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International Paper (IP) set out to transform their HR function in the late 1990s. Management streamlined processes, installed SAP for HR and payroll, and launched a self-service initiative for employees and managers. Their goals were to improve service delivery, reduce costs, and shift the HR focus from administration to strategy.

After benchmarking the results, they felt that more could be achieved. "We were in the top quartile, in terms of service delivery costs," says Mark Azzarello, Director of HR Operations for IP, a global producer of paper, packaging, and forest products, based in Stamford, Connecticut, and Memphis, Tennessee. "The question was, how could we get to the next level? And how could we ensure that our service delivery model would not only be maintained but improved?"

Those questions drove management to analyze the potential for HR business process outsourcing (HR BPO). "We couldn't know if HR BPO made sense unless we fully understood our internal cost structure and our base financials," says Azzarello. "Organizations will say that outsourcing is their strategy, but to us it's an enabler; improved service delivery is the strategy. If the cost benefit hadn't been there, I'm not convinced we would have pursued HR BPO."

After making the business case for HR BPO and gaining executive sponsorship, in October 2001 IP signed a 10-year agreement with Exult, the HR BPO market leader at the time. The agreement supports roughly 52,000 employees and 80,000 retirees. It covers a broad range of HR services, including payroll and benefits administration; a call center; and management of third-party providers such as an employee assistance program, relocation services, and drug testing.

Three years after the completion of the deal, Exult was acquired by Hewitt Associates, which had a long-standing consulting relationship with IP. "International Paper was very pleased when Hewitt and Exult merged, because we believed their combined strengths in consulting and delivery would help us to achieve significant benefits," says Paul Karre, Vice President of HR for IP. "We're beginning to see how end-to-end solutions can enhance our organizational effectiveness. We expect the ability to turn to Hewitt for these kinds of solutions will make our partnership even stronger."

Crafting the Agreement
A first step in building the partnership between IP and Hewitt was the development of a formal agreement that spells out the details of the HR BPO arrangement. "There's a saying, 'Don't sweat the small stuff,'" Azzarello notes. "But in developing an agreement for an HR BPO relationship, you absolutely need to sweat the small stuff. There's such an intricate level of detail involved that if you don't clearly define it all on paper, when you begin to execute, you'll be scratching your head and saying, 'Now what did we mean by that?' You also have to pay attention to deadlines. For an initiative of this size and length, it's crucial to set hard dates and establish best and final timelines to ensure that things get done."

Azzarello also stresses the need to understand the regulatory and business issues that will impact the relationship, such as Sarbanes-Oxley, offshoring, and data privacy laws, and to address them in the document. Of course, it's impossible to anticipate every new law or business issue that could affect a long-term relationship. That's why flexibility is important.

"In a long-term relationship, the business environment, regulatory climate, and the client organization will inevitably change," says Chris Havern, the Hewitt account manager responsible for the overall relationship with International Paper. "You have to approach the formal agreement in the spirit of partnership. Our HR BPO agreements are not intended to cover every possible scenario. They're written so that they encourage people to work things out together, and do what's fair."

Implementation Challenges
Once the agreement is signed, the work of implementation begins. Azzarello belongs to an industry group of some 40 companies involved in major HR BPO relationships. The group meets periodically to share their experiences and learn from each other. Their consensus: The biggest implementation challenge is matching employee expectations with provider performance.

"Employees tend to expect that HR BPO will make things better," he says. "If service levels remain the same, employees will perceive that they're not as good as before outsourcing. It's the company's responsibility to communicate with employees that service levels haven't changed, only the delivery mechanism."

Ongoing communication is a key to success—and that includes sharing the HR strategy with employees. "You have to ensure that employees understand why you decided to outsource, what you're trying to accomplish, and the amount of flexibility and authority you've given to the provider to manage processes and recommend changes," says Azzarello. "They have to recognize that the provider is an extension of your organization."

While communicating to employees is critical, it's equally vital to listen. That's how IP learned one of the most valuable lessons so far. Two years into the HR BPO implementation, the company was measuring the satisfaction of employees who called the service center. The satisfaction reports were positive, but these reports didn't square with the many service escalations and reported problems.

It turns out that management was measuring the wrong things. "Many organizations will use the terms 'client' and 'customer' interchangeably, but I view them as two distinct groups," Azzarello explains. "International Paper is the client; we're managing the relationship and paying the bills. Our employees who use the services are the customers. We were using metrics that were important to us as the client, but they weren't important to the customer, our employees."

What's important to employees is that their service problems are resolved. But no one was measuring this. Instead, for example, customer satisfaction questions were asked at the end of service calls, before the problem was resolved. If there was no service execution after the initial call, employees would be dissatisfied, but this wasn't captured in the metrics. The solution was to create a post-case closure metric, which now provides a more accurate measure of customer satisfaction.

Measuring Progress
Satisfaction surveys are just one of many metrics that IP and Hewitt use to monitor the relationship and measure progress. They also pay attention to factors such as a growing number of employee complaints, which indicates there's a problem that must be addressed.

At a higher level, there's a simple way to gauge how well the relationship is working. "If we have to escalate issues to the executive steering committee, we're not doing our job very well," says Azzarello. He adds that the steering committee was designed to meet twice a year, but so far hasn't met half as often—a clear indication that the governance model is working.

Another broad gauge of progress is who educates the new members of the HR BPO team. In the early days of the relationship, IP was responsible for much of the knowledge transfer to new team members. Now the responsibility has transitioned to Hewitt, which is another sign that the relationship is maturing.

Finally, IP measures delivered cost savings and process improvements. "We knew our cost structure coming into the relationship," says Azzarello. "We were able to validate our rationale for outsourcing, and we continue to validate it. We've seen the cost savings that were guaranteed, and we're making progress on the process side."

One key measure of process improvement is how HR employees spend their time. By the end of 2004, field HR personnel were spending 25% of their time on administration, down from 55% when the HR transformation process began in 1998. The percentage of time devoted to strategy had increased over the same time period, from 15% to 20%.

The ultimate goal, according to Azzarello, is to reduce HR administrative time to 15%, and boost the time devoted to strategy to 25% and time devoted to operational issues to 60%. "We're not there yet, but we're getting a lot closer," he says. To do this, they plan to increase employee and manager self-service utilization. In addition, IP is evaluating the potential to expand their range of outsourced services to include staffing and recruiting, further reducing the administrative burden on IP.

An Integrated Future
As the relationship moves forward, integration will be a key focus. "Hewitt was able to help us with Medicare Part D," Azzarello says, referring to the recent U.S. legislation that provides prescription drug benefits for the elderly and disabled, but is notoriously difficult to interpret and implement. "They put a plan in place that enabled us to leverage their consulting, communication, and delivery skills, and to implement a comprehensive, well-thought-out solution. This is the kind of integrated approach we want to see continue in the future, to enable us to achieve end-to-end performance. And it will allow us to manage our HR BPO relationship from a more strategic perspective, as a key component in helping us to achieve both our HR and our company strategic objectives."

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