BPO conference speech/ghost-written for Jim Robinson/BAE Systems/October 2004

Title: Marry in haste, repent at leisure: the art of forming a successful BPO partnership

By Jim Robinson, procurement director, BAE Systems Shared Systems

Ask the experienced rather than the learned.
- Arabic proverb

Those companies that still have reservations about business process outsourcing or BPO may be surprised by our story.

BPO is an option organisations often turn to reluctantly. They feel it represents considerable, intangible risk; means losing control of an important aspect of their operations (even if this is non-core to the business); and that choosing this 'last resort' route means that they have somehow failed to manage things well internally. This negative perception may be down to the bad press that outsourcing has had over the last couple of decades, or a bad experience of their own in the past.

So it may raise some eyebrows to know that BAE Systems now outsources a staggering £150 million worth of its procurement activities to a third party - a figure that has almost doubled from our starting point three years ago.

This is the world's largest outsourcing partnership to date. It is growing all the time, too, as we find new areas that we feel will benefit from being managed by external experts. Experts with greater buying power and industry knowledge than one company could ever achieve - even a company the size of BAE Systems.

What may be even more surprising, is the scope of the activities that we have now entrusted to our outsourcing partner. As well as low-risk categories such office consumables, and the company's car scheme, our outsourcing provider now looks after all aspects of our business travel, our mobile phone needs, and our sourcing of protective clothing. Soon it will also be taking over our temporary technical design contract labour requirements.

Although we will stop short of outsourcing the procurement of anything touching the strategic end of our business, such as purchasing avionic or navigation systems (a process which involves complex interactions with our engineers), we like to think we are pushing BPO to the limit in the areas where this can - and is - giving us tangible business benefits.

We consider ourselves to be a bold company, and it is this boldness has enabled us to seize an opportunity that other companies have shied away from - one that has made a sizeable difference to our business. But we'll come on to the results shortly…

First, I want to explain why we felt business process outsourcing was a positive step forwards for BAE, and how we approached the transition to this new way of buying in products and services.

But, before I do that, let's look at what the market analysts are saying about BPO.

Back in March, Gartner predicted that the market for Business Process Outsourcing services would reach  25 billion in Europe this year. Key drivers were cited as being the need by companies to focus on their core competencies, while cutting costs and improving customer service.

Gartner also noted from its findings that, while BPO adoption in transaction-intensive processes such as payroll, card processing and claims processing is still on the rise, more and more companies are now extending this to enterprise processes such as human resources, finance, accounting and procurement. Indeed, as you'll be hearing throughout this conference, BAE Systems is far from the only big name to have signed comprehensive BPO contracts in Europe in these areas in the last three years.

The UK leads the way in this market too - representing more than 50% of the total BPO market in Europe today, according to Gartner.

So we're in good company! But why did we take this route?

BAE Systems - a few facts and figures

BAE Systems is a multinational defence products manufacturer, formed on November 30, 1999 from the merger of British Aerospace and Marconi Electronic Systems - Marconi's defence electronics business. Our annual revenues amount to some £12 billion and, including joint ventures, BAE Systems employs more than 90,000 people worldwide.

Since the creation of BAE Systems, we have steadily increased our investment in and our revenues from the US - while our competitors in Europe have found cracking this vast market difficult.

Our mission as a company is to deliver outstanding capability to customers through quality technology, robust processes and the innovation of our people.

The business challenge

When British Aerospace and Marconi's defence business eventually came together in early 2000, there was a great deal of consolidation to be done across the two companies' administrative and support functions. There was much duplication across the newly enlarged group and, as things stood, we weren't punching our weight as a purchaser of goods and services. As a £10 billion+ business, with 40,000 employees in the UK, we ought to have had substantial buying power, but we weren't as well co-ordinated as we might have been, particularly when it came to infrastructure based products and services.

To provide services more efficiently to our now globally disparate organisation, while delivering promised cost savings to investors, something clearly had to be done.

So, in 2000 and 2001, we embarked on an internal procurement initiative to try and regain some efficiencies and flex new purchasing muscle.

We began by restructuring our procurement activities, following the now popular approach of category-based procurement organisation and management, instead of the division or company-based strategy we'd had in place previously. This meant developing category specialists and creating a central 'shared services' environment.

The new structure was formalised in early 2001. It was successful too - we achieved £60 million savings in the first year alone, just by centralising our procurement activities and exploiting market-specific knowledge to leverage better deals with suppliers.

So why didn't we stop there?

BPO - the obvious next step

During 2001, and even before, we were in discussions with a company called Xchanging about outsourcing some of our HR activities. This was a substantial undertaking in itself, but we decided to take the relationship even further when Xchanging came back with a proposal that included related procurement activities.

The proposed deal would involve us using their expertise to procure products and services in areas such as recruitment, temporary labour, company car schemes, health care and relocation.

We came to the conclusion that, although we had made some good progress ourselves with some of these categories, further gains could be achieved if we could aggregate our own purchasing power with that of other companies, by using a third-party that represented multiple large clients.

More importantly, however, by going down this route, we would also gain access to greater staff resources - experts who were close to the suppliers and had in-depth market knowledge in each given procurement category.

As a single company, despite our vast size, we couldn't justify retaining highly experienced experts in each category. Xchanging, as a specialist in procurement services, could.

This has made a huge difference to the value for money we're now able to command in each category we've outsourced. Instead of pitting relatively junior procurement staff against what might be the sales director or even CEO of a supplier, who can exploit knowledge built up over 15 years or more to negotiate aggressively, we can now rely on equal experience and skill levels in the people negotiating on our behalf.

So, one of the key benefits of business process outsourcing for us has been that the knowledge and skills we are buying into are narrow (focused) and deep. That means they understand the markets they're purchasing from as well as anyone selling the products or services we want to buy.

ROI

It's tempting to look at returns from outsourcing in terms of vastly reduced costs, but more important than this is value for money - ensuring that the quality of the goods and services remains constant or is improved, while prices are negotiated down.

To be better off, means being better off financially but without any degradation in service - without any risk. Indeed, it is this absence of any real risk that makes us wonder why more organisations like ours aren't outsourcing their non-core procurement activities too. In our experience, large companies can only gain from doing this.

So what tangible results have we seen?

In addition to the 'softer' benefits, which include more productive use of my team's time and energy, some of the best returns we have seen from outsourcing our chosen procurement categories are as follows:

" Just three years into our 10-year outsourcing contract, we have already achieved savings of 12% - that's over £30 million. That's on a total outsourced procurement spend that totalled £80 million in the first year and grew to £100 million by 2003. This figure will soon rise again to £150 million a year once we've transferred our technical design contract labour sourcing to Xchanging - this is currently in progress.
" One of the biggest surprises to us was the size of the additional savings we made by outsourcing the procurement of routine office consumables. We felt we'd already improved this area substantially by centralising it, but Xchanging managed to drive another round of double-digit savings in percentage terms. In real terms, we're talking about a further annual saving of £250,000 on an average spend of around £3 million.
" Another area that has produced particularly pleasing results is recruitment. Historically, we have done this on a regional basis, without any real co-ordination. By outsourcing the activity and consolidating the recruitment agencies we use, we have seen a 30% reduction in the fees charged.

Other benefits:

" Travel, which we added to the outsourcing arrangement during 2003, is perhaps one of the most surprising categories for us to have outsourced, as it meant relinquishing control of our direct relationships with the various airlines and the discount structures we had negotiated over time. But based on the success we'd enjoyed in the other categories we'd outsourced, we decided to make the leap of faith and have seen some very good results already - not just in unit price improvements, but more in the area of 'spend management', particularly switch selling. I'll come back to explain this in more detail later on.

How were these benefits achieved?

I've already talked about the importance of the quality and experience of the staff handling the procurement, which - certainly to us - is at least as vital as the ability to aggregate our purchasing activities with those of other companies to achieve the best value deals.

When we looked for a partner, initially for our HR outsourcing needs, but then as someone that could take on an increasingly large proportion of our internal services, it was essential that we had confidence in the people that would be working for us.

By working with Xchanging, we have gained much more than an outsourcing partner onto which we can offload non-core business activities. We have gained access to a far more extensive, and more skilled set of resources than we could have established internally.

This has been particularly critical to us in the area of travel, where the only way we could expect to see a substantial reduction in costs was to change the behaviour of BAE Systems' own users.

It's all very well identifying preferred airlines and having access to excellent deals, but if staff don't take up these offers, all that work could be for nothing. So Xchanging has helped us to reshape the way our staff view and use the different travel options.

This has required a lot of work. Although BAE transferred a competent travel manager to the outsourced operation, Xchanging has invested additional resources which has enabled everyone to focus on driving out value.

Because Xchanging represents multiple companies, they can afford to invest in more staff resources. As a result, we now have access to four or five experts who focus on nothing but travel procurement, instead of the two people we had internally.

What's more, where we had been concerned that we might lose visibility of the market by outsourcing these activities to a third party, we have found that we've actually gained greater visibility across the market as a whole because of our access to these specialist resources.

The argument for outsourcing

As we saw it, we had four main choices open to us when we decided to seek external help with our procurement inefficiencies:

1. Buy in some consultancy

Although consultants can open the mind to the art of the possible, our concern here was that we didn't want to be left with the implementation. It's easy enough as a consultant to come in and make ambitious suggestions, but if you're not the one with responsibility for following through on these, how can you be sure that long-term benefits will be sustained? We were looking for more of a partnership - one that would not just fulfil a short-term plan, but look for far-reaching, sustainable business advantage. We wanted any partner to have a vested interest in making sure long-term results were achieved.

2. Use a consortium exchange

While consortium exchanges have proved a successful cost-cutting option for many organisations, these tend to be simplistic in terms of their focus on cost and can leave businesses open to the eyes of competitors. For example, if BAE Systems purchased its fleet of company cars on an online site, our competitors could conceivably gain access to the quantity of goods we're purchasing and the price being paid. With so much competition in the current market place, we didn't want to lay ourselves bare in this way.

3. Use an e-procurement company

We quickly discarded this option because, although e-procurement is successful at slashing unit prices, it isn't specific enough to address the inefficiencies in the whole supply chain, and provides no assurances about the quality of product or service being bought.

4. An outsourcing partnership

For us, this option meant creating a partnership with an outsourcing company that would involve both parties investing time and money, and sharing the risks and rewards.

Although we wanted to harness the expertise of an outside expert, we were reluctant to give up control over our resources, and to pay agent fees. Instead, we sought the long-term stability of cost savings, service levels, some control and a long-term drive for radical change.

That required an outsourcing relationship with a difference - a true partnership, where BAE retained an acceptable level of control over what was happening.

This is what we have achieved with Xchanging, which now manages all aspects of supply for BAE Systems and its UK subsidiaries in a growing range of categories of indirect spend.

Choosing the right partner

Because of the scale of improvement we were looking for, it was critical to us to find a partner that could add substantial value to the improved procurement processes we had already begun to put in place.

I've already talked about the quality of the people and the extended resources we have gained access to, but another critical benefit of working with Xchanging is the fact that the company provides a complete, cradle-to-grave service in each category of spend that they look after for us.

They don't just source a deal and then leave us to implement and manage it - they manage that spend, and manage that supplier, every day for the life of the contract - from requisition to completed payment. That means not only managing how the money is spent, but managing the supplier relationship, as well as the quality of the product or service provided to our organisation. This is quite unusual.

Xchanging was also happy to structure a contract that rewards the company for its own performance. The company offers both a fee-based and gain-share based commercial model, all of which contributed to our feeling of retained control and our confidence in their commitment to delivering on their promises.

A further plus for Xchanging compared to rival outsourcing providers is that it has invested in some very sophisticated category-specific technology systems, which generate further efficiencies by allowing spend to be managed at a very detailed level. It is this technology that has been instrumental in helping to steer our staff's travel preferences, for example, to ensure we make the best use of the new deals that are now open to us. Xchanging's systems do this by steering users to take up the company's preferred travel options.

But again, this is just part of a much wider service that Xchanging is providing to us. They don't provide this technology and walk away, or even stop at running the technology on our behalf. They have assumed a responsibility for ensuring our staff buy in to the procurement efficiencies they have enabled, and are helping to engage people at all levels of our organisation - to educate and explain that their co-operation is needed, and how they can make a difference.

Maintaining quality and measuring success

As I said at the beginning of this presentation, one of the biggest objections companies seem to have to outsourcing business processes such as procurement is the perceived loss of control over spending and supplier relationships and the risks associated with this. So how have we addressed this?

Xchanging offers an important service here, by establishing a baseline at the beginning of outsourcing relationship which we can then measure improvements against. In the area of procurement, this establishes what is being spent currently and what service levels are currently being experienced. This may sound like a basic thing to do, but many organisations - ourselves included, if we're honest - don't have these measures in place. (Disappointingly, many of the alternative outsourcing companies we looked at lacked this capability too.)

Once you have something to compare new prices and service levels against, you're in a strong position to be able to rate the improvements. Clearly, the minimum we'd expect would be the same level of service at a lower cost than we were paying before. Ideally, though, we would get a better service at a lower cost.

By defining where you are today and where you were yesterday, the improvements go beyond the anecdotal and into the measurable.

Improvements are then monitored on an ongoing basis, and reviewed at a monthly review board meeting, which looks at the savings that have been achieved and assesses the quality of service being experienced by comparing this to what are now a set of rigidly defined service metrics.

To give a bit more detail, for each category we have outsourced we have a series of key performance indicators relating to service delivery. These vary from 5 to 10 depending on the category. For each category, we pick the two key indicators and track these in absolute detail for the monthly review. (These reviews are attended by service representatives as well as myself.) The non-key indicators, meanwhile, are tracked behind the scenes. If one turns 'red', they can be brought to the fore, for more detailed assessment next time.

A final word on quality is that, because we have structured our contract with Xchanging so that they are rewarded for results (but by implication penalised for under-performance), the only real risk, if one exists, lies at their door.

They also give us complete transparency, so that we can see exactly what is being spent and where.

Managing the relationship to best effect - our responsibilities

Although I have probably painted quite a rosy picture of procurement outsourcing, it wouldn't be a complete story if I omitted the potential problems we have encountered.

While our overriding experience has been extremely positive - the proof of which is that we are continuing to expand our outsourcing activities - there are some notes of caution which I feel must be sounded to other organisations considering taking a similar route to internal efficiency gains:

The first is that a partnership is exactly that: a two-way relationship that requires commitment, trust, transparency - and hard work - from both parties. As the clichés go, there is no such thing as a free lunch, and you will only get out what you put in.

So, although our relationship with Xchanging has had an extremely positive impact on the business, and has taken away some of the day-to-day complexity away from my team, ultimately I am still responsible for making sure this arrangement works, and that it delivers the best service possible to our organisation, while delivering the right results to the finance department. At the end of the day, it is my team that remains accountable.

We also have a responsibility to keep in touch with the market. If I'm not careful, I could easily become one step further removed from the coalface, and if I let that happen, I have no one to blame but myself.

A further responsibility has been the work involved at our end in structuring the relationship - how we would manage an outsourced provider in our own discipline. This was something completely new to us.

We have also had to look at how we convey the business rationale for outsourcing to our internal community - how we articulated, in simple terms, what we were doing, why, and how this would work.

Our advice to others

I'll finish, then, if I may, with a few pointers that might be useful to other companies about to embark on an outsourcing venture of a similar nature and scope to our own project. These are based on the experiences we have amassed over the last three years:

1. Go into any outsourcing arrangement with your eyes open. Don't assume it will manage itself. You need to actively manage the relationship as you would with any other supplier. Outsourcing is NOT an easy ride, and needs governance and regular reviews.

2. Consider the options carefully. If you want to reinforce your delivery capability, you could do this organically, but this can be a long and laborious process, and the right resources can be hard to come by. Or you could use consultants to help you shape your own future, but this can be expensive and doesn't guarantee that the knowledge will be embedded in your organisation.

3. If you choose outsourcing, think carefully about the activities you move across. You might be tempted to move across the most difficult, neglected areas first, but this may be a mistake. Our experience has taught us to start with the simplest areas - the quick wins; the ones that are likely to face least resistance, and produce an easy success. If you select the wrong categories to outsource to begin with, you may not be given another chance to try this. We started with half a dozen categories as a commitment for the first 12 months. These were low-risk areas such as temporary office labour, our car scheme, healthcare management and some of our office consumables purchasing - categories that we thought to be in relatively good shape already (in terms of us having a pretty good understanding in terms of the existing value and quality of service we were getting). Over a period of six months, we went through each of these categories slowly, transferring them gradually. (The process became quicker and easier with each new category we transferred.) By phasing in the use of outsourcing gradually, we were able to test the model, gather some results, learn some lessons, gain some confidence and build a more watertight business case for any bolder steps we might take later.

4. If you do choose the outsourcing route, think about the type of relationship you want, the type of provider that can best provide this and the terms on which you'd be happiest to engage them. We've been highly impressed with Xchanging because of their high-quality individuals, and because they have both a strong intellectual and operational approach to outsourced, aggregated procurement. Because they're not consultants, they have practical implementation experience too, which is critical. We like their strong baseline methodology, which has given us a solid platform from which to go forward. And, finally, we like the fact that they are both results-oriented and driven, but also very flexible in how they get there. When you're dealing with an organisation as vast and as complex in structure as BAE Systems, where there are lots of internal stakeholders to deal with, that's very important. Xchanging does this very professionally.
5. Be prepared to play a proactive role in managing your outsourcing partner, on the basis that you will almost certainly get out what you put in. This responsibility doesn't stop with your immediate team either. You will need to gain buy-in from the rest of your organisation too, to ensure the good work you have laid down does not go to waste because staff throughout the company are not aware of what you're doing and why, and so are not co-operating. Your migration plan will need to include a considerable effort in the area of internal communication and education.

Conclusion

As we continue to develop our relationship with Xchanging, we expect the results to get better and better as we learn what works and what doesn't, and tweak and hone the partnership accordingly.

This is a 10-year contract which we were very happy to commit to because of the flexibility we have allowed for.

Some may see what we've done as extremely bold, but for BAE Systems this is not unfamiliar territory. We were one of the first companies to outsource our IT activities 10 years ago, and we were already outsourcing our HR requirements, so making the leap to procurement outsourcing hasn't been too much of a shock to the company.

If it's for general goods and service that are similar to those bought by other companies, outsourcing is a great opportunity. Just pick your partner and your categories carefully, and be prepared to give as much as you get. If you do that, any potential risk should disappear and the results might surprise you.

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