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Hewitt-BP Split May Signal End of ‘Lift and Shift’ Deals

Like divorce papers filed by an obviously unhappy couple, the recent announcement by Hewitt Associates CEO Russ Fradin that legacy client BP was not going to renew its HR outsourcing contract caught no one by surprise.

Industry experts had been saying for months that the seven-year deal, which was up for renewal this month, was doomed from the beginning. It was a mar­riage brokered when HRO was barely off the ground, and neither the provider, Exult (which later was acquired by Hewitt), nor BP knew what they were doing, industry experts say.

But the news, which Fradin announced during Hewitt’s fourth-quarter earnings call last month, did reaffirm what many experts have been saying for months: The days of the “lift and shift” deal are dead. Employers will no longer be able to just pass off their HR processes to providers without doing some of their own self-assessment and transformation first.

“This is a good lesson to both buyers and providers that they need to know what the end game is when they enter one of these deals,” says Michel Janssen, managing director at the Hackett Group.

When Exult won the $600 million contract to oversee payroll, relocation, severance and benefits administration for all 100,000 of BP’s employees worldwide, it was the biggest deal of its kind. But there were problems from the start, says Neal McEwen, an analyst at PA Consulting Group and former Exult employee.

On one hand, BP didn’t do anything to transform its HR organization before signing the deal, he says. It kept on much of its administrative staff, who ended up spending “most of their time second-guessing what was going on in the service centers,” McEwen says.

At the same time, Exult didn’t have any clear methodology of how to execute the transition, he says.

“It was an entire lift-and-shift model, and both sides were making it up as they went along,” McEwen says. In the end, Hewitt ended up running HRO processes for only 72,000 BP employees in the U.S. and U.K.

Hewitt will remain the benefits administrator for BP, which is under a separate contract scheduled to end in December 2009. BP has extended its HRO contract with Hewitt until December 2008, but has already put out a request for proposal for a new HRO provider. Hewitt did not make the shortlist of finalists, BP spokesman David Nicholas says.

Since BP started working with Exult seven years ago, the market has changed dramatically and BP realizes it needs a more global HRO solution, he says. The company expects to select an HRO provider early next year.

Before it does so, however, BP needs to make sure it’s clear on exactly which processes it wants to outsource and which it will keep in-house, Janssen says.

And the company also needs to be prepared for negotiations that might be more difficult this time around. Pro­viders are not as willing to agree to all of a potential client’s terms as they might have been in the early days, when they needed these landmark deals, Mc­Ewen says.

—Jessica Marquez