The Kraft of Outsourcing: Learnings from Lee Coulter (Part I)

Lee Coulter There is only one Lee Coulter.  Service providers tremble at the very sound of his name, consultants run for the hills… practitioners flock for advice.  And when he isn't performing carpentry or attempting cordon bleu, Lee has the small task of being SVP for Kraft's shared services, where he is a key leader of the firm's corporate transformation program "Organize for Growth".  He is responsible for Kraft's IT services, global finance and HR shared service centers, in addition to the firm's BPO activities.  He even once threatened to smash up my blackberry.   

On a more serious note, Lee has a practical and experienced perspective on how enterprises today should approach global sourcing, and we have enjoyed his exuberance and candor in our buyers' group meetings.  Today, we are blessed with the first part of a lengthy interview with Lee, where he is discussing how practitioners should approach global sourcing in this economic climate, how to select and engage the right service partner and how to decipher and execute innovation (yes, I said it) in a global sourcing environment…

PF: Lee, we’ve been through some major developments in the world of global sourcing over the last decade. As a senior operations leader in one of the world’s largest multinationals, what, in your opinion, has worked, and what hasn’t?

LC: Let me start by saying that the global sourcing industry has proven its most basic value proposition, and that is a huge success. There are many skeptics of

this industry, however I’m seeing that they are starting to agree that BPO adds value, and is here to stay. Now within that primary success, there are a few areas that need some attention. I have a top three in terms of growing pains in the industry:

- The global mega deal. Simply put, there is very little truly global scale advantage. In almost every BPO vertical, the synergies stop at regional pairs (by regional, I mean North America (NA), Latin America (LA), European Union (EU), Asia-Pacific (AP), and Central Europe/Middle East/Africa) (CEEMA). There are lots of pairs that you see frequently in BPO: NA-AP, NA-LA, NA-CEMA, EU-CEEMA, etc. It is rare that there is any advantage to including more than two regions either as a client or a provider. All the trends today support a regional best of breed approach. So I would say the global mega deal didn’t work out so well, and the regional best of breed strategy is working pretty well. Now we need to spend some time getting more modular and better at managing the interfaces between providers.

- Multi-client, public utility (MTPU) based services. This has long been a promise of all kinds of BPO services. Generally, companies that have enough scale to benefit from BPO at all, are usually capable of creating single-tenant, dedicated (or private) utility (STDU) based services. While there are exceptions, generally a BPO provider is only capable of the minor scale advantage over the client’s capabilities that comes from running many STDUs for many clients. There are a lot of reasons for why MTPU based services have been difficult, but this is one area that I don’t think has worked so well and I believe it is key to the future of the industry. (btw – I made up the acronyms, but if no one else coined it, they work for me)

- Contracting for successful partnerships. Despite literally thousands of relationships that exist in the BPO industry, the industry as a whole has not cracked the code on how to contract for a successful relationship. It seems there is little science here, and mostly art. If you look at the long term success of BPO relationships (getting completely through the originally intended contract term), it is a bit disappointing. I am certain it’s more about client and provider behavior than anything that is written in the MSA, but I think we should have come farther in being able to predictably create sustainable and satisfying relationships.

PF: We’re clearly at an inflection point in the industry as the fog lifts from this Great Recession. Are companies approaching outsourcing any differently as a consequence? Do you believe companies are investigating more in-house models, namely captives or shared services operations as a result?

LC: I believe there are some basic and unchanging (despite a recession) rules that anyone looking at shared services should consider to make the best delivery model decision. I don’t make a distinction between shared services and BPO. BPO is simply a choice to use an external provider for your delivery model. All the essential components of shared services are present in both models. In BPO, the service agreements and chargeback methods might be more complicated, but aside from that, they are very similar. Regardless of the economic climate, any company should examine process capability, client organizational readiness, short and long term financial goals, level of automation and technology, and risk to make the decision on in-house, captive, modified captive, or outsourcing models.

The limits or thresholds of these key dimensions might change slightly because of the recession, but I don’t think they change the basic questions you need to ask to choose the right answer. I will go one step further by saying that I think there is a natural progression (in-house, captive, modified captive, outsourced) that makes a lot of sense. There are times when skipping a phase is the right thing to do, but generally I recommend anyone looking at shared services get the basics in place as a shared service before looking to turn it over to an external. That doesn’t need to take five years either, but to give yourself the greatest advantage of succeeding in outsourcing, implement a shared service first and move up the sophistication spectrum.

In Part II of this interview, Lee will discuss innovation strategies for global sourcing and service provider management

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5 Comments

  1. Andy Williams
    Posted May 15, 2009 at 9:27 am | Permalink

    Completely agree with the strategy of going down a shared service path to begin with. The current climate seems to be driving many firms to optimize and centralize processes internally, which in turn puts them in a better position to outsource processes in the future.

    Thanks for the great discussion Lee,

    Andy Williams

  2. Posted May 17, 2009 at 10:51 am | Permalink

    Good post…touches on numerous BPO experiences I’ve had. Two thoughts come to mind:

    1) Behavior, is a key player. The MSA is something often toiled over for months, sometimes it’s never even truly completed. Eventually it gets stuck on a shelf and simply gathers dust. Once the process has matured (e.g. after 90 days), it’s typically looked at very infrequently.

    As a result, ‘behavior’ of the two parties is precisely the governing factor. The client neglects their responsibility in many cases to execute review processes stipulated in the MSA. At the same time, the provider’s initial sharp focus on service, dulls. The drive to get new clients and their projects are always front-of-mind, steady-state projects get sidelined, and management focuses more on getting the ‘next’ client than on improving the ones they already have invested heavily in.

    2) 2nd Generation
    Another key issue not addressed very often, is the ’2nd generation’ engagement. This is a customer who has previously outsourced services, such as AP, and is changing providers. This obviously results from a change in the relationship, and a perception of value.

    The problem with second generation BPO, is that the client will have outsourced the business process for so long (3-5 years or more), they no longer own the knowledge themselves. And, of course, the outgoing provider’s highly motivated to share with you what you need to know;).

    Good discussion,

    JT…

  3. Posted May 18, 2009 at 6:04 pm | Permalink

    Phil, it was good to see you in Budapest and to reacquaint myself with your blog. In my opinion, Lee Coulter is spot on in this Part I interview. I agree with all of his points with the exception of a subtlety regarding progression through captive to outsourcing. I agree that it is generally better to make this progression, but factors such as (lack of) investment, pace, management focus and change impetus often intervene to make the best thing to do seem less attractive. I’m not an advocate of transformational outsourcing from a traditional model without careful consideration, but it is possible to do it and make it work well, and for many European organisations (at least) it is the only way that they can see themselves making progress.

  4. Michael Steer
    Posted May 19, 2009 at 7:48 am | Permalink

    Great article and I agree with a lot of what is stated.
    I do wonder though about the well sign posted route to outsourcing via a first captive step.
    For me there seems to be a view that outsourcing is somehow more complex, more difficult and more sophisticated than a captive, hence go captive first.
    I am not sure I agree.
    For me if building and running a captive is so easy why are there still organisations struggling to implement and/or deliver and if outsourcing is so difficult why do we have such a large industry in place with a number of successful operations.
    As Lee himself states the difference between BPO and a shared service captive are so minimal as to be largely irrelevant.
    So why the need to go captive first?
    In my experience it is all about the people you put in place and the culture of the organisation you are operating within – fix this and you can take whichever route works best for your organisation, fail to fix and either route will likely be a rocky road.

  5. Lee Coulter
    Posted May 19, 2009 at 3:58 pm | Permalink

    Great dialog from Michael, Tim, JT and Andy. I have a few other thoughts around the logical progression of a shared service, and it principly falls along the risk tolerance line. If a company is just starting along the shared service journey, you can skip the captive step and jump to a commercial relationship, but it is almost a “burn the boats, there’s no going back” sort of decision. I am being a little dramatic, but not that much. When you do a big ITO or HRO or FAO deal, unwinding it can be very expensive, and disruptive. The flipside is that if you take a measured pace, by starting with an on shore centralized service, and focus on getting the behaviors right on the client and provider side, and it doesn’t work out or there are strategic/economic changes that cause a change of heart, the “un-sharing” of the service is way less damaging.
    It is all about the behavior in a shared service. If the first test of good partner behavior is going to be with an external provider that carries a big termination impact, then everyone needs to hold hands and agree to the 3 year journey to get the deal completely installed. I really do think it is three years too – about a year for transition, another year for transformation, and then a third year to get economic efficiencies and hit the first real “run and maintain” runrate of services and costs.
    That’s a long time in the world of today, and corporate memory is often shorter than that.
    One final point I would offer is that the biggest gains in terms of cost come in the fist two steps of a shared service. Moving to a captive (either onshore or off) is usually a 30% savings, and then moving to a commercial provider should net you another 20-30% a couple of years later. If you move straight to commercial solution, you might leave some significant value on the table. It could still be the right thing to do, but it warrants some thought and analysis before jumping in.
    One thing I have always said about shared services and BPO is that they are not in and of themselves, a strategy. They are strategic enablers for sure, but should always be used as a means of achieving corporate strategies around cost/scale, capability/quality, and flexibility. I have not seen high levels of satisfaction when SS/BPO is it’s own strategy.

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