The outsourcing success story of P&G
The Procter & Gamble Company (P&G) is known for producing and selling a wide variety of branded consumer items, such as cleaning supplies, health care, and cosmetics. These products are famous and readily available in more than 180 nations. As the company grew into a global behemoth with on-the-ground operations in 80 countries, fulfilling its business service needs became a challenge.
This problem was solved by P&G’s Global Business Services (GBS) group, which has managed business capabilities for the company for more than two decades now. It achieved this by securing the provision of best-in-class processes through outsourcing, not only generating value for various business units but also lowering costs in the process. For example, the annual revenues of Tide (P&G’s biggest brand in the fabric and household care division) almost doubled, to
Outsource to innovate
Specifically, under A.G. Lafley’s leadership (he was CEO during 2000–10), one of the enablers—innovation—became a top goal for P&G. Lafley later published a book, The Game Changer, detailing how P&G leveraged innovation to boost business performance. According to what he wrote, “In an innovation-centered organisation, managers and employees have no fear of innovation because they have learned how to manage the risk it entails; innovation grows their mental muscles, resulting in new core capabilities.” Soon after taking over as CEO, Lafley worked hard to critically analyze and rebuild the company’s innovation business model. He discovered that exploring outside of P&G’s walls could result in extremely valuable inventions instead of just following the traditional internal, do-it-ourselves paradigm.
Following that, work began on product innovation where he set a target of obtaining 50% of innovation from outside the organization. The goal was to efficiently enhance the skills of P&G rather than just replace them. Lafley challenged P&G to embrace the idea that the 7,500-strong P&G research and development division could leverage the skills of professionals from outside the company, by creating a two-way exchange mechanism. “Half of our new products,” Lafley said, “would come from our own labs, and half would come through them.” In order to develop better and more affordable products more quickly, P&G searched for and recognized promising concepts from all across the world and used its own resources to aggregate and implement them.
How it was done
The journey of outsourcing for P&G began in 2003 when it signed $4.2 billion worth of outsourcing partnerships in various departments, ranging from IT infrastructure, finance and accounting, HR, and facilities management. P&G’s Global Business Services group initiated a transfer of work to third parties to derive additional value for the company. Outsourcing was meant to enhance flexibility and strengthen the core competencies of the company. This was, of course, complemented with cost minimization by outsourcing back end and front-end functions. They initially outsourced to a single party but later drafted a three-party outsourcing plan, based on specific functions. The selected service providers were:
- Jones Lang LaSalle (JLL), for facilities management
- IBM, for employee services
- HP, for IT development and applications
JLL took over the facilities management side by handling the maintenance and security of technical centers and offices. They contracted with P&G to oversee 150 million square feet of real estate at 165 sites in around 80 countries. Sites included sales offices and research facilities, warehouses, and technical centers throughout North America, Asia-Pacific, Middle East, North America, Europe, and Africa. The partnership was based on performance-based goals, termed as a “vested” business arrangement. In a matter of five years, JLL moved from being a brand-new supplier to P&G to being named “supplier of the year”, out of 80,000 vendors. According to the data from P&G’s annual reports, the GBS unit was able to reduce the cost of its outsourced operations, as a percentage of sales, by 33% without sacrificing customer satisfaction.
P&G outsourced its employee services to IBM that primarily focused on human resources business transformation services. Under the agreement, IBM supported 98,000 P&G employees in around 80 countries. It provided various HR facilities like payroll processing, compensation planning, relocation services and HR data management. The outsourcing enabled P&G to benefit from IBM’s extensive knowledge of business processes and technical expertise through a flexible model.
To improve transaction volumes, customer satisfaction, and cost efficiency, P&G outsourced its financial and accounting operations to HP, which in turn took over the management of IT infrastructure, data center operations, user end support, applications, and network management in around 160 countries. The recent agreement also includes HP looking after P&G’s supply chain systems that includes research and development. This has allowed P&G to improve the quality and efficiency of its product supply chain, that too on a reduced overall operating cost. The transactional accounts payable (TAP) under HP has significantly improved the service levels, reduced operating expenses, ensured business continuity, and mitigated some risks for P&G. As one quantitative measure of the benefits of outsourcing for the company, the turnover time in Asia Pacific and Europe, Middle East and African regions improved by 99%. “Just like we buy power and just care that the light goes on, we just want to plug something into a jack in the wall and know that the power is there to give us dial tones or computer connections when and where we need them,” according to Alistair Wilson, P&G’s associate director of global business services responsible for networks and telecom.
Moral of the story
In a nutshell, to keep up with rapidly growing demands and to upscale innovatively, P&G outsourced essential but non-core business processes to people outside of their company. Focusing on the managerial and operational side, the company outsourced their facilities management, HR units and IT services, all with the intention to improve the overall flexibility and enhance the company’s focus on critical core values, while also reducing the overall cost structure. With where P&G stands today, it wouldn’t be wrong to say that they have been quite successful in building and executing a successful outsourcing model. Having said that, there are multiple approaches to outsourcing, depending on the industry and size of the client, and its specific objectives.