In an effort to increase efficiency and cut costs, current business service models for credit and collections, product manufacturing, and even research and development are being compared with offshored, outsourced, and shared-service alternatives. This article identifies an emerging business service model that increases worker efficiency and reduces costs even below shared-service levels. This model, which uses Internet technologies to showcase the contributions and cost reductions provided by employees who share information and services, is referred to as virtual insourcing.
Sharing information is a maturing process. In the last decade, Web 2.0 technologies have emerged to support business models that connect internal business units with external, organizational entities and customers in order to achieve common goals in communities.[1] For example, Procter & Gamble has a website and program called “Connect + Develop” that allows consumers and external partners to submit ideas directly to their product development group; if an idea is used, the submitter is compensated.[2]
This article introduces virtual insourcing as a viable business service model and explains why managers should consider it as an option for the volatile and uncertain times ahead.
What is Virtual Insourcing?
Figure 1 is a visual representation of how virtual insourcing options works: Basically, an Internet communication platform stores information in a single place (Data Center #1) where geographically dispersed employees in a business unit can access the files and programs they need to perform their daily work. It allows employees to be in different corporate offices or work from home because they have the same level of access to their work files and programs regardless of their location.
Ideally, digital copies of paper files, working files from desktops, emails, enterprise resource planning (ERP) data, dashboards, and third-party information should all be available over the communication platform. Daily work activities (services) are performed using calendars, assignment and workflow tools, message boards, and chat rooms. Communication paths, which connect users to the information they need to perform their tasks, can also be customized.
The “people paths” feature allows users to share both information and services (such as new customer applications, financial analyses, risk ratings, approvals, and decisions) while corporate auditors and executives can view outcomes and findings. In addition, employees from other business units can be invited to participate in select two-way communications.
Sharing both information and services across an organization can generate cost reductions and efficiency improvements and even support wealth creation. With virtual insourcing, knowledge is created and stored digitally and transparently; the high visibility of user contributions encourages learning and facilitates sharing. Examples of “off-the-shelf” virtual insourcing solutions include Google Apps and Microsoft SharePoint; however, they may not offer the security or customizations that a particular organization may need.
Strengths and Weaknesses
Organizations with strong local-market customers, suppliers, and business connections are often subject to scrutiny with respect to costs and inefficiencies. Inefficiencies often occur when managers make decisions based on incomplete information.[3] Searching for paper files and connecting information across emails, paper files, desktop files, and telephone conversations only increases labor costs. Management consulting firm McKinsey refers to these costs as interaction costs and has reported that they can account for half of total labor costs.[4] Over the past two decades, Fortune 100 companies that managed and reduced their interaction costs created $30,000 more wealth per employee than their competitors, according to McKinsey.
Sharing information and services can be viewed as a hybrid approach that combines the strengths of other organizational options while minimizing known weaknesses, such as high interaction costs.[5] The following table summarizes the key strengths and weaknesses of the three core organizational options:
| Strengths | Weaknesses | |
|---|---|---|
| Status Quo | Local Connections | High Infrastructure Costs |
| Outsourcing | Low Corporate Cost | High Interaction Costs |
| Shared Services | Low Interaction Costs | Loss of Local Decision-Making |
In this situation, “status quo” refers to a group of employees within a business unit who work with other business units within the organization. They form a local team with strong ties to the market and use an assortment of paper files, desktop files, emails, voice messages to do their work. As they are often located in key metropolitan markets, employee labor costs are high.
Outsourcing is often seen as a cost-saving option as labor costs are low compared to employee costs. However, the interaction costs for dealing with external vendors must be included in the total cost of outsourcing, and they can significantly close the cost gap between this option and others.[6]
In an outsourcing situation, customer and supplier relationships are often more complex and require additional checks and balances to manage. One company recently noted that invoices submitted by suppliers had to go through local offices to a national scanning and coding center in the United States, then to an outsourced accounts payable systems center in Puerto Rico, and then to a control center in Europe before finally arriving at a local bank for payment. In addition, local office staff was required to spend a significant amount of time checking that the scans and codes were done properly, confirming that system notices, such as blocks and denials, were not being encountered, and answering vendor questions regarding payments.
Shared services comprises of a centralized business unit in a low-cost labor area that performs a business function across several local business markets, dramatically reducing the costs of repetitive services or transactions.[7] Some centers are offshored while others are located in rural communities; the information they use is available and stored on corporate ERP systems. The downside is that when automated corporate controls are implemented, talent chains are disconnected and frequent communications with suppliers and buyers are eliminated, which can cause relationships to suffer. Another key disadvantage is that business units lose their autonomy in decision making and their flexibility to do things differently from other units.
Virtual insourcing emerges as the best option as it retains valuable local-market connections and relationships by keeping employees in one business unit in the same space as employees from other units. This solution can also help encourage business units to adopt best practices (through high transparency and audit standards), reduce interaction costs, and recognize employee contributions.
But these are simply the promises of virtual insourcing—can its potential be realized in the real world? The following section attempts to answer this question by documenting a successful case of virtual insourcing implementation.
The Problem
In an uncertain world characterized by volatile markets, innovation is critical. Executives in successful, global companies stress that they want their managers to propose new ideas, even if there is a chance that they will fail. At Nestlé, innovation includes discovering new business service models. This case study focuses on a virtual insourcing model implemented within the company’s credit and collection units.
In 2004, the credit and collections groups at Nestlé companies across the United States knew they were facing some significant challenges. There were five separate credit and collections units—Nestlé USA, Dreyers, Alcon Labs, Purina Pet Care and Nestlé Waters, and so, customers and suppliers often addressed and resolved issues in different ways with different units.
The director of Nestlé USA’s credit and collections reviewed their current operations and reported that account paperwork and information were scattered, which made files hard to find. Phone call messages, emails, attachments, desktop and laptop working files, credit files, and other materials were located in multiple places, making it difficult for employees and the company as a whole to move quickly in response to market changes. While the necessary outcomes were achieved, the process of achieving them was time-intensive and uncertain. Clearly, the monthly phone call to discuss high-risk and high-value accounts was not going to be enough going forward.
At the time, Nestlé USA was launching its new ERP program in the United States, and all IT resources were being directed to its rollout. Discussions were also under way with the chief financial officer regarding shared-service options, with a central location serving all five U.S. credit and collections units. There was a dire need to quickly discover what other options existed beyond the status quo and shared services.
The Solution
An outside advisor with experience in shared services was brought in to discuss alternatives. He told them that the best option in terms of cost would be shared services but the best option in terms of service would be one that shared information as well as services.
The virtual insourcing business service model would create a single place where information could be shared and services, such as financial analyses, could be stored. This would mean that only one application and one financial analysis would need to be performed for each account, minimizing duplication of efforts. A primary difference between the virtual insourcing and shared-services options was that using virtual insourcing allowed professionals to remain with their companies and retain valuable connections with customers, sales, and other units.
A set of analytics was prepared to compare the costs related to subscriptions, duplicated services, staffing, and working capital. The results showed that virtual insourcing held the potential to reduce costs to near the level of the shared-service cost model. In fact, consolidating subscription fees into a single, shared fee and eliminating duplicate services generated savings large enough to cover the basic costs of putting the solution in place.
The related technology, interface, and user risks were also assessed. Of these, the user risks—namely, user adoption—were determined to be the most significant. A recent corporate-wide sharing solution had only seven logins across the entire global company in six months.
A team was formed to meet for two hours, once per week, for eight weeks to work out the details. Four “people paths” were set up for ongoing credit, unauthorized deductions, red flags, and invoice collection discussions. Documents, email programs, subscriber notes, news, references, and working desktop files were all moved to the virtual insourcing solution. Chat rooms were opened to share information on services.
The Results
Once communication lines opened among the five units, customers began to view them as one entity, rather than as separate organizations. Junior analysts learned from seasoned professionals. Employees shared customer contacts and job opportunities opened up for those who could now be recognized as strong contributors. Performance reviews now included sharing activities and survey responses indicated what was working well and what needed to be improved, such as the timeliness of responses to information requests. User activity was tracked and rose steadily.
Over the next three years, credit and collections activities rose, but headcounts remained stable; however, in some cases, open positions caused by normal turnover and voluntary retirements did not have to be filled. Each unit shared in the cost of the sharing solution; once the value of the sharing solution was shown, the path to a shared-cost formula was easy to establish.
In retrospect, the risks taken to implement an innovative sharing solution for credit and collections across Nestlé in the United States were manageable, the outcomes exceeded expectations, and the big question became why had it not been done sooner.
Keys to a Successful Sharing Solution
As part of a well-orchestrated campaign, significant benefits and value can be created by implementing virtual insourcing within an organization. Below is a summary of key findings to stimulate discussion.
Successful sharing solutions can:
- Pay for themselves by eliminating duplicate costs (such as multiple subscriptions to third-party publications like Dun & Bradstreet), reducing redundant work, and decreasing working capital and days-to-order results.
- Open the door to having employees work at home, thus reducing office rental and utility costs as well as employee expenses, such as parking and travel costs.
- Improve the daily work activities of all users. Benefits include reducing time lost due to duplicate work, email, telephone tag, and file or document searches.
- Allow users to go from usage (seeing what is being shared) to participation (taking part in discussions) to contribution (posting information, analyses, and recommended actions), all of which serve as steps along the path to self-engagement.
- Support users with various access and security privileges. Not all users need to be equal. Some can be restricted to discussions with selected accounts so that confidentiality is maintained in accordance with privacy agreements.
- Provide clear audit trails. Notification is automatic and one click should take a user to a new message or document when it is posted for an important account. Documents, discussions, and actions are stored in one place. Search engines make it easy to find and access accounts, documents, and messages.
- Facilitate continuous learning as more information and expertise is centrally and transparently collected.
It is important to note that value must be established before implementing cost-sharing formulas. Ideally, an organization should treat first-year efforts as a corporate investment to discover the benefits of sharing both information and services and to verify that the expected benefits are recognized by business units. Only afterwards should discussions and implementation of cost sharing begin taking place. Also paramount to success is having a clear leader who recognizes the risks and value from sharing solutions and is willing to spend time tracking and managing activities.
The proportion of successful virtual insourcing solutions remains around 15 percent—consistent with other Internet applications. Usage risk, that is, getting employees to engage in sharing information and services, remains the most difficult hurdle to overcome.
Conclusion
Business service models are only as good as the costs they reduce and the benefits they provide. Virtual insourcing is an emerging alternative that uses Internet technologies to enhance the contributions and value of employees. In today’s uncertain economy, and with the great need to create competitive advantages, virtual insourcing offers managers a viable new cost-saving and wealth-creating option.[8]
[1] Daniel Tapscott and Anthony Williams, Wikinomics How Mass Collaboration Changes Everything, Portfolio, (New York: Penguin Group, 2007).
[2] Procter & Gamble, https://www.pgconnectdevelop.com/.
[3] Larry Goldman, “Driving Toward Action: The Action Stage,” DM Review, 15, no. 5 (May 2005).
[4] Lowell L. Bryan and Claudia I. Joyce, Mobilizing Minds, (McGraw-Hill, 2007).
[5] Shelly Heiden, “Centralization Versus Decentralization: A Closer Look at How to Blend Both,” Chief Learning Officer, 6, no. 12, (December 2007). (hyperlink no longer accessible).
[6] Sameer Kumar and Krisoffer Kopitzke, “A Practitioner’s Decision Model for the Total Cost of Outsourcing and Application to China, Mexico and the United States,” Journal of Business Logistics, 29, no. 2, (2008).
[7] JP Morgan Chase, “Moving Towards Global Shared Service Centers,” white paper, JP Morgan Chase, May 24, 2004 [registration required]. (hyperlink no longer accessible).
[8] Antonio Verdü-Jover, Jose-Maria Gómez-Gras, and Francisco Lioréns-Montex, “Exploring Managerial Flexibility: Determinants and Performance Implications,” Industrial Management and Data Systems, 108, no. 1, (2008).
