HR Outsourcing Deal May Signal New Era

It’s a scenario that has played itself out a thousand times over in the retirement services business – company A, which uses Recordkeeper 1, merges with Company B, which uses Recordkeeper 2 – and the merged company puts the Recordkeeping business out to bid.   However, in the still-nascent field of HR outsourcing such ousters have remained relatively rare.   Indeed, while a growing number of plan sponsors have embraced the outsourcing trend (see  Take It Away ), the handful of standout providers have, up till now, been largely able to concentrate their sales efforts on plan sponsors new to the outsourcing notion.  

Merger Urging

While it may be too soon in the product cycle to fully appreciate the impact of yesterday’s decision, it is interesting to note that the BofA/Fleet merger brought together two institutions, both of which had already embraced some level of HR outsourcing and which, as a result of their merger, had an opportunity to choose between two firmly ensconced service providers in the field (see  Bank of America, Fidelity Ink Outsourcing Deal ).

Under the terms of the contract, Fidelity will provide the newly combined Bank of America a range of human resources and benefits administration services, which includes HR administration, Health & Welfare, 401(k), defined benefit plans, payroll and stock plans – services that BofA previously obtained from Exult.

By signing a deal that will provide outsourcing for a wide range of human resource functions for Bank of America’s 250,000 employees and retirees, Fidelity greatly bolsters their presence in human resources outsourcing.   In fact, Fidelity told the Boston Globe that the seven-year Bank of America deal would rank among its top five outsourcing contracts, which already include IBM and General Motors.

Financial Impact

The impact of such a massive contract loss has already made its way to the financial pages.   Following the announcement, Exult came out with forecasts of decreased billing total somewhere between $15 million and $25 million in 2005 and approximately $60 million to $75 million in 2006.   To cover the losses, the company said it ” expects to partially mitigate the impact” through “ related cost reduction measures,” a move that may or may not impact Exult’s 500 Charlotte, North Carolina-based employees, even as Fidelity announced that the Bank of America deal will create roughly 375 in Massachusetts and New Hampshire, a region that was fearful of the impact on their job base with the possibility of the loss of FleetBoston positions.

Irvine, California-based Exult will retain some aspects of its old deal with Bank of America, which was originally inked in 2000.   Included in the expanded services that Exult will be providing is recruiting, temporary staffing, accounts payable, travel & expense, fixed assets and associated information technology support services.   In fact, Exult said that Bank of America will remain “one of Exult’s largest clients.”   The revenue from the requested expansion of Exult’s services is expected, subject to negotiation, to be $20 to 30 million annually beginning in the third quarter of 2004, according to the firm.

Outsource Options

The decision to embrace full-fledged HR outsourcing remains a tough one for many employers, though a growing number are taking a thoughtful look at their options.   Only 26.8% of the 315 companies recently polled by Watson Wyatt completely outsource the administration of their pension benefits, with most (59.8%) choosing a blended sourcing model (see  Companies Hesitant To Elect Total Outsourcing Solutions ).   And while only half of CFOs, COOs and other senior benefits executive respondents to a 2003 Fidelity survey have conducted any formal cost/benefit analysis of their current outsourcing activities, at least 85% – depending on the plan outsourced – said they consider outsourcing to have been a good investment (see  Benefits Execs Say Outsourcing Pays Dividends ).  

Indeed, a recent Towers Perrin survey of companies that have adopted broad-scale HR outsourcing in the last four years found that more than three-quarters said they had met short-term cost-saving goals, with 37% citing “complete success” on this important outcome.   Long-term cost cuts are beginning to emerge as well, although 56% of the group said it was too soon to tell how by how much and just 37% overall cited some success on this front (see  HR Outsourcing Not an Overall Panacea ).