiently as possible," he says.

Companies want outsourcers to help them manage HR processes on the latest technology, and on a global basis. Both were important considerations at Whirlpool, which hadn't made significant investments in HR information systems in 10 years, Luersman says. To upgrade computer systems now would have cost $10 million or more, an expense the company is avoiding by partnering with Convergys, she says.

As part of the upgrade, Convergys will build Web-based self-service "dashboards" that managers can use for global headcounts and employee performance tracking, among other tasks. Whirlpool started transferring work to Convergys on October 31, with an expected completion date of December 2007.

Whirlpool's pending takeover offer for Maytag could be another reason the company is outsourcing, says Lisa Rowan, an HR industry analyst with IDC. Whirlpool officials won't comment on the offer, but Rowan says outsourcing HR is ideal in mergers, startups and spinoffs, when companies need to rapidly assimilate or create HR departments.

"Rather than going out and putting together an entire department, [companies looking to merge, start up or spin off] are looking to outsource to lower costs and keep the overhead down or change over from something that was less cost-effective," Rowan says.

As more companies use outsourcers, standards will become an issue. Historically, hiring people, processing paychecks and enrolling employees in health insurance plans differed from one company to the next. But when those jobs are farmed out to vendors building common platforms for multiple customers, HR managers may have to abide by standards the outsourcers set, says Michel Janssen, managing research director at Everest Research Institute.

"As (outsourcing) moves to smaller organizations and the main market and pricing pressures come into play, this will become more and more critical," he says.

The experience of early adopters has shown that shifting HR processes to an outsourcer doesn't always go as quickly or as smoothly as anticipated. Prep work often uncovers faulty systems and policies that exist only in staffers' heads. Deadlines get missed. Contracts are revised. The more planning a company does on which processes will be implemented and how outsourcer relationships will be governed, the better off they'll be, says Katherine Jones, enterprise application research director for the Aberdeen Group, an industry analyst.

"This is a change-management exercise, and if you don't treat it that way, it doesn't have a chance," she says.

Jones acknowledges that there's resistance to outsourcing inside some HR departments, where top managers can feel threatened by the loss of responsibility that they perceive will happen if certain functions are removed from their direct control.

"It's a new job description for the folks left behind," Jones says. "They have to be contract managers, vendor managers. They have to make sure the program works and (address problems) when it doesn't. Those might be skills they don't know if they have or not. It's scary stuff."

Though scary to some, outsourcing is happening at more companies of all sizes. IDC analyst Rowan says that as the practice catches on, companies are beginning to outsource not only record-keeping tasks, but processes such as hiring and e-learning that will ultimately improve their workforces.

Says Rowan: "We're getting to the Holy Grail of transformation."

FLORIDA OFFICIALS knew it would be a huge undertaking to outsource personnel services for 219,000 state workers and retirees. But they had no idea just how difficult it would be.

ROCKY START

Outsourcing personnel services for state workers and retirees was part of Gov. Jeb Bush's plan to privatize aspects of Florida's government.

Announced in 2002, the PeopleFirst initiative was part of Gov. Jeb Bush's drive to privatize aspects of state government. The idea: Take a hodgepodge of HR practices and systems inside 32 slate agencies, streamline them, then move everything to an outsourcing firm to centralize and run on state-of-the-art technology.

The transformation was expected to save tens of millions of dollars, including $80 million in capital costs the state would avoid because it wouldn't have to upgrade antiquated HR computer systems. The state hired Convergys, a Cincinnati-based customer services, billing and HR outsourcer, to do the job. The project morphed into a nine-year, $350 million contract-the first of its kind for a public agency and one of the biggest HR business process outsourcing deals of its day.

But trouble started almost immediately. State officials underestimated how long it would take to pick best practices for the various processes that were to be ported to Convergys, which delayed startup dates. Once in place, Convergys' systems were buggy, resulting in longer call-waiting times, forgotten payroll deductions and employees erroneously being dropped from their health insurance plans. To add to the problem, every setback was debated by state legislators and chronicled by local media.

Adding to delays, the state's Department of Management Services, which administered the contract, changed top managers five times in three years, says Chris Emerick, operations vice president for Convergys' HR division.

The entire PeopleFirst system has now been operating for more than a year, and performance indicators like call times and hiring cycles have improved substantially, according to Emerick and state officials. They claim to be satisfied with the project's progress, though some of Gov. Bush's Democratic opponents are still dissatisfied, according to local news reports.

The problems Florida encountered aren't so different from the tribulations faced by other HR outsourcing pioneers, who sailed uncharted waters with vendors who were just as green as they were, according to industry analysts familiar with the state's situation.

Florida's trials apparently haven't scared away other government agencies from signing similar agreements. In fact, when Texas officials decided to outsource personnel services for 46,000 Health and Human Services Commission employees last year, they tapped Convergys for the work.

Like their corporate counterparts, government agencies view outsourcing as a way to provide services more efficiently and economically, says Mark Stelzner, an executive vice president with EquaTerra Public Sector, which advises government agencies on outsourcing deals. Outsourcing also allows public agencies to add features like self-service Web portals for managers and employees without having to assume the financial risk of buying new technology, says Stelzner, who previously worked for Convergys on the Florida contract.

Though state governments were some of the first to embrace HR outsourcing, local and federal entities are following suit, both in the U.S. and elsewhere. Public agencies that already outsource HR or have plans in the works include NASA, the Federal Office of Personnel Management, the Transportation Security Administration, the Detroit public school system and the Victoria state government in Australia.

But some public entities have balked at giving government work to corporate partners. That was the case in Ohio, where officials studied the issue but opted not to pursue it after the Ohio Civil Service Employees Association protested, claiming a pro-outsourcing report written by an outside consultant was based on flawed data. The state was already in the middle of a major ERP upgrade, which will address some of the issues HR outsourcing would have, says Peter Wray, the union's communications director. "It would have been a big step backwards," he says.

WHY SWITCH TO HR BPO?

When the Aberdeen Group surveyed HR executives at 97 midmarket companies, here are the top reasons they gave for why they would outsource multiple HR functions:

In May, the city of Copenhagen, Denmark, pulled the plug two years into a seven-year HR BPO contract with Accenture, claiming the company failed to administer payrolls for 55,000 city workers, according to a June news report in CFO Europe. Accenture blames the city's former contractor for giving it bad data at the beginning of the contract, and the city for setting an unrealistic implementation deadline, according to the report.

But for every public agency not interested in outsourcing, another one is. Emerick says Convergys is pursuing other public- sector deals, but he won't elaborate. However, he predicts that two or three states will issue RFPs for outsourcing contracts in 2006.

Interest "slowed down a bit around election time last year -- some states put the brakes on," he says. "Now we're starting to see activity crank up again."

AS MORE COMPANIES embrace HR business process outsourcing, vendors are in a game of survival of the fittest, buying competitors, teaming up in joint ventures or dropping out of the business entirely.

To distinguish themselves from challengers, vendors also are expanding internationally, offering one-stop outsourcing and reaching out to small and midmarket companies.

The urge to merge has held steady for the past two years. The single biggest deal in the HR BPO vendor market remains Hewitt Associates' $690 million acquisition of startup Exult, which became final in October 2004 and pushed Hewitt into the position of market leader. It also pushed competitors and wannabes into their own deals.

PARTNERING UP

In January, outsourcer Electronic Data Systems formed a $600 million joint venture, Excellerate HRO, with Towers Perrin.

In January, IT outsourcer Electronic Data Systems solidified its foothold in the HR market by forming Excellerate HRO, a $600 million joint venture with HR consulting firm Towers Perrin. Two months later, Affiliated Computer Services, another IT outsourcer, strengthened its budding HR business by paying $445 million for Mellon Financial Corp.'s HR BPO unit, which that company had put on the block alter failing to attract the clients it had expected. ADP, the established payroll outsourcer, acquired competitor ProRusiness in 2004 to kick off its own HR BPO offering.

By most estimates, Hewitt remains the leader of the pack. Since acquiring Exult, Hewitt has signed deals with Pepsico, Marriott International, Wachovia Corp. and 11 other HR BPO customers, bringing its outsourcing client list to 30. In all, Hewitt's HR outsourcing contracts cover a total of 800,000 employees. Hewitt is looking to further extend its international business, recently signing a joint venture in Japan to offer HR BPO services there.

Competitors IBM and Accenture are taking advantage of their global reach and product depth by offering to operate clients' HR processes along with finance and accounting, IT, supply-chain management and billing in what's known as multitower outsourcing. In July, IBM signed a 10-year, $1.6 billion deal to provide multitower outsourcing to NiSource, the gas and energy conglomerate. But not everyone is sold on the concept. Suppliers claim they can be more cohesive and economical if they run everything, but that removes a client's ability to farm out individual processes to suppliers with best-of-breed applications, says HR BPO consultant Michel Janssen, managing research director at Everest Research Institute.

"To be frank, I'm not sure I buy it," he says.

GROWING FORCE

Divisional president Carlos Rodriguez at ADP, which in the past two years has signed 35 clients with an average of 11,000 employees.

Technology platforms are becoming a factor in vendor selection. Fidelity Human Resources Services Co., a division of Fidelity Investments, scored major coups in the past two years when it successfully signed second-generation HR BPO deals with Bank of America and BASF, two former Hewitt clients. But industry analysts wonder whether clients with legacy HR IT systems built around standard PeopleSoft or SAP operating systems will be interested in shifting to Fidelity, which built its own software architecture.

As more small and midmarket companies broaden their HR outsourcing from payroll or benefits administration, vendors that traditionally served the small-business market are moving with them. In two years, ADP has signed 35 clients with an average of 11,000 employees. ADP tested the waters by offering HR outsourcing to larger accounts, but as of early October the company was targeting smaller clients with 50 to 1,000 employees. ADP could be a disruptive force, says Everest's Janssen, who recently briefed 500 ADP salespeople on the market. "They're coming out with price points and service levels for a market that's been underserved.

They have the potential to Wal-Mart this industry," he says.

While it's too early to predict which suppliers ultimately will end up on top, it's safe to say consolidation isn't over. Says IDC HR outsourcing analyst Lisa Rowan: "We're going to see more."

"Rather than putting together an entire department, (companies looking to merge, start up or spin off) are looking to outsource to lower costs and keep the overhead down or change over from something that was less cost-effective," she says.

CLIENT BASE BROADENING

Though big companies were the first to embrace HR business process outsourcing, mid-market and smaller businesses are following suit. They are driven by the same needs to upgrade technology, cut costs and refocus on more strategic mandates. That has led vendors like ADP and Ceridian, which have long handled payroll or benefits for small businesses, to expand into HR BPO as well. Here is a who's who of vendors offering HR BPO and company sizes they serve.

FEDS JOINING HRO FRAY

Though state governments were some of the first to embrace HR outsourcing, some federal entities are following suit:

The federal Office of Personnel Management in fiscal 2006 will implement an "intra-sourcing" plan allowing five federal agencies to assume personnel file, payroll and benefits administration for other federal departments. The agencies -- including the Defense, Treasury, and Health and Human Services departments as well as the Agriculture Department's National Finance Center and the Interior Department's National Business Center -- are expected to subcontract some work to commercial vendors, according to industry analysts familiar with the program.

NASA in May awarded Computer Sciences Corp. a five-year, $230 million contract for HR, financial and other administrative support for 20,000 NASA employees and contractors. The deal is part of an initiative to centralize back-office functions at the federal space agency in a new division called the NASA Shared Services Center, which will be built in Stennis, Mississippi.

THE U.S. Transportation Security Administration,, which was created after 9/11 to better secure U.S. airports from terrorists, is outsourcing all of its HR functions from the very beginning to a trio of companies, including Pearson Government Solutions, Accenture and CPS Human Resources Services. The startup agency hired more than 55,000 passenger and luggage screeners in less than a year.

MICHELLE V. RAFTER is a writer and editor based in Portland, Oregon.

Copyright Crain Communications, Incorporated Nov 7, 2005
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