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Reality Check at NiSource

February 21, 2008
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Related Topics: Outsourcing, Labor Relations, Workforce Planning
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In June 2005, when NiSource signed a 10-year, $1.6 billion contract to shift HR, IT, procurement, and finance and accounting to IBM, the deal was heralded as an example of a new breed of outsourcing. The “multi-tower” arrangement, where various types of business processes were transferred to one partner, was the wave of the future, some industry watchers predicted.

But for NiSource, at least, the future didn’t turn out quite as planned.

The $7.5 billion Merrillville, Indiana, energy company revealed in a December 2007 Securities and Exchange Commission filing that it would bring HR functions back in-house during 2008 and had already started taking back other business functions from IBM during 2007.

NiSource officials wouldn’t go into specifics, though in a prepared statement, CEO Robert Skaggs said the revised contract will put the company on a path “to more effectively manage employees and administrative expenses.”

An IBM spokesman did not return calls for comment.

Analysts familiar with the revised agreement surmise that the takeback means cost savings hadn’t amounted to what had been promised, and that transforming so many processes at the same time wasn’t working.

“It’s rare when a marriage breaks up that all the issues are one party’s fault,” says Naomi Bloom, an independent outsourcing consultant in Fort Myers, Florida, who works with vendors, software makers and end-user companies. “They went into it with rose-colored glasses, and when the going got rough, they realized they hadn’t fully understood the circumstances.”

In the SEC filings, NiSource said it would resume managing HR administration and payroll for its 7,500 employees, as well as accounts payable, procurement, sales center, billings and collections. The company will continue using IBM for IT, and will transfer call center operations to Vertex, which had provided those services as an IBM subcontractor. NiSource said it expects to pay IBM $700 million over the remaining 7½ years of the renegotiated contract.

Companies aren’t always so forthcoming about the ups and downs of their outsourcing agreements, but NiSource was required to file the report because it planned to pay IBM $44 million for technology assets developed during the partnership and for future services, and record $10 million of that as expenses in the quarter ended December 31, 2007.

Back when the deal was signed, NiSource expected to save $530 million in operating and capital expenses over 10 years. As part of that, the company cut its total workforce by 5 percent, eliminating 445 jobs and shifting 572 others to IBM.

NiSource will bring some jobs back in-house during 2008, though company spokesman Tom Cuddy couldn’t say exactly how many, nor specify how many of those would be HR positions.

The change was welcomed by NiSource’s union workers, who complained of problems with payroll and benefits processing after IBM took over those functions and moved some of them to a call center in Costa Rica.

“It turned into a real mess as far as correcting anything went,” says Jim Blythe, president of United Steelworkers Local 12775, which represents 1,500 NiSource employees.

When NiSource and IBM joined forces, several vendors were pursuing multi-tower BPO deals as the next big thing, promising that taking over multiple business functions would provide a more cohesive, economical service. Some analysts supported the concept at the time, but skeptics questioned whether awarding such diverse operations to the same outsourcer was better than entering into separate deals with top-ranked vendors for each process.

NiSource is doing what IDC HR outsourcing analyst Lisa Rowan predicts other mid- and large-market companies will do in 2008: narrow the scope of contracts that are up for grabs or up for renewal.

“Future HRO deals will be pared back due to a need to move back more to basics,” Rowan says. “In this case, it was not just HR but much broader in scope, and was just too complex an undertaking.”

Back in 2005, vendors like IBM were aggressively investing in new clients as a way of jumping into the market, says Phil Fersht, outsourcing and IT services research director at AMR Research, “and what they may have been prepared to take on then is not the case today.”

Workforce Management, February 18, 2008, p. 30 -- Subscribe Now!

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