By Jane C. Linder, Martin I. Cole and Alvin L. Jacobson
A little more than a decade ago, Eastman Kodak Company shook the corporate world by announcing a $250 million, 10-year deal to outsource its entire information technology function. Cutting costs and allowing management to focus its attention on core activities were the primary objectives. Since then the number of outsourcing deals—and their value—has ballooned. Worldwide spending on outsourcing services in 2000 reached $1 trillion, according to one study.
But the real story isn’t about the number or size of the deals; it’s about their character. Although some executives still use outsourcing as a blunt instrument to offload unimportant activities and reduce costs, many others have taken a much more sophisticated approach. Sixty-five percent of the organizations Accenture studied engage in collaborative relationships with outsourcing partners to create high-performance support operations that keep pace with industry best practice (see box).
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The result? The benefits of outsourcing have multiplied. Companies that take full advantage of outsourcing now report cost savings that average 50 percent, compared with an average of 20 percent savings reported in the mid-1990s. Beyond savings, these companies gain access to competitive skills, improve service levels and increase their ability to respond to changing business needs. Many public-sector organizations have had similar experiences.
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A few intrepid CEOs have taken the concept one step further. Nearly one-third of the companies we studied are partnering with outsourcers not just to reengineer support processes but to dramatically improve business capabilities that are critical to their companies’ success.
These partnerships employ different mechanisms—some involve pure outsourcing, others rely on joint ventures, for example. But they share one unique characteristic: They are being used to transform entire enterprises. Whether the strategic agenda involves dramatic growth, market repositioning or rapid diversification, the early results of what we call business transformation outsourcing are stunning.
Rapid and Sustainable
We define business transformation outsourcing as a program to change the way a company works by using outsourcing to achieve a rapid, sustainable, radical improvement in performance across the entire enterprise.
Of course, leaders have been transforming and reinventing their businesses for a long time, and they will continue to do so. What is new and different about business transformation outsourcing is that it offers leaders a way to transform their companies at speed.
CEOs who use this approach start with a bold strategic agenda. They share risks and gains with an outsourcing partner as they collaborate to transform key business processes into competitive weapons in an accelerated time frame. The resulting improvement in performance can be measured in dramatic gains in share price, market position and return on capital.
For example, J. Sainsbury, the second-largest grocery retailer in the United Kingdom, recently found its market position slipping as operating problems chipped away at its performance. The company’s costs had risen faster than revenues, and its profits had moved substantially out of line with those of other industry leaders. During the previous three years, profits had fallen by 40 percent; consequently, the company’s share price and market capitalization had significantly declined. Hastening the slide were major new competitive threats from other grocery retailers, such as ASDA and Safeway.
Calling for aggressive action, the Sainsbury board hired Sir Peter Davis as the new group chief executive and gave him a mandate to initiate radical change. Davis arrived in March 2000; within months he had partnered with Accenture, which set out to design and help implement a strategic repositioning and a comprehensive transformation management program to help Sainsbury regain its market leadership.
This innovative and ongoing partnership includes financial structuring that essentially funds strategic investments by making future cost savings available up front. It also includes the transformation of critical IT capabilities: Sainsbury has transferred 800 employees to Accenture, which now runs all of the company’s IT systems and networks.
Measurable Results
A multinational financial services company—we’ll call it Archer Financial Group—had faced a similar challenge. It had slipped from a dominant market position to the middle of the pack, and nimble new entrants were circling to take their share of the company’s business. But although the CEO had a broad vision about how to achieve a turnaround, Archer lacked the culture, the IT capabilities and the management depth to accomplish it.
Now roll forward through three years of a rigorous business transformation outsourcing program. Archer’s operating margins have increased to $370 million from $151 million; its market share has grown to 28 percent from 19 percent; its assets under management have risen 64 percent; and its share price has doubled.
What kinds of results can CEOs expect from business transformation outsourcing? Based on the experiences of Sainsbury, Archer and others, there are certain benefits that appear typical.
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Increased Innovation Through Access to World-class Skills, Resources and Industry Knowledge. The outsourcing vendor that took over Chicago’s parking enforcement from the city used handheld computers that printed tickets on the spot and were linked to a central database for follow-up. The percentage of tickets paid quadrupled, netting the city an additional $60 million.
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Strengthened Competitive Positioning. A major global telecommunications company (which we’ll call GiantTel) will move from being a commodity voice provider to being an Internet data transmission firm, thanks to the new infrastructure that a leading network and communications company (we’ll call it InfraCom) is building for it.
While business transformation outsourcing is not the only factor that accounts for these results, executives closest to the ground in these programs say that it is a major one.
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