Shippers’ IT
BPOs: The new 4PLs?
Recent news of massive accounting fraud at Satyam Computer Services, an India-based information technology and business process outsourcing (BPO) giant, has brought outsourcing contracts under a renewed, intense scrutiny.
On Jan. 9 Ramalinga Raju, Satyam's chairman and founder, resigned and admitted responsibility for the fraudulent accounting scheme, called the 'Enron of India.' Nearly all of the company's reported 53 billion rupees ($1.08 billion) in assets may have never actually existed, leaving shareholders, employees and customers looking for answers.
Satyam's implosion has given BPOs heartburn and unsettled their customer bases. Many companies have come to rely heavily on BPOs for their IT-rich offerings, such as call center management, accounts receivable, help desk, and much more. These functions may not be seen as a core activity but, like logistics management, unforeseen disruptions in activities like customer service or collections can cause far reaching problems for manufacturers and retailers.
News reports have said Satyam held contracts with roughly onethird of the Fortune 500, which includes many manufacturers and retailers that have extensive supply chains managed by established third-party logistics firms. It's likely that these logistics outsourcing contracts will be revisited and those 3PLs will be put under the microscope
When you boil it down, outsourcing is based on trust. Companies of all types and sizes trust these BPOs to provide them a level of customer service that meets their customers' needs. Likewise shippers trust 3PLs to deliver their goods on time and intact. When trust is questioned relationships are re-evaluated, which opens the door for change.
Looking solely at Satyam's book of business, there could be many supply chain deals that are being reevaluated. Looking at the bigger picture, there's a case for rethinking of outsourcing agreements on a grand scale.
Combine this with a declining global economy that is forcing all businesses to look for new revenue streams and you have a stage set for conflict. 3PLs have and will continue to look to move 'upstream' and take on lucrative consulting engagements assisting shippers in retooling and optimizing their supply chains. And it's not hard to imagine BPOs moving 'downstream' from their traditional hands-off role as logistics strategists to more hands-on logistics management.
From a 3PL's perspective these BPOs could become formidable competitors. Amongst chief information officers the saying goes that 'no one has ever been fired for hiring IBM,' and this may well hold true for supply chain managers as well. BPOs, such as Accenture, IBM Global Services, and Cap Gemini, have a certain cache among Fortune 500 executives. More importantly they have access to the C-level and corporate boardroom that traditional 3PLs struggle to access. When a chief executive officer asks, 'why aren't we using IBM for this?,' traditional 3PLs have a difficult time overcoming a Fortune 500 executive's predisposition to conducting business with other Fortune 500 companies.
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| 'Traditional 3PL offerings are hard work that offer small returns. But the opportunity to manage the entire supply chain and delegate the nitty-gritty work to others ' all through extensive IT platforms ' can be very appealing, and profitable.' | |
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More than likely the key battle between 3PLs and BPOs will be fought over the re-emerging concept of a lead logistics or 'fourth-party' logistics provider (4PL), where one party assumes control of a shipper's entire supply chain and parcels out various functions to subcontractors. It's no secret that traditional 3PL offerings, such as warehouse management, distribution, and freight forwarding, are hard work that offers small returns. It's just not an attractive business when compared to other outsourcing opportunities. But the opportunity to manage the entire supply chain and delegate the nitty-gritty work to others ' all through extensive IT platforms ' can be very appealing, and profitable.
But let's not forget that 3PLs are not without their own strategic advantages. 3PLs like Schneider Logistics, Menlo Worldwide Logistics, Ryder, and others have a track record of success and a stable of clients to substantiate their expertise in logistics management. But in order to effectively compete 3PLs must move their relationships beyond the supply chain and into the boardroom. And there's no better time to be pitching efficiencies and ' most important ' cost savings than right now.
Recent history also supports the competitive position of traditional 3PLs. Looking back to August 2007, the U.S. Defense Department named Menlo Worldwide as the winner of a major contract to outsource logistics management for its North American freight transportation network ' also known as the Defense Transportation Coordination Initiative (DTCI). The DTCI contract value was estimated at $1.6 billion, making it one of the largest logistics outsourcing contracts ever conceived.
This massive contract was pursued and lost by consortia led by the usual logistics industry suspects, such as UPS, Eagle Global Logistics (now part of CEVA Logistics), and C.H. Robinson Worldwide. Most interestingly for purposes of this discussion, IBM's consortium competed and failed despite extensive Defense Department relationships through the company's federal government practice.
Let's also keep in mind that was mid-2007. Freight volumes were still growing. The Dow Jones Industrial Average was pushing towards 14,000 points. Satyam, with reportedly 40,000 employees worldwide, seemed like a very safe bet for your back office outsourcing. Times were pretty good, all things considered. Fast forward to 2009 and the environment has certainly deteriorated, which may play to the advantage of the BPOs. These companies have the perception of size and financial strength in their corner.
Based on anecdotal evidence, shippers today are more concerned about the financial health and IT wherewithal of their 3PLs and carrier partners than ever before. No manufacturer wants its supply chain to grind to a halt when its key vendor fails to perform. And savvy consultants with big names on their business cards and eye-catching PowerPoint presentations could seize this moment at the expense of traditional 3PLs.