B of A and Big-Time Outsourcing

April 1, 2001
The controversial "O" word is rearing its ugly head: outsourcing.In some quarters, the concept arouses feelings of insecurity and dread. Inothers, it's perceived as a boon to the HR industry, the greatest thing that'scome along since recruitment went online.

    Last fall, Bank of America, the nation's largest bank, valued at more than$672 billion, signed a 10-year contract with two-year-old Exult, Inc., to managea large chunk of the bank's human resource functions. Exult is a provider ofWeb-enabled, integrated HR services. Both players have termed the November 2000deal a "strategic alliance," practically forbidding the use of theinflammatory "O" word.

    "It's inevitable that this will be the trend," says Ed Rankin, CEOof People Solutions, Inc., a human capital management company in Irving, Texas."If you are a CEO and can get better, more flexible service at lower cost,you're going to go there.

    "I think people get confused about outsourcing HR. Often they think itmeans there's no one left who cares about the employees. But that's not thecase. It simply leaves HR people inside the business free to work on strategyand vision and focus on things that truly add value."

    Mike Salvino, the account executive with Exult who's handling the deal, says,"The 'O' word isn't a good description of all the work that's gone intothis alliance. This is not traditional outsourcing."

    The two companies are determined to control the public perception of thearrangement. But many in the outsourcing industry say it's really more a matterof simple semantics. "They are dipping their foot into the watercautiously," says Carlos Rodriguez, president of HR outsourcer ADPTotalSource. "I mean, what do Ryder and EDS tell people when IT functionsare taken over? Is it outsourcing? Yes. Calling it an alliance makes people feelbetter."

    Yet there are some key differences between the Bank of America/Exultarrangement and traditional outsourcing. For one, a joint Web portal will allowboth companies to sell their products and services online. Another is that Bankof America received warrants for millions of dollars' worth of Exult stock.Among the functions that are being outsourced are payroll, accounts payable,benefits, human resources, information technology, and service delivery --including the call center for human resource and employee benefitsinformation. The bank will still handle design, strategy, policy making, andcompliance.

    Chris Blum, an analyst with the investment banking firm Edward Jones in St.Louis, says the new relationship between the two companies suggests apartnership, not simply outsourcing. "Of course, you can break thatpartnership down into its various pieces. One large component is Bank ofAmerica's outsourcing of its HR functions."

    Although 675 former Bank of America personnel will move to Exult, anestimated 1,300 more will stay at the bank. "That includes staffing,recruiting, compensation, advice, and counsel," Salvino says. "Theblack-and-white stuff will come to Exult; the interpretive stuff, the gray area,will remain with the bank."

    But even administrative functions aren't often outsourced by companies aslarge as Bank of America, says Irving Miller, a shareholder who specializes inlabor and employment law with Akerman Senterfitt in Miami. Miller says he thinksthat for large corporations, allowing someone else to come in and handle HRfunctions would be a disaster. "I represent or have represented 1,000 to2,000 large companies, and they wouldn't dare outsource HR. It's too crucial. Anoutside company isn't going to have its finger on the pulse of a largecorporation like those inside it."

    Mary Lou Cagle, business transformation and benefits executive with Bank ofAmerica, says the bank had good reasons for its decision. She says Bank ofAmerica took a look at itself and decided that some transactional businesseslike payroll and human resources were not a part of the bank's core business,which is "taking care of customers." About the same time thisassessment was taking place, Bob Gunn, a senior member of the Exult team andsomeone who had a previous relationship with the bank, approached Bank ofAmerica about using Exult's services.

    "Bob's idea was centered around what we think is going to be the wave ofthe future: business process outsourcing that is a creative alliance. Bob cameto the bank with a bunch of ideas, and Mary Lou and I took those ideas andcrafted this," Salvino says of the deal.

    Gunn's timing and ideas may have been right on, but Exult itself was astart-up, barely a year old. Cagle says the bank was concerned about that."We went through the due-diligence process and saw Exult had a veryhigh-quality, long-term venture capital partner [General AtlanticPartners]."

    The alliance is expected to save the bank 10 percent annually on HR spending.

    Exult is hoping to generate revenues of about $1.1 billion over the life ofits 10-year contract.

    The agreement is a boon to Exult in other ways, too. Bank of America allowedExult to take over its Charlotte, North Carolina, service center, which handlesaccounting and HR processes, many of the same functions that will be assumed byExult. The center will be expanded and refurbished, but the infrastructure andstaff are already in place. In return, Bank of America received warrants forExult stock worth about $50 million.

    Bank of America isn't the first Exult client to include equity as part of itsdeal. British Petroleum -- formerly BP Amoco -- and Unisys are both major investors,says Mark Hodges, Exult's vice president of strategy and marketing. Although BPwas the first large corporate account the company signed -- in a seven-year, $600million contract -- the Bank of America deal is by far Exult's largest.

    Bank of America and Exult will become Web portal partners, and bank employeescan use the portal to handle a number of different human resource functions suchas viewing a pay stub online or making changes in deductions or benefitcoverage.

    Salvino says the bank already had solid services built around its callcenter. The challenge now, he says, is to teach 150,000 Bank of Americaemployees to deal with those same activities online, by themselves. "We'llstill have the 1-800 number and call center staff, but over the course of time,we want to fully implement the portal." More than just providingWeb-enabled HR, Salvino and Cagle say, it will also be a source of revenue forboth companies.

    Down the line, Bank of America is hoping to take internaldepartments -- such asaccounting and payroll -- and use them as a source of revenue, farming out thoseservices to businesses other than the bank. "Right now, our accountspayable department does accounting work only for the bank, but in time theycould conceivably take on other clients," Cagle says.

    Through Exult's portal, Bank of America will become the preferred provider offinancial services and banking products to employees of other Exult clients. AndBank of America will push Exult's services, hoping that it will benefit bothcompanies.

    Analyst Chris Blum says it wouldn't surprise him if more large companiesbegan forming alliances in this way. "It's a smart idea. Because they willhave a stake in Exult, Bank of America can help Exult by recommending them toits business customers. Ultimately there may be some benefit to Bank of Americafinancially if Exult does well. And because the bank will be a significant Exultcustomer, Exult will probably dedicate a portion of its workforce to servicingBank of America."

    Exult's Salvino admits that, although outsourcing is a very large component,the deal's other elements make this more than an HR outsourcing arrangement.People Solutions CEO Ed Rankin calls Exult "the poster child for theoutsourcing industry. Our firm is like a baby Exult," he says. "Ithink this deal is the beginning of a trend, where corporations choose not tomanage some of their own human resource functions." Rankin says thatbecause the model for outsourcing is still being defined, he disagrees that therelationship between Bank of America and Exult isn't outsourcing.

    Today, clients hire People Solutions to take over some --but not all -- of thepieces of their HR functions. The most common parts outsourced are those relatedto candidate tracking, transactional issues, staffing, and recruitment. Rankinsays the economic fundamentals of this kind of partnership are too compelling todismiss. "I don't think the market really knows what outsourcing is yet. Alot of issues need to be resolved and if you look at how a company like EDS orother IT outsourcers work, there is still a great deal of case-by-case,situational services and contract construction. One-size-fits-all doesn't workany longer."

Workforce, April 2001, pp. 51-54SubscribeNow!