Outsourcing Is In
Why do it yourself if someone else can do it cheaper, better, etc.? That appears to be the rationale behind recent announcements from Supervalu and Procter & Gamble to go outside to have important functions within accounting and information technology (IT) handled by a third-party.
In the case of Supervalu, the grocery wholesaler and retailer announced it would layoff at least 110 finance department employees in Minneapolis and Boise after it made the decision to outsource its accounts payable, vendor accounts receivable and other accounting operations to India. As an Idaho Statesman article points out, this is not the first time that Supervalu has outsourced jobs overseas. Last year, it sent 180 IT jobs to India.
Procter & Gamble also announced it had signed a $650 million outsourcing deal to have BT Group run P&G’s VoIP, internet services, remote access, audio and videoconferencing as well as firewall and anti-virus security services.
Alistair Wilson, P&G’s associate director of global business services responsible for networks and telecom, offered an explanation for the move to BT. "Just like we buy power and just care that the light goes on, we just want to plug something into a jack in the wall and know that the power is there to give us dial tones or computer connections when and where we need them," he told InformationWeek.
P&G has also gone down the outsourcing road before. In 2003, it signed a 10-year deal with HP to handle certain IT functions. The same year it signed an agreement with IBM to manage human resources.
Discussion Questions: Do you expect to see the percentage of companies outsourcing IT, HR, accounting functions, etc. begin to pick up? Will more of these outsourcing deals mean sending jobs overseas? What do you see as the relative merits/drawbacks to outsourcing jobs rather than keeping them in-house?
Outsourcing makes sense for certain functions but not for those who still need a human touch, as Laura points out. It must be carefully monitored and evaluated to know if there are continuing cost savings and to determine how the change is viewed by your associates, customers and business associates.
As someone who has led significant outsourcing initiatives at a retailer, I can tell you that there are several advantages.
Advantages include operational cost efficiencies from reduced headcount, an opportunity to take advantage of outside expertise, dedicated technology solutions that may not exist in-house and an opportunity to focus your internal resources on more strategic efforts to grow the business vs. tactical day to day functions to “keep the lights on.”
There are many functions within a retailer that have little to do with the core business of retailing and that is where a retailer can lose focus. Let experts do what they do best and don’t get sucked into your own inwardly focused bubble.
Outsourcing is the right strategy in any number of capacities, provided retailers and manufacturers identify the right “source.”
Don’t necessarily contract the biggest or the most well known. Choose a “source” that truly fits your company’s size, and your real objectives. Remember, the bigger the source, the less attention you will get from the senior people involved within the source. Many times, smaller means hands-on, with more focus and energy. Smaller often is a lot more like what you would expect from your own employees or department. Resist the temptation to hire big but instead hire the best expertise and experience. Smaller, more focused sources can give you a lot more for less expense because he or she has less overhead, less structure, and less employees and headaches of his or her own to keep track of and manage.
I see outsourcing picking up pace. Think about it; just how many people do these companies have that spend most of the day drinking coffee, playing on the internet, and talking with their kids at home? This is a good way to eliminate ineffective employees who are hiding under the corporate umbrella. Companies can then partner up with the best former employees as vendors/consultants. This saves the company money, rewards productive workers who are hired as vendors, and punishes the ineffective and lazy.
I might be a bit biased because I’m one of those people who now handle outsourced real estate work. You have to produce results or you don’t get paid. I really don’t see many drawbacks to this as long as you can get good vendors. I’m fine with sending outsourced functions overseas–as long as it’s not the function I perform.
Retailers are under more pressure than ever to shave costs and increase productivity. If outsourcing can do both, it’s just going to happen.
But outsourcing overseas really bothers me. At least outsourcing within the U.S. gives laid off employees the chance to switch to the vendor side and still collect a paycheck.
Also, I do believe that it’s hard to secure a certain kind of company culture when folks around the globe are overseeing key functions (especially HR!) Common sense would dictate that yanking out core functions that rely on the human touch and working intrinsically with internal teams may cause a negative effect that’s not always easy to correlate dollars to.
It’s a pendulum. Outsourcing looks attractive and solves certain problems. It gets implemented. Often overseas. The positive benefits have to be more than short term before the negatives start to kick in. When the outsourcing becomes more a problem than a plus, the pendulum swings back. Right now, it’s still too new (and it’s not that new) for the reversing cycle to have kicked in yet. I believe it will reverse some time in the not too distant future. At least the outsourcing will be less overseas based. One can only hope.
All great points as noted. To answer the questions posed, YES, I believe you will see more activity of this type going forward. “Buying” resource needs and changes you require vs. “investing” in full time employees to manage existing resource support and the development of new support requirements is more costly and requires training and development of your in-house people to stay in tune with the new technologies and changes taking place. You can negotiate with consultant groups and experts in key functional areas and weigh each firm with regard to those most qualified to deliver on your needs. You also do not invest in benefits with consultant groups and can extend or end the relationship when the project is completed.
The value equation of cost vs. return on investment in outsourcing vs. employees (especially near term) makes it compelling to move more towards outsourcing.
The question that every organization needs to ask every day is can we do this job differently and more effectively–can we figure out how to do this job without people? If you look at all of the most respected companies out there, you find they all keep challenging themselves to be better and adapt new thinking and new ideas. If they don’t do this, someone will sneak up behind them and put them out of business.
Regarding outsourcing jobs, if it is not a core competency or a competitive advantage then let someone who makes it their core competency do it.
One last point: Even with the increase in unemployment at this time, the Bureau of Labor Statics says that by 2010, we will be over 7 million workers short in this country. We will either have to outsource or find new ways of doing things.
Do we understand what we are advocating here?
How many of us have called looking for customer service from one of our suppliers only to find ourselves talking to someone God knows where, reading directly from a script that had little relevance to our situation?
My favorite experience was the time I bought a TV for $150 for my place in St. Croix, USVI. The TV blew out after 30 days. We called RCA support who advised me we should ship the TV to the closest repair center in DALLAS at OUR expense and RCA would fix it and return it. I asked this support person if she understood how many thousands of miles away Dallas was and how much it would cost to ship this thing there. Of course she didn’t. She was in Indonesia. Luckily the local Kmart took it back and gave us another one.
Are we really going to endure this kind of situation with our own internal departments? Can you see it? Got a question on HR policy? Hello India. Got a question on an expense report? Good morning Viet Nam.
There are some things we ought to keep ownership of–even if it costs a little more. The good will of employees is one of them. And control of our finances is definitely another.
I think a lot of companies who are currently saddled with long term outsourcing contracts that were negotiated during stronger times are starting to ask themselves “how did we get here?”
The challenge with outsourcing is that it limits a lot of flexibility for the corporation to respond to external changes. Just as government finds itself stuck with “entitlement programs,” companies who have guaranteed a revenue stream to an outside supplier, whether they are an outsourcer or a software vendor, find it difficult to keep making those payments when the core business turns down.
Like many things, outsourcing makes a lot of sense if it is well planned and carefully managed. But to think an independent second party will have the corporation’s best interests in mind when things get tough is foolish. Nothing can beat a dedicated organization comprised of employees possessing diversified skills all working towards shared goals and having the organization’s best interests in mind.
Outsourcing is about Operations Execution of the non-core but essential aspect of a business. It should not deal in the creation of strategy but rather the execution. Why do businesses exist? Because they have created a strategy that makes commercial sense; however, they may not all have the execution competence.
Outsourcing may not always be the cheaper option but it certainly plays a role in ensuring the Client focuses on why they exist. The objective is to ensure a Return on Investment through increased Throughput, decreased Inventory or decreased OpEx.
Many folks don’t like customer service outsourced to India or the Philippines. But everyone’s experienced customer service conversations with Americans who aren’t well trained or empowered to solve problems. So incompetence isn’t limited to Asian outsourcers.
At least 4 decades ago, American nonfood retailers started Asian outsourcing for merchandise. If a clothing chain gets its inventory from China, Viet Nam, and the Philippines, why not have the accounting department overseas, too? Is there an Asian way to write JavaScript? As for HR, lots of that activity is simply the mechanical steps of processing forms and answering policy questions. It’s less likely that management recruiting, appraisals, and organizational development would go to Asia.
And then there were none….
After all the ‘outsourcing’ is completed, does anyone have a job left to earn any money to buy anything?
The person that will be buying my house someday, will have to have a pretty good income to afford it! I hope there are jobs out there for them.
The falling USD and rising cost of living and high inflation in India, combined with job hopping pushing up salaries may well change the appetite for outsourcing.
This actually make sense now, especially this particular part of the year.