Business process outsourcing can be key for survival

Executives like St Leonard’s College’s Brad Sims already know outsourcing can be critical to survival, but many technology executives in larger companies are finding it takes an impending catastrophe to drive acceptance of outsourcing.

Outsourcing business processes that are an integral part of a company is rarely well received by the rank and file for obvious reasons: job insecurity, threat of lower wages and the risks that go along with handing key aspects of your day-to-day business to outsiders.

However, executives who have been there and done just that -- outsourced core business processes -- say attitudes can and do change when a company is fighting for its life.

"When it is a matter of survival, you tend to sign up," said Vasant Bennett, president of engineering services at packaging equipment manufacturer Barry-Wehmiller Cos.

Bennett, who spoke at a recent IDC business process outsourcing conference, pioneered an offshore outsourcing strategy for Barry-Wehmiller in 2000 when the company was having trouble filling IT jobs at newly acquired business MarquipWardUnited. Faced with a labour crunch that threatened to hold back the fast-growing acquisition, Bennett established an IT outsourcing operation in Chennai, India.

Now staffed with 160 engineers, the Chennai centre plays a key role at Barry-Wehmiller. It helped to lessen some labour costs and increased the company's ability to bid for contracts competitively at some of its divisions. In some cases, it increased the sise of the company's own workforce. Still, acceptance and support of the strategy are tied closely to a division's unique circumstance, said Bennett, citing Paper Converting Machine Co. as an example.

Acquired by Barry-Wehmiller in 2005, Paper Converting had been in a downward spiral since 2001, under pressure by customers to lower prices and forced to cut workers. "They were losing money and the need for outsourcing was a matter of survival," Bennett said. In the end, "the entire organisation embraced it."

Although many large companies often expect to handle their key processes themselves, their often grudging acceptance of outsourcing initiatives reflects a growing understanding that it's just not possible for one company to efficiently do everything.

That's a lesson learned long ago by small and medium businesses, which operate in a market where doing everything is more likely to be draining than efficient. St Leonard's College, a private school with 1740 students in Melbourne's southern suburbs, recognised this fact more than a year ago when it finally gave up on trying to manage its payroll operations and embraced the online Empower-HR solution from Adelaide based Empower.

"Schools generally run fairly lean corporate services, so administrative departments are fairly lean," says St Leonard's College accountant Brad Sims, who recognised that outsourcing both payroll application management and payroll processing would help improve service delivery despite thin IT support.

"With the previous solution we had a number of manual processes in place, using Excel spreadsheets," he explains. "It was just all over the place. Now it's all online, has given us a fair bit of time, and we can access a lot more data by pressing a button. Because we're online, we can see changes the same day rather than having to wait until the next day. It has just given us a lot more freedom."

Chief Babysitting Officer

While many smaller businesses turn to business process outsourcing as a matter of necessity, other companies learn the lesson in much more difficult situations. Marcia MacLeod, vice president of business process outsourcing at The Williams Cos., learned the necessity of outsourcing shortly after she arrived at the energy company.

One of the largest natural gas producers in the United States, Williams had 25,000 employees and was trading at close to $50 a share when MacLeod accepted a job there in 2000. By 2002 the energy company was on the ropes, tainted by the Enron scandal and flirting with bankruptcy. Its high-riding stock dropped from $48 a share to $28 and finally $2 before bottoming out at $0.78. A loan from Warren Buffett kept the company afloat, while it spun off nearly everything except its core business, natural gas exploration, production and distribution, and took steps to shed 85% of its employees.

"BPO was a tool to ensure cost reduction and process improvement," MacLeod said. Highly customised business operations in numerous subsidiaries made no sense for a company reduced to 3,500 people. The former energy giant feared it lacked "the discipline to achieve common processes on its own," MacLeod said, and decided it needed a partner to help drive its downsising strategy.

So in July 2004, Williams signed a 7.5-year contract to hand off its finance and accounting, human resources and IT services to IBM, in a $320 million deal. As part of that deal, IBM agreed to offer jobs to 460 accounting, finance, human resource and IT employees from Williams.

Outsourcing was 'transformational' for Williams, as the experts like to put it. "For the first time, we can call Williams a growing company," MacLeod said. Now at 4,000 employees, Williams is hiring again. "Outsourcing has played a significant role in that."

But change is hard, even when livelihoods hang by a thread. Three years into the contract, Williams and IBM are still refining the scope of the agreement, MacLeod said, and Williams is still feelling the aftershock of the realignment. Some employees did not make the transition to IBM. The indoctrination for the Williams employees -- a two-and-half hour class called "How to be Blue" -- made some veterans feel rookie-green again beside their IBM colleagues.

"A lot of knowledge" walked out the door, MacLeod said, "so we are looking to bring some of the business analytical work back."

On the other hand, an ongoing internal debate about whether Williams should maintain its own data centres dissipated when a centre in Oklahoma was flooded last year and IBM flew in people to make payroll and close out the fiscal year on time, she said. But the company continues to realign the IT portion of the contract, refining statements of work, service-level agreements and roles and responsibilities.

"Never underestimate the impact of change management," MacLeod warned the audience at IDC's conference in New York. "Out in the oil fields, employees like to do things their way, with a handshake." Autonomy dies hard. "It amazes me that some people still believe that how they pay their bills is strategic to their business."

As the liaison between IBM and Williams, MacLeod came to call herself the CBO -- chief babysitting officer -- given the time required to "making the kids play nice together." Others in the company were more inclined to refer to her as the "IBM hugger," she joked, although "IBM would probably say they haven't seen that side of me."

Read more on Information technology (IT) in Australia & New Zealand