Geraint John (GJ): What are the major business operations and services that your company has outsourced in the past 10 years, and are any of these “business-critical”?
Damon Jones (DJ): It’s a huge range and it covers pretty much every part of the business, from back office right the way through to client-facing activities. For example, six years ago, prior to my appointment, Group 4 Securicor outsourced its IT. We’ve also outsourced significant elements of our HR function, and our entire fleet management in the UK, as well as a number of delivery services.
Alex Mayfield (AM): For us it’s almost a question of what we haven’t outsourced. We’ve looked at everything and done a lot. A couple of examples would be warehousing and logistics, and HR services such as recruitment and graduate recruitment, one of which we’ve brought back in-house because the company wanted to go down a different path. We’ve also done IT in the past 12-18 months and that’s relatively well embedded now. I think the question of where that business critical line sits is an interesting one. Quite often people say something is a nuisance, let’s outsource it, but then when it goes wrong they suddenly realise it’s quite important after all.
Jeroen Hulsman (JH): Before I joined Rabobank two years ago, it had already outsourced warehousing, because there’s a lot of logistics to our local banks. The company also outsourced catering for its headquarters and the archives. Last year, we did our biggest sourcing deal so far. It concerned the design, build and test activities of our corporate information and communications technology department. Although that aspect isn’t perhaps business critical, IT as a whole is core for a bank like ours.
Roger Gonourie (RG): We’ve got a very similar situation to Alex. The slight difference with Wyeth, particularly across EMEA, is that the business is made up of a number of different selling organisations, all of which operate their own P&L. So each country has undergone different levels of outsourcing and the degree of externalisation varies from 70 per cent of costs to 30 per cent. Our bigger areas are around marketing and sales expenditure – agencies, print, branded items, those kinds of things. We’ve also outsourced facilities, catering, security and fleet. IT is another area we have started to make progress on and more recently we’ve begun to outsource some of our finance processes. But the one that is probably most business critical for us is logistics and distribution, predominantly because of changes in the market, and because our products have very tight controls around temperature. There’s a lot of regulation.
Tom Timmerman (TT): At InBev we’ve outsourced in various categories, at both operational and managerial levels. Things like IT are run on a global level, whereas others, like car fleet, we still run by region. A large part of the facilities management is outsourced, in areas such as security, cleaning, catering, warehousing and logistics. In a number of areas we’re looking at moving a number of key tasks to external specialists, because the hunt for talent is making it very difficult to find or keep in-house expertise. So it’s a mixed basket, but we’ve gone fairly far in terms of outsourcing.
Martin Raab (MR): As well as offering outsourcing services – especially in the area of IT, managing data centres and applications, and more recently business processes such as finance or accounting – at Capgemini we use outsourcing ourselves for HR services like payroll or travel management. We’ve also offshored some of our operational procurement to Poland.
Matt Dyer (MD): Similarly, LeasePlan is an outsourced supplier and heavily dependent on outsourcing. Our business model is such that we outsource business-critical services in order to meet our customers’ needs. These include car maintenance, tyres, fuel, insurance and replacement vehicles. We rely on outsourcing partners to provide those services, but then we wrap all that up in a product for our customers that we take responsibility for.
GJ: How involved has procurement been in this outsourcing activity?
JH: Procurement at Rabobank is an internal consultancy department and we are involved as an adviser, supporting our internal clients. But, as a result of our last outsourcing deal, the proposal now is to involve procurement and legal representatives in the small core outsourcing team of four or five people who lead and co-ordinate the process from the start. From a procurement point of view I think that’s necessary because when you are called in as an adviser to the core team, you are not fully involved in all stages and don’t know the whole story, so it’s not always easy to give good advice. We have been outsourcing more important parts of the company than in the past and therefore the impact of the outsourcing deal can be bigger. This means it has to be managed really well, not only during the outsourcing process but also after the deal is closed. At the same time, procurement is getting more capable people onboard who are able to organise these kinds of deals, both on the supply side and on the internal demand side.
AM: At Northern Foods, this cross-functional team is primarily procurement led. We identify from a procurement perspective the areas we believe need to be outsourced, we go and sell that internally, we bring a joint team together and we drive it through that way. So we are well involved in all the outsourcing decisions and often leading the debate. But I think this involvement varies from company to company. We spend approximately £550 million annually and almost all of that comes through procurement. It is a better level of involvement than I have seen in the past when I worked for much bigger companies.
RG: Strategic sourcing in Wyeth EMEA is relatively new. Historically, it was left to individual countries to develop capability and one of our key agenda items, as a sourcing team, is to have people in those local territories who are able to support things like bigger outsourcing activity. As the categories become more critical to our business, we are more involved, which hopefully is the right way round. So today we are
100 per cent involved in, if not actually running, more critical areas like IT, logistics and distribution, and fleet. But in others, like facilities, we are involved less.
TT: The involvement of procurement at InBev is high because of the company’s zero-based budgeting system. Unless something is budgeted it cannot be spent, and procurement gets involved in building the budgets.
DJ: We have very good relationships in some countries and we are touching all procurement, including outsourcing. But we’ve got other countries where we have virtually no touch in any way, shape or form. We’ve got outsourced contracts that were put out 10 years ago where there was no procurement involvement at all; then there are others where procurement has not only been involved in the process, but we also continue to own it and a member of my team sits on the board that manages that contract. In the past, people tended to take a function – be it IT, HR or logistics – and outsource it en masse to one provider. But what we’re seeing now is greater segmentation, where you might use several specialist IT suppliers for your e-mail, server farms and so on. That puts the onus back on the customer to manage those relationships, which is great news for procurement, because who else in the business is going to do that?
GJ: How successful have these outsourcing deals been, compared to the original business cases?
DJ: On the client-facing activities we’ve got that battened down, we are very good at that. What we’ve not been so good at doing is some of the back-office stuff. I don’t think I’ve seen any outsourcing deals where procurement wasn’t involved that have worked 100 per cent successfully, but the ones that have failed the most are those where management pushed procurement involvement for cost purposes as opposed to overall delivery objectives. At the other end, I would say that by far the biggest successes we’ve got are outsources where procurement has been involved at a genuine commercial and strategic level to help mould and drive the project, rather than just trying to negotiate the deal. They are the ones that build the relationships up.
I can give you two examples at the extremes. Our IT outsourcing deal in the UK, I think it’s fair to say, has been disastrous. If you go back to the business case, the reason for outsourcing IT six years ago was that we were a growth organisation, our IT systems were failing and we didn’t know how to run them. We tried to fix it and get cost savings at the same time, and we also force-fitted everything into one box, from managing the handout of mobile phones right the way through to disaster recovery. That was taken off the UK businesses last year and group procurement now manages it.
On the positive side, at around the same time we outsourced fleet management. That was a massive decision for us, because fleet is our lifeblood. That worked really well and delivered value, but we felt it could be done even better, so last year procurement took it over, re-tendered it and awarded it to a different provider. As a result, we’ve been able to share some of the risk that our customers put on us back down through the supply chain. That’s an absolutely brilliant example, it works superbly.
AM: In the main I have good experiences of outsourcing. I can find one or two examples that would be at the opposite end, but almost all the deals that I’ve been involved in have achieved the business case. I don’t think any have been stellar and outstripped it. As long as you are clear and have an owner internally, nine times out of 10 it delivers what you think it’s going to deliver. We’ve got an example at the moment where the supplier has failed, but it’s failed because it lost two or three other pieces of business elsewhere in its portfolio. »
MD: I certainly agree with Alex’s comment about the clarity of the business case. We’ve been through the process where we outsourced our data centres and have now taken them back in-house. I think the reason that didn’t work was because it was outsourced by the IT people and there wasn’t sufficient commercial involvement to make sure that the deal, the process and the service met our requirements. Looking at it from the supplier side, if you’re talking to a company that has a view of the sort of metrics it wants to improve, then you can start to put a proposal and a solution together that fits it, with the necessary governance around it. It’s where you are feeling your way a little bit, in terms of what does this company want to achieve and what sort of mandate is there to evolve things, that you start to feel a little less comfortable. That’s often where you end up compromising on the outsourced solution that you actually implement, because you try to satisfy everybody and you end up satisfying nobody.
MR: For me, the key success factor – and the key health factor for relationships – is having a clear picture on what you outsource, in terms of the transactions, the costs of these transactions and the quality level you want to have. This makes your outsourcing more likely to be successful than if you just try to get rid of a problem or try to get as much cost saving as possible in a very short time period. But I still see companies trying to get quick savings and then paying a high price afterwards. Sometimes, before you even do the outsourcing bit, it’s necessary to have an internal reorganisation, perhaps by establishing a European or global shared services concept and then moving it to an outsourcing partner as the next step. It’s also a question of the supplier market and its maturity. For example, 10 years ago an accounting process was very hard to outsource. These days it’s a standard service and people on both the supply side and the demand side have developed experience in that. There are other functions that are much more difficult to outsource, because you may be the first company that tries to find a solution provider for that service.
TT: I don’t believe a lot of outsourced contracts are measured really well, and are usually not remunerated on a performance basis. They often continue running, and when things go wrong people will raise the flag. If companies really want to look at this in a sustainable way, they need to constantly measure and improve these contracts. And I’ve very rarely seen that done in a thorough way.
RG: My experience of outsourcing is a little patchy; I’ve seen some good ones and some not so good ones. In the good ones the common denominator for me was that we had good people in place to take it forward. Yes, we had a good set of requirements, governance and metrics – the structure defined at the outset – but it was really because capable people were involved on both sides. You were dealing with someone on the supplier side who was an equal, who understood the problem the company was trying to solve and essentially worked together to do that and to evolve the contract.
GJ: How would you describe the state of the relationships you have with your outsourcing providers?
DJ: It depends where you look in the business. We’ve got outsourced providers that are virtually part of our organisation – they know how we think, we know how they think, they act like we do and vice versa. They are an extension to our business and that works exceptionally well, the communication is brilliant. At the other end of the spectrum we’ve got outsourced providers, such as in IT, where we’re totally at arm’s length and not far off litigation. If I take a snapshot across the UK, I would say that 90 per cent of our outsourced relationships are very good. That’s a level of maturity that we see as a result of the market. As you move to Europe that drops slightly, because I don’t believe the outsourced market is as mature in Europe as it is in the UK yet, then in Asia and the Middle East I think it’s a lot lower.
TT: It varies, as you have a number of relationships that are purely operational, like some logistics and facilities management areas. They’re not strategic to InBev, they’re not strictly business critical, so you really treat them as a supplier, not a partner. There are a number of other ones that operate on a higher level where you really almost get into bed together because you have a joint interest in developing the relationship. That’s where you start building a different type of relationship.
MD: For LeasePlan as a procurer of services from outsourced partners, I would say the large majority of relationships are co-operative rather than collaborative. And if you judge them on a co-operative basis, I think that, like Damon, 80 to 90 per cent work well. Our challenge as an outsourced supplier is to move the relationship from being co-operative to collaborative, to move from understanding the needs and objectives of a customer to really being proactive. What makes one customer bring that collaborative environment compared to a co-operative environment does vary, but it’s a lot about the relationship that’s in place and your track record; you have to have credibility to be able to put something on the table that’s going to be deemed valuable by the customer.
AM: It’s up to the customer to drive that, I think. If the customer is not receptive to that collaborative arrangement then it will feel like the outsourcing provider is always beating their head against a brick wall. The relationship moves from being co-operative to collaborative when the customer understands the benefit and then proactively engages with the supplier. There will be sourcing decisions – and some outsourcing solutions – where the customer just never wants to go there because they don’t see the value in it, it’s not business critical to them. But in others they see as business critical they are very quickly into “we need innovation and we need it constantly”, and we need to drive it forward.
DJ: But equally you’ve got to carry on doing it. Salesmen in the outsourcing industry – and I speak as a former one myself – are great at differentiating themselves from the competition at the point of tender. What their businesses are not quite so good at doing, from my experience, is then continuing to differentiate themselves, so that when that five-year contract expires it’s a no brainer that it’s going to get extended. We’ve seen this with a number of areas of supply. It’s only at year four and a half that the supplier suddenly comes in with a load of innovation. What we are getting with our 90 per cent of good suppliers now is they’re constantly coming to us with innovation. That’s because we’ve brain-trained them into doing that.
RG: I would say the majority of our outsourcing relationships are co-operative. If I’m being honest, I don’t think we put enough time and effort into deliberately engineering collaborative relationships where we should have those and co-operative relationships for the remainder of the portfolio of stuff we do. We don’t make that conscious decision. An example where we need to be more collaborative is fleet, and I’m not just saying that because Matt’s here. The marketplace is changing, there are corporate manslaughter laws and other serious things happening, and as an organisation we don’t want to build new systems and have lots of meetings to heighten awareness. We’d much rather go to a provider and say “Can you manage this for us? And can you manage it consistently across Europe, because we don’t want to put our company at risk?”. There’s a bit of a conflict in terms of how we set that kind of sourcing strategy up, because on the one hand you’re dealing with a commodity – cars – where you really should be approaching the market on a frequent basis to make sure you are getting best value; on the other hand, on the service side, you want more embedded and integrated processes and systems. That’s not something you want to be swapping in and out on an annual basis.
TT: It depends on how you define collaborative, but I don’t think we would ever go into collaborative relationships in a category like car fleet. Usually, collaborative relations are built in areas that are closer to the core business; these are strategic in the sense that you are engaging in a joint venture where both parties have something at stake. That requires more attention and maturity; it’s something you do for the longer term.
RG: Yes, I wouldn’t put collaborative and strategic together necessarily. Fleet is not a strategic category for us, but certainly there are elements to that service where I’d want to become more collaborative.
GJ: What scope is there to move towards these deeper relationships? And how big is the prize?
AM: I don’t think the potential will give you a paradigm shift; it’s about incremental benefits. Every half a point of margin that you can get out of an outsourcing relationship will give you that benefit, especially in low-margin businesses. The key probably is in innovation; it is using a supply base that has better access to research and development and is making that next level of investment, and being able to tap into that quickly. I don’t see it as suddenly changing your whole business case significantly, but it will give you benefits that you would not have got if you were doing it yourself.
But it’s also about recognising that it doesn’t necessarily have to be a fiscal return. I have a very flat procurement structure and I struggle to get rotation within people’s career paths, so we identified two of our major outsourcing providers, approached both of them and asked whether we could add a six-month rotation in their procurement departments to our career paths. That’s massive for me in terms of talent retention. There will be some risk there: occasionally you might get somebody poached. But the fact that you can go back to your staff and say we are looking at things like this adds a huge benefit. So there’s always scope for deeper relationships, you just have to be innovative in how you look at them and then you have to invest in them.
RG: Where our businesses with a highly externalised cost base benefit, I think, is from flexibility and agility, both in terms of responding to cost challenges and satisfying growth needs. A strategy that plays to that is going to be pretty significant in terms of how we run our businesses. We are going through a corporate cost reduction programme at the moment and the organisations that are highly internalised are struggling; they are finding it really difficult because they just have not got the agility of the cost base that the highly externalised organisations do. So there is a big prize to be had there, in terms of performance.
DJ: One area of opportunity for us is emerging markets, because as our business grows in those countries we want to introduce more outsourcing. But they are the least mature markets to be outsourcing in, so the challenge is trying to get a handle on both our own internal business management and the local supply market and bring the two things together. But we’ve also got a couple of areas where we’re working with key outsourced providers in Europe on new products and services. One, in particular, is aimed at the retail market and it will fundamentally change the way cash is managed and handled. That is co-operation with not just one external partner but four, driven by us, where we’ve gone to them and said let’s pool the innovation rather than doing it on our own, as we have done historically. That is pure strategic collaboration and if it comes off the impact on our revenue and earnings will be significant.
JH: I think we can really benefit from innovation. Rabobank hasn’t outsourced strategic areas that much yet, but I think if you are able to do what Damon was describing then you get real competitive edge. The benefits of supplier collaboration and partnership are especially in the strategic areas, working with the best suppliers in the market, so I would focus on those. In the less strategic areas it’s about having really good KPIs (key performance indicators) and relationship management in place, although these are also prerequisites for supplier collaboration.
GJ: How do you evolve your relationships with outsourced providers to achieve these benefits in practice and what obstacles and risks do you see?
JH: I would say create transparency by agreeing on the right KPIs and setting up a good relationship and communication structure. First, create clear and well-defined KPIs that are aligned to your business targets or strategy on both company and supplier side. This enables both parties to have discussions based on facts rather than just a “good guess”. For example, if there’s a problem you are able to track where that comes from and start a discussion on how you can solve it, rather than blaming one another.
Second, set up a good relationship management structure by aligning the right hierarchical levels and functional areas of people, so that directors speak to directors, for example. And agree on fixed agenda points and a meeting structure. You should do that for all type of outsourcing deals, whether they are strategic or not. For the more strategic outsourcing deals I believe you should step, where possible, into the next level: supplier collaboration. This involves sharing information about where we are going together. From the supplier side, this should include information on new innovative services and products that the supplier is developing. If you are able to manage this relationship well, I’m convinced that you can really get ahead of the competition.
MD: For us as a supplier, it requires far more investment in terms of the people we’ve got working with our customers. We have good, accurate data but we are not necessarily using it to come up with the sort of collaborative suggestions that are required. That is an important stepping stone to put a business case on the table for increased levels of outsourcing. We have to earn the right to do that. As a supplier we need to be investing in the right account managers with the right knowledge management and expertise, so that we can drive the innovation agenda that customers have.
MR: If I take the example of IT services, you can play it in two ways. You can buy IT services as a commodity, but in some cases the value for companies is much higher if you can drive change through process innovation and the implementation that goes with it – but only if you give more information to your IT service provider. It might be able to take that up and really co-develop a new solution with you, which might be quite complex. This is a decision that has to be taken consciously. It means you might not be able to source at the lowest cost possible, you might pay 5 or 10 per cent more, but if you are faster with the implementation that might be a wise decision in some cases. There are occasions, such as going into emerging markets, where a customer decides that they need a strong partner and they agree to give away some of their negotiating power for the sake of a more collaborative relationship.
TT: Trying to get all of your innovation from day one is not going to work. The deeper relationship needs to be built on a solid foundation that is well managed. In this journey you navigate through the basic level, defined by clear KPIs and a secure contract, before moving to a second or third level. After a defined period of time – let’s say, one year – you will need to evaluate the relationship and decide whether you end it, leave it at that level or move it up a notch. Time is a critical factor here: you don’t decide to outsource and then immediately go to the “dream scenario”.
DJ: Assuming we do want to take the relationship to a more collaborative level, we need to ask ourselves what are the key things that any strategic outsourced supplier wants from us? There’s five things that the managing director of that business is going to want: revenue growth, profitability, referenceability, ease of business and contract tenure. Matt talked a moment ago about investing in better account management and innovation. He has to see a return on that. We’ve got to go back to him as procurement people and say: “This isn’t about screwing the price down, this is about helping you to grow your revenue or increase your profitability.” It’s about jointly understanding our business objectives and engineering something that meets in the middle. Many procurement people avoid that issue.
AM: It almost goes without saying that you have to have that level of understanding between the two businesses. But Damon is right, it probably doesn’t exist in many cases.
RG: I also think we have to convince the business on this, and I’m not sure they necessarily look at suppliers in the same way that we do. They want their operational parameters satisfied and they want the cheapest price, and sometimes I find myself saying “Hang on, slow down, let’s take a broader perspective on this”. Quite often it is for exactly that reason, that they don’t give a damn about the supplier’s business.
It’s about convincing them to look at sharing the benefits of our success with our partners, helping them to manage the performance of their people who are involved in this outsourcing. I’m not saying that would happen with all of our commodities, but certainly in some of our bigger ones we do operate gainsharing, and in certain marketplaces we are forced to do that with our distribution providers, our wholesalers.
The flipside of all this is risk. It’s great to have the collaboration, I absolutely agree that’s what we want to do, but we almost need to set up our contracts for termination, because the last thing we want to do is get so much into bed with a supplier that we can’t get out of it. We do want innovation, we do want the relationship to evolve with the right capabilities, but we don’t want to end up in five years’ time with something that is a real mess to get out of and find we have created an anti-competitive situation for ourselves.
