ICIS/Celerant survey shows outsourcing risks are misunderstood

Outsourcing lessons

14 March 2008 11:49  [Source: ICB]

Is your company reaping the rewards from outsourcing its noncore activities? There's plenty to learn, according to the latest reader research carried out by ICIS on the subject

John Baker/London

CHEMICAL PRODUCERS continue to strive for lower costs and an increased focus on core functions and businesses. As a result, the trend to outsource more and more aspects of business operations is gaining momentum. And, it seems, the largest of the producers are well ahead.

A recent survey of ICIS Chemical Business readers by ICIS and Celerant Consulting showed that two-thirds of respondents have seen outsourcing in the chemical sector grow in prevalence over the past five years. And over half of them have seen its use gain importance within their own companies over the same period.

Over 800 respondents took part in the survey (see ICIS Chemical Business, December 3, 2007), and 80% of them revealed that they ­outsource one or more key functions of their company's operations.

IT, warehousing and manufacturing top the list of activities outsourced. Maintenance comes fourth, but facilities and utilities ­outsourcing are still well down the list.

Overall, only 20% of those taking part declared that they did not outsource any operations. But, of that 20%, nearly a quarter are actively considering going down this route.

However, only 7% of respondents from the largest companies - those with over $20bn (€13bn) of sales - say their companies do not outsource, compared to the overall survey result of 20%. And for nearly half of these major producers, outsourcing is a major part of their business strategy, compared with an overall survey figure of 28%.

The percentage of non-outsourcers varies considerably when analyzed by industry sector. Among pharma firms, only 10% were not outsourcing, while in fine chemicals, the percentage was much higher, at 26%.

Specialty chemicals and coatings saw about 15% not outsourcing, while petrochemical and polymer producers were close to the 20% overall figure.

EACH SECTOR HAS ITS PRIORITY

A sector breakdown also shows significant, but largely understandable, variations in terms of what is outsourced. Thus, pharmaceuticals, fine chemicals and coatings appear to outsource a much larger proportion of manufacturing than the commodity chemical sectors, while specialty chemicals outsource warehousing and distribution to a much larger degree than other sectors conversely, agrochemicals and fertilizers outsource this function to a minor extent.

For those companies that do not currently outsource, three main reasons for caution stand out. They fear loss of control over product quality, loss of intellectual property, and loss of knowledge and capability in the function being outsourced.

Cost overruns and failure to deliver product on schedule are two lesser concerns, running just behind overdependence on third-party suppliers.

The fears, however, do not reflect the concerns held by those who have experience of outsourcing. Among these respondents - 90% of whom reported that they regard their outsourcing initiatives as being successful - overdependence on third-party suppliers is the lead risk factor, followed closely by cost overruns and the failure of outsourcing partners to deliver products on time.

Loss of product control and loss of intellectual property were seen as lesser risks, the practitioners of outsourcing revealed.

This disconnect, says Tim Durston, client partner at Celerant, is an intriguing finding, as "perception of risk evidently changes when practicing outsourcing." Those who have not taken the first steps really need to understand the real risks, he advises. "Maybe companies are holding back for all the wrong reasons."

For those companies where outsourcing is now a reality, 28% of respondents agreed that it was a major part of the business strategy in their company, but a slim majority revealed that outsourcing is used only on a case-by-case basis or to solve business challenges that cannot be solved in-house.

COST REDUCTION IS THE IMPETUS

By far the main driver for outsourcing is cost reduction, reported as a significant driver by three-quarters of all respondents.

Capacity reasons and bringing in third parties to provide noncore services were closely matched in second and third place, while gaining access to technology was a fourth important driver.

Lower down on the list of drivers were risk management, production of noncore products, and quality issues.

However, when assessing an outsourcing project, performance and capacity were the biggest issues after costs, and were seen as very or fairly important by 88% of respondents when considering projects.

The important factors when considering the choice of an outsourcing partner inevitably focus on all-round performance. Ability to deliver on time, in full, and technical expertise were cited as the top two criteria by nearly all readers, with cost and license to operate as close runners-up.

Perhaps surprisingly, given the number of respondents citing strategic reasons for outsourcing, commitment by the partner to continual improvement, cost reduction and their ability to assist in product and process development were lower down the ranking. But, in these days of good communication and logistics, the location of the potential partner was not seen as important - either in terms of closeness to the market or the outsourcing company.

Again, given the relatively high proportion claiming to undertake outsourcing as a strategic function, very few (32%) look at return on investment (ROI) as a prime indicator of outsourcing performance.

Those who do measure ROI say they are typically looking for returns of around 10-20%, but the survey shows that levels achieved are generally somewhat lower than anticipated.

The most regularly used indicator was the rather rough and ready delivery ­performance, used by 63% of companies, which ties in closely to the emphasis on delivery criteria when selecting an out­sourcing partner.

Other well-used performance indicators were variable cost savings and year-on-year cost reductions, closely followed by capital expenditure savings.

Given the concerns over quality highlighted above, it is again surprising that more companies do not use customer satisfaction surveys, cited as being used by just under one-third of respondents. However, when asked how important these were, over 90% described them as very (63%) or fairly important (34%). Manpower reduction was not a major indicator used to measure outsourcing success.

A number of conclusions can be drawn from the ICIS/Celerant survey. Although outsourcing is on the increase, many companies are making the decision to outsource for specific reasons in specific cases, rather than along business strategy lines.

The relative importance of the risks arising from sourcing seem to be poorly understood by those not yet involved, and in the main there is an emphasis on measuring execution performance rather than the financial benefits arising from outsourcing decisions. Most respondents still see plenty of room to improve their outsourcing execution. All of this suggests that the area still has some way to go before it can be regarded as mature.

As Durston points out, in the current wave of outsourcing, all the emphasis seems to be on cost, cost and cost.

In the next wave of outsourcing, perhaps, driving more leverage through involvement and control with the outsourcing partner will be the case, and finally, the chemical industry might move on to a third wave, exhibiting excellence in decision-making and execution of outsourcing.

RESPONDENTS' PROFILE

Most respondents were based in North America (38%) and Europe (34%), reflecting the readership base of the magazine. Asia provided a further 14% of respondents.

In terms of sectors, 19% operate in specialty chemicals, 18% in petrochemicals and 17% in polymers. Pharmaceuticals and fine chemicals accounted for a further 12% of the respondents.

By company size, almost half had turnovers of $500m (¤323m) or less, with the remainder being split equally between the ranges $500m-$1bn and $1bn and over. Respondents varied in status from CEOs and vice presidents down to general managers (49%) and others.

The findings of this ICIS/Celerant outsourcing survey will be discussed at a high-level roundtable meeting in Brussels in June. If you are interested in this event, please contact John Baker at john.baker@icis.com for further information.

Places are limited and will be by invitation only. The outcome will be published in a forthcoming issue of ICIS Chemical Business.

 

ABOUT ICIS

This reader survey and roundtable are part of the service offered by ICIS Custom Publishing, headed by John Baker, formerly editor of ICIS Chemical Business' European edition, and now global editor of custom publishing. For details of what ICIS offers in its custom publishing unit, email john.baker@icis.com

 

ABOUT CELERANT

Celerant helps leading companies worldwide achieve and sustain world-class performance from their operations. The essence of its approach is Closework, where consultants work side-by-side with people in the front lines of the business to ensure sustainable and measurable gains. Celerant embeds long-term behavioral change into the culture of the client organization - the key to sustainable change. Contact www.celerantconsulting.com

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