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Key Points
  • The logistics industry is facing a crisis. For asset-based companies such as ocean carriers, the volumes are at an all-time low and there is excess capacity
  • BPO may be a survival strategy for the industry. Companies can save 30 - 40 percent, sometimes even 60 percent, of their back office costs by moving processes to a BPO service provider offshore
  • In the fast growing segment of the third-party logistics companies or 3PL, who have built a business model of partnering with multiple service providers, BPO is just another key partnership they should leverage
  • BPO also helps the companies move their fixed costs to a variable structure through unit transaction pricing model. Here, the volume risk is taken over by the partners
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Jessica: Hello and welcome to the WNS business insights podcast series. This podcast series brings you the latest trends and concepts in your industry in field of outsourcing so that you can make your outsourcing programs even more successful. I am Jessica Reinelt, your host for this podcast with Jaison Augustine, Vice President at WNS, a leading global business process outsourcing company. Jaison has unique perspective on outsourcing in the shipping and logistics industries having worked in the industries for over 14 years. In today’s episode, we’ll discuss with Jaison why he believes that shipping and logistics companies need to leverage Business Process Outsourcing to survive the current economic turmoil more so now than ever before.

Jessica: Hi, Jaison. Welcome to the WNS business insights podcast series.

Jaison: Hello Jessica and thank you. I think these are very extraordinary times for the logistics industry and this is definitely a very relevant topic for discussion.

Jessica: Jaison, you’ve recently been promoting the idea that Business Process Outsourcing is the life raft for shipping and logistics businesses to stay afloat in today’s economic environment. Can you tell us why you believe so strongly about this?

Jaison: Sure. This is definitely a time of crisis for the logistics industry by any measure. This is probably the worst situation for them in decades. Let’s look at some numbers. A recent analysis of top ten ‘third party logistics companies’ has shown that compared to the first quarter of 2008, the average net revenue decline in the first quarter of 2009 was to the tune of 21 per cent. If you take ‘Earnings before Interest and Tax’ which is a better measure of a company’s performance, the decline during the same period was a staggering 34 per cent. For asset based companies such as ocean carriers, the volumes are at an all time low and there is excess capacity of anywhere between 30 to 40 per cent across the board. The situation is not very different for air cargo operators as well. On top of this when you superimpose the macroeconomic conditions such as the world GDP which is expected to contract by about 1.7 per cent and the world trade volumes expected to drop by about 6.1 per cent in 2009 over the previous year, the situation clearly calls for quick and decisive action. That’s where Business Process Outsourcing or BPO may well be underutilized survival strategy for the industry to adopt in a big way in 2009. Companies can save anywhere between 30 to 40 per cent sometimes even as high as 60 per cent of their back office costs by moving processes to a BPO service provider in an offshore location.

You may already know that the logistics industry is still very paper driven. When you consider that roughly 15 to 25 per cent of the overall staff costs of an average logistics company is transactional back office work, one can easily estimate the impact on savings here on their overall cost structure.

There is really no reason Jessica, in today’s difficult times to keep processes such as Bills of lading input, airway bill manifesting, rates and tariff management, track and trade support, sales schedule compilation, driver logs and trip records apart from finance and accounting processes such as AP and AR in high cost onshore locations. The good news for companies that aggressively adapt a BPO strategy is that this is not only going to help them reduce the cost structure during these very difficult times, it also positions them very well for the economy turns around.

Jessica: One of the perceptions that exist is that Business Process Outsourcing takes time to deliver results. It is largely a cost saving tool rather than being more strategic. What is your position on that?

Jaison: Like anything in life, I’m sure there may be some bad examples out there, but based on my experience, I would like to challenge that thinking. According to me, one needs three essential ingredients for a successful BPO program. One: Clear vision on part of the company that wishes to outsource and objectives and time lines they want to achieve. Second: A BPO partner who has a track record of operational excellence and a very strong domain expertise in the customer’s industry and finally the third point: Enability on part of the BPO partner to align effectively to the culture of the customer, to truly act as an extension to their enterprise. I’ve seen where the above three factors are met BPO programs can deliver results and cost savings in two to three quarters.

BPO is particularly well suited to the logistics industry. In the fast growing segment of the third party logistics companies or 3PL who have built a business model of partnering with multiple service providers to provide end to end services to their customers, BPO becomes just another key partnership they should leverage. If they can outsource warehousing, trucking, customs clearance and IT, there is no reason why business processes cannot be outsourced to a company who can certainly do it better and more cost effectively than themselves.

Apart from just cost reduction, BPO also helps the companies move their fixed costs to a variable structure through unit transaction pricing model. Here, the volume risk which is particularly relevant today is taken over by the partners. There is an ability to improve business outcome through a strong BPO partnership as well. And I think that becomes even more important than the cost element.

I have several examples where companies have been able to reduce unapplied cash, improve collections, submit import manifests to customs quicker, reconcile unmatched fuel tickets faster and more accurately and in general improve the quality of processes through the application of innovative tools such as six sigma and lean. So clearly BPO is more than just a cost reduction tool in the long run.

Jessica: Can you give us some specific examples of how companies have used outsourcing to deliver quick and strategic returns?

Jaison: Sure. I will highlight a couple of examples here. The first one is of a leading global express and logistics company. They outsource their entire ship to collect process including processing of airway bills, manual billing of freight duties and taxes, cash applications and invoice adjustment. They consolidated the above processes from over 50 countries to two WNS offshore centers. Some highlights of the program that I can mention are apart from a labour arbitrage of around 60% the huge volume of transactions which ran into several millions required us to ramp up hundreds of agents, train them and get them ready for production in record time. The average productivity of the agent was equal to the client baseline in less than 180 days of transition.

Most of the transactional processes were on unit transaction pricing model completely variabalizing the cost structure for the client and then not having to worry about ramping up or more importantly these days, ramping down according to the volume forecasts.

A stringent quality standard of 99.7 per cent was consistently being met along with very tight cut off times. On the accounting side, specifically across the accounts receivables cycle, the billing become quicker at WNS from a typical four day turnaround time to now a two day turnaround time. And the improvement in cash application workflow showed dramatic results in bringing down unapplied cash from about seven to eight per cent at the time of transition to consistently under two per cent. This meant faster collections and lowering of DSOs. Now, that was my first example.

The second example is of a European Non Vessel Owning Common Carrier or NVOCC who outsourced their entire import manifest process from across 13 countries in Europe, Asia and Latin America. Now this involves processing of house BLs i.e. house Bill of Lading and compilation of import documents for customs clearance at consolidation hubs and final destinations.

Apart from a labour arbitrage of about 50 to 60 percent again which was very relevant to them because they transferred work from mostly high cost locations in Continental Europe and even high cost locations in Asia like Japan. The entire paper workflow was automated through the implementation of a work flow tool for electronic prioritization, distribution processing and tracking of the house bill of lading. This resulted in dramatic improvement in productivity from around 18 HBLs per person per day to a staggering 80 HBLs per person per day. This also had a more relevant impact of ensuring import manifests were prepared sooner and were now ready for submissions to customs 10 days prior to vessel arrival rather than 6 days which used to be the norm earlier. So you can see that when the BPO service provider has the domain expertise, they are able to deliver dramatic results and improvements in a relatively short period of time.

Jessica: In today’s environment, clearly time is the enemy. How can companies’ jumpstart their outsourcing journey?

Jaison: That’s a great question Jessica. BPO is somewhat like that perfect golf swing. Anyone who has swung a golf club can tell you that it only works when there is clear focus and commitment; a well defined objective usually within one’s sight, the application of a correct technique or process and the use of the right rules of partnership. All golfers know that with experience the slightest hesitation produces poor results and therefore, no half measures will work. BPO are somewhat like that.

I think there are about seven important points to keep in mind to jumpstart a BPO program. The first one is to ensure that BPO is a CEO priority. It only works if sponsorship for a critical program like the BPO initiative comes from the very top. Only the CEO can deliver that message that there are no other options for survival. Otherwise the imperative for outsourcing is not taken very seriously and the rest of the management sees implementation as optional.

I would highlight is to 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. For example think freight audit. Think tariff filing and maintenance. Think claims management. Think marketing analysis. Think complex finance and accounting work.

The third point is to 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 clearly 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 of a program in times of economic uncertainties and focusing only on obtaining the benefits that truly matter now.

Number four is the mandate to move fast. Companies can quickly put in place outsourcing programs by mandating that aggressive timelines are a must. 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. By imposing deadlines for the development and implementation of a road map including scope, provider selection and transition will mobilize the organization.

Moving fast obviously does not mean throwing caution to the winds. Therefore my fifth point is to develop a realistic deployment plan. Even when outsourcing is being implemented for cost savings, a deployment strategy that builds up steam over time and is founded on very strong and sound transition methodology is key to success.

The sixth point is to debit budgets in advance. This is putting your money where your mouth is. 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 take the cost out and finally and probably the most important, my seventh point is the selection of the BPO partner itself. Insist on alignment and industry knowledge without which the partnership cannot succeed. Partnering with a BPO provider who understands that you are the client and will align with your ways of working rather than impose its own is vital in good times and bad.

Equally important is deep domain and industry knowledge. If a provider isn’t highly experienced in processing bills of lading, freight bills, driver logs, commodity classifications and is unfamiliar with underlying rules of freight, duties and taxes, in different operating regions, entrusting delivery of these processes to that third party provider can quickly sink the ship.

In summary Jessica, like that perfect golf swing, when all these factors come into play, organizations are likely to hit the ball on the sweet spot and achieve the desired results.

Jessica: Thank you Jaison for an insightful conversation. I am sure we will be hearing more about outsourcing and survival strategies for shipping and logistics companies in the coming months. For more information on how shipping and logistics companies can leverage outsourcing or other business insights on how you can improve your business performance, visit us at www.wns.com.

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