An Outsourcer to be Reckoned With

A $1.1 billion, 13-year HR outsourcing contract signed early this month between DuPont and Convergys is arguably the largest of its kind, but it’s more than just that. It’s validation, say analysts and other industry observers, that major corporations continue to use outsourcing as a preferred method for cutting costs and re-engineering HR systems. It’s also confirmation, they say, that Convergys, the one-time telephone billing service, has evolved into a competitor to be reckoned with.

    For DuPont, outsourcing was the quickest way to adopt best practices, re-tool antiquated technology systems and refocus HR on policy and strategy, according to a company HR executive. It’s also part of a greater initiative the $23.7 billion chemical conglomerate announced November 7 to cut its operating costs and improve its stock price in the wake of lower earnings due to higher energy and materials costs.

    The win couldn’t have come at a better time for Convergys. In July, it signed another major HR BPO contract, with Whirlpool, and in recent weeks had been the target of rumors of a possible takeover by HR outsourcing competitor IBM. The back-to-back wins surprised Michel Janssen, president of supplier solutions for the Everest Group, a Dallas HR industry consultant. He now places Cincinnati-based Convergys among the top three competitors in the industry, behind Hewitt Associates and Accenture.

    The deal calls for Convergys to run a wide array of HR services for 60,000 DuPont employees and 102,000 retirees. The Wilmington, Delaware, corporation will transfer all transaction and administrative-intensive functions to Convergys over a two-year period, starting with North American payroll and benefits administration in January 2006. Convergys is building an SAP platform that by late 2007 will also manage functions such as employee development, workforce planning, compensation management, health benefits, recruiting and HR consulting services.

    As a result of the shift, DuPont will eliminate an as-yet-undetermined number of HR positions. Some staff will be offered jobs at Convergys, while others could be placed elsewhere in DuPont, says Ernie Lareau, DuPont’s director of HR portfolio and program management, who is overseeing the outsourcing transition.

    The deal’s price tag is significantly greater than average, which analysts say could be due to the sheer number of systems being outsourced. Janssen, the Everest Group analyst, estimates DuPont is paying $1,410 per employee per year for the deal, almost four times more than the current industry average of $358 per employee per year for contracts covering more than 25,000 employees.

    Lareau wouldn’t comment on financial aspects of the deal. However, he confirmed that DuPont expects the partnership to initially reduce HR operating costs by 20 percent, and up to 30 percent after five years.

    Unlike large corporate HR BPO contracts that have limited their scope to English-speaking countries, the deal will cover DuPont operations in 70 countries and 30 languages. That could make it tricky to execute, says Lisa Rowan, an HR outsourcing analyst with IDC. Not true, says Lareau. One reason DuPont picked Convergys was because the outsourcer had established services centers in regions and languages that matched DuPont’s operations, Lareau says.

    The deal is thought to be the largest pure HR BPO contract ever. Other contracts of similar dollar value included some non-HR services, and a contract between Bank of America and Exult, now part of Hewitt Associates, had a comparable value but ceased to exist after BofA turned over the majority of the work to Fidelity, says Rowan, the IDC analyst.

    Convergys started out as a customer billing outsourcer for telephone companies, and then cable TV companies. But in recent years it has used acquisitions to refashion itself as a billing, customer service and HR outsourcer. In August, Convergys bought Deloitte’s finance and accounting BPO business to further increase its scope, all the better to compete with companies such as IBM and Accenture that offer so-called “multitower” outsourcing of IT, finance and accounting, supply-chain management and HR.

    Convergys’ stock jumped 13 percent in late October after third-quarter earnings surpassed analysts’ expectations, and hit a 52-week high a week later after the DuPont deal was announced. Even then, some company watchers say the stock is undervalued, one possible explanation for the buyout rumors. Company officials denied the rumors, which they said had been circulating for months. DuPont officials wouldn’t comment.

Workforce Management, November 21, 2005, p. 3 — Subscribe Now!