BP's HR outsourcing success: can it work for you?

How to decide if HR will help or hinder your rm

n December 1999 BP gave away $600 million and responsibility for its global human resources administration and management. The seven-year contract, with then startup rm Exult, is the biggest HR outsourcing deal on record, and some would say it is a sign of the times. HR is a constantly growing area, which has to be constantly aware of the changing business world which relies more heavily on freelancers, advancements in technology and new specialist skills. As a result, companies of all sizes are now considering HR outsourcing as a viable option, and it is a big business. In 2000, revenues amassed to almost $22 billion, claiming more than 8 percent of the total amount spend on HR that year, and gures are predicted to rise. But that is not to say it is right for you. There are as many staunch critics of HR outsourcing as there are advocates, and though both arguments can be persuasive, there appear to be several major factors that any rm should seriously consider before signing a deal.

Case study: BP and Exult

BP decided HR outsourcing may be right for them after a fast succession of takeovers, which brought them 100,000 new employees spread all over the world and a number of conicting HR strategies. The organization was interested in saving money and increasing efciency, and soon realized that an HR vendor may be able to cut their in-house HR costs and coordinate the systems in place. Exult, based in California, looks at companies that spread over at least ve countries and have over 25,000 bringing in revenue of over $10 billion a year. They say they can cut costs between 10 percent and 20 percent per year. After some debate, it was decided that the rms were mutually attractive. The subsequent deal made Exult in charge of running most of BP's HR processes, leaving BP with ``only the things that would require judgment and policy''. That was the rst wise move: Exult brought their time and expertise to all administration issues, recruitment, development, training and relocation but ultimately BP maintained control. The second was both rms' approach to the working relationship. Most commentators on outsourcing agree that trust is a vital ingredient in the recipe for success. From day one, BP and Exult opted for an open book relationship, where BP shared all their data and Exult explained how they intended to cut costs as well as where they would make their prot. BP also had a get-out clause should the venture fail, but showed support for Exult by investing in the rm. The effect was mutual trust, so both sides could get on with their job without worrying about hidden interests of the other.

are as many staunch critics of HR outsourcing as `` There are advocates. there ''

DOI 10.1108/09670730410534830

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BP and for `` From day one,where BPExult optedtheiran open book relationship, shared all data and Exult explained how they intended to cut costs as well as where they would make their prot.

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Some criticized BT for going into such a large venture with a relatively unestablished company, but BT had well-researched the advantages, and were won over, at least in part, by Exult's prociency where theirs was lacking. Exult boasts Web expertise, and BP were attracted to the idea of having an Internet-enabled HR system in place, which would allow all employees access to HR information from home. Similarly, critics said that in handing over HR, BT was handing over the key to their competitive edge, but BT were careful to analyze and prioritize the various interdependencies involved, and only handed over the most time consuming jobs, namely putting the strategy they would still design into practice. Despite the inevitable glitches, so far the deal has brought benet to both sides. Exult has signed other major deals, and BT is pleased to report high payroll accuracy, simplied global appraisal systems, fewer different employment contracts, Web portals for each employer and other benets. Could BT have done it on their own? ``Personally, I doubt it'', says Nick Starritt, once group vice president for HR, ``certainly not at the cost incurred''.

The pros and cons what to be aware of

So if it worked for BT, will it work for you? Advocates of HR outsourcing offer certain factors to consider. They argue that rms should be aware that HR is often an area where costs can be cut, stating also that HR has an increasingly complex legal environment, and the increase in mergers and takeovers requires both specialist knowledge and a much HR attention. Further the Internet and new software are rapidly changing the nature of HR systems. Many believe that HR has become a specialty eld in itself, and rms are wiser to call in outside experts and focus their attention on other things. On the other hand, Bob Morton, head of the HRD and regional competency centre, North Europe, at Ciba Specialty Chemicals, believes that HR outsourcing is a faddish trend, and will not take off to the extent that has been predicted. He urges rms to question whether an external source can ever know your business as well as you do, and though there may be a place for outsourcing routine tasks like payroll, it is unwise to let a vendor make decisions for you. ``Your people are your biggest resource'', he says. ``It's important to keep hold of power over them.'' Brian S. Klaas, who has written a long theoretical study on the impact out HR outsourcing, also believes that rms should be well aware of the potential dangers before calling in an HR vendor. His interest is small and medium enterprises in particular, who are increasingly turning to outside sources to obtain HR services. The rst things to consider, he says are the variables that can be affected by what he calls the professional employer organizations (PEOs). These are administration fees, staff time costs, HR outcomes and compensation costs, and will vary from PEO to PEO. Any rm considering outsourcing HR should fully research these variables and consider whether costs will be exceeded by benets. It is important that any contract between a rm and an HR vendor offers the buyer a clear escape clause should anything go wrong, and that any chances for opportunism on the part of the vendor are constrained. Klass proposes that if constraints on opportunism are not clearly limited in the contract, SMEs will be adversely affected by less reduction in costs and fewer improvements in HR outcomes. This is where the value of the trust shared by BT and Exult proves itself, and Klass' theory illustrates that this trust is more likely to develop in a situation which encourages both frequent interaction between the SME and PEO and retention of PEO

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staff members. It is important that a rm, as BP did, is willing to show support to the needs of their vendor, and that communication is often and extensive. Further, the rm should demonstrate that they are receptive to external advice, providing the vendor has prior specic knowledge about that rm's business practice. Keywords: Human resource planning, Cost minimization, Contracting out, Organizational If an organization of any kind is cautious about potential pitfalls and fully researches the potential cost cuts offered by competing HR vendors, HR outsourcing could be a viable option with the potential for high benets. If rms ensure the contracts drawn up leave ultimate control in their hands, both in terms of major decisions and a get-out clause, and work to create an atmosphere of mutual trust and mutual reward, the BP-Exult success story should be widely achievable.

Comment
This review is based upon ``Double vision'' by Bob Morton and Alex Wilson, ``Making the outsourcing decision'' by P.S. Adler and ``Professional employer organizations and their role in small and medium enterprises: the impact of HR outsourcing'' by B.S. Klass. ``Double vision'' juxtaposes two different points of view on HR outsourcing, from Ciba Specialty Chemicals' head of HRD and regional competency centre, Northern Europe, and BT's group HR director. The issues they raise include the impact of outsourcing, the role of human resource functions within the organization, and the way that human resource management will develop as a career. ``Making the outsourcing decision'' identies six key factors that companies need to consider when making outsourcing decisions, showing that they can be effectively applied to HR functions. The article explains how changes in the business environment are affecting how rms approach HR management, and how outsourcing has divided into three main segments, ultimately aiming to give advice on when and when not to outsource. A case study of BP's deal with Exult illustrates the argument. Klass' article takes a theoretical approach to the issue of HR outsourcing, considering transaction cost economics, social change theory and strategic HR literature and how each could affect a decision-support model for SMEs. The article focuses on the conditions best suited to HR outsourcing, as well as establishing and maintaining a good relationship with the vendor and reducing opportunity for the vendor's opportunism. The argument leads to 15 propositions, which usefully summarize the theoretical discussion.

References
Adler, P.S. (2003), ``Making the HR outsourcing decision'', MIT Sloan Management Review, Autumn, Vol. 45 No. 1, pp. 53-60, ISSN: 1532-9194. Klaas, B.S. (2003), ``Professional employer organizations and their role in small and medium enterprises: the impact of HR outsourcing'', Entrepreneurship Theory and Practice, Autumn, Vol. 28 No. 1. pp. 43-59, ISSN: 1042-2587. Morton, B. and Wilson, A. (2003), ``Double vision'', People Management, 9 October, Vol. 9 No. 20, pp. 37-8, ISSN: 1358-6297.

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