Outsourcing: tool of the future for retailers
Elsevier Food International Vol.8, No.4, November 2005
Steve Foster
Used as a strategic tool to gain and sustain competitive advantage, outsourcing is now hard at work in the retail business. Whatever the arguments in favour or against outsourcing, it is inevitably going to play an increasing role in international retailing as globalisation takes hold.
In an ideal business environment, retailers would have little or no need to outsource services or production. Harking back to the late 19th century and well into the 20th century, when information technology was not even a blip on the horizon, retailers owned farms, manufacturing sites and there was little or no need to outsource. Boots, the UK-based retailer, even used to have its own fire service and employed its own gardeners who grew Boots own label bedding-out plants and bred Boots own ladybirds.
However, outsourcing is now hard at work in the retail business. Traditionally the preserve of product manufacturing such as private label, there has increasingly been a move to the outsourcing of services including IT and logistics. Outsourcing also comes in other forms such as advertising, public relations, marketing and sales promotion. And now the growth of services is being accentuated by the dramatic economic growth of India, China and other Asian countries such as The Philippines, and the cost-savings they offer.
Logical need for centralisation
Tesco, for example employs a three-tiered approach to outsourcing. A Tesco spokeswoman says: “With any innovation we consider three things: is it better for customers, simpler for staff and cheaper for Tesco.”
In addition, Tesco, in its position as an international retailer, believes that there is a logical need for centralisation. “As an international retailer, it makes sense that some of our functions have a more centralised element to them. The benefits of outsourcing can include using a level of expertise not already within a business, consistency of standards across the group and economies of scale.”
Tesco does try to stay ‘local’ where possible. “Each of our businesses has a unique local character and all our operations are run in the main by local people.”
When it comes to measuring the effectiveness of outsourcing, Tesco again applies a set of clear principles the Tesco spokeswoman points out. “Any measurables would focus on whether 'better, simpler, cheaper' has been achieved.”
Among Tesco’s existing outsourcing companies is Xansa, an IT company that has recently agreed a new IT services contract, which includes a minimum revenue commitment over the three years to 2008.
For Tesco and Xansa this builds on a 15-year relationship between the two companies. Xansa will continue to provide a portfolio of services through its integrated delivery channels in the UK and in India. Services will include application management, software development and programme and project management for a wide range of Tesco's critical IT systems covering distribution, stock replenishment, products and pricing through to daily shelf-edge labelling.
Commenting on the agreement, Alistair Cox, chief executive, Xansa says: "We are extremely proud to be working for Tesco, a world-class retailer. Our relationship goes back over fifteen years and has been built upon consistent excellent delivery and providing innovative solutions to Tesco's challenges. I am very pleased that this has been recognised in this IT services agreement. It will allow us both to do more of what we are each good at - Tesco to continue to be a world leading retailer, and for us, to provide appropriate innovative cost effective solutions."
Service-based economies
While retail lags behind industries such as car manufacturing, banking and financial services when it comes to the extent of business which has been moved to outsourcing, its growth is a reflection on the shift from manufacturer-based economies to service-based economies.
According to consultants Accenture, outsourcing is not a new concept, and it is not even limited to large businesses. Richard Wildman, UK & Ireland Retail Lead Partner at Accenture says: “Outsourcing is simply hiring another entity to take on certain jobs that you’ve decided to no longer do in-house. This may be running the IT function for a retailer, handling application software for a bank or taking over the human resources for a consumer goods manufacturer.
Wildman says: “The rationale of traditional outsourcing agreements has been to outsource non-core activities like HR, finance and accounting or IT to niche providers to achieve cost savings and allow the company to focus on more strategic areas like customer service or product development. Cost savings, however, have ceded ground to new goals of increased control and radical performance improvement.”
“Business leaders are now bringing a creative bent to outsourcing, raising the bar and using it as a strategic tool to gain and sustain competitive advantage; outsourcing several processes to one supplier; and outsourcing strategic as well as tactical processes.”
In a global, cross-industry survey among more than 560 executives at companies with experience at outsourcing, Accenture found that three-quarters (74 per cent) of respondents exercise moderate-to-extensive reliance on governance, and more than two-thirds (69 per cent) have an executive dedicated to the management of their outsourcing relationships.
Different forms
Outsourcing comes in different forms. Business process outsourcing (BPO) allows companies to delegate technology-intensive processes to an outsourcer such as Accenture, which owns, administers and manages the processes, provides service according to defined metrics, and continuously improves the processes over time. Accenture's BPO services include finance and accounting, human resources, learning services, supply chain management, and customer relationship management.
In addition to BPO, there is also business application outsourcing and technology infrastructure outsourcing. Application outsourcing helps businesses control software development costs while keeping up with market innovations. It allows a company to have consistent access to highly trained technology experts without having to put them on their own payroll full time.
With technology infrastructure outsourcing, an outsourcer such as Accenture would operate information technology systems on behalf of clients.
While outsourcing can take place at the company site with company employees working side-by-side with staff from the outsourcer, companies can also take advantage of delivery centres. Accenture has a network of more than 40 delivery centres around the world. The aim of these centres is to improve efficiencies, innovation and cycle time while reducing costs for clients.
The ability to use resources anywhere in the world on a 24-by-7 basis provides companies with flexibility and security.
Richard Wildman says: “Outsourcing is a critical competitive tool in a global economy. In a global marketplace, companies must use every opportunity at their disposal to remain competitive, grow and create jobs. Outsourcing is one of these practices and a key component of the business model for successful companies.”
Offshore outsourcing
Amit Bajaj, head of retail and consumer industries at TATA Consulting Services (TCS), says outsourcing has traditionally focussed on two activities in the retail sector: products and services.
TCS, an information technology consulting services company, provides offshore-based IT services for retail clients including Target, Best Buy and Walgreens in the United States and Somerfield in the UK
Bajaj says that as an industry retail is one of the “laggers” in adopting offshore outsourcing, especially when compared to the banking and financial services sectors. “If you looked at the top 50 business and financial services companies almost 70 per cent would go through offshore whereas retail hasn’t even crossed the 20 per cent mark.”
Bajaj points out that retail differs from other business sectors because “it is very people-driven” with an estimated 85 per cent of people employed at the stores. “We are looking at the remaining 15 per cent,” he says, pointing out that one of the essential ingredients for a successful offshore partnership includes flexibility, “to react to a changing environment, and to do something new.”
According to Bajaj there is an additional benefit for retailers who move to offshore outsourcing. It opens up opportunities for retailers in the markets of the participating offshoring countries.
Increasingly, retailers that outsource offshore have to be prepared to face levels of criticism that jobs may be sacrificed at home in the drive for cost savings.
Whatever the arguments in favour or against outsourcing, it is inevitably going to play an increasing role in international retailing as globalisation takes hold. Outsourcing may not be a universal panacea but it appears to be a tool of the future for retailers.
What the consultants say
Research and be prepared: End users need to go into an outsourcing deal with their eyes open. Thorough research of objectives on both sides is essential. All too often companies think that if they outsource a function or a project, they can wash their hands of it. This is not the case.
Find the right fit: The right supplier is vital. Outsourcing means an ongoing relationship and different suppliers will have a ‘fit’ with different companies. Like any relationship, everyone is different and finding a match is paramount in having a long lasting and happy partnership.
Management is essential: Good management of outsourcing and retaining some of the knowledge within the organisation is vital.
It is not just about cost: Although tempting, cost should not be the only motivation behind outsourcing. The primary concern should be standard of service. Cost savings can be made but be realistic. Pinning a supplier to the wall on a contract will mean that service will suffer or the relationship will break down irrevocably. Realism and transparency are of vital importance.
Evaluate: From the start clear objectives and targets on both sides need to be defined and ways of measuring the completion of those targets need to be agreed upon. If this is not done, the lines become very blurred, with frustration and misunderstanding abounding.
Source: Deloitte Outsourcing Research/National
Outsourcing Association (UK)
April 2005
• Incorporate business outcomes as a performance measure from the outset of the arrangement.
• Look for an outsourcing provider that brings a wide set of skills and strengths, and a long-term track record of delivering results, in addition to competitive pricing and commitments to cost reductions.
• Give as much attention to performance measurement and the quality of your relationship with your provider as you do to the contract.
• Use risk/reward provisions as incentives for higher performance outsourcing.
• Use active governance to manage the outsourcing relationship for maximum performance.
• Task talented executives with optimising outsourcing arrangements.
• Be clear about objectives – cost, process improvement and the ability to focus on the core business are the most common among veteran outsourcers.
Source: Accenture
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