Is extreme outsourcing and consolidation worth it?

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 $700,000 in the first year.

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At the same time, Accenture will be migrating all of Unilever over to a single system based on SAP’s offerings. 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 application outsourcing, tells me that Accenture will help Unilever harmonize its business processes across Europe with a pan-European SAP system that will lower TCO and globalize 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 any Unilever office anywhere in Europe and you would 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 catalogs, 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. You can be certain neither Unilever nor Accenture invented what we might call extreme outsourcing and extreme consolidation. It is happening here in the States. Consolidation is a huge driver in the enterprise.

But we should also look at the downside. The immediate negative is the loss of IT jobs. Accenture said 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 would be attending the “academy” and my repeated calls and e-mails to Unilever went unanswered -- except for an automated e-mail asking me to put my request in writing (which of course I did).

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 the benefits of a service architecture, composite applications, and business process modeling 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 localized products. Greenbaum, obviously a world traveler, 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 localization.

After examining outsource contracts from 2003 through 2005, outsourcing consultancy TPI finds that the claim that outsourcing can reduce costs by 60 percent is highly inflated. If you add in professional fees, severance pay, and governance costs, the average savings is closer to 15 percent, 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 understand that before doing anything extreme.