Hewlett-Packard has signed a human resources outsourcing deal with Nestlé, the first of its kind for the Palo Alto, California-based technology company.

Under the deal, Hewlett-Packard will oversee payroll for Nestlé's operations in "a number of European countries," says François-Xavier Perroud, a spokesman for the Swiss consumer goods company.

Nestlé will decide on a country-by-country basis whether other processes, such as benefits administration, will also be outsourced to HP, Perroud says. Recruiting is not part of the deal, he says.

"We are outsourcing processes that do not play an important role between the company and the employee," he says. He could not say how many of Nestlé's 250,000 employees would be affected or disclose the length or value of the deal.

Implementation of the deal is starting now and is expected to last through 2007, he says. HP will oversee a call center in Barcelona, Spain, and a back-office operation in Poland.

The deal represents a "low-capital, low-risk way" for HP to enter the HRO business, says Naomi Bloom, an HRO analyst. Nestlé outsourced its finance and accounting processes to HP several months ago, and this deal marks an extension of that relationship, experts say.

"It's a very smart way to go," says Phil Fersht, an analyst at Everest Group. HP is taking a slower approach to the HRO market by initially targeting just its finance and accounting clients, which makes sense, he says. Outsourcing finance and accounting processes has been a much more successful model than HRO because it's simpler, Fersht says. Finance and accounting includes a handful of processes, "as opposed to 20" such as in an HRO deal, he says.

"A lot of the vendors now are looking at how they can make their HRO deals more like F&A deals and shave away the complexities," Fersht says. Bloom notes that several India-based IT firms are working to include payroll and benefits administration in their finance and accounting outsourcing deals.

Nestlé is the second major European consumer company to go this route. Several weeks ago, Unilever announced an HRO deal with Accenture. "HP has the potential to be a major contender in this space," says Lisa Rowan, an analyst at IDC.

HP's entrance into HR outsourcing may serve as a boon to all IT companies in this area, says Marc Pramuk, an analyst at Everest. As of the end of the first quarter, IT providers had won 58 contracts, compared with 48 from other providers (excluding Hewitt Associates), according to Everest.

"More often than not, it's the desire for a technology refresh that is driving most of these HRO deals," Pramuk says.

Pramuk says he wouldn't be surprised if HP acquired one of the existing HRO companies to gain a bigger presence in the market.

There have been rumors for some time that they are a candidate to acquire another company, he says.

Although analysts say that HP is going to take a slow and steady approach to the HRO market, rumors are that HP is "aggressively ramping up its HRO sales force," Fersht says.

"Word is they're dabbling," in this space, he says. "They're seeing how Nestlé goes first."

HP spokeswoman Natalie Wallace declined to comment.

--Jessica Marquez