Xchanging’s recent ‘good news story’ has taken a step back with the announcement that anchor client BAE Systems won’t be renewing its landmark HR outsourcing (HRO) deal with Xchanging HR Services (XHRS). Having made recent progress with its restructuring programme, and bringing on board industry heavyweights Geoff Unwin and Bill Thomas as its forthcoming new chairman and non-exec director (see Xchanging grabs another heavyweight in Bill Thomas), the news is an unwelcome setback for Xchanging. The contract is worth c£18m per annum to Xchanging, and delivers a 5% margin. Investors reacted by knocking 6% off Xchanging’s share price.
In truth the announcement doesn’t come as much of a surprise to us. ‘HR’ as a theme was conspicuously absent from Xchanging’s recent analyst and advisor morning, where we spotted some ‘notable gaps’ in its strategy (see here). XHRS is the enterprise partnership (EP) joint venture that was set up by Xchanging back in 2001, and was very much the test case for the EP model that Xchanging forged in the UK BPO market. Xchanging then took over BAE’s procurement and HR services in the UK, including the transfer of some 400 people under a ten-year £800m deal.
This announcement shouldn’t be taken that the Xchanging/BAE relationship is in trouble however, since Xchanging did recently win a new $150m procurement contract with BAE in the US (see Xchanging wins new BAE deal in US). Moreover what this announcement shows to us is how far the BPO market has changed over the past ten years. As we keep saying, business process services (BPS) is no longer about ‘lifting and shifting’ assets and delivering them more efficiently. Clients increasingly want platform-based BPS delivery that can offer best-of-breed technology and services, and show the provider has ‘skin-in-the-game’ for the long-term. This was a key factor in Friends Life’s decision to award a £1.4bn life and pensions BPS contract to TCS/Diligenta recently (see BanCS platform key to Friends Life deal). But it leaves a big gap in Xchanging’s HR offering.
Who will now take on BAE’s HR needs? BAE could of course now take the service back in house when the contract ends next year. But for us the smart money would be on BAE continuing down this outsourced route with one of the platform-based HR services specialists such as Northgate or Accenture.