2001 Editor's Choice Award PricewaterhouseCoopers and ANZ Bank
From the CEO: The winner of this award was a unanimous choice among our judges, for this relationship clearly demonstrates how outsourcing is the ideal solution to improve business processes and solve competitive dilemmas. ANZ Bank in Australia is outsourcing its procurement function to PricewaterhouseCoopers (PwC), and the results achieved already in this outsourcing agreement have been dramatic. Read their story and see an example of business process outsourcing (BPO) at its best, as well as a wonderful example a highly effective gain-sharing pricing mechanism.
ANZ Bank, with operations in about 28 countries, is one of the four major banks within the Australian-New Zealand, Asian Pacific area. Competition among the four banks is intense, especially from the perspective of cost-to-income ratio. ANZ now ranks at the top in this regard, having spent quite a lot of time and energy on moving itself into a more competitive position.† In order to accomplish this feat, the bank had to make a major point of departure from its historically conservative mindset. Here's the rest of the story.
In the Beginning . . .
Because of its poor position with respect to costs (three years ago), the bank hired Peter Donald, an outsourcing veteran with noted success for the City of Melbourne. ANZ wanted him to identify outsourcing opportunities and to apply his prior successful principles in implementing outsourcing for the bank. Donald recalls that this departure from conservative thinking sparked internal challenges. Although the bank had decreed that something had to be done about its costing structure, there were degrees of tension among management when it came to identifying which opportunities might be selected.
The opportunity identified was the bank's procurement -- its sourcing function -- because it was not providing the level of strategic importance to the bank that was desired. "We spend just under $1 billion Australian dollars per year in Australia and New Zealand (a total of about $1.5 billion worldwide) on a whole range of items from telecommunications to stationary, from technology to marketing and travel," says Donald. Two prior consultancies had attempted improvements in this function but failed.
Now Donald found himself having to go down that path a third time to try to effect improvement at an operations level and also to reduce spend. But he did something different -- he decided to outsource. "It was potentially difficult," he admits, "because there were few other examples anywhere in the world where an organization had outsourced its sourcing function. Subsequently I discovered that it is quite innovative."
Shelling Out for Quality
"In search of a supplier that would understand what the bank wanted to achieve and would work with the bank in developing the solution, they settled on PricewaterhouseCoopers (PwC) a firm known for stepping aside from fixed approaches to meet clients' needs. PwC's proposition was that it undertake ANZ's day-to-day procurement operation and that it have responsibility for the nearly $1 billion spend for Australia and New Zealand (along with the ability to negotiate umbrella contracts that impact other countries). PwC is also charged with leveraging its worldwide expertise to provide strategic sourcing input -- innovative solutions to significantly lower the bank's quality spend.
Into their August 1999 contractual agreement, they built a powerful incentive to ensure successful alignment of both parties' interests. Once PwC achieves spend reduction over a particular hurdle, the incentive of gain-sharing kicks in. The relationship and strategy are working well. ANZ has already achieved a reduction in its operating costs and a major outcome of reduction in its quality spend.
Donald says the transition was effective, and he was pleased with PwC's handling of employees and other issues.† What has been truly impressive is the short time in which PwC was able to produce results. "Results started to flow through within the first six months," he says. "We agreed on targets, but the timing in which those targets are being achieved is well in advance of what I expected."
Even with the successful results, Donald says the primary reason the relationship is working is because both sides are frank with one another. They meet weekly at the operational level, monthly at a management level and Donald meets quarterly with PwC's managing partner of BPO.
Ways and Means
There is a new force to be reckoned with that will have an impact on their relationship. A procurement exchange was established in Australia in Summer, 1999. Core Procure, whose founding shareholders are the 14 biggest corporations "down under" -- including ANZ Bank -- has a combined commodities spend of about $12 billion (Australian dollars) annually. Ironically, the exchange selected PwC as its supplier also. The bank plans to direct a large portion of its spend through the exchange instead of relying on its own leverage. "We know it will have some impact on our relationship with PwC," says Donald. "We don't know the extent yet, but we are working with PwC on those implications. And that goes to the strength of our relationship."
Their 1999 outsourcing contract is for a period of five years with an option for a further two years. They are already planning ahead. Donald says, "One of the things we are currently working on is a total quick management concept. This is something that we are aware other organizations around the world have looked at and attempted to put in place. PwC is leveraging from the knowledge they have out of North America to apply that concept into this part of the world." The concept is to consider the bank's spend across absolutely everything and then attempt to bring it all under one umbrella.† It's a PwC initiative, which the bank has encouraged them to pursue. Donald says, "We don't yet know what the positive or negative implications of that total concept might be, but that is exactly the sort of strategic thinking that we were looking for when we decided to go down this path with PwC."
Lessons from the Outsourcing Primer
- Outsourcing is the best solution for improving a company's cost-to-income ratio.
- To achieve significant reduction of spend, choose a supplier with innovative expertise to leverage along with it economies of scale.
- Incentives for gain-sharing are a very effective means of aligning supplier and buyer interests.
- Buyers going down the path of outsourcing must first decide exactly what outcomes they want from the arrangement.