Intelligence Total
Business
May 2003 
At a Glance
A small but growing number of companies are proving they
can achieve high-speed, breakthrough results like this with a bold new approach
we call business transformation outsourcing. Companies now report cost savings
that average 50 percent over 10 years, as opposed to an average of 20 percent
savings reported in the mid 1990s.
Shortcut to: An Example
C-Level Leadership
Bold Strategic Agenda
Innovative Deal Structure
Collaborative Outsourcing to Transform Processes
Focus on Enterprise Outcomes Posted: June 17, 2003
  Some executives still use outsourcing as a blunt instrument
to offload activities considered to be unimportant, and wring the costs out of
those considered non-core. Many have progressed to a more sophisticated
approach—and engage in collaborative relationships with outsource business
partners to create high-performance support operations that keep pace with
industry best practice. Just a few, bold, CEOs take the concept of outsourcing
one step further. They partner to drive enterprise transformation—not just to
re-engineer support processes—through Business Transformation Outsourcing
(BTO).
Imagine you are CEO of a multi-national financial services
company. Over the past three years your firm has steadily slipped from a
dominant market position to the middle of the pack, and nimble new entrants are
circling to take their share of your hide. You were brought in to lead a
turnaround, and your board has given you three years to pull it off. The broad
vision has been conceived, but the culture, IT capabilities, and management
bench-strength to make it so are simply lacking.
Now roll forward three years. Operating margins have
increased from $151 million to $370 million, market share has grown from 19.1
percent to 28.1 percent, assets under management are up 64 percent and your
share price has doubled in two years.
Sound impossible? Well, it’s not. A small but growing
number of companies are proving they can achieve high-speed, breakthrough
results like this with a bold new approach we call business transformation
outsourcing. This sophisticated approach has led to a proliferation of
outsourcing benefits. Companies now report cost savings that average 50 percent
over 10 years, as opposed to an average of 20 percent savings reported in the
mid 1990s. Furthermore, they gain access to competitive skills, improve service
levels, and increase their ability to respond to changing business needs.
Slightly over a decade ago, Eastman Kodak shook the
corporate world by announcing a $250 million, 10-year deal to outsource its
entire IT function. Cutting costs and reserving management attention for core
activities were the primary objectives. Since then both the number of deals and
their value have ballooned. Worldwide spending on outsourcing services in 1999
totalled $116 million. But the real story isn’t about the number or size of the
deals, it’s about their character.
While companies have been transforming and reinventing
their businesses for a long time, what is new and different about business
transformation outsourcing is the achievement of transformational outcomes at
speed. CEOs who use this approach start with a bold strategic agenda. They
share risks and gains with an outsource business partner as they collaborate to
transform roadblock business processes into competitive weapons in an
accelerated time frame. This results in measurable performance improvement and
dramatic gains in share price, market position, and return on investment.
An
Example J. Sainsbury, the second-largest grocery retailer in the
United Kingdom, found its premier position slipping as operating issues chipped
away at its performance. Costs were rising faster than revenues, and profits
had moved substantially out of line with industry leaders. Over the previous
three years, profits had fallen by 40 percent, and share price and market
capitalisation had consequently declined significantly. Hastening the slide
were major new competitive threats from other grocery retailers such as Asda
and Safeway.
Calling for aggressive action, the board hired Sir Peter
Davis as CEO and gave him a mandate for radical change. Within months, Sir
Peter had entered into a partnership with a large consulting firm to serve as
the company’s prime adviser to design and help implement a strategic
repositioning and comprehensive transformation management program to help J.
Sainsbury regain its market leadership.
This groundbreaking partnership includes innovative
financial structuring that makes future cost saving available up front to
finance strategic investments. It also includes transformation of critical IT
capabilities: J. Sainsbury has transferred 800 employees to the partner firm
which now runs all the company’s IT systems and networks.
Exhibit 1: Conventional Outsourcing Doesn’t Measure Up.
[PDF, 486K]
PDF Help The benefits CEOs can expect from business transformation
outsourcing include increased revenues, increased profits, and an improved
competitive trajectory. While business transformation outsourcing is not the
only factor that accounts for these results, executives closest to the ground
in these programs acknowledge that it is a major one.
Business transformation outsourcing achieves rapid results
by integrating five essential components:
- C-Level Leadership
- Bold Strategic Agenda
- Innovative Deal Structure
- Collaborative Outsourcing to Transform Processes
- Focus on Enterprise Outcomes
C-Level
Leadership Enterprise-level change requires enterprise-level
sponsorship. In each of the business transformation outsourcing cases we
studied, the CEO was the force behind the program. This doesn’t mean just an
inspiring kick-off meeting and a regular quarterly review. These CEOs took
hands-on roles in overcoming obstacles, dealing with resistance, redirecting
resources, and mastering new skills while they made sure the ongoing business
didn’t falter. For example, one of Les Dietzman’s motivations for taking the
top spot at Family Christian Stores was to join an organisation with a higher
mission. When he arrived he saw an unexpectedly compelling opportunity for
transformation. He developed an overall vision for company growth, then
personally oversaw the effort to triple the company’s revenues and profits. On
the other hand, when a new CEO took over at a large financial services
organisation and delegated the governance processes to a lower level in the
organisation, the outsourced business processes continued to operate, but the
transformation stopped.
Bold Strategic
Agenda BTO means big change fast. Without a radical new agenda,
executives have little hope of achieving the seismic results they’re after.
They need to break out of their industry’s strategic ruts to tap new sources of
value. What’s more, BTO is specifically designed to implement strategy at an
accelerated pace. Whether on their own or with their business partners,
executives develop a compelling set of strategic imperatives for the company,
and use BTO to implement it rapidly. For example, Sir Peter Davis took over as
chief executive of J. Sainsbury in March 2000. By November of that year, he had
developed a reinvigoration strategy and entered into a partnership to begin
implementation.
Setting a bold agenda doesn’t mean carving the CEO’s vision
in stone. BTO partners are constantly scanning the horizon to keep the edge on
their agenda.
Innovative Deal
Structure A transformation deal’s financial structure must serve two
masters. First, it must fund the necessary investment at the best possible cost
of capital. Second, it must motivate the business partners’ commitment by
aligning goals, distributing risks, and promising rewards. BTO deals require
that both partners have skin in the game.
Innovative financing arrangements can take a wide variety of
shapes. Some companies use joint ventures. The firm and the outsourcer jointly
create a separate venture to house the people who will transform the critical
processes. The outsourcer may also buy assets from the firm and lease back over
time. This removes assets from the firm’s balance sheet and produces a
quick-win improvement in ROA.
Companies can also use debt markets to “borrow against
results.” Especially if the outsourcer has an established reputation for
delivering on promises, a company can attract financing for the transformation
based on the expected outcomes. For example, a premier capital firm funded
Family Christian Stores’ IT transformation. Working with a recognised
outsourcer helped the small retailer bring this firm into the deal, secure
attractively priced financing, and pay off the cost of its transformation with
incremental profits.
Collaborative Outsourcing
to Transform Processes Most firms try to distinguish between core and non-core
processes to decide what’s appropriate to outsource. In a dynamic business
environment, that’s not necessarily the important distinction. Transforming a
business quickly means handing off the processes to a specialist company that
can bring them up to competitive snuff. Outsourcing makes all the difference
because a skilled, incentivised and highly motivated business partner can drive
change even more aggressively than the firm itself. Otherwise, these broken
processes roadblock the strategic agenda.
For example, Archer’s CEO recognised that he had to transform distribution channels, call centres, branch operations, and back office processes to reverse his company’s performance slide. In his mind, information technology was central to all of these activities, and he recognised that his internal staff couldn’t manage the transformation required.
He partnered with a large consulting and outsourcing firm to put discipline and
cost controls into existing systems operations and to invest the savings in
critical new applications.
Focus on Enterprise
Outcomes BTO raises the stakes of the game. While collaborative
outsourcing seeks respectable improvements in costs, service levels, and
support capabilities, BTO aims squarely at outcomes shareholders—and
competitors—can see. Along the way, other issues like call centre response
rates and speed of management decision-making will certainly be addressed. But
companies that want sweeping change set goals like doubling profits or
achieving market dominance.
Collaborative outsourcing transforms a support function or
process, but the radical change stopped there. BTO sets a higher standard. It
is a comprehensive approach both to create new capabilities and to use them to
achieve a clear strategic objective.
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