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Corporate
An inside look at OUTSOURCING
Today more companies are restructuring and are turning to outsourcing to gain a competitive advantage. Here's how the trend is changing the corporate landscape.
Thomas Cook, one the largest travel companies in the world, knows what it's like to be on the brink of survival. Two years ago, the company was suffering not only from an industry recession, but also from an unaligned operating structure that was costing it millions of dollars in lost revenue. To turn the company around, a new CEO, Stefan Pichler, was named and by May 2001 a sweeping business transformation was launched. Not surprisingly, one of the first things Pichler did was partner with a leading provider of outsourcing services to handle all of the company's back-office, information technology, finance, and human-resources operations. The idea was to centralize all these functions—formerly done in a number of different places using different systems—in one processing center in order to reduce costs and improve operating efficiency.
The initiative launched last April, also supported by a global network of specialized IT providers, reduced annual expenses by more than $220 million. Even more important, Thomas Cook was able to go into the black and turn a strong profit, despite the unprecedented challenges faced by the travel industry after Sept. 11. At Thomas Cook, outsourcing "is seen as a key contributor to the current success of the business," says Ian Ailles, managing director of specialist businesses and former group finance director, Thomas Cook UK Ltd. "It's helped us focus more on our core competency—the travel business."
Thomas Cook's tale is not unique. Many companies around the world are restructuring and turning to outsourcing as a way to tighten their budget and gain a competitive advantage. Over the past decade, the number of companies opting for this strategy has exploded. Since 1998 the industry has been growing 16% annually. It's no wonder management guru Peter Drucker has called outsourcing the "fastest-growing industry in the United States."
The Maturing Industry
Today companies are not only outsourcing traditional tasks such as manufacturing and shipping, but also other niches of their business. These include specialized domains like finance, information technology, document management, telecommunications, and payroll; most recently, they have come to include essential transaction-processing activities like employee-benefits administration, receivables and payables, and claims processing.
As the business has evolved, so has the model for the corporation.
Enterprises are no longer vertical businesses. Instead, they are organizations with no boundaries operating with unique supply chains that have redefined the corporate landscape.
The outsourcing trend should continue to gain momentum. Greg Secord, vice president of marketing and business development for ADP's National Account Services division, points out, "We're seeing outsourcing grow in good times as well as bad. In good times companies outsource to complement what they are doing. In periods of contraction like today, they are looking for access to best practices and avenues to reduce their costs."
There are, in fact, a number of forces converging to make outsourcing the business tool for the 21st century. Besides pressures to drive costs down, especially in this slow economy, there are broader universal trends. Free-market politics—reflecting the fall of the Berlin Wall and the rise of capitalism—is propelling us toward a business world dominated by the twin pillars of specialization and globalization. "That's just what our customers expect of us," says Barbara Echols, Avaya Global Services Outsourcing director. "To be their specialized internal communications department and to flexibly manage multivendor communications networks worldwide."
It's an example of how today's hypercompetitive environment is shaping and sharpening companies—making them specialists in those areas they can dominate. Globalization means that they are both competing and sourcing 24/7 all around the world.
That is particularly true when the work being done is riding on today's global digital infrastructure. Technology is really at the heart of contemporary outsourcing. As work becomes more and more information intensive, it also becomes more and more placeless. It no longer matters where software is written, a balance sheet reconciled, or a toll-free customer call answered. It's irrelevant to the end user whether that activity is taking place down the hall or half a world away.
Outsourcing also means that entire countries are emerging on the global stage as centers of excellence for particular types of work. Just as China has long been a center of excellence for manufacturing, India has emerged as a center of excellence for software and back-office operations. Other countries like Ireland, a haven for call centers, and Russia, the new Eastern European Silicon Valley for software development, are scrambling to attract corporate investment in this burgeoning field.
But it's not just FORTUNE 500s that are outsourcing; the phenomenon is increasingly reaching down and across organizations of every ilk.
Partnering for Success
With outsourcing, finding the right partner and negotiating the right deal is only the beginning. For the relationship to succeed, the partner has to add value across the customer's business each and every day. Outside vendors should be expected to respond quickly to problems and changing needs and provide a steady work flow, a passion for innovation, and great customer service.
"Let's face it," says IKON's vice president of Strategic Marketing, Dan Murphy. "It's easy for a service provider to add value when they first come in. Implementation of new standards offer immediate and obvious improvement. But the hard part is continuing to find ways to increase your value throughout the life of the contract. That's what the IKON Service ExcellenceSM methodology is all about."
To develop its proprietary approach, IKON, the world's largest distributor of document management products and services, first spent a lot of time with its customers to better understand the key issues they have with any and all service-provider relationships. They then set out to document the process relative to customer interaction—specifically how they identify customer requirements, build and maintain an efficient site, deliver world-class service through motivated employees, and continually analyze and adapt to ensure strategy alignment. IKON Service Excellence is designed to keep these processes connected and efficient. "It is designed to provide the focus on investment return and value that customers are looking for from their document-management provider," says Murphy.
Another example is ADP, a provider of HR and payroll services based in Roseland, N.J., that constantly works to improve its entire service value chain. "We begin by making it a priority to be the employer of choice for our people. Happy employees deliver excellent service," says Greg Secord, ADP's vice president of marketing and business development. ADP performs client-satisfaction surveys twice a year at management levels ranging from the CFO to the head of payroll. That feedback reinforces a partnering relationship based on objective measurements and frank dialogues. "It's a matter of spending time to understand how our services need to be delivered for that customer, and how we can deliver them better," says Secord.
Outsourcing's Future
Once the genie gets out of the bottle, it's hard to imagine ever putting it back in—and that's certainly the case with outsourcing. That's because, as companies like Thomas Cook have found, the benefits of this practice are too good to ignore. "It all comes down to partnering and expertise," says Avaya's Echols. But as she points out, forging the right alliance is critical for success. "Companies need to be able to expand and contract rapidly to keep up with changes in their businesses. Increasingly, they are using the power of outsourcing to help them achieve that level of flexibility and scalability."
So what is the future for the industry? Companies of tomorrow should probably continue to morph into complex enterprises that operate like atomic universes in which core competencies are left in the nucleus and all other functions—from staffing to manufacturing—are performed by satellite suppliers. In this brave new world the boundaries of the organization will be limitless.
—Michael F. Corbett
Michael F. Corbett & Associates is a research and education firm that helps executives around the world improve their business performance through outsourcing. The company also produces the Outsourcing World Summit Conference Series, which showcases the industry's best practices. For more information about the company visit www.corbettassociates.com. For more information on the topic of outsourcing visit www.firmbuilder.com.
Dr Pepper/Seven Up, Inc., headquartered in Plano, Texas, is the largest noncola beverage enterprise in the U.S. and the largest beverage division of London-based Cadbury Schweppes plc (NYSE: CSG). Known for its cutting-edge, lively, and entertaining advertising, Dr Pepper/Seven Up is also a serious business with all the operational challenges faced by any multinational corporation.
One such challenge was the company's mail and copy centers, shipping and receiving operations, and document design and layout. In 1998, the company was struggling with very poor uptime on its copiers, excessive overtime and contract labor costs in its mail centers, and poor package-delivery performance. Given three months to fix the problems, outsourcing emerged as the best approach. "We needed to fundamentally redesign our operations and to do so quickly," says Wade Hogle, Office Services manager, Dr Pepper/Seven Up.
IKON won the business on the strength of a unified strategy that leveraged its professional and well-established operations. "Anyone could have come in and reduced costs bureaucratically, but to accumulate the savings by improving processes was IKON's differentiator," Hogle continues.
The results have been impressive. Copier uptime has gone from 5060% to 99.5%. Package volume through the shipping and receiving department has more than tripled because of the improved performance and reliability that employees can count on. The document strategy, which included document and mailroom process improvements, has generated $1.25 million in process and cost savings.
Most importantly, these efficiencies were not the result of a one-time effort, but of IKON's ongoing efforts to apply its best practices and document expertise, utilizing innovative technology and world-class service. This methodology is currently being packaged and launched on a national basis as IKON Service ExcellenceSM. Above all, the goal is to ensure customer satisfaction.
For more than 10 years, Wyndham International, one of the largest hospitality and lodging companies in the U.S., has been using ADP products and outsourcing services to pay and manage records for its 25,000-plus employees across North America. Says Karen Sparks, senior director of accounting at Wyndham International: "Their [ADP's] staff is an extension of ours. We collaborate with them whenever needed—typically many times every day."
To meet the needs of its unique business structure, Wyndham organizes its payroll, human-resources, and benefits-administration operations so that larger properties have on-site HR and payroll professionals, while the corporate HR and payroll team manages the operations for the smaller locations. With each individual property conveniently managing HR functions through the same ADP system, Wyndham's corporate office is allowed complete access to corporate data. Frequent property sales and acquisitions make it an even more fluid environment, one that ADP's outsourcing services complement perfectly. "Keeping up with the constant change is almost as easy as flipping a switch. There's a vibrant, ever-changing relationship between Wyndham and ADP," says Sparks.
Not that Wyndham isn't constantly testing the marketplace for even better solutions. A year ago the company conducted an extensive analysis of converting to SAP and bringing its payroll operations back in-house. The conclusion: Even though they already owned the SAP application as part of an integrated software purchase, staying with ADP and upgrading to its latest application suite provided a better return on investment.
"This wouldn't be the case if we were simply using the same service-delivery model today that we were ten years ago," says Greg Secord, vice president of marketing and business development for ADP's National Account Services division. That's the beauty of outsourcing—finding a specialized partner that continually evolves its products and services to align with and stay ahead of its clients' needs. "It's a long-term relationship that has grown over time, been tested, passed, and continually improved," adds Secord.
It's not easy to manage the complex communications needs of a far-flung workforce. Take the case of Silicon Graphics Inc. (NYSE:SGI), a leader in high-performance computing that operates worldwide. With more then 4,000 employees—each with their own voice mailbox, in different languages—that's a formidable challenge.
It's no wonder, then, that Silicon Graphics turned for help to Avaya Inc. (NYSE: AV), a global leader in communication networks, and other business services based in Basking Ridge, N.J.. The goal: to have Avaya Global Services streamline a voicemail network that was composed of 41 different communications systems from multiple vendors.
Avaya Global Services took over this operation in 1997 and manages every aspect of it today—from adding and removing individual mailboxes to making sure the entire voicemail system delivers communication message reliability. It's a relationship that benefits both parties. In exchange for paying Avaya Global Services on a per-mailbox basis, Silicon Graphics gets cost savings, with a predictable expense stream.
"It was an outstanding move for us to enter into an outsourcing relationship with Avaya Global Services for our global voice-messaging needs," says Dean Drougas, chief information officer and vice president of Silicon Graphics. The payoff has been huge. For example, Avaya Global Services provides Silicon Graphics with complete visibility into its voicemail costs, billing, and processes. That business intelligence enables the company to focus its core business while significantly reducing IT spending.
The arrangement has been successful for Silicon Graphics because of Avaya's Global Services partnership approach. Instead of just having a vendor mentality, Avaya always looks for solutions for clients and then offers them a broad range of options that can be tailored to suit their needs. "Each client is different," says Barbara Echols, Avaya's Global Services Outsourcing director. "As a result, we've developed a suite of services that our customers can use based on budget, time frames, and objectives." Avaya Global Services provides: stand-alone services for short-term needs; assistance in moves, adds, and changes, and system backup; application services for call centers; network-management services for voice, data, and converged networks; and complete communication-infrastructure management, including inventory, billing, and financial ownership.
"For us," says Drougas, "it's a very open relationship. We have a dedicated support team from Avaya Global Services that knows our business and is always available to quickly resolve problems." Just as important, Silicon Graphics and Avaya meet quarterly to review the project. The goal: to make sure both companies are in business alignment. Now that's a powerful business relationship.
Ikon www.ikon.com
ADP www.adp.com
Avaya www.avaya.com
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