By Lisa Stone, Rebecca S. Scholl and Geraldine Cruz
Gartner Inc.
A contract with Procter & Gamble (P&G) will give IBM an anchor client in the burgeoning HR business process outsourcing (BPO) market. Comprehensive outsourcing deals require ongoing executive-level commitment.
Event
On 9 September 2003, IBM announced a deal with P&G to operate most of the company’s HR processes globally. This BPO deal is valued at US$400 million over 10 years.
First Take
This announcement is a partial conclusion to an extremely protracted sourcing effort. P&G initially sought to outsource almost all of its back-office operations, including IT, facilities, HR, and finance and accounting operations. Unable to attract a provider willing to assume this wide scope at the anticipated payout, P&G divided the deal into several stand-alone pieces that service providers have found more acceptable. To date, P&G has signed contracts with Hewlett-Packard to support its infrastructure and with IBM to support its HR environment, including people, processes and technology. P&G has also contracted with Jones Lang LaSalle for facilities management and with Sykes Enterprises for some customer service work.
Benefits: Effective 1 January 2004, IBM will take on 800 P&G employees and their associated facilities, located in San Jose, Costa Rica; Manila, the Philippines; and Newcastle, United Kingdom. IBM support will include payroll, benefits administration, expatriate administration, travel and expense tracking, data management, training administration, and application management. This deal will give IBM an anchor client in the burgeoning market of HR BPO as well as access to additional offshore delivery centres. The deal further complements IBM’s global delivery capabilities. P&G will get immediate value as IBM pays for the initial transfer of assets (the amount has not been disclosed). In the fiercely competitive consumer packaged goods market, enterprises constantly seek to free up capital to invest further in product innovation. In the short term, the BPO relationship with IBM will enable P&G to do that.
Risks: IBM has never brought to market HR BPO services of the same breadth and complexity. (IBM does have a very comprehensive finance and accounting BPO relationship with the energy provider BP.) From Gartner’s perspective, for the deal to count as a long-term success, IBM will need to attract other clients to fully exploit the assets it has assumed from P&G. As a further complication, P&G has limited experience with outsourcing and is already involved with another challenging global infrastructure contract with HP. Gartner predicts that, by 2006, IBM and P&G will significantly modify the contract’s terms of cost or scope of services. The success of the BPO contract between IBM and P&G will depend entirely on the ongoing involvement from executives within the two companies. Without such support – the single most critical success factor in comprehensive BPO deals – neither party will be satisfied with the outcome of the relationship.
Analytical Sources: Lisa Stone, Rebecca Scholl and Geraldine Cruz, Gartner Research
Recommended Reading and Related Research
“Comprehensive BPO Is in Its Infancy; Buyer Beware” – To make successful sourcing decisions, enterprises must understand the maturity of comprehensive offerings from BPO providers. By Lisa Stone
“Aggregated BPO Deal Signings Will Continue in 2003” – Aggregated BPO will grow steadily in 2003, but to succeed, external service providers and their clients will have learn to adjust their contracts continually. By Lisa Stone
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