Outsourcing of strategic IT functions and organizational impact

Outsourcing of Strategic it

As the forces of globalization amounted, countries saw incremental opportunities of crossing geographic barriers and capitalizing on the comparative advantage of other global regions. The real life examples in this sense are countless, including the operation of Nike's manufacturing plants in third world countries or the Ford plants in Mexico. The decision to take work outside one's country and have it completed within another global region is called outsourcing and it is mostly based on financial considerations, as the foreign regions offer cost efficiencies.

While outsourcing is common in all sectors of the industry, it is mostly present in services, with Information Technology services occupying a leading position on the chart of the outsourced services. Two of the more favored outsourcing destinations are India and China. Outsourcing to these regions, as well as to other cost effective regions has generated impressive turmoil. On the one hand, the disclaimers of the phenomenon argue that it takes jobs away from the Americans, generating as such socio-economic problems at a national level. The advocates on the other hand argue that outsourcing is a means of bringing prosperity to less economically advantaged regions.

A particularity of outsourcing has been that of taking a certain type of it services out of the company. Such a measure is taken for various reasons, the most prominent of them being the lack of adequate resources (people, capitals or technologies) to handle the it operations and the realization that a tertiary party would be able to offer the respective services in more efficient conditions. Such a contract was signed between Unilever and IBM on 2005 and it spread throughout seven years; its object was that of IBM offering financial transactional services to Unilever. Both parties recognized the outsourcing contract as a viable means of attaining their own organizational goals.

From the customers' standpoint, the outsourcing contract supported the completion of their One Unilever strategy and despite the weaknesses and the risks involved, the strengths proved more important. Aside the material gains, Unilever's collaboration with IBM has also materialized in several valuable retained qualities, such as an improved organizational culture or the learning of several success lessons.

From the supplier's standpoint, the contract would be a challenging, but rewarding one which would help the company promote its Business Performance Transformational Services worldwide. As time progressed the partnership proved useful and culminated in the extension of the services to Unilever Latin America and the receiving of the Outsourcing Excellence Award.

Still, in order to maintain these success rates, it is important for the company to consider several recommendations. These include the necessity to remain alert to emergent modifications in the environment; the need to continually invest in people and relations; the need to develop and learn from mistakes or the suggestion to diversify the business operations.

2. The Parties in the Contract

Before discussing the actual contract signed between IBM and Unilever it is important to become familiarized with the two organizations. Unilever is a leading consumer brand, constructed on a British-Dutch partnership and headquartered in London and in Rotterdam. Its products include everything from foods to detergents and they are distributed in most global markets, including America, Asia, Africa or Europe. At the end of 2009, the company employed 163,000 individuals and registered revenues in the amount of €39,823 million (Unilever 2009 Annual Report). Unilever's main competitors are encountered in the foods and personal care products sector and they refer primarily to Kraft Foods Inc., Nestle S.A. And the Procter & Gamble Company (Hoovers, 2010).

The International Business Machines Corporation, or shortly IBM, is a New York based it company offering both it products as well as services -- the focus is however on services. IBM is the largest it company in the world and it provides services to various places across the globe. At the end of fiscal year 2009, IBM had registered annual revenues of $95.757 and was employing 399,409 individuals (IBM 2009 Annual Report). IBM's main competitors are Accenture Plc., the Hewlett-Packard Company and the Microsoft Corporation. Competition within the industry is fierce and the demand is given by the it needs of the public and private sector, as well as the desire of these agencies to achieve operational efficiency (Hoovers, 2010).

IBM is not only specialized in it services, but also on the segment of outsourcing the it services. In 2009, the International Association of Outsourcing Professionals developed the Global Outsourcing Top including 100 of the best outsourcing service providers. IBM occupied the second position (International Association of Outsourcing Professionals, 2009).

3. Contract Overview

On the 23rd of December 2005, a press release was issued and it argued that Unilever and IBM had reached a contract to sign an outsource agreement in which the it company would provide it services to the consumer products company's locations in North America, Asia, Africa, the Middle East, Turkey and Unilever Central it (Savvas, 2008). The duration of the contract was announced at seven years, during which time ISM would be offering financial transactional services.

The services included in the processes represented a significant part of Unilever's it operations and cover over 20 European countries. The picture below reveals the presence of IBM in the Unilever world wide operations:

Source: van Dijk, 2009

The outsource contract is part of the company's One Unilever strategy, by which the organization intends to step up its growth and further increase its competitive position within the global marketplace. One point on the One Unilever agenda is that of achieving annual savings in the amount of €700, and the seven-year partnership with IBM is expected to support the achievement of this particular goal. In terms of project details, the implementation process would commence in the first quarter of 2006 and it would be completed throughout a period of two years. Relative to the people who are expected to be directly impacted by the outsourcing contract, this number revolves around 750 employees which would be let go.

The services which would be offered by IBM include a wide series of it solutions, such as Purchase to Pay, Bill to Cash or General Accounting and they would be offered from the IBM centers in Portugal, India and Poland. The Unilever managerial team was extremely confident that they would be able to capitalize on the relationship with IBM and as such come closer to their own organizational goals. In the immediate aftermath after having signed the outsourcing contract with IBM, Unilever Europe president Kees van der Graaf stated: "IBM brings strong business process knowledge, deep technical expertise and a flexible, responsive business model to finance shared services. As a specialist in this area, IBM will be able to help us optimize our business process performance, and deliver additional savings in support of our core business; offering consumers excellent brands and products." Tony Cronin, general manager of business transformation outsourcing at IBM added: "IBM will apply business insight within our global network of operations to optimize business performance. The agreement will create long-term economic benefits for Unilever. […] This relationship is a strong example of the new on-demand business IBM is targeting in the marketplace for Business Performance Transformation Services" (Real Wire, 2005).

4. Client Perspective

From Unilever's standpoint the decision to outsource its Information Technology operations was supported by the simple realization that the it services did not represent a core operation. As a general rule, firms will generally outsource complementary services rather than core operations. The outsourcing of additional operations helps companies reshape their business operations and create efficiencies which allow them to better focus on their core operations. From this standpoint then, Unilever's decision is fully understandable and just and the contract is appropriate.

Aside the fact that it services were not a core operation at Unilever, the client based their decision to outsource on several other elements. These elements represent the strengths of the outsourcing contract:

The outsourcing strategy was aligned with the Finance and Shared Services Strategy

The outsourced contracts would generate more value by reducing costs and increasing operational efficiency. Also, by signing a contract with the largest global provider of it services, Unilever secured a reliable partner who guaranteed high quality it services. The better developed it system would better support the company in reaching its objectives.

Additionally, the status gained by IBM ensured Unilever's increased access to the expertise of the supplier as well as to their future innovations

Finally, the consumer products company perceived the partnership with IBM as a "further continuous improvement in service and cost" (van Dijk, 2009).

Overall then, the outsourcing contract with IBM allowed Unilever to enhance and consolidate its competitive position and to better focus on attaining its organizational goals.

The weaknesses of the contract were less obvious and less important than the strengths, and this is proven by the very fact that the contract materialized as the strengths overthrown the weaknesses and the risks. Yet, it would be important to mention them. In this order of ideas, the main risks and weaknesses of the outsourcing contract are identified as follows:

Unilever stood to lose the control over its it operations; in other words, a loss of centralization would be achieved which reduced Unilever's power over its own it system

Unilever would come to be incrementally dependent on its it services supplier which made them more sensitive and possibly less competitive if IBM were to encounter difficulties in the delivery of their it services

The contract signed with IBM could change in the future in terms of costs or other elements to reduce the benefits to Unilever

Another downside of the outsourcing contract is that allowing tertiary parties access to confidential organizational data. Once the outsourcing agreement ends, it is possible for the supplier to sell the information to the client's competitors (Schniederjans, Schniederjans and Schniederjans, 2005)

It would require long periods of time for the outsourcing operations to be implemented and retrieve the desired results

The organizational change generated mutations in the organizational culture and stood increased chances of being welcomed with reticence on the part of the Unilever employees

It would be necessary to convince IBM to implement a managerial process based on customer satisfaction (van Dijk, 2009)

Throughout the duration of the outsourcing contract, several lessons were learned by the managerial team at Unilever. All these lessons represent retained capabilities which will help the company improve its future operations and as such its future results. Some of the most notable of these lessons include:

In order to succeed, strong organizational culture and governance are pivotal

Partnerships with strong teams increase success rates

It is important to implement change management strategies

Unite the two teams under the umbrella of the same goals

Capitalize on the expertise of the supplier, but value the relationship with them

Offer and expect trust and transparency

Clearly establish goals but also allow flexibility

Allocate sufficient resources to the outsourcing contract

Maintain key people (van Dijk, 2009)

Finally, it is crucial to engage all stakeholder categories in the change process (Gottschalk and Solli-Saether, 2005).

5. Supplier Perspective

The initial contract was expected to generate positive outcomes not just for Unilever, but for IBM as well. The it company was already established as a reputable leader of Information Technology services, but its partnering with Unilever -- a multinational corporation with complex operations -- and the success in such a challenging partnership would additionally enhance the company's reputation as it would prove its capabilities. From this standpoint then, it becomes obvious that the IBM selection of Unilever as a partner was an adequate decision.

Aside this however, there were also the financial outcomes which would be retrieved from the customers. In other words, the value of the contract with Unilever was to be a dual one, with financial gains on one side and reputation gains on the other side. Yet, throughout the supplier selection process, several advantages and disadvantages could have been observed. Some of the advantages of IBM in the Unilever outsourcing contract include:

IBM had a vast expertise in outsourcing contracts with various clients and it had even managed to diversify its offering

The provider had proven their ability to adapt their it solutions to fit the needs of each individual customer

The IBM brand was strong and reputable all over the world and Unilever could gain advertising advantages from the contract

IBM possessed experience with financial transactional services, the specific service palette desired by Unilever

Some of the disadvantages for IBM in the Unilever outsourcing contract refer to the following:

The large size of IBM and their increased number of customers could materialize in low levels of flexibility and a reduced interest in the distinctive desires of their individual customers

IBM would offer its financial transactional services from three different global locations, element which might materialize in more difficult communication between client and purveyor.

Aside from the disadvantages revealed to the customer, the deal could also pose risks for IBM. For instance, the Unilever operations could have been too disperse or too complex for IBM to handle them efficiently. Also, the costs of the endeavor might have run too high to generate any profitability.

Aside the material and reputation gains which prove that the contract with Unilever was fruitful, the conclusion is also supported by the satisfaction of the client. Due to the positive results achieved, Unilever and IBM extended their contract in 2008 to also include the offering of it services to Unilever Latin America. The contract would be applicable for five years and, through it, "IBM will help Unilever integrate and standardize its procurement practices throughout Latin America. IBM will consolidate spend management and help reduce overall procurement costs across Unilever's Latin American operations. The procurement of many of the products and services that Unilever Latin America uses to run its business will be handled by IBM, including it, office equipment, travel, marketing, and technical services" (Savvas, 2009).