Business Process Outsourcing: A survival tool for logistics companies in uncertain times

Today's economic climate is clearly causing gloom, doom, fear and often panic for the logistics industry. A host of factors - the credit crunch, unprecedented economic volatility, deteriorating consumer confidence, yo-yoing fuel costs, increased governmental regulations, declining revenues, severe earnings and cash flow pressures, loss of pricing power and excess capacity - together are significantly impacting the industry's bottom line.

Need evidence of how bleak the state of the logistics industry really is? The following are just a few examples which indicate how treacherous the waters are

• Hapag-Lloyd, the German container shipping line, swung to a loss of $302 million in the first quarter of 2009 from a $24.5 million profit a year ago on double digit declines in cargo volumes and freight rates. (Ssalesource: Journal of Commerce)
• UPS' 1Q09 results showed revenue was off 13.7 percent at $10.9 billion. The continuing deterioration in global economic activity resulted in decreased revenue and profitability in all business segments. (Source: UPS investor relations website)
• Freight traffic on U.S. railroads was down sharply during April 2009, carload traffic fell by 23 percent, and intermodal car traffic dropped by 17.9 percent, as compared to April 2008. Combined cumulative volume for the first 17 weeks of 2009 on 12 reporting U.S. and Canadian railroads was 5,573,088 carloads, down to 19.0 percent (1,308,561 carloads) from last year. (Source: Association of American Railroads)
• Year-over-year tonnage freight is expected to bottom at - 10.3 percent in 2Q09 before beginning a slow rise to a still stressful of - 6.6 percent in 4Q09. For truckers, this promises steadily increasing pressure on rates into the summer months. (Source: FTR Associates)

BPO to the rescue

Business process outsourcing (BPO) represents a strategic and efficient life raft for companies striving to stay afloat in these tumultuous times. If implemented appropriately, BPO can be a fast and simple solution to rapidly reduce costs, help companies survive the economic downturn and set the stage for future growth and expansion after the economic tsunami subsides.

Why BPO for logistics companies?

Rapid cost reduction is mandatory for companies trying to survive the most challenging economic climate in over 60 years. And while they have been laggards in BPO uptake, logistics companies can gain significant cost savings value by leveraging BPO. For example, approximately 60 percent of a logistics company's operating costs are attributable to customer service. Of this, roughly 60 percent is back-office document processing or phone-based customer contact. Outsourcing these processes to a logistics industry-savvy service provider can deliver cost savings of 40 - 50 percent

But BPO delivers benefits which extend far beyond cost savings, including moving costs from fixed to variable, maintaining focus on the customer and retaining them in the face of operating cost reductions, placing focus on knowledge rather than intuition to increase revenue, consolidating delivery operations to standardize business processes, getting even more out of shared services costs and delivering continuous improvement. Logistics companies which have included BPO in their corporate strategy are better poised to weather this economic storm which threatens to sweep even the most established players away.

Clearing the decks for success -Seven simple rules for logistics companies

1. Ensure BPO is a CEO priority

In uncertain times, sponsorship for critical initiatives such as BPO must come from the very top. Only the CEO can deliver the message that there are no other options for survival. Otherwise, the imperative for outsourcing is not taken very seriously, and management sees implementation as optional, easily finding ways to opt out, with arguments ranging from "outsourcing never works, we've tried it," to "the process is too critical to outsource" to "I have to implement new systems first". As many logistics companies with a history of private ownership try to stay afloat in the current environment and attempt to reinvent themselves to stay ahead of the competition, there is clearly no time to lose or room for 'management by consensus'. This is a decision for the CEO and no half measures will work. BPO succeeds for logistics companies when there is clear visibility of the CEO behind the wheel.

2. Approach outsourcing with an open mind

The BPO industry has moved well beyond delivery of volume-based voice and data work into highly complex industry and insight processes - think freight audit, tariff filing and maintenance, claims management, billing, exceptions management and marketing analytics. Therefore, smart companies collaborate with providers to determine 'the art of the possible.' They start the outsourcing discussion by saying, "This is where we need to get to, so how do we get there?". In the logistics industry, there are a number of companies that are improving their operating ratios by moving processes offshore, either to captive operations or to third-party providers. Ocean carriers including Maersk, APL, Hapag-Lloyd, NYK, MOL and CSAV initially pioneered the move offshore, by setting up delivery centers in India and other lower cost countries such as Malaysia and China. And third-party logistics companies such as FedEx, Exel, Penske, Ryder, Yellow and Bax Global are taking the next step by outsourcing to external BPO providers. Processes delivered offshore include not only rules-based work such as export documentation, and time sensitive shipment updates and tracking, but also more complex finance processes such as accounts receivable and consolidation of books. A typical business case for logistics companies delivers annual savings in the range of $1 million per 50 FTEs when a documentation process is moved to an offshore BPO provider, with a payback period for the initial investment, necessary for knowledge transfer and transition, of less than 9 to 12 months.

3. Keep it simple

Speed to cost reduction with no diminution of quality should be the first and foremost objective of BPO as a survival tool. This is not the time to radically transform business processes, implement new enterprise technology, put in the latest bells and whistles or conduct a wholesale overhaul of the logistics industry business model. Keeping it simple means being realistic about the aspirations for the program in times of economic uncertainty, and focusing only on obtaining the benefits that truly matter now. Thus, logistics companies should strongly consider outsourcing their simplest, most repetitive documentation processes such as bill of lading and freight cargo receipt processing, billing, airway bill manifesting, driver logs entry, and freight bill capture and audit on an 'as is' basis. A BPO service provider with expertise in these areas can deliver cost savings for their clients in as little as 90 days.

4. Move fast

Companies can quickly put in place outsourcing programs by mandating that aggressive timelines are a must. Truth is, there is no change without urgency. If moving quickly to implement BPO is not seen as vital to the basic survival of the company, it will not produce the desired results. But imposing deadlines for the development and implementation of a roadmap including scope, provider selection and transition will mobilize the organization. For example, when a multibillion dollar North American shipping company decided to move its export documentation process in Europe and the U.S. to India, the CEO set an internal deadline of reducing onshore headcount by December 31st of that year to ensure that lower operating costs kicked in as of the start of the new fiscal year. Establishing clear deadlines, especially when mandated by the CEO, gets the entire organization focused and moving quickly to reap the benefits.

5. Develop a realistic deployment plan

Even when outsourcing is being implemented for cost savings, many companies push for or buy into an unrealistic transition roadmap in their haste to cut out more cost. And when the first failure occurs because processes cannot be thoroughly documented, the network is not ready or work shadowing is insufficient, the naysayers come out in force. A deployment strategy that builds up steam over time after the success of initial phases is far more likely to meet objectives. For example, due to the geographically dispersed nature of the logistics industry, a key initial consideration is which operating regions are better suited to consolidation via outsourcing benefits than others. In many cases, if in-house shared services centers (SSC) already exist, developing an offshoring plan through the SSC may be the logical place to begin, with other regions following suit in a phased approach.

6. Insist on alignment and industry knowledge

Partnering with a BPO provider who understands you are the client, and will align with your ways of working - rather than impose its own - is vital in good times and bad. Alignment refers to understanding the client's values and accordingly adjusting its working style, designing its deliverables to support the client's needs and having the flexibility to meet ever changing business needs in this economic climate. Equally important is deep industry knowledge. If a provider isn't highly experienced in processing bills of lading, freight bills, driver logs and commodity classification, and is unfamiliar with the underlying rules of freight, duties and taxes in different operating regions, entrusting delivery of those processes to that third-party can quickly 'sink a ship.'

7. Debit budgets in advance

This little trick obtains commitment where it counts - in the budget process. Building BPO savings into the current year's budget in advance ensures managers have no excuse but to be committed to the implementation of the BPO program or find some other way to get the cost out fast. Truth be told, short of cutting staff to the bone, there is rarely another way. This is particularly true in cost center functions such as documentation, freight audit, driver logs, claims and finance and accounting. A BPO provider with logistics domain expertise knows the extent of cost savings attainable for outsourced processes, and can work with the client to craft a scope of services specifically designed to achieve budget goals.

Advantages logistics companies gain by moving to a BPO model

Rapidly reduce cost by sourcing processes with scale With industry-wide declines in operating margins in 2008 of between 10 to 40 percent and pessimistic outlooks for 2009 where flat growth will be considered "success", the need to reduce the cost base to align with volume and revenue projections has never been more urgent. For example, document processing as part of the value chain accounts for 35 to 50 percent of total personnel costs in the logistics industry. This people - time - and money-consuming process can easily be selected as the first candidate for outsourcing to a third-party with the scale to deliver these processes at a significant cost savings, leading to a more expansive BPO program to further decrease operating costs.

Standardize business processes Consolidating business processes offshore in an effort to reduce cost has a positive by-product - levels of standardization that are difficult to achieve through incremental efforts such as process reengineering when times are easier. With standardization, organizations are wellpositioned to take the next step to transform processes through technology and quality, which takes them to the next level of efficiency. For example, a leading NVOCC successfully standardized its import manifest process across 13 countries by moving it to an offshore BPO provider. By standardizing how every single field is captured with the exception of specific regulatory or critical local requirements the company now has a more robust MIS capability and a uniform process across its operating regions, performed with fewer resources at lower cost.

Rationalize the delivery model The greatest challenge in moving to a shared services, or horizontal structure is overcoming misconceptions and fears about diminution of service levels, risk and performance. By wrenching processes out of the business lines in the name of corporate survival, the objections which delay or derail consolidation and centralization are, in effect, overcome. In an outsourced environment, the scale, expertise, flexibility and cost savings quickly become evident. BPO providers can readily and rapidly tap offshore talent pools to deliver business processes at a significantly reduced cost. Moreover, given enhanced and redundant communications and connectivity infrastructures, shipping documents can just as easily and transparently be processed in Mumbai, Mexico City or Manila. For example, with 24x7 availability of skilled staff, BPO has emerged as one of the only strategies with which logistics companies are able to ensure a turn around time of less than one hour for bills of lading and airway bills with nearly 100 percent accuracy. In fact, some processes such as freight audit or duplicate payments analysis cannot be delivered cost-effectively without tapping into BPO's lower cost base.

Commercialize the approach to operations Most companies cannot put a price on the cost of processing a bill of lading, driver log or airway bill, collecting a receivable or interacting with a customer. Imposing the discipline of a BPO contract replete with unit cost, turn around times and customer satisfaction levels makes the organization think differently about consumption and service levels, making the actual cost to sell a product or service transparent. By partnering with a knowledgeable BPO provider and implementing a transaction-based pricing model, logistics companies can typically reduce their transaction processing expenses by as much as 30 to 50 percent. Specifically, the in-house cost of processing a bill of lading can run $5.00 - $8.00, while offshoring can reduce the expense to $2.00 - $4.00. And processing an airway bill can cost a logistics company between $0.30 - $0.40, but an offshorer can deliver at a cost in the range of $0.10 - $0.20.

Which logistics processes are ripe for business process outsourcing?

A wide range of transactional and highly complex logistics processes can successfully be outsourced to a third-party service provider with deep, proven logistics industry domain expertise.