Enterprise: In Through the Out Door
Outsourcing is big news, but rarely has there been a larger outsourcing than the recent $400 million employee services agreement between Procter & Gamble (P&G) and IBM. Under the 10-year global agreement for Human Resources Business Transformation Outsourcing (BTO), announced in September 2003, IBM will support 98,000 P&G employees in 80 countries, providing services that will include payroll processing, benefits administration, compensation planning, expatriate and relocation services, travel and expense management and human resources data management. In addition, IBM will provide application development and management of P&G's HR systems, including P&G's existing global SAP implementation and employee portal.
Dealing With A Series
The partnership is one in a series of major outsourcing deals P&G has signed, and it may or may not be the last. In June of last year, P&G finalized a five-year agreement with Jones Lang LaSalle Inc. to outsource corporate facilities management and project management services, putting Jones Lang LaSalle in charge of managing all the P&G-owned and leased corporate real estate, a total of nearly 13.8 million square feet of offices and technical facilities spread across 60 countries and six continents.
Also in June, P&G inked a five-year deal with Sykes Enterprises Inc. to outsource some of P&G's global customer care services, including the development and hosting of a global CRM technology application and a complete range of consumer contact support and global fulfillment services, a deal with an estimated value of $70 million. And in May, P&G announced an agreement worth an estimated $3 billion over 10 years to outsource the company's overall IT infrastructure to Hewlett-Packard. That agreement has been trumpeted by HP--deservedly--as a prime example of its Adaptive Enterprise strategy designed to help companies "simplify, standardize, modularize and integrate" IT, and is similar to IBM's "On-Demand" strategy, of which BTO is a part.
Embracing the Benefits
Taken as a whole, it's clear that P&G isn't dabbling in outsourcing, but sees outsourcing as a major component in the company's future strategy. And the IBM agreement means that just about everything that isn't directly related to P&G's core businesses (as many of them as there are), including IT and HR, is going to be outsourced. P&G isn't the first company to wholly embrace the potential benefits of large-scale outsourcing, but it's one of the largest. As P&G likes to say: "Two billion times a day, P&G brands touch the lives of people around the world," making it a de facto leader in the consumer goods industry. As such, the success of outsourcing as a whole, and the individual components of the overall outsourcing strategy, will be watched closely and most likely acted upon by companies of every size.
Obstacle Course
One aspect of the P&G/IBM agreement that may create obstacles that smaller companies won't face is the sheer physical scope of the outsourcing operation. IBM will have operational responsibility for three HR shared service delivery centers: San Jose, Costa Rica; Newcastle, England; and Manila, Philippines, along with professionals in more than 25 other countries, all of which will be integrated into IBM's global network of BTO service centers. "IBM brings strong business process knowledge, deep technical expertise and a flexible, responsive business model to employee services at P&G," says Filippo Passerini, P&G's global business services officer in a press release. (P&G declined to comment directly on the agreement.)
Passerini adds, "IBM's vision for combining our capability with their own to lead the BTO marketplace is a win for P&G and IBM, its future customers and the many employees who will benefit from strong future career potential."
The move to outsource non-core business practices to third-party providers is obviously catching fire, as evidenced by P&G's aggressive moves over the past year. But while this outsourcing can be a "silver bullet" in some instances, allowing a company to cut costs and refocus, not all outsourcing deals are as profitable as initially expected.
As a result, companies looking to outsource non-core activities, from IT to HR (and more), are increasing their due diligence before committing to an outsourcing agreement. In the case of the IBM agreement, P&G selected them from a pool of four competitors--IBM, Hewlett-Packard, Accenture and Convergys Corp.
Sources pointed out that the P&G/IBM agreement, as well as other P&G outsourcing deals, is emphatically not a "shipment of jobs overseas", but a concerted effort to remove P&G emphasis and resources away from peripheral businesses to focus on the company's core. While some downsizing is inevitable in an outsourcing arrangement such as this, it's not unusual for the third-party provider (IBM in this case) to take on employees from the customer, retaining those employees' experience, knowledge and expertise regarding the client. P&G reports approximately 800 P&G employees will be offered employment with the IBM HR BTO team.
Speeding the Process
Analysts agree that the success of the P&G/IBM outsourcing agreement, along with the rest of the P&G outsourcing initiatives, should speed the move toward business process outsourcing among consumer goods companies of all sizes as they take advantage of the opportunity to trim costs and focus on core businesses while taking advantage of the benefits offered by BPO providers, such as process change, technology integration and "best practices." Providers such as IBM and HP are obviously eager for this move to outsourcing, and the competition to land more deals will increasingly benefit CG companies.