When BP struck its $600 million (£400 million) deal with Exult and transferred HR administration to service centres in Glasgow and Texas, some predicted it would be the first of many similar moves. But, so far, BP remains the only British-based global organisation to have taken such a step.

Others, such as BAE Systems, have set up joint ventures in partnership with specialist providers, while most large companies, such as IBM and Shell, remain content with their own internal restructuring. In the public sector, several local authorities have opted for business-process outsourcing (BPO) along the lines of BP. Liverpool City Council decided to go down the partnership route, while Kent County Council consciously rejected outsourcing.

Why have some chosen to keep their function in-house while others haven’t? Do organisations feel they have made the right choice? What problems have they encountered? We put these questions to representatives from all six organisations.

Who’s who?
• Alan Bailey, head of communications and change management, Xchanging HR Services (joint venture between BAE Systems and Xchanging). Worked in BAE Systems for 20 years and was “Tupe’d across to Xchanging” as part of outsourcing deal.
• Lisa Carlson, global business department and customer relationship manager, Shell People Services, Shell International.
• Craig Griffin, director, Kent support services improvement programme, Kent County Council.
• Martin House, consultant, House Warburton Consulting, also responsible for managing Liverpool City Council’s establishment of HR service centre in partnership with BT.
• Martin Stockton, eHR and PeopleSoft practice executive, IBM Global Services, IBM’s consultancy arm. Advises other companies on transformation. But not selling IBM systems for HR BPO and not planning to sell an outsourced service at this stage.
• Peter Whalley, HR outsource relationship leader, BP. Looks after outsourced relationship with Exult. Been involved in this since “glint in the eye” five years ago.

What we did and why
Peter Whalley: Before taking the plunge, we debated whether to set up our own service centre, work in partnership, or outsource it fully.

Outsourcing was chosen because we recognised the transformation we were seeking would be enabled by technology that we needed help with. We felt that a different HR model was required as people’s expectations were changing, fed by the internet. Line managers now expect answers to questions much faster. And there are changes in the employment environment generally, such as globalisation. We started dealing with Exult in December 1999, giving 18 months of transition and a year of full operation.

The decision was strongly influenced by our history and culture of outsourcing. Cost-cutting was not our primary goal; it was about transforming the company and creating the capability to do this. The people who didn’t transfer to Exult have found other roles and some have since left BP.

Lisa Carlson: We went through similar discussions in the latter part of 1999 and formed Shell People Services in January 2000. We decided not to outsource because we felt the Shell people processes were essential to our business success. The knowledge of Shell business and strategy was core to our organisation and we wanted to deliver the services through Shell people.

We had a commitment to reduce costs and felt the savings should accrue to Shell and our shareholders and not to an external provider. That was a very large part of our decision. We also felt outsourcing would disrupt the delivery of our HR services and affect our process improvements.

Alan Bailey: After the merger of British Aerospace and Marconi Electronic Systems, we needed to introduce common processes and transform HR. Cost was a big challenge, but we didn’t want the service to deteriorate. We had people with good HR skills, but not the IT, service, process or commercial skills that was needed to transform the organisation. Also, we felt that old silos of ex-British Aerospace and ex-Marconi would resist a common way of doing things. We didn’t think we had the culture to enforce common practices, and that’s why we looked
at outsourcing.

Martin Stockton: At IBM, we have an internal HR service centre that deals with the Europe, Middle East and Africa region and provides common defined processes. Why didn’t we outsource? Basically, when we first thought of this six or seven years ago, we couldn’t find anyone who could do it for us.

Also, because our region goes from Chechnya to Portugal to Africa and Israel, it would be difficult for another organisation to handle it. The context was the transformation of the whole organisation. We did what Shell has done and got cost-savings for our shareholders.

CraiG Griffin: My job from March 2000 to September last year was to be involved in brokering an outsourcing deal. It involved 850 staff providing finance advice and HR services for 32,000 employees.

We wanted change but were not sure we had the management capacity to drive it ourselves. We were influenced by the market, because at that time a big outsourcing deal had been struck in Lincolnshire. But we didn’t want a partnership; we felt the idea was a little woolly around the edges. And we were only interested if the contractor could prove to us that they could make money out of it. Because if they couldn’t, it would have been a miserable relationship.

We really put all we had into trying to make this deal work. But at the end of the day the benefits were looking marginal, so we decided not to outsource.

At that point Kent asked me to do it internally. The council could make available enough money over the following 18 months for us to approach this in the right way.

We are about to sign a contract for designing and building the systems. The business case will only prove itself when we go into the second phase, which ends in April 2004. We believe it will be cost-effective because the backbone of the infrastructure will also support better frontline services.

Martin House: I’m a consultant and have been working with Liverpool for two-and-a-half years on the major transformation of an organisation that was universally regarded as a basket case.

We’ve put the HR and payroll function into a service centre launched in January. It’s taken 50 per cent or more of cost out already. And technology will enable us to take further cost out.

This has all been done by “insourcing” HR through a partnership. We’ve created a joint venture company with BT, to which we have seconded some 800 staff, so they haven’t been Tupe-transferred. The idea was to remove the issue of Tupe and focus people’s energies on improving the business.

The council needed to follow the government’s e-agenda and address quality, cost and consistency. The HR function was devolved, with eight different systems and no sharing of information and practice.

The venture with BT applies to all business support services. It was established because the council didn’t have the expertise and, unlike Kent, couldn’t muster the investment for technology.

Success stories
Peter: People are beginning to realise the complexity of the organisation and the cost of doing things differently. They are starting to compare the various policies in different areas and asking: Which one adds value? Take performance packages, for example. We experienced a 30 per cent reduction in the number of variable pay plans from the first cycle of 2001 to the same cycle of 2002, because it became very apparent that we had more than enough – by a thousand or two!

Martin S: Did you need to outsource to find that out?

Peter: There’s a cultural difference between organisations and, for us, actually getting people to talk and see the value of doing things together is quite hard. We have 140 to 150 businesses with a lot of autonomy and a history of mergers, so there have been many opportunities for fragmentation over the past 20 years. Now, with information on an intranet, we can start to get this radical openness and coherence in our organisation. Outsourcing drives us forward in a way that is very business focused. Exult points out opportunities for making savings and performance improvements, and having this conversation with a third party who won’t let you off the hook is helpful.

Martin H: I think you’ve put your finger on it: it’s a matter of culture. Local authorities are fairly insular and have a tendency for longer service, and in the end people can’t see the wood for the trees. They are the problem but they can become part of the solution. You need a catalyst to unlock that potential, which you just can’t do in-house.

Lisa: I agree you need a catalyst. But our catalyst in Shell is performance measurement based on the success of the enterprise, and part of that is around a cost-savings mandate. I think that’s the incentive.

Peter: Measurement and the objectives against which it’s being measured are great. We have a mandate for that, too. The trouble is, at BP, each person files it differently. When you try to measure it for our organisation, it’s difficult to get anything that connects. So it works for us to have someone giving us measurement of volumes for each month, the cost of those activities and the frequency. It lets us see analogies that we’ve never seen before.

Lisa: So you can say with a high degree of certainty that you wouldn’t have been able to get there on your own without Exult?

Peter: I’m pretty certain that we would not be where we are within the time frame. It may have taken a little longer than our imaginations had envisaged. But I’m darn sure it’s got there a lot faster than it would have done otherwise.

Lisa: But everything Peter is saying applies to us, too. We’ve had significant cost savings, we’ve standardised processes, we’ve shared best practice – and in terms of HR, we have a very similar structure to BP’s. Some operating units are autonomous, but we’ve brought together HR people from different Shell companies into an internal organisation serving the enterprise. And we’ve been able to achieve the same successes as BP.

Martin S: We’ve generated huge cost savings by harmonising processes – with, for example, one recruitment process that every country in Europe would be obliged to work to, instead of 18.

Between 1995 and 2002, our customer satisfaction rating with human resources went from 40 per cent to almost 90 per cent by having an internal HR service centre. HR is now considered as vital as finance, marketing, or sales. And I think that’s the crucial thing.

Martin H: So what happens if your customer in Greece wants to use their own system of recruitment?

Martin S: They don’t have a choice. It’s mandated.

Alan: For us, the HR service measures have either been static or are improving. The main thing is that we measure them, which we couldn’t before, and if we’ve got some challenging areas, action plans are used to tackle them

We’ve had investment in skills and £6.5 million in HR IT, which we couldn’t find internally. Within six months we’ve gone from 28 HR IT systems in the UK with no integration, to giving 43,000 people a common portal to access their records. By ourselves, we just wouldn’t have been able to move at that pace. The culture wouldn’t have allowed us.

Craig: It’s early days for us but we’ve had a real injection of energy and enthusiasm into the HR function because people had been waiting two-and-a-half years for improvements and didn’t believe they were going to get them. We had to give people early wins; we are only three months into funding for this project, but they are about to get new, top-spec, flat-screen PCs.

Martin H: We reduced costs and re-enthused the providers – the people we put into the front office who were in fairly dead-end admin jobs locked into paper processing. People have turned into real stars in delivering customer service who would have been written off in the past, quite frankly. They have just revelled in the whole thing. There is also more clarity of roles.

Martin S: What the organisation dictates as priorities in moving into shared services may not necessarily be the ones that the employee thinks are important. For instance, in our organisation, payroll and expenses belong to finance. But pay queries were being referred to line managers who were not always able to handle them. So now the HR service centre has taken ownership of the problems.

Craig: It was far easier to define the IT services and the finance services than it was the HR services. It’s incredibly complex.

There are also conflicting expectations. Our guys will be given a problem and work on it for three months. On Thursday afternoon they produce the answer and expect the business to react to it on Monday morning. And the business goes nuts.

Martin H: We also generated high expectations, which you don’t always meet initially. But the big lesson for us was: the more you can put into training and development, the better. We didn’t put enough time into training our frontline advisers. We went to some lengths but it wasn’t enough.

Alan: I agree that keeping up with expectations is a real challenge. It’s a bit like the CD system in a car, electric windows or the sunroof. As soon as you improve something, that becomes the standard, and the better you get, the more challenging the customer is.

Xchanging has got one owner, one managing director and is able to move very quickly. But it’s a challenge for some of our clients to go at that pace.

Peter: One of our problems is the speed of imagination versus the actual capability to deliver these things. We are releasing a whole host of possibilities. But people’s imaginations are zooming ahead into a quality that isn’t feasible in the timescales.

It takes time to get the systems integration needed to feed personalised data to an individual. And you have everyone dipping in and out and saying: “I can tell you how to do it.” Also, that initial period of making a change is going to disturb things that are long practised by people who possess tremendous knowledge, but keep most of it in their heads. When you start to move things around, you break connections and things go lumpy and bumpy for a while. That transition becomes part of a process of analysis of the problems leading to continuous improvement.

Lisa: Looking back, wouldn’t it have been better to wait until the market was more fully developed? I mean it sounds as if you have suffered from teething pains to some extent, with press reports saying that you had to stop rolling out globally.

Peter: We have implemented it in our two biggest population centres in the US and UK, which represent nearly 60 per cent of our total global population.

The agreement we had with Exult was to explore the possibilities of extending it globally but not to force an economic model that might not fit small populations with different languages, different policy settings and so on. What we are looking for are ways to expand when the time is right and the capabilities are there.

So what IBM is doing is a great example. They have a presence in countries that we don’t have.

Lisa: The main problem for us as an internal shared service provider is that our customers feel they know our business as well as we do and are probably more critical than they would be of an external provider. As they know our people, our capabilities, our pay, they feel very free to give us advice.

Also, people from HR functions coming into a shared-service organisation lack some of the customer-focus skills and commerciality needed in such a business – but nothing that isn’t fixable.

Then there are problems that would be the same if we had outsourced: determining what to keep global and what has to have local delivery. There is a lot of change management involved, and we are under continual pressure from our customers to reduce costs. They constantly challenge us with what the service would cost in the outside market.

It’s not a mandate that they use our services. They have the option of going on the external market. But if they do, we find they usually come back to Shell People Services.

Alan: I disagree that criticism is purely a feature of keeping the service in-house. I’m dealing with the same people that I’ve dealt with for the past 10 years, but they are far more critical of me now as an outsourced provider than they were internally.

Lisa: But I think expectations of what we are able to do is sometimes greater. They expect us to go the extra mile time and again.

Alan: Only 12 people in Xchanging HR Services transferred from Xchanging while 500 came from BAE Systems, so we also have a lot of internal knowledge. But people still treat you differently to how they’ve done for the past 20 years.

The future
Alan: Will the model work? I think it will. As I walk down the street in London, every single office block has HR services and, from my experience, the majority would say their HR service was rubbish.

For someone who is making HR their core business, I think the sky’s the limit. business-process outsourcing just needs a few success stories and it will take off.

Will it work for everybody? No, it won’t. If you’ve got the scale internally – like IBM and the skills and the right leader, then you might as well do it yourself, if you can afford to.

Martin S: We do it ourselves, because it works and we have the skill to do it. But some organisations talk to us about doing HR business-process outsourcing because they want to give all their problems to someone else to solve. One major company was contemplating giving an external organisation the job of deciding who was going to be terminated and who wasn’t. I said: “This isn’t delegation, this is abdication of your duty to your employees.”

We have to tell some senior managers: “The plan you’ve got is like dinosaurs walking to extinction. Your vision of HR BPO does you all out of a job, because you are not thinking it through properly.

Martin H: That’s why the joint-venture solution works so well. If people are saying: “This is my job at stake”, then you are never going to get much change, are you? Because turkeys won’t vote for Christmas.

Craig: The supplier knows what it has to deliver, but I bet the organisation doesn’t know where it has to meet them. And they won’t stick with it. The thing gets signed, the champagne corks start popping, but then you get exactly what Peter’s going through now: you are going to get everyone knocking it a year in.

Alan: I think that the reason why people won’t outsource is more to do with being scared of the unknown. Where we are today in HR is exactly where IT was 13 years ago – and there haven’t been many U-turns in
IT outsourcing.

Martin S: I believe that HR BPO is up for consideration in any organisation, but the jury’s out on whether it’s suitable for most of them. For many, the partnership concept is more valid.

Peter: What’s happening now, whether it is outsourced or in-house, is a separation between what is discretionary to the business in terms of its HR resource and what is non-discretionary. The latter is becoming more focused and measurable and can be very business-like.

Martin S: Yes. For the first time, HR function can provide a tangible cost benefit analysis of their service to an organisation. I think this, whether it is in-house or outsourced, has major implications for the profession.

Alan: Being in the transactional arena is a really different way of working from what you are used to; the pressures are a lot higher and that’s a challenge for HR people. But if you are confident of your ability, it’s a fantastic opportunity because you have the data to do the job better.

Peter: Whether you outsource it or insource it or joint venture it or otherwise, it’s a whole transformation taking place and I think that is what’s so exciting for the HR profession.

Further information
Chris Dickson, HR director of shared services, BAE Systems, and Martin Stockton will be speaking at a seminar on “Outsourcing”, on Thursday 24 October at the CIPD’s annual conference and exhibition, being held in Harrogate, 23-25 October. For more details, contact the CIPD on 020 8263 3434 or visit www.cipd.co.uk/annualconf-ex