Outpacing the competition with outsourcing

OUTSOURCING HAS been an effective management tool for decades, but it is taking on added significance in today's highly

Outsourcing in the twentyfirst century goes far beyond traditional contracts for services and subcontracting manufacturing as well as other business functions.

"It is important to distinguish between contracting and outsourcing," says Peter BendorSamuel, CEO of the Outsourcing Center in Dallas and author of the soon-to-be-released book, Turning Lead Into Gold (The Demystification of Outsourcing). "Contracting is the purchasing of goods or services when the buyer owns the process. In contrast, under outsourcing arrangements, the supplier owns and controls the processes. This requires an important paradigm shift in Western management thinking, because we are used to keeping control. To compete effectively, companies need to manage results and not the process."

Among other benefits, outsourcing allows companies to be more adaptable. "Companies are building structures that allow them to be nimble and flexible," says Jagdish R. Dalal, a partner with PricewaterhouseCoopers, L.L.P. "They are creating `boundary-free' companies, recognizing that in order to keep up with growth and be responsive to change, they must look outside of the company. These companies are creating 'molecular' structures, aligning themselves with partners and service providers that each perform business functions in their own area of expertise while connected to the core business. Outsourcing has been a key driver for creating this new shape of business. Firms are recognizing that business-process outsourcing is an organizational design model and not a services acquisition activity."

Increased Revenue

According to a PricewaterhouseCoopers "Trendsetter Barometer" survey, growth companies that outsource grow faster, larger, and more profitably than their counterparts that do not. In fact, most companies involved in outsourcing say they are saving money and are highly satisfied with their service providers. Eight in 10 of America's fastestgrowing companies outsource at least one noncore business function, delegating day-to-day management to outside providers.

Over the past year, "trendsetter" companies that outsource increased their revenues by 23.3 percent versus 20.4 percent for nonoutsourcers. Looking at the global marketplace, outsourcing companies that market internationally are expecting a revenue contribution of 20.3 percent from abroad compared with only 15.4 percent for nonoutsourcers selling internationally. Over the past year, 44 percent of outsourcers increased their gross margin, compared to just 29 percent of those that do not outsource.

While 62 percent of companies rank cost-related savings as a major reason for outsourcing, 60 percent of the firms say another major factor in the outsourcing decision is the technical expertise offered by outsiders and not readily available internally.

"Outsourcing is foundational to the new economy with greatly compressed cycle times, increasing competition, and a global economic environment," stresses Bendor-Samuel. "In order to be successful, companies must focus on where they create value and outsource noncore operations to firms that specialize in those functions. We call this the TINA concept: There Is No Alternative."

Boosting Core Competencies

It is important to note that while outsourced functions may not be core processes, they are still important to the overall success of a company. Human resources operations remain integral to a firm's overall productivity but may be outsourced in order to gain cost and expertise advantages. On the other hand, the fact that a business process is very important does not make it core to the business.

Core competencies also vary from firm to firm. One company may consider manufacturing activities as core to its business; another may not. For example, Bendor-Samuel points out that Nike has long outsourced the manufacture of its popular footwear. Management understands that its core business is not the manufacturing of sneakers but rather their design and marketing.

Xerox operates on both fronts of the outsourcing process. It outsources parts production to other firms as well as its information management delivery systems to companies specializing in that highly technical area of expertise. However, it also provides outsourcing solutions for companies seeking to improve a broad portfolio of operations from traditional document services such as mail-room and copycenter operations to training-manual development and sales fulfillment activities and aids.

According to Joe Valenti, senior vice president of Xerox Business Services in Rochester, N.Y., "We are seeing tremendous growth in the outsourcing market as companies seek to focus their scarce capital and human resources on what they do best - their core competencies."

Valenti notes several trends in outsourcing. In the past, clients often purchased equipment and turned over the running of the equipment and specific departments to Xerox. Today, Xerox decides what equipment is needed to perform the job or deliver the product, purchases the equipment, and manages the entire process. Another new trend is hosting, where the supplier performs the services away from the client facilities.

"Outsource the processes that add value to your core business," advises Valenti. "Seek out companies with brand reputation in the industry that are proven quantities capable of delivering the resources and expertise to get the job done right."

National Penn Bank in Boyertown, Pa., turned to CGI Consulting Group of Malvern, Pa., to handle the outsourcing of its insurance and employee-benefits operations. According to Sharon Weaver, National Penn Bank executive vice president, "We derive several benefits. We don't have to have a large in-house professional insurance and employee-benefits staff. These functions generate a lot of paperwork, and we have a lot less in-house clerical personnel by outsourcing. Employees also benefit by receiving an 800 number where they can talk directly to a professional who can help them with their issues. Another plus: We are out of the insurance shopping business. CGI shops all the insurance for us, and we make a decision after review and analysis."

CGI concurs that the arrangement is a beneficial one. "We can provide a higher level of expertise more economically since this is our specialty," says Harriet Hankin, president of CGI Consulting Group. "Clients and their employees gain consistency and availability. We are open six days a week and provide service in five languages. Equally, if not more important, insurance and employee benefits are complicated and can create liability issues. As qualified specialists, suppliers take on the liability."

For Banc One of Dallas, information delivery was a priority. "We are very careful in our outsourcing decisions due to the sensitive nature of the information we send to our customers," says Len Goodman, first vice president for Banc One. "It is not a step we take lightly. We want to get information to our customers the fastest and most convenient way possible." Banc One turned to Eatontown, N.J.-based Xpedite, which possesses the world's largest IP-based network for business-to-business informationdistribution services. Xpedite first delivered Banc One's customer information via fax to customers and is now using volume e-mail engines to get the job done more efficiently.

"Large-volume delivery of information bogs down and sometimes crashes internal e-mail systems," says Marion Bartholomew, director of strategic analysis for Xpedite. "We have invested in the expertise and equipment to handle high-volume information delivery for multiple customers. Individual companies can not afford to staff up and purchase their own equipment to handle these volumes."

Outsourcing and the Technology Revolution

New telecommunications technologies, the internet, and the proliferation of websites have changed the way companies do business and created whole new information-processing industries. Firms that formerly handled their own communications networks now find it more economical and productive to turn these operations over to specialists with the know-how and equipment to get the job done more efficiently while they pay attention to their core competencies.

"We outsource the hosting of our website instead of running our own server," says Jane Scholz, editor for Knight-Ridder/Tribune Information Services in Washington, D.C. "We gain 24-hour, seven-day-a-week technical support and redundancy to prevent against downtime."

Outsourcing allows companies to tap into unique technical resources. "We look for targeted areas of expertise that we do not possess in-house and outsource on a number of different levels," notes Gary Lazarus, chief technology officer for office.com. in Rochelle Park, N.J. "It is expensive and time consuming to get to a certain level of expertise; it is cheaper and faster to outsource. With the quick infusion of new technology you protect yourself against outdated equipment and technology. You let the supplier invest in upgrading and purchase the service and product you desire. Leverage the expertise of industry consultants and benefit from the knowledge they gained from their mistakes."

Boca Raton, Fla.-based Intraco Systems, Inc. offers network communications and Internet outsourcing services for the growing e-commerce segment, an outsourcing market estimated at nearly $70 billion and growing fast. "Companies no longer need to invest in separate systems for their telecommunications, computer data, and personnel computer needs," says Walt Nawrocki, Intraco's chief executive officer. "High-level telecommunications personnel are a scarce commodity and at a premium. We provide the expertise and flexibility for future growth with offsite equipment in a secure, protected environment as well as backup capabilities and built-in redundancy. Using outsourcing protects the client against shutdowns, rapid technology obsolescence, and high capital investment."

Filling a Niche

Deregulation opened up new opportunities and competitive challenges for Houston-based Shell Energy. When the firm decided to enter the Georgia retail market after the state deregulated its natural gas industry, Shell Energy outsourced its marketing efforts to Salience, a professional sales-channel outsourcing company headquartered in Andover, Mass.

Georgia officials had opened up the natural gas market for competition during a limited time frame and under specific ground rules. "We felt that given the tight time frame we could enter the market quicker and with a lower cost to acquire customers by using a specialized supplier with saleschannel expertise," says John Sadrowski, Shell Energy marketing manager. "Salience gave us tremendous speedto-market at a much lower cost than if we had tried to build that capability inhouse."

Salience management stresses the collaborative nature of the arrangement. "We look at outsourcing as a true partnership. We look at our customers' corporate strategic plan, marketing plan, and the training and other programs needed to successfully implement them," says Bob Stockard, president and CEO of Salience.

Out on the West Coast, Itron, Inc., a manufacturer of utility meter-reading equipment, retains in-house manufacturing of high-volume products with periodic outsourcing to meet peak demand situations and completely outsources lower-volume products to suppliers.

"We gain manufacturing flexibility and lower production costs and avoid high fixed costs for low-volume items," says Mike Frazier, Itron's director of supply-chain management. "With the uncertainty of the utility business in the wake of deregulation, we don't want to invest heavily in equipment for low-volume lines for a customer who may not be ready to go to the dance."

The Importance of Leverage

Peter Bendor-Samuel highlights leverage as the crucial component of successful outsourcing. According to Bendor-Samuel, leverage derives from one or more of a different number of factors:

Leverage of scale: Economies of scale is a powerful source of value when outsourcing can transfer a buyer's process to its own operation without significantly altering the way the business function operates.

Leverage of expertise: An outsourcing supplier must have, or be able to develop, expertise superior to that of its customers.

Leverage of access: This is the availability of equipment, raw material, technology, capital funds, and other crucial business elements not readily available at a reasonable cost to the customer.

"A single point of leverage is often sufficient to support an outsourcing play. However, when multiple points of leverage are deployed, the opportunity for highly profitable outsourcing increases," says Bendor-Samuel.

PricewaterhouseCoopers' Jagdish Dalal sees the traditional business model of functional hierarchical organizations as a barrier to achieving the best results from outsourcing. He suggests viewing outsourcing as a functional restructuring of the business and operational models using a three-step approach:

1. Visioning the future: Identifying core business principles and how outsourcing specific functions will enhance their agility and their responsiveness

2. Creating the new model: Fully developing and defining the new business model by identifying core competencies

3. Implementing the changes

According to Bendor-Samuel, key elements to successful outsourcing include focusing on results instead of the process, using the leverage described earlier, and making a workable outsourcing arrangement. The scope and elements of the process must be clearly defined, and an equitable price must be determined for each aspect of the process that is supplied. Companies must provide flexibility for unforeseen changes, tie the length of the contract to the life of the underlying technology, and develop a set of metrics to measure performance and make sure the outsourcing contract has real teeth in terms of performance requirements. In addition, companies should develop a spirit of partnership for a win-win situation.

"Inspect - don't expect," warns Bendor-Samuel.

Karen Roberts, senior manager/ West Coast practice leader for the Benefits Administration and Sourcing Solutions Practice of Deloitte and Touche in San Francisco, adds another caveat: "Beware of vaporware - outsourcing suppliers selling what they can't deliver. There has been an explosion in new technology-outsourcing suppliers, and the turnover has been terrific. Be very careful who you partner with. Check out their track record, and ask for and check out references from past and current clients."

A new business age is dawning. Unless you create a vision and operating environment for your company that focuses on your core competencies and embraces outsourcing, your firm may become a relic of business history.