Outsourcing: The U.S. Business Revolution Spring 1997 Copyright © Michael F. Corbett & Associates, Ltd., 1997 Customer Confidential. Reproduction in whole or in part is strictly prohibited. Outsourcing: The U.S. Business Revolution Published by: Michael F. Corbett & Associates, Ltd. Lexington Park, East Bldg. Suite A 255 Route 55 LaGrangeville, NY 12540 (845) 452-0600 (845) 452-6988 (fax) Email: [email protected] Copyright Ó Michael F. Corbett & Associates, Ltd. 1997 All rights reserved. Michael F. Corbett & Associates reports are limited publications containing valuable management information provided to a select group of customers in response to orders and our customers acknowledge when ordering that the reports are for our customer’s own internal use only and not for general publication or disclosure to third parties. This report may not be copied or given, lent or resold to third parties without written permission nor may its contents be disclosed to non-customers without written permission. Information is believed to be reliable but cannot be guaranteed to be correct or complete. Copyright © Michael F. Corbett & Associates, Ltd., 1997 2 Customer Confidential. Reproduction in whole or in part is strictly prohibited. Table of Contents SECTION 1: OUTSOURCING: BACKGROUND, DEFINITIONS & DECISION FACTORS 5 OUTSOURCING DEFINED 5 TRADITIONAL ORGANIZATIONAL STRUCTURES 6 OUTSOURCING’S EMERGENCE AS A POWERFUL MANAGEMENT TOOL 7 DRIVING FACTORS 12 OUTSOURCING AS A “MAKE VERSUS BUY” DECISION 12 TOP TEN REASONS COMPANIES OUTSOURCE 17 TYPES OF SERVICES OUTSOURCED AND SELECTED CASE STUDIES 21 THE OUTSOURCING CONTINUUM 21 CLEANING 21 FOOD SERVICES 23 COPY CENTERS 23 MAILROOM OPERATIONS 24 PAYROLL 25 FACILITY MANAGEMENT 25 HUMAN RESOURCES 27 TRANSPORTATION & LOGISTICS 28 INFORMATION TECHNOLOGY 30 MARKETING & SALES 36 FINANCE 37 THE OUTSOURCING PROCESS 39 STRATEGIC ANALYSIS 39 IDENTIFYING BEST CANDIDATES 39 DEFINING REQUIREMENTS 40 SELECTING PROVIDER(S) 41 TRANSITIONING THE OPERATION 41 MANAGING THE RELATIONSHIP 42 Copyright © Michael F. Corbett & Associates, Ltd., 1997 3 Customer Confidential. Reproduction in whole or in part is strictly prohibited. SECTION 2: OUTSOURCING PROVIDER ASSESSMENT 43 TOP 200 U.S. PROVIDERS OF OUTSOURCING SERVICES 43 ADMINISTRATIVE SERVICES 44 CUSTOMER SERVICE 62 DISTRIBUTION 76 FINANCE 103 HUMAN RESOURCES 118 INFORMATION TECHNOLOGY 138 MARKETING AND SALES 220 FACILITIES MANAGEMENT 227 TRANSPORTATION 249 SECTION 3: OUTSOURCING EXPENDITURES 252 EXPENDITURES AND MARKETS FOR OUTSOURCING IN THE U.S. 252 EXPENDITURES BY INDUSTRY & COMPANY SIZE 265 PROFILE DATA: REASONS FOR OUTSOURCING 267 PROFILE DATA: VENDOR SELECTION FACTORS 269 SECTION 4: EXECUTIVE PRESENTATION 270 BIBLIOGRAPHY 308 INDEX 395 ABOUT THE AUTHOR 413 Copyright © Michael F. Corbett & Associates, Ltd., 1997 4 Customer Confidential. Reproduction in whole or in part is strictly prohibited. Section 1: Outsourcing: Background, Definitions & Decision Factors Outsourcing Defined Although the term may be new to some, many believe that the basic concepts of outsourcing are not. After all, companies have always "out-tasked," that is, hired special contractors for particular jobs or to level-off peaks and valleys in their workload; they have always partnered -- forming needed relationships with firms whose capabilities complement their own; companies have always contracted for shared access to resources that were beyond their individual reach - - whether it be buildings, people, or technology. Indeed, none of these concepts are new, yet, none of them represent what we today call outsourcing. Outsourcing is nothing less than a basic redefinition of U.S. corporations around core competencies and long-term outside relationships. These core competencies and outside relationships are chosen to bring the greatest value to the ultimate customer and the greatest productivity to the corporation itself. Outsourcing applies to every facet of today's corporation and at every level. It is a central management tool for the fundamental reengineering and reenergizing of America's businesses. Many believe that outsourcing must be embraced by corporations if they are to compete successfully in today's global economy. It is these realities that make outsourcing an exciting marketplace in the U.S. Put simply, outsourcing is buying services from external providers. What is truly new is the size, scope and frequency with which U.S. organizations are entering into long-term services contracts for activities traditionally performed in-house. Today, 85% of organizations buy services once performed in-house, and 93% expect to do so within the next 3 years. Michael F. Corbett & Associates estimates that $100 billion was spent on outsourced services by U.S. Copyright © Michael F. Corbett & Associates, Ltd., 1997 5 Customer Confidential. Reproduction in whole or in part is strictly prohibited. firms in 1996. Information technology represents 40% of this total, logistics, 15%, facility management and operations, another 15%, and the remaining 30% is spread across activities, such as, administration, human resources, customer service, finance, and marketing and sales. (These figures do not even include manufacturing outsourcing, or contract manufacturing, which some estimates place at between 50-70% of the total cost of goods sold in the U.S.) The result is that the traditional vertically integrated, self-sufficient organization of the past is quickly being replaced by interdependent organizations focused on core competencies. Along the way, entirely new classes of business-to-business services are emerging as well as entirely new industries and exciting opportunities for firms entering these markets and providing these services. Traditional Organizational Structures An understanding of the importance of the outsourcing megatrend in the U.S. starts with a reexamination of the traditional U.S. view of a “company," which is rooted in the post- industrial-revolution model defined by giants such as General Motors and DuPont in the 1920s and ‘30s. On the basis of this model, a company is generally thought of as a large, integrated organization -- that is, as an organization that directly owns and manages most if not all of its required resources. Under this model, business success was traditionally seen as synonymous with acquiring the factors of production. Over the years, as organizations became more complex, their resources were further specialized and directed toward various aspects of the company’s operations -- product design, engineering, manufacturing, human resources, information technology, distribution, and sales, just to name a few. Viewed strategically, outsourcing fundamentally challenges executives to rethink this notion of the traditional vertically integrated firm in favor of a much more flexible organization where internal investments are made in a more focused way on the organizations Copyright © Michael F. Corbett & Associates, Ltd., 1997 6 Customer Confidential. Reproduction in whole or in part is strictly prohibited. core competencies with mutually beneficial longer-term outside relationships used to source many, if not most, of these ever increasingly specialized sub-disciplines. The reality is that in the U.S. this traditional integrated firm is not the only, or necessarily the best, way to create value -- especially in the ferociously competitive highly volatile global economy of the 1990s. Almost any organization can gain access to resources. What differentiates companies today is their intellectual capital, their knowledge and their expertise -- not the size and scope of the resources they directly own and manage. As a result, outsourcing is being adopted by firms from across the corporate spectrum as well as governments at all levels and not-for-profits. No organization is too large or too small to be examining outsourcing. Preeminent organizations, such as those on the FORTUNE 500 list of America’s largest corporations, are adopting outsourcing as a cornerstone of their efforts to sharpen market focus, capitalize on global opportunities, and reenergize operations. At the same time, smaller, rapidly expanding companies are using outsourcing as a way to match the capabilities of a large firm without the expense and delay of directly acquiring and managing each new resource needed. Outsourcing’s Emergence as a Powerful Management Tool In a recent survey of FORTUNE 500 CEOs, Chief Executive Magazine concluded, “outsourcing is clearly regarded as a plus for those companies seeking to gain a competitive advantage.” How is outsourcing used to gain competitive advantage? To begin with, outsourcing demands an understanding of the concept of core competencies. Core competencies are the capabilities of the organization that truly distinguish it from its competitors. They are the capabilities upon which the success of the company, both today and in the future, depends. Core competencies are what gives an organization its clear leadership position -- as seen by its customers. Copyright © Michael F. Corbett & Associates, Ltd., 1997 7 Customer Confidential. Reproduction in whole or in part is strictly prohibited. The key to understanding core competencies is an understanding of what business the firm is in, what its customers perceive as its core competencies, and knowing how to map these core competencies into enrichment-based solutions for the customer. Success is based on reengineering the organization to focus on customer enrichment. The agile competitor uses outsourcing