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Procter & Gamble poised to make outsourcing leap

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Consumer products giant Procter & Gamble is about to choose a vendor for what could be one of the largest outsourcing contracts in recent memory, according to reports published last week.

Procter & Gamble executives told employees last Thursday that the company is planning to turn over about 80% of its Global Business Services group to a third-party IT outsourcing vendor, according to The Wall Street Journal and other publications. P&G Global Business Services, which was created in 1999 to consolidate the company's back-office IT functions, employs around 7,000 people.

The Journal reported that both EDS and Affiliated Computer Services are in contention for the Procter & Gamble contract, which will likely be a multiyear deal that will be valued in the hundreds of millions of dollars. Aside from absorbing most of the P&G Global Business Services staff, the winning bidder will inherit half a dozen data centers and one of the largest SAP software installations in the world. The contract is expected to be awarded later this year.

A Procter & Gamble spokesman said the decision to outsource was the product of a year-long study in which the company researched outsourcing benefits achieved by other large corporations, including General Motors and General Electric. Procter & Gamble hopes to lower costs and increase efficiency by taking advantage of the greater scale and expertise of a third-party provider, the spokesman said.

Given the current economic climate, Procter & Gamble's decision makes sense. A company like EDS or ACS can evaluate the P&G Global Business Services organization and streamline it, cutting waste and improving the value of Procter & Gamble's IT spending dollar. Under pressure to keep its own profits up, a company like EDS will review the P&G Global Business Services operation with a cold, practiced eye and swiftly trim the fat. The Procter & Gamble spokesman conceded that there would be layoffs, though the company expects them to be minimal.

Procter & Gamble will gain other benefits by outsourcing. Companies like ACS or EDS can purchase technology in volume, lowering Procter & Gamble's hardware and software costs. In addition, a large outsourcing vendor can share the lessons it has learned in deploying mission-critical applications, such as SAP, in streamlining those of Procter & Gamble.

Even with all these benefits, however, it is important to remember that in making a wholesale shift toward outsourcing, Procter & Gamble also will risk losing some IT advantages. The most important loss - and perhaps the most difficult to quantify - will be the close relationship between the IT staff and the business units they serve.

True, the new contractor will retain most of Procter & Gamble's current staff, and most of those staffers will continue to play their current IT roles. But there is a nearly inevitable rift that occurs when the IT person and the business person draw their paychecks from two different companies. Even though outsourcing representatives might be completely devoted to their clients, they now must serve two interests: the client's and those of their own company. An outsourcing vendor might argue that those interests are one and the same, but some outsourcing clients in the past have found out differently.

The other potential loss for Procter & Gamble might be the ability to use IT as a strategic weapon. By treating IT as a separate organization, Procter & Gamble may jeopardize the close ties that enable IT to facilitate - even innovate - new product offerings, new business processes, and new means of interacting with partners. As part of a separate company, P&G Global Business Services employees may feel less involved - and perhaps less invested - in efforts to make Procter & Gamble more competitive with its rivals.

The near-term benefits of Procter & Gamble's outsourcing decision are clear, and they will likely be manifested in greater efficiency of operations and a better bottom line. But over the long term, it will be interesting to see if Procter & Gamble becomes less responsive, and perhaps less innovative, in its IT development efforts. Only with great vigilance - by Procter & Gamble and its outsourcing partner - can Procter & Gamble walk the tightrope between short-term cost control and longer-term loss of innovation.

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Senior Analyst Tim Wilson is with Enterprise Management Associates in Boulder, Colo., an analyst and market research firm focusing exclusively on all aspects of enterprise management. Wilson has over 10 years of experience in covering e-business and enterprise management issues, most recently with InternetWeek, where he was chief of reporters. He can be reached by clicking here.

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