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Outsourcing the Enterprise

Outsourcing Allows British Banks to Check Out of Check Processing

Outsourcing Long-Term Care Policy Administration Allows Entry in the Short Term

Trust Nobody; Train Everybody: Health-MOAT Solution Results in Privacy-Certified Employees

The Art of Fulfillment

Cost V. Control: Thoughts on Outsourcing Your eCommerce Offering

Asia
Australia
Best Practices
Business Process (BPO)
Canada
Events
Finance & Accounting
Financial Services
Healthcare
Human Resources
Information Technology
Manufacturing
Offshore
Outsourcing Journal
Supply Chain Management

Change Without Pain - An Alternative Model for Year One of Outsourcing Agreements

Growing Beyond Illusions - Guidelines for Changing and Improving Outsourcing Relationships

The Snowball Effect: Characteristics of Outstanding Outsourcing Relationships

In the late 1980's British Petroleum (BP) took a radical step. It decided to "crack" apart its business processes like it cracked its crude oil. Cracking is the process that distills crude oil into its various by-products. Similarly, British Petroleum distilled its core processes from the other business functions that support it.

BP sagely realized the best way to compete in the rough-and-tumble petroleum market was to focus its talent and capital on just two business tasks: finding oil and selling the oil-based products that its plants cracked from the black gold. Then it systematically outsourced the other functions that made the company run like a well-oiled machine. In the last 12 years, human resources (HR), finance and accounting, IT, and supply chain management (SCM), among others, all flowed to capable outsourcing suppliers who could perform the job both better and cheaper.

BP pioneered this new strategy, now called enterprise outsourcing.

Today, enterprise outsourcing is the fastest growing type of BPO. Companies in a surprisingly wide spectrum of industries are arriving at the same conclusion: enterprise outsourcing is the best way to survive and thrive in today's brave new world. Two distinct trends are converging to make enterprise outsourcing a viable -- and one of the most valuable -- business strategies in 2002.

The Arrival Of The Global Marketplace

The Internet ushered in enormous changes in the business environment. Competitors now include not just the usual suspects but new players who operate in distant lands. Separate but equal economies have merged into one global village.

That has put pressure on companies to be the best at what they do. Twenty-first century organizations can no longer operate in nineteenth-century ways. The new pressures force companies to adopt a laser focus on their core competencies, cropping everything else out of the picture. They have to assign their best talent and spend their limited capital on the processes that distinguish them in their marketplace. They can't afford to divert management attention or resources on the other processes that help make this happen.

Outsourcing the other processes allows them to do this. Like BP, companies employing this BPO strategy have taken a global, enterprise-wide perspective on their business processes. They identify the key drivers and decide to pour all their resources into them. Then, they conduct a make-versus-buy analysis on everything else. Finally, they select trusted outsourcing suppliers to handle these non-core processes for them.

As BP discovered, outsourcing yielded another welcome benefit: It allowed the oil company to position itself as more flexible and responsive than its competitors. Outsourcing on an enterprise-wide strategy allows a company to adjust its cost structure (read: downsize) during hard times AND expand rapidly in boom times. This created an immeasurable advantage for a player in the volatile petrochemical market where the price of raw crude can change from $30 to $9 to $30 a barrel during the same day.

Deregulation also accelerated interest in enterprise outsourcing. For example, when states deregulated electric utility companies, outsourcing became a strong current for these companies. Next month the BPO Outsourcing Journal will include a story about Hydro One, a Toronto, Canada utility company that adopted an enterprise outsourcing strategy to compete in the new world of deregulation. It chose Cap Gemini Ernst & Young to power up this outsourcing strategy.

Why Shared Services Companies Can't Compete With Outsourcing the Enterprise

At the same time BP was pioneering its enterprise outsourcing strategy, some companies its size tried to achieve the same results with a different method. They addressed the issue of focus and resources by forming a shared services company. For example, one parent company consolidated all the finance and accounting needs for all its divisions in a wholly owned subsidiary. This shared services company viewed each division as its clients.

These shared services companies did create value for their parent corporations. Consolidation definitely sliced some cost from the equation. However, shared services companies could not generate the same amount of value as outsourcing.

Shared services centers could not achieve the economies of scale that a supplier servicing multiple large clients could. They still had to compete for the same limited corporate investment dollars with the parent's other line businesses. They discovered the best and the brightest employees preferred to work for the outsourcing supplier who offered a more exciting career path. They often didn't have access to the process' best practices.

The result: No shared services company could create the kind of value BP enjoyed after it outsourced the enterprise.

Because of these constraints, the shared services centers found their services deteriorated over time through lack of attention and capital. Today many corporations are trying to sell their shared services units to outsourcing suppliers because they discovered outsourcing on an enterprise-wide basis is a better business strategy for them. History has proven that enterprise outsourcing is the strategy that works.

History is the reason enterprise outsourcing is the way of the future. It has demonstrated its power for more than a decade, in boom times and bust. Outsiders sitting on the sidelines have watched the game, liked the score and decided they want to play.

The Arrival Of The Competent Supplier

At the same time, BPO outsourcing suppliers were coming of age. Competent, trusted and credible, BPO suppliers were now ready to tackle these big assignments.

BP, for example, chose to wait to outsource its HR functions until it felt the supplier community was mature enough to provide the superior service it demanded. It settled on Exult when it felt comfortable with the supplier's capabilities.

In some cases, the outsourcing expertise has been around for a long time. Third-party administration for insurance companies has been a niche market for a decade. Now, however, it is becoming the cornerstone of an overall enterprise outsourcing strategy for insurance companies.

Enterprise Outsourcing's Broad Appeal

Enterprise outsourcing is spreading as quickly as wildflowers after a spring rain. Its appeal is broad. In the last two years, Everest has been involved in helping companies outsource over 30 different types of processes.

Everest has worked with transportation companies who divested their IT infrastructure, their maintenance facilities and their real estate management to strong suppliers. We have worked with many hospitals that have discovered the remedy to their financial health was enterprise outsourcing. They now have X-ray vision on curing the sick, while outsourcing nearly everything else. One hospital we worked with divested seven different processes that dramatically changed its cost structure.

That's a healthy trend.

This article is the first in a series focusing on outsourcing the enterprise. Next month we will focus on the human resources process, exploring how HR fits into a company's global outsourcing strategy.

Lessons from the Outsourcing Journal:

• Enterprise outsourcing's appeal is astonishingly broad. Its appeal is universal because it helps companies compete in their core marketplaces by giving them more flexibility.
• Enterprise outsourcing now has a 10 year track record. Executives feel comfortable with its promise.
• A strong supplier base has emerged that can apply best practices and economies of scale to enterprise outsourcing.
• Shared services companies produce value, but thet cannot produce the broad, strategic impact value that is achieved by outsourcing on an enterprise-wide level.

Publish Date: April 2002

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Copyright © 2002 - Everest Partners, L.P.

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