When Procter & Gamble, the biggest consumer package goods company in the world, announced it had outsourced its IT systems services to HP Services, the news was a declaration that outsourcing had arrived for consumer-focused companies. Last year HP Services landed a $3 billion, 10-year IT services contract to handle Procter & Gamble’s key systems and applications globally.
Of course, outsourcing is nothing new in the retail sector. Giant Eagle, Shoppers Drug Mart, The Home Depot, and Target have outsourced a variety of functions.
But package goods companies are now finding merit in outsourcing. Companies targeting the consumer space increasingly are outsourcing applications and processes like accounts payable and receivable and even store operations. The results are lowered cost, higher efficiencies, and custom specialization. This allows buyers to focus on more profitable efforts by leaving non-core applications to service providers who can handle maintenance, service, and important business processes more effectively. “Procter & Gamble can now focus on core business processes,” points out Joe Hogan, vice president of marketing with HP Services.
Outsourcing in the consumer-focused space has accelerated in the past six to nine months, reports Michael Whitacre, senior client executive with Acxiom Corporation, an outsourcer of customer and information management that helps companies acquire, cross-sell, and retain customers.
There are many reasons. The first is cost. The search for savings across the company — from the cost of personnel, technology, equipment, and facilities — is steering consumer-focused package goods companies to look for greater efficiencies and places to cut costs, says Marilyn Nelson, director of retail solutions with Getronics, an IT service provider. “The trend is price, price, price,” she says. “It all has to be done cost effectively.”
But outsourcing’s promise is about more than cost savings. Outsourcing also creates value by improving customer relationship management. “Retailers can either go to battle and beat the heck out of each other on price, or they can fundamentally change how they present themselves to their customers through a superior customer experience,” says Whitacre. “They are not only challenging us to reduce costs, but to grow revenues. They want to use outsourcing as a strategic tool to differentiate themselves in the market.”
Finally, the Procter & Gamble contact highlights outsourcing’s role as an enabler of supply-chain synergies between package goods companies and the retailers who sell their products, Hogan says. “What you’re really talking about is improving the supply chain process, making it more agile and adaptive to the patterns of what occurs inside a given business environment,” he says.
The Importance of Managing Customer Information
Customer loyalty has long been the mantra of the consumer-focused organization. Instead of winning over new customers, keeping the ones a package goods maker already has typically results in greater sales at a lower cost. Yet, the consumer-focused sector is facing heightened commoditization of both products and retail venues. Thus, a superior customer experience will differentiate providers, says Whitacre. Outsourcing customer information management can lead to better interaction with consumers throughout the transactional life cycle, from product development to purchase, feedback, and marketing. Such initiatives can create predictive modeling that allows product development based on specific consumer desires. But the company must first have a clear understanding of the customer; that information comes through the improved relationship management that results from tracking and aggregating consumer data showing who uses what, when, and why.
“The packaged goods manufacturers have to fundamentally change their infrastructure to accommodate a customer-centric strategy,” he says. Such an effort, Whitacre predicts, will come as consumer-focused companies reach out to business process outsourcing and technology providers who have experience garnered through similar industry segments.
Outsourcing operations can be a critical solution for any industry working on thin margins, says David Tapper, a senior analyst with International Data Corp (IDC). Package goods companies are finding competition keen in the retail sector; ensuring a positive, intuitive customer experience can increase return customer visits, improve sales, and lower operational costs related to winning over customers. Additionally, as tight margins drive retailers to encourage lower prices from product manufacturers, outsourcing hardware or business process applications like electronic data interchange can improve financial performance while also allowing the buyer to stay focused on core business applications.
Most companies, like those in package goods, spend upward of 6% on IT and support. Retailers, like grocers and other retail outlets, traditionally have spent less than 0.5% of revenues on IT and associated applications, Tapper says. For both, tight profit margins have led to “stingy” IT expenditures. The result is a similar downward pressure on package goods companies’ profits. The economic slowdown forced senior executives to look at new customer acquisition as well as customer retention as a means to prop up revenues.
“Outsourcing becomes valuable because providers can cut costs, provide efficiencies, and enable companies to do business in new products and markets,” he says.
B2C Is Far Different From B2B
The distinctions between outsourcing to business-to-business companies (i.e. packaged goods to retailers) versus business-to-consumer companies are important, Whitacre adds. Consumer-focused companies have large customer databases with millions — rather than hundreds — of customer names.
Outsourcing facilitates the creation of a manageable infrastructure to handle the vast numbers of consumers while avoiding costs of acquiring automation hardware and software solutions needed to handle millions of consumer records and other pieces of information that have to be distributed across the enterprise to people who can use the knowledge, Whitacre says. Many consumer companies are turning to managed services to serve these needs.
Historically, buyers have thought their products, applications, and systems are unique and too difficult to be candidates for outsourcing. The challenge for outsourcing providers is in getting consumer companies to accept outsourcing of non-core functions.
“Providers must get buyers to believe their business is not much different than the other enterprise business we do,” she says. Helping the buyers understand that outsourcing can bring value — even if the buyer hasn’t seen the application used for its type of business previously — is one way to do this.
Outsourcing allows packaged goods manufactures to use a supplier’s tested expertise in helping them determine what their customers want. That knowledge wasn’t mandatory when there were only two or three types of detergent on the grocery store shelf. With today’s plethora of consumer products, outsourcing IT to the right provider may be the best way to soup up sales.
Lessons from the Outsourcing Journal:
- Improving customer outreach and retention can improve customer loyalty. This is one way outsourcing non-core processes enables companies to focus on core service differentiators.
- Consumer packing companies are changing their infrastructure to accommodate a consumer-centric approach through outsourcing.
- Margins for consumer packaging companies are tight — and getting tighter. Increased competition and thin profit margins will force companies to watch the bottom line more closely and outsource processes that are more expensive if handled internally.
- Outsourcing has picked up in this industry within the last year because of thin margins and increased competition.