HR Outsourcing Success and Failures

Not every HR outsourcing relationship results in a sizable return on investment (ROI). In some situations, the net result can be a substantial write-off. In this article, we study some high profile HR outsourcing failures.

Many companies have been burned - badly, in some cases - as a result of misaligned expectations, selection of the wrong vendor or too narrow a focus on why they were outsourcing in the first place.

Companies are slowly come to appreciate that HR outsourcing is far more complex than meets the eye both in terms of technology and business process change.

Hughes Electronics and Fidelity Employer Services
Hughes Electronics, well known for its subsidiary DirecTV, began to outsource various HR functions to pursue a cost avoidance strategy. The main cost the global communications company wanted to avoid was that of upgrading its legacy mainframe system to meet the growing HR service levels demanded by its 13,000 employees. Developing additional in-house administrative capabilities certainly wasn't the answer. And creating a new internal system wasn't considered realistic. So a task force at the company conducted an eight-month study of options for both its DirecTV subsidiary and corporate headquarters--seeking a better HR solution.

The choice soon came down to buying a product off the shelf or outsourcing, and ultimately the task force determined outsourcing to be significantly cheaper. Hughes began off loading its payroll, hiring procedures, compensation management, and other HR functions to Fidelity Employer Services Co. (FESCo), the unit of Boston-based Fidelity Investments that was handling Hughes's 401(k), defined-benefit plan, and health and welfare administration.

British Telecom and Accenture's ePeopleServe
One of the most prominent full-service HR deals was ePeopleServe, set up by Accenture and BT to provide HR services to both companies. It was dissolved in 2002, with Accenture taking the operation in-house and rebranding it Accenture HR Services. Accenture's acquired BT's stake in e-peopleserve for 70M dollars. Under the agreement, BT will also receive additional payments from an earn-out arrangement based on e-peopleserve revenues from customers other than BT and Accenture over the next five years. These additional earn-out payments will total between 35.0 M and 222.5 M dollars.

The landmark outsourcing deal is having problems because it didn't drive down costs. BT's projected spend on the contract was 75 million pounds for 2002, but additional charges pushed HR costs up to 80 million pounds for the year. According to Margaret Savage, the BT director of HR strategy, policy, and organizational design, the company was not happy that costs were going up. BT was supposed to get 5 million pounds back, but ended up paying 4 million pounds more. (source: Personnel Today, BT's Costs Climb In Outsourcing Deal, September 24, 2002).

Today, Accenture uses the old ePeopleServe solution unit to provide outsourced human resources services, which it delivers through self-service tools such as Web-based technology, its network of resource service centers, and counseling from skilled caseworkers.

The bottom line - Outsourcing failure can be costly. The cost of an outsourcing contract failure can be significant and difficult to reverse. Picture the trauma of a failed HR outsourcing contact. Your applications, people were transferred to the outside vendor. Now in the third year of a seven year deal both you and the provider decide to terminate the contract. Your options are either go with a new vendor or rebuild the entire department from scratch by hiring new employees. Either way the impact on business can be quite costly.