Starbucks/Convergys Terminate HRO Contract
In a March 13th presentation to industry analysts, Convergys (NYSE: CVG) announced that they and Starbucks (NASDAQ: SBUX) have mutually agreed to terminate their human resources outsourcing contract.
Convergys announced the Starbucks contract only eight months ago, with the anticipated scope of work to have included HR administration and payroll services for both US and Canadian employees, as well as benefits administration for Canadian workers. Convergys had successfully completed their blueprinting process on time and budget when Starbucks elected to shift management priorities following the return of Howard Schultz as CEO. Convergys does not expect the decision to impact 2008 or 2009 profitability guidance.
Said Starbucks about the decision:
“The decision to discontinue the project was made based on the changing needs of the business and in no way reflects on the quality of the work Convergys has done for Starbucks.” (page 64- Convergys Analyst Presentation)
This latest development comes less than three weeks after Wachovia announced their intent to take back a number of HR processes they had outsourced to Hewitt, an action followed by Hewitt’s Friday SEC filing which anticipates a charge between $16M and $23M as a result of the change.
Let’s keep the conversation going.
March 18th, 2008 at 6:56 pm
Wow…yet another failed HRO play. Thanks for calling it out.
There is limited to no value in HR outsourcing. Without the ability for companies to adopt common business rules and technologies, HRO vendors have minimal economies of scale. In fact, they typically sign-up to rationalize the client’s vendors…many of which are entrenched. Most HRO operations are precluded from operating offshore, so there isn’t labor arbitrage.
If the value of HR is managing the cost and quality of labor, outsourcing doesn’t contribute to this value. It’s a cost cutting move that backfires. Especially if you consider the cost of supporting an armada of Starbucks stores spread throughout the USA (and world). The issue most HR teams are facing is the higher cost of managing benefits, LOA/workers comp, and increasingly litigious employees. Until there is a solid SMB play, you can’t outsource the problem…you have to manage it.
My thoughts in detail are here:
http://360vendormanagement.com/2007/12/29/human-resources-outsourcing-wheres-the-value/
Tony
March 19th, 2008 at 7:20 am
There have clearly been issues across all the HRO providers including Hewitt, Accenture, Fidelity, ACS, Convergys, and EHRO. Much of this appears to be due to the Class of 2005 - the hey day of HRO. During that timeframe, the model was either lift&shift or transformation - neither of which worked all that well.
The fact is the ADP PAyroll model and the Hewitt Benefits model are the correct models (to some degree). They are mostly propriatery technology with a 1:many leverage that allows vendors to take on additional clients with only incremental costs.
Many current HRO clients do not want the work back - they like what they have even though they know they may have gotten the deal of the century and it will never happen again. Having said that - vendors are retrenching and beginning to come out more focused. I would expect to see a couple of things in year ahead:
- Less players than that described above
- Remaing players will have tighter scope of work - they will not get into areas thet should play in nor will they let clients push them to add at last minute during deal negotiations
- They will have well defined scope of work for which a client will fit or will not fit. They will know what they can do and what needs to stay at client
- They will offer configurations and minor customizations (as opposed to the No customization ADP offering)
- They will own the technology and will control their own destiny.
In this day of divestitures, of risk & compliance issues, of politicized organizations within Fortune 500 companies, of cost cutting due to the economy, of clients wanting to be more strategic and less tactical, and of many getting comfortable with offshoring - HRO does have a future. It will be different, it will be more focused…but it should be better for clients and more profitable for vendors.
March 19th, 2008 at 12:03 pm
I agree the future of HRO will be firms focused on specific HR services (payroll, regulatory, compensation/performance management, benefits admin).
I wonder what will happen to those “deal of century” companies who face contract renegotiations? These vendors have much greater pricing discipline than they once did.
I wonder if they will plan in advance to build a transition strategy (for specific services) or they will stay-put and pay higher fees/consider offshoring to offset price increases.
March 19th, 2008 at 3:42 pm
Believe those clients are already beginning to assess since they can see the hand writing on the wall.
- They know next deal will not be as good as current deal
- They know next deal will be done with vendor’s process and not their process
- They know homegrown systems that they gave to clients will either go away or come back in house
Having said that - I believe most of these clients do not want the work back and also realize that their “custom” needs were not really adding any value. What they thought made them ‘unique’ was not much more than them having a preconceived way (political agenda) of doing something - without it really having to be done that way or providing any value.
On vendor side - some outsourcers will get out completely (perhaps an ACS, EHRO); others will refocus on a core (Hewitt, Convergys), and others will act more like system integrators and just get paid more for the custom processing (Accenture). I believe those that will remain and profit will the ones that have a vested interest in HR for HR sake and invest in new and focused model.