Blazing a BPO trail

Early adopters of business process outsourcing (BPO) services said they have been able to save money and improve productivity for functions such as human resources and finance.

Nevertheless, several BPO adopters who spoke Monday and Tuesday at a conference presented in New York by market research company IDC said they have had to go through a steep learning curve and tackle tricky personnel and contractual issues under agreements where there's little historical context to draw upon.

"Ten years ago, the solution was the hiring of arms and legs," said Donna Kinnaird, executive vice president at Swiss Re Life & Health North America Inc. She was referring to an agreement the Stamford, Conn.-based reinsurance company entered into with El Segundo, Calif.-based Computer Sciences Corp. in 1994 to manage more than 2 million life-insurance policies.

"Now, it's much more of a value and knowledge proposition" where more specific performance metrics have been worked into a recent 10-year, US$700 million contract renewal, said Kinnaird.

Still, establishing reasonable performance metrics continues to be a problem for BPO customers and vendors, according to John K. Halvey, a partner in the technology finance and outsourcing group at Milbank, Tweed, Hadley & McCloy LLP, a New York-based law firm. Plus, intellectual property ownership and liability issues in these deals are "becoming much harder to define," he said.

BPO clients have also had to contend with thorny personnel-transfer issues. For instance, in late 2001, Hydro One Inc. entered into a 10-year, $730 million pact to outsource its finance and accounting, supply chain management, CRM and settlement services to Capgemini. But before the deal could be signed, the Toronto-based electric utility had to reach a precontract accord with two labor unions on a staff-reduction plan that allowed it to achieve its 30 percent cost-savings target, said Jeffrey Smith, Hydro One's director of finance.

Hydro One and Capgemini gave the two unions a two-year job guarantee and are now working with the unions to reduce the head count for some of the 900 workers who were transferred from Hydro One to Capgemini, said Capgemini account manager Dale Rooney.

The staffing issues didn't end there. During the first year of the contract, Paris-based Capgemini SA was pressured by the unions to return roughly 40 workers in waste management and warehousing to Hydro One to ensure their job stability, said Rooney. "We didn't want to do this, but we did it in the spirit of collaboration with Hydro One."

While most companies outsource business processes to cut costs, Canadian Imperial Bank of Commerce entered into a cost-neutral, seven-year agreement with Electronic Data Systems Corp. in June 2001 to manage its human resources operations. In this case, the outsourcing deal was designed to help CIBC avoid "tens of millions of dollars" in IT upgrade costs and improve the productivity of its human resources department, said Danielle Kay, senior director of eHR at Toronto-based CIBC.

For instance, EDS last year consolidated 30 disparate human resources systems previously used by CIBC onto a common PeopleSoft Version 8.3 platform, said Kay. In addition, EDS is managing 95 percent of all human resources-related calls in 20 seconds or less -- up from the 80 percent response rate that CIBC achieved prior to the contract, said Kay.

"Often, the benefits of the transformation outweigh the cost reduction," added Kathy Hegmann, general manager of global business transformation outsourcing at IBM Business Consulting Services.

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