The success of the single-vendor approach hinges on matching supplier capacity with client needs.
Only three HRO deals valued at $1 billion or more have been signed in recent years, and Convergys Corp. holds two of them: the $1.1 billion, 13-year DuPont contract signed in November 2005; and the $1 billion, 10-year Johnson & Johnson deal announced in May 2007. The third mega-deal is Accenture’s 2006 contract with Unilever.
Convergys has signed other major deals in the past year, including a contract for HR administration and payroll services for Starbucks in the U.S. and Canada as well as benefits administration in Canada. Customer management remains the mainstay of the company, however, which reported total revenue of $2.8 billion in 2007. Convergys’ guidance to investors and Wall Street calls for HR management revenue of $250 million in 2008, up slightly from 2007, and an operating loss of less than $15 million for the HR line.
“The HR deals are large and the implementation cycle is very long,” says John Gibson, president for the Convergys HR management business line. “The time frame for implementation is 12 months to 24 months or more. Also, we use a very conservative accounting treatment for these contracts.” Convergys does not expect the Johnson & Johnson and Starbucks deals to affect revenues and earnings until 2009.
Some vendors are pulling back from big deals or partnering with other vendors to handle them, but Convergys continues to pursue the largest global contracts with a transform-and-transfer HRO model.
“In the market, there is a high degree of interest in transforming HR, and the outlook is strong,” Gibson says. “There is some supplier constraint and we are being very selective in who we partner with.”
He believes that this selectivity and Convergys’ specific model allow the company to take on and implement the big deals.
The transformation process begins with a thorough review of all HR policies and practices and detailed decision-making about which of them can be harmonized.
“We build a global template and try to find alignment, and then look at unique processes that may be needed for specific geographies,” Gibson says. “The most difficult parts of the large deals are change management and alignment around governance. Technology and operational issues can be worked out.”
The primary cost savings for clients come from transforming policies and processes and then automating as much as possible, Gibson says. Labor arbitrage is a less important piece, but Convergys makes full use of its 12 HRO centers worldwide, including its centers in such low-wage locations as Malaysia, India, China and Hungary. The company uses a combination of internal resources and subcontractors—depending on the combination of tasks involved, the geography and its capacity—yet remains the ex- clusive partner with the client.
“Our clients have viable business cases for outsourcing already on the table,” Gibson says. “They are generally looking for 10 percent to 30 percent in cost reductions. They know they can make the upfront investment and still reduce costs and improve efficiency.”
During the past several years, however, he has seen clients place more emphasis on the intangible benefits of HRO, including a more strategic role for HR, more effective talent management and the efficiency of a global technology platform.
Workforce Management, March 17, 2008, p. 32 — Subscribe Now!