OUTSOURCING: BENEFITS AND RISKS-A CASE STUDY ON UNILEVER
1. THE EVOLUTION OF OUTSOURCING
Businesses have evolved consistently over the years driven by different factors. First it was to build market share and market dominance, especially in the 1960s with the invention of new technologies and the evolution of the service industry.
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Then in the 1980s, it was on competition for market dominance and survival. Organisations needed to build competitive advantage by producing the goods and services their customers required, and maintaining customer relationships through these feats. Businesses evolved from being mainly product based, to being customer focused, and through that being able to ascertain what customers want, and redefine their operating models to fit in with these changes (Willcocks et al, 2009).
The constant evolution of businesses meant that they had to constantly change and adapt their resources and capabilities to fit with the changing customer taste, and this meant focusing their core efforts on what mattered most, that factor that resulted in sustainable competitive advantage for the company. The decision for organisations to focus on their major operations, put into consideration other back office functions such as Human Resources, Finance, Technology and Procurement, and steps that the organisation could take to make these more efficient, save costs, whilst also adopting best practices.
The revolution of the technological industry in the 1980s showed that the PC industry did not need just one provider for all-in-one computer technology (Hardware, software, peripherals), by showing that different parts could be sold separately, especially with the establishment and growth of Apple, Oracle, and Microsoft. That same revolution has been showcased within organisations to show that the firm does not necessarily need to take ownership of all functions required within the organisation (InfoWorld, 2006). According to Varadarajan (2009), there are functions that are core to an organisation, while some others are basically support functions. Both entail capital, manpower, and other resources to run, however, core functions are also profit centres, while support functions usually serve mainly as cost centres. Therefore, organisations are increasingly concentrating on their core services, while delegating the function of their support functions to external service providers that specialise in providing these services, services otherwise known as outsourcing.
Outsourcing is defined as the transfer of an organisation’s operations, processes or functions to an external service provider, which is obligated based on specific and/or flexible contractual terms to conduct these tasks on behalf of the organisation (Quinn et al, 1995). The global outsourcing has witnessed enormous growth over the past decade, from $232 billion in 2000, to $442bn in 2010, and predicted to grow to $518 billion by 2013 (Accenture, 2009). Outsourcing usually involves the transfer of responsibilities, but could also include the transfer of staff and business processes to providers inshore or offshore. According to Accenture (2009), outsourcing has dramatically changed the manner in which most companies “create and distribute value”.
Outsourcing has gradually evolved from being hardware and applications based, to higher-level business processes and services. Now instead of companies just outsourcing their IT maintenance and installation to external parties, they now outsource their support functions such as Human Resources, Finance, Procurement and Technology, all so they could reduce costs, avoid wasted resources, utilise best practices and concentrate on their core services, albeit theoretically. It is increasingly becoming a major strategic option for most small, medium and large companies, hence the reason why it has been chosen as an important topic for this study. The following are examples of companies that have adopted outsourcing as a strategic option for their organisational growth.
Ericsson has recently announced that it has finally signed an outsourcing contract with HP. It is a five-year contract that will allow HP to manage the infrastructure services, desktop support, helpdesk and output services for Ericsson. This contract is actually an extension of a contract that was signed in 2003. The IT services of Ericsson will be updated so that they will cater to the future needs of the employees of the company. It will also allow for flexible support for the global business. Outsourcing IT allows Ericsson to reduce IT spending, total costs of ownership and will help to make the IT structure more efficient (HP 2003).
Furthermore, Kodak has outsourced IT to IBM in order to reduce internal IT costs. The help-desk support for windows Server and Windows XP has been outsourced to IBM. This will help Kodak cut costs drastically and will also provide flexible pricing that will allow Kodak the ability to adjust the IT operating budget. The contract between the two companies will allow IBM to build and maintain an energy-efficient green data centre in addition to the converged IP network infrastructure for Kodak. This will help Kodak save more than $1.2 million in reduced energy costs and operational efficiency over the next five years (IBM 2005).
JP Morgan entered into a multi-sourcing, 7 year deal with 4 vendors. 45 percentage of JP Morgan’s IT employees were transferred while 600 vendor’s staff were also supplied to work together so as to achieve the targeted goals. The data-centres, mid-range computer distributed data services were outsourced to different vendors while It strategy, application development and vendor management were kept in-house. This outsourcing strategy led to an annual savings of $ 700 million for JP Morgan (Willcocks et al, 2009).
1.2 UNILEVER, THE ORGANISATION UNDER STUDY
Unilever is a global company, and a group of companies responsible for producing and marketing some of the world’s largest brands such as Persil, Knorr, and Lynx. Its major strategy is to add vitality to life by producing goods that help people live better, feel better and get the most out of life. With revenues exceeding $40 billion in 2009, Unilever employs over 200,000 individuals globally and has operations in more than 100 countries worldwide.
1.3 OUTSOURCING IN UNILEVER
Unilever has embarked on several outsourcing agreements over the past decade with a number of notable vendors such as IBM, HP, BT and Accenture. They have outsourced a number of their non-core business operations to these third party providers, and the nature of these agreements are outlined as follows:
Unilever signed a seven-year application outsourcing agreement with Accenture in 2005, which covers the development of applications, their implementation and support for Unilever across the whole of Europe. The contract cost ?500m and entails Accenture deploying a unified European IT platform and the provision of IT services to Unilever’s operations in 20 European countries (Personnel today, 2006; Accenture, 2010).
IBM in December 2005 also signed a seven-year finance transactional services outsourcing deal with Unilever across Europe. This transition affected 750 staff across 20 European countries and entailed the handling of Unilever’s Purchase to Pay, General Accounting and Bill to Cash functions (Silicon.com, 2005). In 2008, the agreement was extended to procurement outsourcing in which IBM assisted in integrating and standardising the procurement practices across all regions within Latin America (ComputerWeekly.com, 2008).
In 2006, Unilever signed an additional seven year HR BPO outsourcing deal with Accenture that covered areas such as payroll administration, reward administration, performance management, workforce reporting and core HR administration across 100 countries in more than 20 languages, delivered through centres in Bangalore, Manila, Dalian, Bucharest, Prague and Curitiba (Unilever, 2006).
In 2006, Unilever also extended a BT outsourcing contract for an additional three years, for an extra fee of ?270 million. This outsourcing contract covered areas such as voice, mobile, Internet, DSL, VPN, audio and videoconferencing solutions within Unilever Europe (Silicon.com, 2006). Later in 2006, Unilever outsourced its global firewall management systems to BT over a 6.5 years period for ?10.5 million (ComputerWeekly.com, 2006).
HP and Unilever in 2008 announced that they had signed a seven-year outsourcing contract in which HP was to manage the infrastructure of Unilever operations across the Americas, Asia, Africa, Turkey and Middle East. This arrangement included the standardizing, virtualizing and optimizing of existing enterprise infrastructure, and was predicted to enable the company work more effectively (Networkworld.com, 2008).
1.4 PROBLEM STATEMENT
These contracts were part of the “One Unilever” transformation initiative and were designed to deliver annual savings of $927 million yearly. Unilever hopes to streamline the operations of its multi-domestic franchises across Europe, whilst also implementing shared services globally, and outsourcing agreements were deemed as the most efficient and effective way of having these done, especially across procurement, finance and infrastructure management functions. However, according to InfoWorld (2006), several issues may arise with outsourcing, especially when its conducted on a multinational scale, and these may comprise:
Security vulnerability – Outsourcing firewall to external parties
Employee resentment – Cutting staff and transferring a large portion to third party clients.
Change management difficulties – Inability of retained staff to quickly recognise and blend in with newly established partners and processes.
Inability to calculate cost savings and efficiency progress, and effectively manage contractual relationships with several third parties.
All these could make it difficult for Unilever as an organisation to appropriately recognise if / where it has saved costs and achieved efficiencies, and could even result in higher cost of operations and managing, than could have otherwise occurred when it was managing these operations itself, especially if the relationships between outsourcer and outsource goes wrong, or a security vulnerability occurs (InfoWorld, 2006).
1.5 RESEARCH OBJECTIVE AND QUESTION
Based on the overview of outsourcing as discussed earlier, and the problem statement highlighting possible ways in which these arrangements could go wrong, this research would aim to:
Investigate the current progress and success of outsourcing in Unilever especially in the UK, and to a smaller extent across Europe.
Ascertain how the maintenance of supplier relationships have been instrumental in achieving better results from outsourcing projects.
Understand how outsourcing has helped contribute to overall competitive advantage in Unilever, in the UK, and also across the UK.
Based on these objectives, the following research question has been coined:
To what extent has outsourcing with single or multiple partners contributed or disrupted the drive for sustainable competitive advantage within global multinational firms, what are the potential benefits attributable to outsourcing within companies, and how could possible disadvantages be identified and subjugated?
1.6 Dissertation Structure
This study is structured in the following way:
The Literature Review chapter that follows would highlight relevant texts and reviews that have been obtained from academic theorists regarding outsourcing. The literature review would cover the theoretical definitions of outsourcing, business functions that are usually covered under outsourcing agreements, the different forms of outsourcing, the manners and processes through which organisations outsource, the benefits attributable to outsourcing and threats that could arise as a result of outsourcing. An outlook on the outsourcing industry would also be included.
The Methodology chapter would highlight the main methods through which data would be collected and analysed for the sake of answering the aforementioned research question, and accomplishing the research objectives. Additional information on the research approach and strategy would also be included.
The Results chapter that follows would include a concise response to all questions asked during the interview process, and these would be arranged according to the manner in which the results are structured. The results would be structured based on the topics covered in the literature review.
The Discussions chapter would seek to compare and contrasts findings from secondary data analysis and also from the interviews, and compare them against findings from literature review, using a deductive methodology.
2 LITERATURE REVIEW
2.1.1 Theoretical definition of outsourcing
In our contemporary fast moving business world, many organisations are struggling to differentiate and crave the right competitive strategy in the market. Businesses are encountering enormous pressures in the market to improve and maximise their operational efficiency. In order to gain a sustainable competitive advantage in the market; organisations (both private and public) have turned to outsourcing as a major element in their business strategy.
Click & Duening (2005) defines outsourcing as “the movement of business processes from inside the company to an external provider”.
Businesses outsource their management practices to add specialised expertise where needed to help management run or improve the organisation and business module. The ultimate reasons that facilitate the emergence of this strategy are competition, cost reduction and the emergence of information technologies.
Outsourcing has hugely enabled many organisations to focus on strategic aspect of their business and allows third parties to deals with their non-core activities (McIvor, 2005). Firms normally embarked on outsourcing activities when their secondary-level activities started to consume more of their existing scarce resources, consuming time and hindrance investment from their core activities. Companies that intends to concentrate on their core business activities, will find outsourcing as a way of minimise the load and risk of their secondary-level activities (McIvor, 2005).
For majority of firms, outsourcing is a result of innovation (Quinn, 2000, Corbitt & Al-Qirim, 2006). Outsourcing derived from the daily changes that occurred in the environment, the emergence of new technologies, rapid changes in the market demands and shorter product life cycles are some of the crucial elements that have changed in the recent years.
Nowadays, outsourcing has been widely discussed issue in terms of business strategy, and has become a regular topic in the academics literature. Most successful organisation in the world use it, and it essence seems to be ever interesting. The major highlight about this topic is the offshore possibilities; where significant markets like India and China competing with the West. In the case more and more businesses are looking to East for cheap labour, efficiencies and market opportunities. Theoretically, outsourcing can tremendously leads to short-term profits.
While businesses outsource, they targeted few core activities and try to gain substantially from outsourcing their non-core activities. Such strategy would ultimately improve performance through scope economies and reduces costs through scale of economies (Harland et al., 20005). When strategic alliances are formed, the core business skills and competence are hardly maintained and can be easily lost. This may not be a potential threat to some firms because outsourcing can enormously allow them to learn quickly new skills and competences from third party. However, it is essential for outsourcing firm to maintain its most crucial part within the organisation and retain developments and manufacturing of essential parts. The manufacturing is the most crucial element in terms of how customers perceived the firm product (Brandes, Lilliecreutz & Brege, 1997).
Many researchers believed that business non-core activities should be outsourced and the core activities remain in house (Kakabadse and Kakabadse 2000a). Core activities are corporate skills that impact numbers of activities within the organisation, but it is not that simple to define a core competence.
As per Willcocks, et al 2002, the firms which have decided to outsource will need to spend considerable time on carefully choosing those processes which need to be outsourced and those which should be retained within the firm. Much time need to be spent on evaluating and distinguishing between the core processes which should be controlled in-house and commodity processes which can be outsourced. The authors argue that the processes which lead to value creation should never be outsourced. It is therefore required that the top level executives spend considerable time in ranking the various organizational processes according to “their potential for value creation and their potential of value capture”.
This ranking can help in creating a value hierarchy which provides further clarity on which processes can be safely outsourced. Willlcocks et al. 2002 suggest that the business processes should be carefully evaluated or compared with the concept of value creation as described above along with their “contribution to competitive positioning”. This leads to the following grid which can be used in choosing those processes which can be outsourced.
Fig1. Decision making Matrix on Outsourcing
Activities that firm continuously engaged on such as; functions that are performed in-house, that create huge competitive advantages, critical to business success, and activities that drives growth and innovation (Kakabadse and Kakabadse 2000a). Quinn and Hilmer (1994) added that core competencies are not only products or functions, but are also skills or knowledge sets. Competencies are sets of skills stretching across all functional borders. Managers should pinpoint on aspect where the firm dominates, instead of stretching their over the entire value chain. Competencies are limited in number, therefore, managers must be able to understand the strategic fit that directly relate to understanding of serving and meeting with the customers’ requirements (Quinn & Hilmer, 1994).
For organisation to outsource its non-core activities or non-essential activities is a vital way of thinking. Reason had been that, such strategy enables the organisation to redirect its people towards performing activities in accordance with the firm core competences. (Brooks, 2006). Many researchers believed that, a firm strategy to outsource it non-core activities can free its human resources from undertaking low level jobs, and build a platform wherein the people can work on more highly knowledge intensive project that may be beneficial to the organisation and its people (Lacity et al. 1995). This concept was also supported by McKinsey Global Institute (2003) about the benefits of outsourcing on a national level. The report claimed that outsourcing low-level jobs mainly to developing countries would release the burden in the human resource, and also allowing the developed countries to create a higher value adding activities.
The combined effort to focus on organisations core activities and releasing human resources enables an optimisation of the organisational capital investments (Quelin & Duhamel, 2003), which ultimately maximises the returns on internal resources (Bailey et al. 2002).
2.2 Different forms of outsourcing
Technology has been one of the most crucial components in terms of outsourcing. Getting access to technology or competence outside the organisation may be a motive to engage in outsourcing as a solution of shortcoming. The situation when this approach may be favourable is when suppliers prove to be more advanced (Harland et al. 2005) or have protected their own technology through patents, which render access impossible. Then the only cost-effective way for the organisation to access this technology may be to engage in an outsourcing agreement with the supplier. To get access to the specific technology needed outsourcing also give firm the opportunity to reduced potential risk of investing in research and development associated with large and often irreversible investments (Quelin & Duhamel, 2003). The technology example may also be applied to the search for relevant competence when companies may perceive a gap within their own organisation compared to knowledge and competence found outside the organisation (Quelin & Duhamel, 2003). Couple of years back, IBM Business consulting services signed a seven-year outsourcing contact with Unilever which covered significant parts of Unilever’s financial transactional `services, including its Purchase to Pay, General Accounting, and Bill to Cash functions. Furthermore, when accessing to a new technology the host organisation may find themselves in a situation where they end up rediscovering their old technology. This may occur in the adaptation process between the host organisations technology systems and the systems used by the third party supplier (Weigelt, 2009).
2.2.2 Business process outsourcing (BPO)
Business process outsourcing is relatively new business phenomenon. BPO is an outsourcing phenomenon where much responsibility has been given to third parties to undertake and perform the entire business functions on behalf of the client organisation (Dibbern et al., 2004). Incredibly, there are vast number of industries that are embarking on business processes outsourcing such as; the financial sectors (Banks, insurance companies) the government services, financial services, logistics, transportation, health care etc.
BPO initially started with non-core activities and is now moving towards core activities. Mainly targeted areas were; call centres, help desks/customer support, hotlines claims management, document processing etc., and its gradually booming core areas like software development, Finance and Accounting, Human Resource etc. The trend at which these activities are moving is beyond the speculations outlined on the above literatures. Due to the trend and pace of competition, outsourcing of typical back-office functions are now and shifting into middle-office functions (Millar, 2004). Recent research showed that, India, China or the Philippines are not the only nations that have benefited with BPO, but also Eastern and Central Europe’s markets are also chasing near shore outsourcing from Europe.
Many outsourcing organisations are beginning to think that BPO is drastically moving from efficiency to effectiveness. Another research done by Terra (2005) concluded that 73 per cent of BPO customer’s survey shows that BPO is enhancing their outsourcing processes.
For the host organisation to deliver outstanding and quality service, it must have the requisites service methodology, people/expertise, technology, infrastructure, metrics capabilities etc. All these requisite plays major roles in helping the outsourcing party by reducing “investment” risks, increase transparency, improve the overall process quality and above all lowering costs.
2.2.3 Applications Outsourcing
This practice is concerned with maintaining client applications, which may include Enterprise Resource Planning (ERP) systems, legacy systems, portals and middleware (Deloitte, 2010). The service provider is responsible for maintaining and developing the applications, delivering technical and end-user support, and providing technological infrastructure support as covered in the outsourcing legal agreement (InfoWorld, 2006).
2.2.4 Infrastructure Outsourcing
This practice is concerned with managing all relevant IT related infrastructure that enable the technological processes of the organisation function effectively. Infrastructure such as data centres, servers, desktop management systems, and hosting services are outsourced to competent third parties, with the aim of reducing the cost associated with managing these infrastructure internally, as it could be found cumbersome for a non-technical organisation.
2.3 How organisations outsource?
As described earlier, the general rule for all outsourcing is to outsource the more commodity-like activities to one or more external suppliers in hope that they can provide the service equally or even better for less money (Lacity et al., 1995). There many critique against this approach since it tends to over-simplify the complexity around the outsourcing decision, which easily can lead to disappointment (Lacity et al., 1995).
To outline in a simple format on how organisation outsourcing is a daunting task. Let assumed when Unilever decided to outsource its IT to third parties. The question all managers need to answer when outsourcing the IT function of the organisation is which aspect of the activity should performed internally, and what other aspect should be managed by an external vendor (Willcocks & Lacity, 1998)In recent scenario where Unilever found out that its in-house calls centres were incapable to respond to its increasing business needs, they outsourced this activity to external parties. Over a period of time, Unilever team shortlisted and scrutinised 11 call centres companies and choose a particular vendor on the basis on its below industry attrition rate and the way it managed its staff. On a daily basis, staff members from Unilever supervise their operation and report back to the firm. The crucial aspects of this partnership demonstrate that Unilever succeeded in maintaining the right level of control with its operations without getting involved in the technical aspect of the operations. A strategic measure employed by Unilever to ensure outsourcing a viable long-term solution was the way the firm utilises and combined its own in-house product knowledge to specialist resources gained from its vendor.
But since every organisation is different and faces different challenges, it is impossible to give a simple answer. IT is today a highly important and integrated part of most businesses and can therefore be said to affect and shape most processes within an organisation. More research on this aspect concluded that the following activities are unwise to outsource; activities that require enormous knowledge of business needs, IT strategy, IT architecture and activities that are perceived as a problem (Lacity and Hirschheim, 1994).
The degree of outsourcing is a quantitative measure of categorising different outsourcing options. Different types of outsourcing models can be developed on the basis of the total IT resources (Lacity et al, 1997).
Total outsourcing – simplifies that mostly 80 per cent of the IT budget is outsourced, on the other hand;
Total in sourcing – simplifies that 80 per cent of IT budget is kept in-house after outsourcing alternatives has been evaluated.
Selective outsourcing – a mix of outsourced and in-sourced functions, neither reaching 80 per cent of IT total budgets.
De facto in sourcing – the internal IT department is used without any evaluation of external alternatives.
Generally, large scaled outsourcing deals (total outsourcing) is often a part of a bigger and more lasting change involving the way in which the organisation need to be structured, focused and managed (Willcocks & Lacity, 1998). Applying total outsourcing while using one or a few vendors can put the client at risk since it tends to increase costs and decrease flexibility over time. An alternative to total outsourcing is to use selective outsourcing. This approach assigns specific functions or services to the vendors that are best suited for the job. However, many believed that selective outsourcing is a successful form of outsourcing since it incorporates the fact that the information technology span includes a wide spectrums of activities that are different in terms of the levels of technical of maturity, integration with existing processes and the business contribution (Lacity et al. (1997).
Arguably, there is no one internal IT department or suppliers that has the experience and economies of scale to perform all the required IT activities effectively. By using selective outsourcing, the organisation should be able to increase its flexibility and control and also minimise risks by spreading it onto different vendors and time horizons. This approach also takes into consideration that IT activities, depending on their characteristics, require different amount of management attention, security and consideration to be successful IT outsourcing objects (Lacity & Willcocks, 2000). The authors also stress that selective sourcing works most effectively within the context of business strategic concerns and an overall IT-sourcing strategy that retains both flexibility and control.
Other benefits of using selective outsourcing are for example motivated in-house personnel competing with external suppliers, reduced risk since it is spread over a number of vendors and a learning process that can be incorporated more swiftly. Possible downsides with selective outsourcing are increased costs while managing multiple contracts and vendors, problems with the integration and cooperation among the different vendors and finally a risk of losing sight of the overall strategic issues while focusing on maximising the operational possibilities (Lacity & Willcocks, 2001).
2.4 Benefits OF outsourcing
2.4.1 Cost Saving
The reduction of operational costs is still one of the main goals of outsourcing. Significant savings in capital and operational costs have been reported from organisations that outsource parts of their in-house operations (Harland et al., 2005).
To reduce costs, the organisation needs to start by locating and subsequently divide the organisation into core and non-core activities. After the organisation core and non-core activities have been identified, the non-core activities/competences may be outsourced to a third party contractor/vendor. The idea is thus to remove a part of the organisation that the organisation don’t have adequate resources, time or strategic interest to accommodate in-house.
The reason why the third party contractor can produce the same product at a lower cost is generally through achieving a production of greater scale (Kakabadse & Kakabadse 2005). The larger volume is maintained by taking on many small volumes from a variety of different clients. The larger scale also enable the supplier to further specialise in its field which leads to higher plant efficiency and hence, lower costs per item or service produced (Weigelt 2009).
Furthermore, one of the catalytic factors that have hugely driven and enabled the implementation of cost effective outsourcing possible is the increased globalisation over the last 50 years. The focus has moved towards outsourcing low level jobs to developing countries where the wages and labour costs are significantly lower than in the developed countries (Farrell, 2006). The low level jobs are hypothetically characterised by a low need on experience level and prior knowledge. The transfer of these jobs have also been facilitated when they have been regarded as unattractive in the developed countries but considered attractive in low wage countries (McKinsey Global Institute, 2003).
Thus, implementing outsourcing can be seen as a management technique that creates radical changes by step-by-step improvements. These are aimed to lower overall costs within the organisation (Bailey et al. 2002) as well as creating a price competitive advantage over competitors. Though, when engaging in outsourcing activities to reduce costs in one part of the organisation other parts will often require increased investment and higher management attention. Areas concerned are primarily related to the management of increased interactions with the buyer and supplier network. This as well as an increased level of outsourcing demands needs to acquire and to maintain a higher level of logistic excellence within the organisation. Further on, savings gained by outsourcing is weighed against costs due to the need to monitor the performance of the supplier. This to ensure that for example; quality, service and timing of delivery remain on a high level (Quelin & Duhamel, 2003). These are negative aspects that may lower the motive of outsourcing an activity with the sole goal of achieving cost reduction within the organisation. However, hiring expertise from host country has not been proving to be an effective cost saving strategy.
For example, to hire skilful personnel from another country especially outside the host country region can be burdensome and frustrating tasks as there are many protocols involved like visa processing time, immigration rules and settlement.
The concepts about cheap local labour are gone, a Chinese operating firm in the UK may finds it extreme difficult and expensive to hire expatriate’s from China, in that case outsourcing can sometimes be the right strategy. On the contrary, empirical researched show that in India, $10,000 or less can hire a highly qualified software engineer’s for an entire year (annual basis). This figure may not be enough to hire UK a software engineers US or UK, therefore in a country where work permits and other restrictions are not essential, then companies may finds this strategy as cost effective one.
Besides the aim of cost reduction, the strategic goal of sustaining a higher level of flexibility within organisation has forward as one of the strategic motives in implementing outsourcing activities. Acquiring higher levels of flexibility becomes essential for the firm, in an approach to handle the uncertainty parameter connected with increased volatility in the global market (Buckley, 2009). This was further emphasised by another researchers who revealed that companies’ intention to outsource application services was positively related to environmental uncertainty (Verwaal et al. 2009). By engaging in outsourcing activities the organisation acquire flexibility in the sense that it is easier to change purchasing requirements for a contracted service then to change in-house activities. This, due to in-house, the needs of different stakeholders perspective’s such as employees and trade unions needs to be taken into account (Hendry, 1995). Outsourcing in this sense also presents a mean to downsize the organisation to render it more flexible (Bailey et al. 2002). This enables large static and vertical organisations to move towards smaller and more horizontally structured organisation where the focus has moved towards increased flexibility and control over the organisations network. This enables the possibility to change, when needed, the direction of the organisation to pursue new opportunities and openings in a fast and shifting market (Lacity et al. 1995).
When relevance is concerned, Bengtsson and Dabhilkar (2009) found in their survey that the motive to gain flexibility was judged nearly equally important as the number one motive, to reduce costs. This is as well as Quelin and Duhamel (2003), whom showed that the motive to establish flexible may be considered as the third most crucial aspect after the aim to lower operational costs and focus on core activities.
In outsourcing, for a firm to be able to change conditions to a third party organisation, the ethical aspect of the arrangement particularly between the supplier and the host is highly essential. A good contract between the two parts should contain a certain degree of flexibility and to maximise flexibility the host organisation should aim towards establishing short-term contracts (Kakabadse & Kakabadse, 2005) that enables renegotiations of conditions with suppliers in accordance with changes in the market.
This may specially be vital for organisations that find themselves in a fast moving field like information technology. Here, a long-term contract may turn out to be costly when price changes and technology improvements occur rapidly. Thus the organisation may risk to be stuck with old technology over the contract length whereas the rest of the market may benefit from better technology at a lower price. To avoid this problem, shorter contract length is a good method where flexibility is gained through maximising competition between different suppliers at each renegotiation process (Lacity et al. 1995).
Further, flexibility and competitiveness may be gained by dividing the organisations activities and outsource them to different suppliers. This lowers the dependence of one specific supplier just as it lowers potential switching costs if it proves to be necessary to change supplier (Lacity et al. 1995).
2.4.3 Knowledge and Expertise
Skills, knowledge and expertise are the core competences of a firm, and are likely to develop to a cost for the organisation should outsourcing decreases. In a situation where the business core competences decline in the market, the organisation may be force to look elsewhere for an alternative outsourcing as a means of compensating the cost for staying competitive in the short-term. This may have a tremendous effect on the firm competitiveness (Arbaugh, 2003). Many organisation have suffered enormous consequences when attempting outsourcing, often they might have little knowledge about the market. Therefore, strategic capabilities and market knowledge must be embedded and integrate within the firm.
In that regard, the phenomenon of outsourcing business activities is regarded by some, as a learning dilemma (Bengtsson, & Dabhilkar (2009). There are many resisting forces within a firm trying to outsource, particularly “offshore outsourcing”, employees may restrain the process, when realised that the motive of outsourcing is not to gain new opportunities but to lose to exist ones (Corbett, 2004). Many outsourcing company these days are trying to select the right supplier, reason had been that most suppliers’ actions might have a tremendous impact on the outsourcer. This often happened when businesses become dependable on their external suppliers, core business strategies, trading patterns and other crucial information’s are revealed, and it can be more crucial if the same supplier is working for other competitors.
Most activities that are outsourced are not likely to provide the firm with the same knowledge and expertise as it would have performed in-house. However, if the supplier has a more sophisticated resource base, then the outsourcer may ultimately benefit from their recent technologies (Harland, et al. 2005). Market knowledge can be a key to organisation when shaping the future of the firm and its employees.
2.4.4 Quality and Efficiency
The opposite of outsourcing with a cost reduction motive is to outsource with a quality driven motive. Maintaining efficiency and outsourcing to gain a higher quality is a strategic choice that is difficult to combine with gaining a lower cost (Varadarajan, 2009). Yet, outsourcing with the goal of improving product or service quality has, as shown by Kakabadse & Kakabadse (2005) been an important motive when implementing outsourcing. Hence, an organisation may choose to pay more to gain a higher quality to standardise it product or services efficiencies. Though, the quality aspect of outsourcing is often brought forward when the organisation reviews its internal activities and benchmarks them against external competitors (Quinn & Hilmer, 1995). This action may evoke the question to why outsourcing organisation should create a service or product internally when an external supplier may provide the same product or service within the same frequency and quality but at a lower price. Hence, outsourcing may prove useful to gain a higher quality than would not be possible to achieve internally for the same costs.
Innovation is mostly the primary reason why businesses outsource their activities, so that they can acquire competence and establish a platform within the firm that may enable innovation in the future (Verwaal et al. 2009). This may enhanced the organisation to develop and improve their products or services, business processes or reduces the time products stay in the market.
Hence the organisation motive are different from getting access to new technologies and competences that aim to reach a short term goal to fill up current or temporary knowledge and technology gaps within the organisation. Consequently, innovation motives are a part of the possibilities connected to strategic outsourcing (Harland et al. 2005) where the goal is to ensure the organisations future position and survival in the global market. What makes strategic outsourcing with the motive to create future innovation possible is the increased level of expertise on the supplier level. Outsourcing of activities has shifted from low level jobs to include outsourcing of high level and more problem resolving tasks. Thereby providing the sourcing organisation with new and innovative solutions (Varadarajan, 2009), (Bengtsson and Dabhilkar, 2009).
2.4.6 Competitive advantage:
Innovation is a motive to gain a competitive advantage and to aspire a world leading position within their field. i.e. becoming the number one choice for potential customers. The argument to focus on the organisations core business was put forward by Prahalad and Hamel (1990) and presents a vital step in this direction. Though, when focusing on the core business, non-core activities regarded as non-essential for the organisation may be selected to be outsourced (Prahalad & Hamel 1990).
Applying this, the organisation may gain an advantage compared to competitors when they, through their outsourcing network may come in contact with different/smarter solutions. These different solutions may be presented as the possibility to produce offered item or service at a lower price, which increases the price pressure on competitors acting on the same market. The price pressure may be created when production is outsourced to a supplier that may use scale driven cost efficiencies (Varadarajan, 2009), domestic or abroad. When outsourced abroad, suppliers and producers situated in developing countries possess an even greater cost competitive advantage compared to sourcing competitors situated in developed countries (Farrell, 2006). To challenge this problem, the companies situated in developing countries need to create and offer solutions with different attributes (Varadarajan, 2009) such as offering flexibility, services etc. that may benefit the customer in different ways hence putting aside the temptation of choosing a lower price alternative. Outsourcing in this perspective gives the organisation the possibility to increase responsiveness to the customer’s needs (Bailey et al. 2002).
Furthermore, a competitive advantage may also be created when outsourcing an activity from the organisation will contribute to a higher efficiency in the organisations remaining activities. This was brought forward by Verwaal et al. (2009) who showed that production efficiency advantage was positively related to organisations intent/motive to outsource application services through a third party supplier (Verwaal et al. 2009). The last motive brought up here is connected to the competitive advantage related to the latest management trends. Which is followed by a way of “if everyone else does it, we have to do it too”-thinking. Hence, at times, organisations make outsourcing decisions because it’s considered an acquirement to stay competitive and increase innovation (Brooks, 2006).
2.4.7 Business benefit contracting
Business benefit contracting is a contractual agreement or the last stage of outsourcing arrangement that outlined the vendor contribution to the client, in terms of the associated benefit to the business (Millar 2004), and the payment that the customers are willing to make based upon the vendor’s ability to deliver the services. The associated risks with business benefit contracting based on how the third party providers and the vendor can match the costs with benefits and then apportion the risks.
2.5 OUTSOURCING RISKS
Many organisations failed to evaluate the risk factors associated in outsourcing. For instance, when outsourcing activities such as IT services or capabilities, the outsourcer will assign a substantial part of its operations to the third party’s and setting unrealistic expectations for the outsourcing outcomes. To avoid the likelihood of loss as a consequence of uncertainty in the market, recent studies done by Ross and Westerman (2004) divided these risks in four major categories: strategic risks, relationships risks, vendor/technical risks and transition risks.
2.5.1 Relationship risks
When businesses formed an outsourcing relationship, both the parties should take into consideration the changing circumstances of their relationships during and at the end of the business contracts. The emergence of new technologies has changed the market drastically, and it has opened tremendous opportunities and challenges for businesses. Therefore, since these unprecedented changes and their impact are unpredictable, clients should be very technical when signing a new deal with third party’s that later might not be needed or meet future needs. Risks should be not be under estimated at all cost, especially when signing new and long-term contracts (Ross & Westerman, 2004; Lacity et al., 1995).
2.5.2 Transition risks
All IT outsourcing arrangements includes a transition phase where the organisation, the processes and the staff need to adjust to the new situation. This phase often involves great technical challenges; e.g. linking outsourced applications together with internal applications or transferring technical staff to the vendor. Other challenges are related to dealing with organisational changes, which are likely to appear as the vendor makes changes to the old IT processes. (Ross & Westerman, 2004) It is important not to underestimated the time and money needed during the transition phase. If not calculated correctly these additional costs can easily turn the positive margin of the outsourcing deal into negative. According to the Ross and Westerman (2004) it can particularly become an issue when handling new technologies since the vendor are probably selling undeveloped competencies. Dealing with new technologies can hence be particularly hard for the parties involved.
2.5.3 Strategic risks
As concluded earlier, organisations in general want to outsource what they consider to be non-strategic activities (Ross & Westerman, 2004). But using this approach solely when deciding upon which part of the IT-function to outsource can lead to problems. The risk lies in simplifying the complexity of IT and the uncertainties surrounding it. Since IT often is a highly integrated part of the business it can be hard to identify so called non-strategic activities. The rapid technical advances in this area together with the complexity and unpredictability of the global market make it possible for the commodity of today turn into a strategic advantage tomorrow (Lacity et al., 1995).
2.5.4 Vendor – Client risks
When signing an outsourcing contract the client loses some of its control over the IT function and processes, becoming dependent on the external vendor for delivering the capability needed in the way and the quality agreed upon in the contract. Therefore, the client should always be aware of the risk that the supplier goes out of business or for other reasons not be able to deliver the agreed upon service level. (Ross & Westerman, 2004) Thus it is important to choose the vendor with care in order to minimise the risk of this occurring.
Another issue concerning the vendor selection is the occurrence of a so called bidding war over attractive outsourcing contracts between different vendors. This situation, which at first can seem positive, will in worst case result in vendors making unrealistic bid offers. Sometimes the vendor already knows or discovers by hand that they are unable to recover their business results and operational costs for the near future. This situation is called the “Winner’s curse” and can lead to additional costs, poor service or considerable switching costs for the client. (Kern et al., 2002) It can particularly become an issue when handling new technologies since the vendor are selling capabilities they may not be fully developed. When dealing with new technology it is hard for both parties to weigh the potential benefits against the technical and organisational difficulties that might arise (Ross & Westerman, 2004).
2.6 Outlook in the outsourcing industry
In the some previous research, the effects of outsourcing have been evaluated in different level of performance. Theoretically, outsourcing can be a useful tool to help organisation gaining profit. It is an opportunity to companies learning from outside expertise and making benefit from it. However, in recent study, fewer firms achieved significant benefits than what they initially speculated. In some circumstances, the profitability in some firm decreased in their first year’s of outsourcing. Within the outsourcing industry, cost reduction, innovation ability, benefits from supplier, improving operational capabilities and improving risk management have one way or the other affecting the firm’s products and services. And now it is become more unpredictable for any to forecast what the future strategy hold for outsourcing firms. Incredibly, innovation and reduction of the operational costs are still the main reasons of outsourcing, but many other researchers belied that the trend will change as the importance of this argument will decrease in the next years (Kakabadse & Kakabadse, 2002).
3.1 Research Philosophy
Saunders, et al. (2009) state, “a research philosophy depends on the way that a person thinks about the development of knowledge” (p. 83). When looking at knowledge development, it becomes clear that three main schools of thought exist: ontology, epistemology, and axiology. According to Saunders et al (2009) “ontology is the study of the nature of existence or being.” Epistemology, or theory of knowledge, is defined as “the branch of philosophy that studies knowledge and attempts to answer the basic question: what distinguishes true knowledge from false knowledge”. A more recent philosophical development in the study of knowledge has revealed axiology, which studies judgements about value and the role value plays within research (Saunders, et al., 2009). Within these three main research philosophies exist four dominant views regarding the research process: positivism, realism, interpretivism, and pragmatism.
Positivism relates to natural sciences and can result in law-like generalizations (Remenyi et al., 1998). During the positivism process, the researcher serves as an objective observer and is independent of the research itself. Jankowicz (2005, p. 110) describes three aspects of positivism: “events exist out there”, “data pertaining to them can be found by anyone who follows the same procedure”, and “truth exists independently of the people who seek it and can be found through logical deduction or through the collection of data which result in unarguable facts.” The process of positivism utilises existing theory to develop hypotheses. These hypotheses are then tested and either confirmed or denied. The replication of such experiments is therefore paramount to the positivism process. Saunders et al. (2009) emphasize the importance of value-free research in the positivism approach. This is a result of the fundamental process of positivism in that the researcher is objective and independent of the research. However, it can be postulated that evidence of a value-free approach does in fact imply the existence of a value position.
The process of realism relates to social occurrences and the affects they have on individual awareness. According to Saunders et al. (2003, p. 84) “realism is based on the belief that a reality exists that is independent of human thought and beliefs.” Therefore, this philosophy suggests that reality exists outside of and independent of the mind. This view can be said to be the direct opposite of an idealist view, which suggests that the mind and its contents are the only variables that do exist.
The research philosophy of interpretivism argues against positivism in that it suggests that the world we live in is too complex to apply law-like generalisations. Social constructionism, which is an ontological form of interpretivism, is said to “view reality as being socially constructed” and seeks to “understand the subjective reality of those being studied in order to be able to make sense of and understand their motives, actions, and intentions” (Saunders et al., 2003, p. 84). An important factor to interpretivism is that of empathy, in which the researcher seeks to enter the world of research and understand the motives and feelings of those being researched: the researcher seeks to become part of the research. As opposed to positivism, interpretivism begins with the collection of data and then compares that data to existing theory.
The research philosophy of pragmatism argues, “the most important determinant of the epistemology, ontology, and axiology you adopt is the research question – one may be more appropriate than the other for answering particular questions” (Saunders et al., 2009, p. 109). Pragmatism suggests that the researcher does not have to be limited to one research philosophy, and that it is in fact possible to employ multiple approaches when conducting research. Tashakkori and Teddlie (1998) suggest “it is more appropriate for the researcher in a particular study to think of the philosophy adopted as a continuum rather than opposite positions.” Whereas other philosophical approaches are concerned with data collection and theoretical analysis, pragmatism is concerned with producing positive results. According to the pragmatism philosophy, this can be achieved through a mixed methods approach.
The research philosophy utilised in this research study is that of objective ontology and positivist epistemology. This research philosophy was chosen due to the fact that the researcher chose to ascertain the effectiveness of outsourcing within Unilever through objective means, rather than subjectively interpreting what was researched. Through the positivist approach the researcher was able to serve as an objective observer and independent from the research. Through this approach the researcher was also able to utilise existing theories in understanding the topic and conceptualising a research objective and question. The results from the study were then tested against the existing theory. Given the mixed method approach chosen by the researcher, it can also be stated that an element of pragmatism has been adopted within this research.
3.2 Research Approach
There are two different approaches that can be utilised when undertaking research: inductive and deductive. With an inductive approach “theory is developed from the observation of empirical reality” (Collis and Hussey, 2003, p.15). Conversely, a deductive approach starts with the relevant theory or hypothesis and focuses on developing a strategy for testing that theory or hypothesis (Saunders et al., 2009).
The research approach that was utilized during this study was that of deductive. This approach was chosen due to the fact that the research philosophy adopted was positivist epistemology, and also because the researcher aimed to compare existing theories with the findings supplied through interviews and secondary data. The deductive approach supported this research study more appropriately than would the inductive approach due to the fact that the researcher began with the theory and sought to test that theory based on data collection and analysis. A deductive approach represents the most common view between theory and research. Results obtained through this approach are developed using logical reasoning (Bryman and Bell, 2007).
According to Robson (2002), five sequences exist when undertaking a deductive approach to research:
Deduction of a testable research question regarding the connection between two or more variables,
Relation of the question to the current research study or question(s),
Thorough testing of the available data to answer research question,
Analysis of results generated through data analysis, and
Reevaluation of the theories with regard to results generated through testing.
3.3 Research Strategy
A research strategy is a general plan or road map of how the researcher intends to answer the research question(s) (Saunders et al., 2003). When looking at the research strategy, six different methods can be utilized: experiment, survey, case study, action research, grounded theory, and ethnography. The specific research strategy type used during the research will be dependent upon the specific objective(s)/question(s) of the research.
The case study strategy was adopted in this study. Case study is defined as “a strategy for doing research which involves an empirical investigation of a particular contemporary phenomenon within its real life context using multiple sources of evidence” (Robson, 2002, cited in Saunders et al., 2003, p. 93). Morris and Wood (1991) suggest the case study strategy if the researcher “wishes to gain a rich understanding of the context of the research and the processes being enacted.” The case study strategy was chosen for this research project due to the fact that the researcher utilized both secondary and primary data when evaluating the research objective(s)/question(s). Because the research aim of this project was to ascertain the extent to which outsourcing has affected Unilever’s competitive advantage, the research strategy needed to be one that allowed the research to be “descriptive”, “illustrative”, “experimental”, and “explanatory” (Scapens, 1990). Therefore, the case study strategy was utilized.
Table 1: The different research approaches utilized in this study
StrategyAIMSAMPLEDATA COLLECTIONMETHOD OF ANALYSIS
Ascertain manager’s view regarding effectiveness of Unilever’s outsourcing activities2 UK relationship managers in separate departments responsible for managing outsourcing contracts (Pranab and Jamil).Semi-structured interviewsContent analysis
Secondary data analysis
Compare relationship manager’s views with existing theoriesRelevant journals, company information, websites, etc.All relevant, accessible meansContent analysis
3.4 Data Collection Methods
There are five main ways that data can be collected for research projects: observation, sampling, secondary data, questionnaires, and interviews (Saunders et al., 2009). Contained within each of these five main methods are various sub methods that can also be utilized when collecting research data. Saunders et al. (2003, p. 93) suggest that the methods of “questionnaires, interviews, observation, and documentary analysis” are best suited for a case study strategy.
3.4.1 Data Choice
The data chosen to be collected for this research project consisted of both primary and secondary data. The primary data for this project was collected through semi-structured, face-to-face interviews. Secondary data was also gathered utilizing organizational records and data, journals, web sites, industry statistics and reports. The approach of choosing to use both primary and secondary data was done in an effort to ensure triangulation throughout the research process. This approach also helped in the efforts to guarantee the aspects of reliability, validity, and generalizability.
3.4.2 Sampling Method
For the purposes of this research project, a non-probability sampling method was utilized. Due to restrictions imposed upon the researcher, it was not possible to interview all relationship managers or a random selection of managers within Unilever. Therefore, it was necessary to single out two specific managers to be interviewed. These individuals were chosen on the basis of previously existing access between the managers and the researcher. As mentioned above, the researcher also chose to use secondary data through gathering public and academic opinion regarding outsourcing activities within Unilever.
3.4.3 Data Collection
Primary data for this research project was collected through conducting semi-structured, face-to-face interviews. Interviews were conducted with two UK relationship managers within Unilever. The interview information was gathered using a voice recorder and then transcribed at a later point in time.
Secondary data for this research project was collected through extensive Internet research regarding information on Unilever and outsourcing. This information was gathered, analyzed, and collated accordingly. Two different managers were interviewed (Pranab and Jamil), and in order to be able to interview them effectively, the semi-structured questionnaire was divided into two major sections. The first one was on the background of outsourcing within Unilever, and its nature within the company. The second was on the potential benefits or threats in outsourcing. Pranab was interviewed on the nature and background of outsourcing, while Jamil was interviewed on benefits and potential threats, just so the researcher could use her time more effectively and obtain more information in the process.
3.5 Data Analysis
Content analysis was used when analyzing the primary and secondary data gathered during this research project. This technique was used due to the fact that the information being analyzed was qualitative in nature and needed to be authenticated across a large cross-section of resources (Saunders et al., 2003).
Qualitative analysis was also utilized during this study. Qualitative analysis is described as “the processes and procedures whereby we move from the qualitative data that have been collected into some form of explanation, understanding or interpretation of the people and situations being investigated” (Saunders et al, 2009). For these purposes the researcher chose to gather information from a smaller, but more focused group of individuals within Unilever. This data was then analyzed using a qualitative method for deeper and richer information. The result of such analysis was categorized into three separate groups according to background on outsourcing within Unilever: outsourcing background and nature, potential benefits and likely threats. This categorization allowed for more content rich analysis and support for the overall research objective(s)/question(s) (Saunders et al., 2003).
The researcher has an existing relationship with a relationship manager employed at Unilever UK. This relationship has afforded the researcher access to two other relationship managers within Unilever UK that have been utilised for interviews. Minor access to company information and records has been granted to the student for the purposes of this research project.
3.7 Reliability, Validity and Generalisability
Quinton and Smallbone (2006, p. 129) postulate, “Reliability is sometimes seen as an assessment of whether the same findings would be obtained if the research were repeated, or if someone else conducted it.” Saunders et al. (2009, p. 252-253) suggest certain reliability issues associated with semi-structured and in-depth interviews: “interviewer bias”, and “response bias.” Reliability issues associated with secondary data relate to the source of the data and the authority and reputation associated with that source.
The researcher took every precaution necessary in order to avoid issues associated with reliability, including: interview preparation, proper education of interviewees prior to interview, listening skills development, frequent tests for understanding, and proper investigation and citation for secondary sources. However, certain reliability issues can be identified in relation to this particular research project. Given the small number of individuals interviewed during the study, it could be suggested that the information produced may not be a true reflection of what the research managers actually feel in relation to the questions asked.
According to Bryman and Bell (2007, p. 164), “validity has to do with whether or not a measure of a concept really measures that concept.” Six major threats to validity have been identified: history, instrumentation, ambiguity, testing, maturation, and mortality (Robson (2002, cited in Saunders et al., 2009). When considering interviews, Sykes (1991, cited in Saunders et al., 2009, p. 253) suggests “the flexible and responsive interaction which is possible between interviewer and respondent(s) allows meanings to be probed, topics to be covered from a variety of angles, and questions made clear to respondents.” Validity issues associated with secondary data are mainly concerned with the information being provided actually relating to the research objective(s)/question(s). Given these issues, it is the intention of the researcher to utilise only pertinent and up-to-date information in relation to this research project.
Saunders et al. (2009, p. 102) describe generalizability, as “whether findings may be equally applicable to other research settings.” Generalizability is a concern of the researcher due to the fact that only a small number of relationship managers have been interviewed for this research project. It is unknown whether the information gained during the interview process can be generalised across all Unilever relationship managers. To this end Marshall and Rossman (1999) argue that during case study research “the ability to relate the research project to existing theory will allow the researcher to demonstrate that the findings will have a broader significance than the case or cases that form the basis of the research.”
3.8 Ethical Issues
Ethics is concerned with a researcher’s behaviour and how that behaviour affects those involved in the research process. Diener and Crandall (1978) have divided research ethics into four main areas: “whether there is harm to participants”, “whether there is a lack of informed consent”, “whether there is an invasion of privacy”, and “whether deception is involved.” Although previous access had been granted to the researcher to conduct this body of research, certain ethical issues may arise as follows:
Organisational reservations regarding the publication of findings, and
Concerns of relationship managers regarding personal information.
To this end, the researcher has taken every precaution to protect the confidentiality of the persons involved in the research process. The researcher has also agreed to adhere to the specific ethical guidelines outlined by the University.
3.9 Limitations of Research
The fact that the researcher had access to, and was only able to interview two UK relationship managers may prove to be a limitation for this research project. Given the time frame for the project, and the limited access granted to the researcher, it was not possible to interview more relationship managers. More interviews would have resulted in a greater amount of data. This increase in data would have only added to the validity of the researcher’s findings and conclusions.
Another limitation recognised by the researcher is the lack of available primary data from Unilever’s outsourcing partners. Whilst these partners do exist, it was not possible for the researcher to gain access to these individuals given the time frame of the research project and general issues regarding company access. Although extensive secondary data has been reviewed and provided in relation to these outsourcing partners, the research would have been greatly enhanced with access to primary data in the form of semi-structured, face-to-face interviews with some of these outsourcing partners.
Although extensive secondary data was reviewed and presented for this research project, there were certain secondary data requests made by the researcher that had not been received by the time this dissertation project was to be completed. It is the researcher’s belief that this information would have proven valuable to the project and enhanced conclusions and findings.
The following chapter outlines the results that have been gathered from semi structured interviews with 2 relationship managers within Unilever, that are responsible, or partially responsible for managing outsourcing contracts, especially within UK and Ireland. Additional results are also included from secondary data gathered through journals and news articles regarding the effects and progress of outsourcing within Unilever, with the aim of answering the research questions and accomplishing the research objectives.
The results chapter would be subdivided according to the three major objectives of the research, which are to ascertain the nature of outsourcing within Unilever, the potential benefits that have accrued as a result of these contracts, and finally, the likely threats attributable to such contracts. Information for all three sections would be sourced mainly from the semi-structured interviews, including several quotes directly from the interviewees. Additional information from secondary data would also be included to add authenticity and / or depth to the findings.
4.2 OUTSOURCING BACKGROUND
4.2.1 Outsourcing in Unilever
Unilever began its outsourcing strategy in 2005 as part of a “transformative one Unilever strategy”. Unilever companies in different European countries had different organisational processes, infrastructure, financial systems and HR policies. “On our own, these countries cost a lot of money to run, and a number of our services were overlapping. We had several enterprise resource planning (ERP) systems, about 80 of them, all conducting the same processes in different ways” – Pranab
Implementing shared services across the European subsidiaries was seen as a way of driving down cost and streamlining business processes. Significant cost savings of up to ?600 million yearly across Europe was forecasted.
“Outsourcing works just the way outsourcing is meant to work elsewhere. We see our service providers as partners, and not as third party suppliers, because we believe we should work together with them if we are to achieve the sort of results we need to achieve. We have drawn extensive contracts, trained them appropriately, have regular meetings, and ensure that we have liaison managers at every level of the outsourcing relationship, so as issues arise, we fix it. We try not to allow anything creep up unwanted that could disrupt our operations.” – Pranab
4.2.2 Core and Non Core Functions
Core functions have been identified as:
Research and Development.
According to Pranab, “…these are the services that are crucial to the profit line of the business, they determine how we manufacture our products, market them to the end users, sell them to wholesalers and retailers, and innovate on existing products. Unilever has to perform these functions; we cannot give them to an external party. They contribute to what we really are.”
Non-core functions have also been identified as:
These functions are usually uniform across most FMCG (Fast Moving Consumer Goods) companies. “…Finance is mostly about purchase to pay and general accounting. Human Resource is about payroll administration, recruitment amongst others. Procurement is how we source our goods from suppliers, and Technology refers to how we manage our IT infrastructure. These are support functions for our business, and we need them to work well, however, we do not necessarily have to do them ourselves.”
Third party companies that specialise in these services are seen as being better capable of performing these services than Unilever. Outsourcing has also been seen as a method through which Unilever could implement shared services across its entire sister companies in Europe. Before the outsourcing agreements started, Unilever was largely decentralised, however by signing up a single partner to undertake all these tasks, these functions can now be handled by a single service supplier, which supposedly promotes streamlined processes.
4.2.3 Managing Relationships
Unilever manages supplier relationships by liaising closely with partners. Outsourcing suppliers are called partners not service providers, and regular meetings are held with each supplier at every level of management including ground level with individuals that actually do the work. Meetings are still held when there is no significant news. “…We believe this has helped deepen our relationship with our partners and also helped create a working environment where problems don’t just creep up behind us when we are not looking.” – Pranab
Relationships are monitored closely by following due process, conducting regular meetings, and by considering service providers as partners not suppliers. “…That way, I believe we are able to constructively work together. Identify problems and tackle them before they become an issue.” – Pranab
4.2.4 Processes and Due Diligence
A number of top organisations bid for the outsourcing contract when Unilever initially set out to outsource their non-core functions. Unilever set out the following criteria for companies aiming to win the outsourcing contract:
These were used in ascertaining what contractors to use.
Accenture was used for Applications and Infrastructure outsourcing, and also for Human Resources, because both companies had a relationship spanning over 10 years, and Accenture had previously assisted Unilever with services such as Management and Technology Consulting.
IBM and HP were also chosen in other regions due to their track record, strong reputation and their size relative to Unilever.
Guidelines are present on managing supplier contracts, however a hands-on approach is preferred and utilised in ensuring that each guideline works. Multiple weekly meetings at all levels of the outsourcing agreement are conducted, from supervisors to management.
Half year and yearly review are also conducted on outsourcing contracts, where partners are expected to present how they have assisted Unilever in efficiency and cost reduction. The partners assist the organisation in evaluating whether or not contracts or contract terms should be modified, and also on how the company could achieve more going forward.
4.3 OUTSOURCING BENEFITS
This subchapter outlines the extent to which Unilever has achieved the following benefits from outsourcing.
4.3.1 Cost Savings
“Well, from what I can think back to, the main aim of the outsourcing contracts in the first place was to save cost. We felt that if we shared these common services in just one centre across Europe, we would be able to reduce overlapping cost. The estimated cost savings back then were about $900 million or so, and I believe we have made steps towards achieving those goals…” – Jamil
Outsourcing partners are much cheaper cost wise than when these services were done in house. Most of these functions have also been moved to lower cost bases in South East Asia and Latin America.
Computerworlduk.com (2008) in their article on the same of Unilever’s Shared Services centre to Cap Gemini cite that Unilever announced the programme had saved them ?740m over the last 12 months.
Outsourcing consultancy TPI found that the projected 60% savings that Unilever aimed to achieve may be highly inflated. Professional fees, severance pay and government costs could reduce the costs significantly to 15%. – InfoWorld (2006)
Prior to the outsourcing agreements, Purchase to pay processes that usually took about 3 – 4 weeks from inception to completion is now much faster. “…This meant that we usually had to wait long times before these were done, and these processes were much different in different European countries. In some countries, processes could take up to 6 weeks, while some others like the UK were more efficient. These affected the whole group as a whole, Unilever as a whole could not be efficient on one part and inefficient in others…”
“…Now that we have one partner handling the finance functions across the whole group, I can say these functions are now more efficient, there is no wastage, and we can derive more from them.” – Jamil
4.3.3 INNOVATION AND QUALITY IMPROVEMENTS
Prior to outsourcing agreements, the systems that ran Finance, HR, Procurement and Infrastructure operations were based on recommendations from the technology department, and the business case presented to senior managers. This process usually followed due process, which saw some vital technology never being implemented. Updates usually occurred once in several years, because the business never thought they needed rapid updates.
“But now that we have external parties handling our infrastructure, technology, finance, HR and procurement systems. Accenture has the best in class practices for these services and they are much more improved than what we could have done ourselves. Since this is their core function, this is what they do best, and they do it for several other clients, we know that they are in the right hands. For instance, they have partnerships with SAP and Oracle and through that they can deliver the best updates for the services. The manner in which they conduct our businesses is far better than we could have done ourselves. We believe this partnership has brought results that are far broader than what we anticipated.” – Jamil
4.3.4 FOCUS ON CORE BUSINESS
“Oh well, I cannot say without a doubt, the way in which outsourcing has enabled us focus on core businesses. But what I do know is that we do not have to worry about the finance, technology, human resources and procurement functions as much as we did initially. Now all we have to do is have an outsourcing department that deals with our service providers across all levels, and ensures they are conducting their business appropriately, and whatever issue we have is resolved. By not having extensive non-core departments as such, we are indeed able to focus our strategic activities on those functions that matter most, which are supply chain, marketing, sales amongst others.” – Jamil
4.3.5 OPERATIONAL EXPERTISE
“Well from what I have learnt, since our service providers have taken the time to learn much about our business, they are much better than us at performing these functions now. They have much more experience and resources at their disposal to conduct the same functions. In a situation whereby we would have had to send a couple of workers on training to learn a new practice, now all that is covered in our contract agreements, and the service provider sends their people on training so they could deliver better to us.” – Jamil
“Since we have adopted a shared services centre in the Europe, we have been able to extend these services to other European countries that were part of the initial agreement. Because our outsourcing partners have been able to understand our business and conduct these functions in a way that is uniform across all businesses, it is now much easier for them to extent it to a new country. All they need to do is just transfer relevant staff from there, and have their infrastructure transferred. With outsourcing, we are able to conduct the same service on a larger scale.” – Jamil
When asked if there were any other potential benefits, Jamil stated that “You have identified most of them, I would just like to state that it was a strategic move that was crucial to our one Unilever project, and even without cost benefits, it still helps all parts of Unilever Europe work together, and that is something we are happy about. We have been able to derive substantial benefits from outsourcing.”
The Unilever EMEA_IBM Finance and Accounting Outsourcing deal secured the top position in “2008 FAO Research Awards of Distinction”, which is awarded by FAO Research, a research firm that focuses on Finance and Accounting outsourcing agreements. According to the firm, the FAO contract is “a ground-breaking success thus far, with the potential to expand significantly within the entire Unilever organization.” – Globalservicesmedia.com (2008)
4.4 OUTSOURCING RISKS
This subchapter outlines the risks and threats that have arisen as a result of outsourcing in Unilever.
Labour and work disruption is a considerable factor when Unilever decides on whether they are going to outsource to service providers. The agreement with IBM affected about 800 workers, while the Human Resource BPO affected about 1,500 workers across Europe. Unilever found alternative employment and proposed early retirement for these individuals, without which they may have had significant labour disruptions.
“We also ensure that every part affected is informed once we have agreed on any outsourcing agreement, so they are catered for immediately and without any sort of disruptions. We conduct change management operations within the company, we do not consult with anyone else for that because we have learnt from our mistakes and ensured that we cater for staff appropriately to prevent any such things from happening again. In 2005 we did have some staff disruptions, but not now that we have learnt from our previous mistakes.” – Jamil
According to Reg Bull, Group Senior VP of Global HR transformation in Unilever, stated that most line managers did not want Unilever to outsource its HR. Apparently, there was a wide consultation before the group signed its Accenture HR BPO, “We did personal interviews with all board members and executives and went to our clients, asking them what they wanted… But most of our line managers didn’t want to do this. If you have a ratio of 1:67 and a tame HR person just outside the room, why would you want to?” – www.hroaeurope.com (2006)
The Accenture HR BPO contract impacted about 3,300 Unilever HR employees globally, and up to 40% were directly impacted, with a considerable amount losing their jobs (Unilever Global Media Relations Vice President – Time Johns) – physorg.com (2006)
Contract management is also a very serious risk while outsourcing “…because if we do not maintain our contracts appropriately, then it is possible that a conflict of interest may arise between our partners and us and we do not want that. I always participate in weekly meetings between our team and their team to ensure that they are functioning well, they have everything they need, and adopting the right processes to ensure everything is done.” – Jamil
Contract reviews are conducted twice yearly to ensure everything goes smoothly. “At first when we first started these outsourcing contracts, it was difficult because we had to learn a lot of things fast, but now, we have built extensive relationships with our partners and used that in making things work good.” – Jamil
No significant security threats have been recorded so far, or were known by Jamil. Every supplier staff is vetted, and information that is provided to them is low level security information. The only significant issue is that employee information could be lost or mishandled. In the event where that happens, procedures have been established to manage them.
The outsourcing relationship team is always in contact with their suppliers so communication issues do not arise. With respect to lack of innovation, Jamil states “That is not an issue we suffer from here. On the contrary, due to our outsourcing agreements, our partners adopt a much better process than we could have adopted on our own.”
4.5 FUTURE OUTSOURCING IN UNILEVER
The functions that are outsourced are non-core functions that do not contribute directly to improving market share against competitors, however they may contribute indirectly. “Looking at the wider picture, we believe that outsourcing would help us work better together across the whole of Europe. By doing that, we believe we can achieve better results, reduce cost significantly, and that to me is the main definition of competitive advantage. So in terms of cost reduction, outsourcing is great.” – Jamil
5.1 Research design
The objective of this research was focused on answering the research question:
“To what extent has outsourcing with single or multiple partners contributed or disrupted the drive for sustainable competitive advantage within global multinational firms; what are the potential benefits attributable to outsourcing within companies, and how could possible disadvantages be identified and subjugated?”
A detailed analysis of existing literature on outsourcing was reviewed along with data being collected from the Unilever through semi-structured interviews. The semi-structured interviews with the UK relationship managers provided a background on the outsourcing in Unilever and also gave a rich insight into the benefits and risks observed while outsourcing various functions in the organisation to various service providers outside the firm.
This chapter attempts to bring to answer the research question as described above in the light of the primary findings from the interviews and the secondary research data.
5.2 Research Answer
The research question can be broken down and answered in three sub-sections as below.
5.2.1 The competitive advantage in outsourcing
Unilever realized the need for a transformative strategy due to multiple organizational processes within the same global firm. This realization led to a need to cut down on unnecessary expenses in managing multiple ERP systems and services. Outsourcing was adopted as one of the major steps taken towards achieving a unified global organization, which would help in gaining competitive advantage.
As an initial step towards outsourcing, the firm identified and separated the core and non-core functions within the organization. It is quite important to identify the critical differentiators that can help the company gain competitive advantage and those which can be safely outsourced.
As per the findings, Unilever identified the core functions that needed to be retained within the firm while non-core functions such as human resources, finance and information technology were outsourced. This is quite in line with the strategic outsourcing grid framework as outlined by Willcocks, et.al 2002. The functions that are “useful” “commodities” can be outsourced safely to third party service providers.
After separating the core and non-core functions, Unilever proceeded to outsource the services to multiple service providers rather than relying on a single provider. This choice of selective outsourcing has its own advantages and risks associated with it. Accenture was the preferred vendor for Applications and Infrastructure Outsourcing due to its experience and reputation in the industry while IBM and HP were also chosen in other regions. This provides significant competitive advantage, as the vendors are able to provide their best in their specialized areas due to their skilled resources. Lacity and Willcocks (2001) advocated the advantage of a reduced risk as it is spread over multiple vendors.
The IT vendors have their development centres in offshore locations which lead to reduced costs and also provide access to skilled workforce which provide a high quality of service. As per Harland (2005), the supplier’s highly sophisticated resource base acts to the advantage of the outsourcer, which is Unilever in this case. Innovation is at the core of these IT vendors as they develop smarter ways to solve complex business problems. This further helped Unilever in gaining competitive advantage over its competitors in obtaining solutions at a lower price.
Also, as seen in findings, both Application Outsourcing and Human Resources functions were outsourced to Accenture. This was based on yet another important factor – prior experience. 10 years of relationship between Unilever and Accenture has led to growth of mutual trust that is indeed a major factor towards successful outsourcing relationships.
However one of the respondents stated that as the functions being outsourced were non core, there would be no way of directly measuring its impact of sustainable competitive advantage, especially if these were calculated based on market share or profit growth. Even though cost reductions of up to $900 million were witnessed over a couple of years, that could only be seen as a significant contribution to cost advantage if it resulted in increased market share or the acquisition of valuable, rare and inimitable assets (Buckley, 2009).
Buckley further states that sustainable competitive advantage is related to the acquisition of resources and core competences, and these are related to the competency of the core functions within the organisation. Therefore, if an organisation such as Unilever were to improve on these core functions, then it could be seen as contributing directly to competitive advantage. However, since outsourcing contributes to non-core functions, then it could be seen as a way of indirectly ensuring the organisation has the manpower and resources to focus on core functions, which would then indirectly contribute the competitive advantage.
In answering the first sub question, on the extent to which outsourcing has contributed or disrupted the drive for sustainable competitive advantage, the results from the semi structured interviews and accompanying literature review, has inclined me to conclude that outsourcing has indeed contributed. This contribution is with respect to cost reduction and indirectly allowing the organisation to focus on its core functions, which are indicative, but not necessarily affirmative contributions to competitive advantage within organisations. Therefore, though the contribution is present, it is not necessarily to a large extent.
5.2.2 Benefits of outsourcing in unilever
The findings also provided a detailed account on the benefits that are evident from outsourcing its non-core processes. In line with Harland’s (2005) proposal, Unilever has significantly reduced the operational costs. In fact, running similar processes in various groups were expensive. With the introduction of outsourcing, common services to all the subsidiaries across Europe were unified into a single centre.
Another major reason for cost-reduction comes from the third party service providers. Technology firms like Accenture and IBM have a number of clients to whom they provide similar services and thus they have a larger scale of production. This enables them to provide quality services to clients at lower rate.
As described by Weigelt (2009), this in turn helps the service provider to further specialise in their domain (technology services in the case of Accenture and IBM), thereby leading to a more focussed and efficient solutions. Thus better quality solutions are obtained from the service provider than those produced in-house by the outsourcer. Moreover these firms have stronger contacts with the various experts in the industry that provide support to these technology firms in high-technology product support like SAP, Oracle. Hence while issue resolution, the partners are able to collaborate well with the product support team of these companies in providing a faster and quicker means of resolving issues. Also Unilever has chosen the experts in the field based on prior experience, which provides them the advantage of the best in the technology industry.
In fact, the Unilever managers admitted that their partners have better processes in the system, which was better than the one in-house, and hence the quality of the deliverable was of high quality. An important point in this aspect is that outsourcing can lead to disruption in the existing organisational processes in the firm. The well-defined processes of the partners helped Unilever in the transition phase where the outsourcing partners supported Unilever throughout the change management process within the organisation while helping the managers and staff at Unilever to adjust to the changes as part of implementation. These helped to reduce the impact of change management within the organisation. From the Unilever perspective they had a set of relationship managers who managed the outsourcing relationship with multiple partners, which has significantly helped in the successful management of the outsourcing. All the teams had constant and easy access to information and reporting data from the vendors, and this helped them in measuring the success of the solution delivered. Also, conducting due process helped Unilever managers to continuously monitor the performance and activities of the outsourcing partners.
Also, the impact of Globalisation has had profound impact on cost-reduction in outsourcing. Movement of development centres to lower cost bases is quite common these days. With access to superior technology infrastructure and communication facilities, co-ordinating of offshore-outsourced projects is easier. Developing countries have skilled resources that are technical expertise in developing software applications. The cost of hiring software programmers in countries like India is cheaper as compared to hiring technology worker in UK or USA.
Technology firms like Accenture have development centres based in India, which has low labour costs and high skilled resources. Thus the service providers are able to provide services at a reduced cost. This has contributed to the significant cost savings that Unilever has enjoyed while outsourcing its processes.
The study findings reveal that the though the initial cost savings were found to be 60% these were not entirely correct. This calls for proper Outsourcing evaluation techniques to assess the accurate returns obtained in outsourcing. This reveals the hidden costs in outsourcing, which must be accounted for while calculating the actual cost savings. As per InfoWorld (2006) findings, in the case of Unilever these included professional fees, government costs etc. Unilever conducted half-yearly review and other reviews on a regular manner to ensure that the entire outsourcing function was operating as expected. This is indeed is a quite an important aspect to be considered while managing outsourced relationships. However, the costs that creep up in outsourcing unknowingly need to be taken care of. The initial cost savings data released by TPI did not consider many of the hidden costs. This calls for the need for the choice a suitable evaluation technique for assessing the actual benefit of outsourcing function. Also Unilever had a dedicated outsourcing department that managed all aspects of outsourcing with multiple partners. Maintaining this department would require a significant investment and thus needs to be accounted for while calculating the cost benefits.
Efficiency is another major benefit that was evident as a result of implementing outsourcing at Unilever. The studies show that outsourcing led to a single service provider handling one process (e.g. finance) across the entire group, which improved the efficiency of the organisation as a whole. Also, this also led to another benefit, which is scalability – the entire European group worked in a unified manner that strengthened the operations of the firm globally. This in turn adds to the competitive advantage. Unilever managers were quite satisfied with the unified operations of the European countries. As per the findings, the purchase to processes which were initially quite time consuming in many countries are now quicker as the entire process across all the countries are being handled by one outsourcing partner. Thus, the outsourcing partner is able to streamline the processing times in all countries by leveraging their core capabilities and expertise in the process.
The market knowledge and expertise of suppliers in their specialisation is quite high as compared to that of the outsourcer if it chose to manage the non-core processes in-house. Since the service providers are constantly updated on the latest technologies and processes, they are able to provide a better solution that is quite innovative and efficient. Also as the study indicates, the processes followed by the partners were “top of the class” as they studied the business of the Unilever very well. Here there is an opportunity for knowledge management between the client and supplier which can strengthen the relationships between the client and supplier. The constant knowledge transfer between the client and the service provider in mutually to both parties and both of them gain from the initiative. Managing common knowledge management pools is the trend these days which help in faster resolution of issues and streamline the support processes.
Finally, Unilever was able to focus on their core competencies such as Supply Chain, Marketing, Manufacturing, Sales, Research and Development. The non-core processes were outsourced to their partners who were good at the functions like HR, IT and Finance. Of course, managing the outsourcing relationships is vital to successful outsourcing delivery. By outsourcing the necessary evils, the organisation was able to focus more on their core business areas and refine them further to their advantage. Willcocks et. al (2002) refers to this as the recommended strategy in outsourcing decision making as many firms have suffered in outsourcing many functions which are the core competency of the firm itself which can lead to adverse effects.
Another benefit of managing the core business areas in-house is that it significantly reduces the security risks. As per the relationship manager of Unilever, the information shared to the partners of Unilever are low level information and have less potential to cause harm. However, Unilever admits that some employee information does get lost or mishandled. Unilever has proper management measures in place to ensure that these are handled appropriately.
5.2.3 outsourcing disadvantages at unilever
Though outsourcing some of the processes at Unilever resulted in cost benefits and other advantages, there were also some risks involved in the process. Some of them are quite in accordance with the literature on outsourcing.
The major risk is the rise of employee discontent and labour disruption in outsourcing. At Unilever, the outsourcing led to loss of many jobs. However, the firm was quite prepared for this issue; also it had some previous learning experience which helped in decision making. The decision to provide voluntary retirement for some employment provided some pacification for a group of employees. Apart from the actions taken, the important step taken by Unilever was to communicate well in advance about the decisions to all affected personnel. Effective communication at the right time is indeed important for maintaining employee-employer relationships within the firm. Also arriving at a unanimous decision while considering all the opinions is a major task, especially in global firms like Unilever.
Hidden costs in outsourcing has been briefly mentioned above, however, these need to be analysed carefully while implementing outsourcing. Implementing new technology may disrupt existing organisational processes which can incur costs. Also, training personnel in using new IT systems, co-ordinating with offshore teams etc. are can add to costs. Apart from this managing vendors is requires effort and time. In the case of Unilever, the outsourcing to multiple suppliers increased the overhead of managing the contracts. Processes were laid down to manage the contract with each supplier and regular meetings helped in building proper client-supplier relationship. The idea of considering the suppliers as partners instead of third party service providers further strengthens the relationship. The partnership model is increasingly being recommended in major global outsourcing projects (Willcocks, 2002).
A significant point noted is that the though lack of communication is considered as a risk in most outsourcing projects, Unilever has maintained excellent communication and regular contacts with the partners which has led to successful outsourcing and timely delivery of services. This in turn has improved the trust between both the parties.
In this paper, an analysis has been done to investigate the positive and negative aspects of outsourcing in Unilever. An attempt has been made to analyse the core-competency and non-competencies of firms who want to outsource their work. The different types of outsourcing has also been analysed in detail. It has been concluded that the two major types of outsourcing are IT and BPO. Lots of companies including Unilever have realized the importance of outsourcing their work to multiple vendors so as not to be overly reliant on one particular vendor. Multi-sourcing has also been found to be cost effective and contributing to more benefits. Companies are selecting their vendors on the basis of the vendor’s specialised area of work and by doing this they able to control the whole work process also.
Some of the major benefits of outsourcing for Unilever are the cost savings and better work efficiency. It has also contributed to innovation and quality improvements for the company. Furthermore it has enabled the company to focus on their core business area. All these have contributed to significant competitive advantages for the company. The manner in which Unilever manages their supplier relationships and how its outsourcing strategy has contributed to its competitive strategy has been analysed and discussed in detail. While lots of companies are outsourcing their work, one of the most important lessons to be learnt from the way Unilever has outsourced their work is the way they manage their supplier relationship. If a company wants to reap maximum benefits from outsourcing then the way they manage the supplier relationship is of prime importance.
The decision making matrix has been used so as to analyse the rationale of Unilever behind going for multiple vendors for outsourcing their work. Interviewing the employees of Unilever provided a rich insight into the outsourcing strategy of the company. On the basis of the information gained from these interviews and other industry wide research an attempt has been made to analyse the benefits and risks of outsourcing strategy at Unilever. The qualitative research was of immense assistance to gain a holistic view of the outsourcing strategy of the company. The semi-structured interviews made the interviewees talk about their views and opinion in detail. It helped in gaining knowledge about the things which were not planned initially.
6.1 Recommendation for Unilever
Following are some of the recommendations for Unilever:
Method of IT evaluation needs to be reconsidered: One of the present issues in evaluating the contribution of IT is that the companies are not investigating the potential risks and costs associated with IT outsourcing. Even in the case of Unilever while one of the studies revealed that the initial cost savings for Unilever was more than 60%. While the knock-on costs associated with operations and maintenance has been ignored which needs to be incorporated while performing IT evaluation.
The intangible benefits of outsourcing need to be evaluated so as to get a complete picture.
How Unilever has managed to align their business strategy with their outsourcing strategy can be researched further. Although outsourcing has helped Unilever to gain considerable competitive advantages, in order to sustain these advantages both the organisational business strategy and outsourcing strategy needs to be aligned properly.
The time-scale of the potential benefits also need to be considered. Unilever started outsourcing their work in 2005 only while it can take many years for a company to analyse the benefits of outsourcing completely. Over a longer time-period the impact of outsourcing can go in both the positive as well as negative side. This can be another potential area of research which will require a considerable time from the side of researcher also.
Unilever should also make an attempt to take into consideration about how the employees of the company perceive the changes brought by outsourcing with regard to their work culture and its potential impact.
6.2 Research Recommendation
Following are some of the recommendations for further research on the topic:
One of the current developments that can have a potential impact on the growth of outsourcing is the issue of globalisation and protectionism. While the emerging economies like India and China are supporting globalisation, developed economies like US are taking a stance of protectionism. The current global economic situation has been one of the major influencing factors for such a difference of opinion between the major economies of the world. While there is no doubt that outsourcing is here to stay for long and companies cannot do without it, the direction in which the current debate goes which decide the future of outsourcing.
A further area of research would be to incorporate the views of the vendor side also. This will provide a complete picture about outsourcing by including the views of both the client and the vendor side.
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8.1 Appendix 1
This section contains the questions of the semi-structured interviews of the Unilever employees.
– Could you kindly give a brief explanation of how outsourcing works within Unilever UK, and across Europe.
– What are the Core and Non Core business functions across the group, and how does Unilever choose what functions need to be outsourced, and what functions should be run internally.
– What different forms of outsourcing agreements are currently being utilised across the group, and could you kindly discuss the main use and effectiveness of these different agreements.
– In what manner has Unilever managed supplier relationships, and how do you believe these have either contributed to, or disrupted the potential effectiveness of these outsourcing agreements.
– What processes, due diligence and procedures does Unilever undergo:
Before outsourcing contracts are awarded
In managing outsourcing contracts
POTENTIAL BENEFITS AND THREATS
– To what extent has Unilever achieved the following benefits from outsourcing:
Focus on core business
Any other potential benefits
– To what extent are these disadvantages possible, or occurred in the past as a result of outsourcing contracts:
Labour and work disruption
Lack of innovation
Any other difficulties
– What can you say about the future role of outsourcing as an enabler of competitive advantage within Unilever?
8.2 Appendix 2
This section contains the responses of the employees of Unilever.
8.2.1 PART A – PRANAB
Could you kindly give a brief explanation of how outsourcing works within Unilever UK, and across Europe.
Outsourcing within Unilever started fully in 2005, as part of our transformative “one unilever” strategy. We had different Unilever companies in different countries of Europe, all of whom had different processes, technological infrastructure, financial systems and human resource policies. On our own, these countries cost a lot of money to run, and a number of our services were overlapping. We had several enterprise resource planning (ERP) systems, about 80 of them, all conducting the same processes in different ways.
We felt that if we found a way to implement shared services across Europe, then it would be possible for us to drive down cost significantly and streamline our business. The potential cost savings of such a project was rendered at over ?600 million yearly across the whole of Europe. So we felt it was a good strategy going forward.
Outsourcing works just the way outsourcing is meant to work elsewhere. We see our service providers as partners, and not as third party suppliers, because we believe we should work together with them if we are to achieve the sort of results we need to achieve. We have drawn extensive contracts, trained them appropriately, have regular meetings, and ensure that we have liaison managers at every level of the outsourcing relationship, so as issues arise, we fix it. We try not to allow anything creep up unwanted that could disrupt our operations.
What are the Core and Non-Core business functions across the group, and how does Unilever choose what functions need to be outsourced, and what functions should be run internally.
Good question. Off the top of my head, I am going to try to distinguish the functions of Unilever between core and non-core functions. In Core functions, we have supply chain, marketing, manufacturing, sales, research and development. That’s off the top of my head. These are the services that are crucial to the profit line of the business, they determine how we manufacture our products, market them to the end users, sell them to wholesalers and retailers, and innovate on existing products. Unilever has to perform these functions; we cannot give them to an external party. They contribute to what we really are.
However, we have non-core functions. Such as Finance, Human Resources, Procurement, and Technology. These functions across most FMCG businesses are usually uniform. Finance is mostly about purchase to pay and general accounting. Human Resource is about payroll administration, recruitment amongst others. Procurement is how we source our goods from suppliers, and Technology refers to how we manage our IT infrastructure. These are support functions for our business, and we need them to work well, however, we do not necessarily have to do them ourselves. Other companies that specialise in these could do them better than we could. So we decide to outsource them because we feel it is better than if we did them ourselves. Also, outsourcing was a method through which we could implement shared services across of Europe. By outsourcing to a single partner across Europe, all the individual services in these countries, would be implemented by a single service provider, thus enabling us to have a streamlined service.
In what manner has Unilever managed supplier relationships, and how do you believe these have either contributed to, or disrupted the potential effectiveness of these outsourcing agreements.
Like I explained earlier, at Unilever, we believe in closely liaising with our partners. We consider them partners not service providers. So we have regular weekly client meetings. Not at the senior management level, but at the ground level, with those individuals that actually take part in the work. Even when we do not necessarily have anything to say or report, we still meet and ask them “how is it going”. We believe this has helped deepen our relationship with our partners and also helped create a working environment where problems don’t just creep up behind us when we are not looking.
So we have closely monitored our relationships by closely following due processes, having regular meetings, and by considering our service providers as partners and not suppliers. That way, I believe we are able to constructively work together. Identify problems and tackle them before they become an issue.
What processes, due diligence and procedures does Unilever undergo:
Before outsourcing contracts are awarded
When we first set out to outsource our processes within the organisation. We had a number of suppliers. HP, BT, Accenture, Cap Gemini, all of the big top names came out and said they could assist us.
Overwhelmed with all these bids, we needed to determine for ourselves who we wanted to work with and how we wanted to build a relationship with them. We established a set of criteria such as experience, reputation and previous relationships, and used that in determining the sort of partners we want to have. For instance we choose Accenture for our applications and infrastructure outsourcing, and also for our human resources, because we have built a relationship with them for over 10 years, and they have assisted our business in management and technology consulting, so we felt it was only logical that we extend our relationship with them. The same occurred with IBM and HP in other regions. We knew their track record, they have a strong reputation, and we believe that for a company like us that are large, we require partners of similar magnitude and reputation, who are also willing to work alongside us in doing what needs to be done.
In managing outsourcing contracts
Although we do have a set of guidelines and processes on ground for managing outsourcing relationships, we also like to take hands on approach in ensuring it works. We conduct multiple weekly meetings at all levels of the outsourcing contract, especially from supervisor to management level, so as to ensure that all issues have been identified and addressed.
We also conduct half year and yearly reviews of our outsourcing contracts, where our partners present how they have assisted us in being more efficient and reduce cost. These help us evaluate whether or not we should extend existing contracts or contractual terms, and how we expect to achieve more through outsourcing going forward.
8.2.2 PART B – JAMIL
POTENTIAL BENEFITS AND THREATS
To what extent has Unilever achieved the following benefits from outsourcing:
Well, from what I can think back to, the main aim of the outsourcing contracts in the first place was to save cost. We felt that if we shared these common services in just one centre across Europe, we would be able to reduce overlapping cost. The estimated cost savings back then were about $927 million, and I believe we have made steps towards achieving those goals. Though I do not know the precise figures, I do know that our outsourcing partners are much cheaper cost wise, than when we had to have these services done ourselves in house. They have also shifted these functions to lower cost bases like South East Asia and Latin America. That way we do not necessarily have to do as much to get the same work done.
Off the top of my head, I remember that our purchase to pay processes usually took about 3 – 4 weeks from inception to completion. This meant that we usually had to wait long times before these were done, and these processes were much different in different European countries. In some countries, processes could take up to 6 weeks, while some others like the UK were more efficient. These affected the whole group as a whole, Unilever as a whole could not be efficient on one part, and inefficient in others. So we had to find a way to ensure that all functions and processes across the group were equally efficient and streamlined.
Now that we have one partner handling the finance functions across the whole group, I can say these functions are now more efficient, there is no wastage, and we can derive more from them.
Innovation and Quality improvements
Previously, the systems we used to run our finance, HR and Procurement infrastructure were mostly based on what the technology department suggested, and the business case presented to the senior managers to justify such an expense. We only improved or innovated on current practices if we thought it was of crucial importance. For instance, we used one ERP system for several years, even when they were several updates available, all because we thought we did not necessarily need it, and that current processes were fine. The CIO could also not prove beyond reasonable doubt that it was really needed.
But now that we have external parties handling our infrastructure, technology, finance, HR and procurement systems. Accenture has the best in class practices for these services and they are much more improved than what we could have done ourselves. Since this is their core function, this is what they do best, and they do it for several other clients, we know that they are in the right hands. For instance, they have partnerships with SAP and Oracle and through that they can deliver the best updates for the services. The manner in which they conduct our businesses is far better than we could have done ourselves. We believe this partnership has brought results that are far broader than what we anticipated.
Focus on core business
Oh well, I cannot say without a doubt, the way in which outsourcing has enabled us focus on core businesses. But what I do know is that we do not have to worry about the finance, technology, human resources and procurement functions as much as we did initially. Now all we have to do is have an outsourcing department that deals with our service providers across all levels, and ensures they are conducting their business appropriately, and whatever issue we have is resolved. By not having extensive non-core departments as such, we are indeed able to focus our strategic activities on those functions that matter most, which are supply chain, marketing, sales amongst others.
Well from what I have learnt, since our service providers have taken the time to learn much about our business, they are much better than us at performing these functions now. They have much more experience and resources at their disposal to conduct the same functions. In a situation whereby we would have had to send a couple of workers on training to learn a new practice, now all that is covered in our contract agreements, and the service provider sends their people on training so they could deliver better to us.
Since we have adopted a shared services centre in the Europe, we have been able to extend these services to other European countries that were part of the initial agreement. Because our outsourcing partners have been able to understand our business and conduct these functions in a way that is uniform across all businesses, it is now much easier for them to extent it to a new country. All they need to do is just transfer relevant staff from there, and have their infrastructure transferred. With outsourcing, we are able to conduct the same service on a larger scale.
Any other potential benefits
You have identified most of them, I would just like to state that it was a strategic move that was crucial to our one Unilever project, and even without cost benefits, it still helps all parts of Unilever Europe work together, and that is something we are happy about. We have been able to derive substantial benefits from outsourcing.
To what extent are these disadvantages possible, or occurred in the past as a result of outsourcing contracts:
Labour and work disruption
Well I have to note that this is always a considerable factor whenever we are contemplating how exactly we are going to outsource to service providers. For instance, the agreement we signed with IBM affected about 800 workers, while the HR BPO affected about 1,500 workers across Europe. We knew that so we had to find alternative employment and early retirement for these individuals. Without that we may have had significant labour disruptions.
We also ensure that every part affected is informed once we have agreed on any outsourcing agreement, so they are catered for immediately and without any sort of disruptions. We conduct change management operations within the company, we do not consult with anyone else for that because we have learnt from our mistakes and ensured that we cater for staff appropriately to prevent any such things from happening again. In 2005 we did have some staff disruptions, but not now that we have learnt from our previous mistakes.
Contract management is a very serious issue, because if we do not maintain our contracts appropriately, then it is possible that a conflict of interest may arise between our partners and us and we do not want that. I always participate in weekly meetings between our team and their team to ensure that they are functioning well, they have everything they need, and adopting the right processes to ensure everything is done. We have contract reviews twice a year just to ensure everything goes smoothly. At first when we first started these outsourcing contracts, it was difficult because we had to learn a lot of things fast, but now, we have built extensive relationships with our partners and used that in making things work good.
Not that I know of. Every staff that work with them is vetted, and the information that is provided to them is really low level security information. We do not possess a large security threat from that information, except to say that information of employees could be lost. If that does happen, we have established steps to circumvent such events.
Communication could be an issue if not handled effectively, but we ensure that we are always in contact with our service providers.
Lack of innovation
That is not an issue we suffer from here. On the contrary, due to our outsourcing agreements, our partners adopt a much better process than we could have adopted on our own.
What can you say about the future role of outsourcing as an enabler of competitive advantage within Unilever
Uhm, competitive advantage is a very broad word. We could say it in terms of improving market share against our competitors, but these functions are support functions and do not necessarily contribute directly, but they may have done something unquantifiable indirectly.
Looking at the wider picture, we believe that outsourcing would help us work better together across the whole of Europe. By doing that, we believe we can achieve better results, reduce cost significantly, and that to me is the main definition of competitive advantage. So in terms of cost reduction, outsourcing is great.