Are extreme outsourcing and consolidation worth it?

It's wise to look beyond the immediate financial benefits of outsourcing, says Ephraim Schwartz

Last week, Accenture signed a seven-year applications outsourcing deal with Unilever, to run all of Unilever’s application development, implementation and support.

Unilever believes it can save approximately US$700,000 (NZ$1.1 million) in the first year.

At the same time, Accenture will be migrating all of Unilever over to a single system based on SAP. The theory (and it is just a theory at this point) is that IT efficiency — in this case, moving from a thousand different systems to a single vendor solution — is a competitive advantage.

Pascal Manhes, Accenture’s global managing director for applications outsourcing, says Accenture will help Unilever harmonise its business processes across Europe, with a pan-European SAP system that will lower TCO and globalise sourcing.

It will also lower training costs and increase the efficiency of deploying all resources, including staff, Manhes says.

In theory, you could walk into a Unilever office anywhere in Europe and feel right at home, says Josh Greenbaum, principal at Enterprise Applications Consulting. With a single software instance, everyone is working from the same page with the same product definitions, supplier catalogues, partnership models and business processes.

“It should, in theory, cut down on a tremendous amount of integration costs, which is the largest single IT expenditure,” Greenbaum says.

But we should also look at the downside. The immediate negative is the loss of IT jobs. Accenture says it will hire 300 Unilever people and retrain the rest. Accenture plans to set up an “academy”, Manhes says, “for displaced Unilever staff to identify and close skill gaps to improve their job prospects”.

Accenture did not say how many IT staff will attend the “academy” and repeated calls and emails to Unilever went unanswered — except for an automated email asking that questions be put in writing.

As far as infrastructure goes, there is the danger of absolute metaphysical lock-in. Eventually, there must be some kind of consolidation at the platform level if a service architecture, composite applications and business process modelling are the megatrends Greenbaum says they are. By adopting a single SAP system across Europe, Unilever is tying its fortune to SAP NetWeaver.

The other challenge is that Unilever is a company that sells highly localised products.

Greenbaum, obviously a world traveller, tells me that a washing machine’s wash cycle in most of Europe is one and a half hours whereas it is half an hour in the United States, which calls for a different kind of soap product.

So, although you may increase efficiencies in the back office, on the customer-facing side you still have to deal with localisation.

After examining outsourcing contracts from 2003 to 2005, outsourcing consultancy TPI finds that the claim that outsourcing can reduce costs by 60% is highly inflated. If you add in professional fees, severance pay and governance costs, the average savings is closer to 15%, TPI says.

The truth is that not every company has the command and control structure to make this kind of change stick. And I suppose the winners will be those companies that take that into account before doing anything extreme.

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Tags outsourcingmanagementconsolidation

More about Accenture AustraliaEnterprise Applications ConsultingSAP AustraliaTCOUnileverUnilever

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