Ingersoll-Rand (IR) has aggressive plans to achieve "dramatic growth" in sales in a four year period. This diversified manufacturing company reported over $9 billion in annual sales last year and is committed to increase that number to $20 billion by 2005, according to Steve Rose, IR's Director of Enterprise Outsourcing.
During the growth planning phases, IR recognized this quantum leap was not possible without a significant transformation of its business focus, steering it toward its core competencies and leveraging the investment capital this growth required. In examining the transformation process, its executives came to grips with certain obstacles that could potentially obstruct their plans.
IR was built primarily through acquisition; the natural outcome is much duplication of operations. IR traditionally ran its numerous business units as a portfolio of semi-autonomous concerns - a "confederation" of entities replete with mismatched, excess, and overlapping technology and processes. IR management recognized that running the corporation this way handicapped their ability to take advantage of the streamlined business process and IT synergies integral to accelerated growth. "We just weren't scalable," says Rose.
IR established Global Business Services, a shared services organization, in response to this dilemma. IR invited ACS, Inc., a Dallas, Texas-based BPO and ITO service provider, to examine outsourcing as an effective cost cutting measure. Clearly, outsourcing looked like a viable solution to help facilitate IR's growth plans.
Making the Decision to Outsource
"We were very concerned with helping our partner focus on their core competencies, increase operational efficiencies, reduce costs, and augment the quality of their systems and processes in order to fuel their growth strategy," says Rex Shelton, ACS vice president. "We wanted to make sure we had the right engine in the right vehicle for this driver."
"We asked ourselves, 'What is our core competency?' We realized there were other people better suited to do our IT," Rose notes. The lack of available resources for ongoing development and maintenance of IR's IT infrastructure had taken its toll. Although many of its systems were new, IR was spending less than the industry's accepted baseline 3 percent of its annual revenues on IT. IR needed an outsourcing service provider who could make the necessary investments in technology, methodologies and people.
"Outsourcing initially was the catalyst that brought a more centralized focus to IR's activities," says Mike Hall, solution architect for ACS. Outsourcing also addressed the manufacturer's desire for its information technology costs to fluctuate in harmony with the cyclical nature of its business. "We gear up to a high water mark and then have to deal with a downturn. We want to be able to shrink or increase as the market demands," Rose explains. "We simply wanted to pay for what we used."
IR was initially interested in using outsourcing to consolidate an important but non-core business process - accounts payable (AP). But ACS pointed out there would be substantial additional cost savings by incorporating IT services into the equation. Outsourcing the enterprise - combining business process outsourcing with IT outsourcing - would yield greater financial gains and provide the engine that could power IR's growth.
Outsourcing the Enterprise Limits Service Provider Choices
The decision to outsource the entire IR enterprise limited the service providers who were capable of handling the task. "There weren't that many players out there," says Rose, who worked for Perot Systems before joining IR. Rose's enterprise outsourcing team initially examined six service providers, but three or four obvious choices "opted out at the desk check."
IR was serious about its due diligence before selecting a provider. Rose says the business cases for all three firms selected as finalists were "very similar." IR selected ACS for its closeness in corporate culture. "We are extremely flexible and able to adapt quickly to IR's business model," notes Shelton. ACS has also grown quickly through an acquisition strategy, so it understands the pitfalls and has great experience managing such radical integration. ACS is also on a fast track for growth.
"IR asked us some very pointed questions," says Hall. Management wanted to know the magnitude of savings to be generated and the anticipated timeframe for transformation to the ACS solution. "They wanted to be on an accelerated path so they could begin seeing an immediate return on their investment," recalls Hall.
The Actual Transformation
The companies signed a seven year agreement that commenced in June, 2002 with the transition of four IR data centers and IR's accounts payable system into ACS facilities in Dallas and Pittsburgh. This combined move is on schedule for completion by July, 2003, and will integrate both mid-range and mainframe processing components. ACS is consolidating platforms and centralizing support. ACS is also taking on some of IR's staff, "transitioning them from a manufacturing environment to a service provider mind set," says Shelton.
ACS advantages in technology and processes have already created increased efficiencies and new opportunities for IR. The manufacturer is now able to redirect many of its resources from non-core activities toward actions that serve its customers.
Lastly, ACS and IR have created an innovative peer-to-peer business relationship that is overseen by parallel management components at both the executive and business unit levels. This structure provides a strong framework for open and honest communication - from senior management on down - and, most importantly, for alignment of management and business priorities with transformational tasks.
Lessons from the Outsourcing Journal:
- Outsourcing the enterprise - combining ITO with BPO -- yields greater savings and efficiencies than outsourcing them separately.
- Outsourcing is a great vehicle for change and consolidation.
- Outsourcing provides investment capital; this helps business units still using outmoded technology.
- Governance is critical in outsourcing relationships.