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Vested Outsourcing: How P&G Brought its Focus on Innovation to Facilities Management

In a unique arrangement, P&G outsourced its facilities management, along with several other functions, creating a collaborative, win-win relationship with its service providers.

Kate Vitasek, Faculty, Center for Executive Education, University of Tennessee,  and Joseph Tillman, Vice President, Transportation, KS Harvesters (Directory 2014)
Innovation has always been a byword at Procter & Gamble; indeed, the company attributes much of its long-term success to research and new, innovative ideas.

That drive to innovate became even more focused in 2000, when A.G. Lafley took the helm as P&G’s CEO to help take the organization into the twenty-first century. Lafley and his team identified five core enablers: consumer understanding, brand-building, innovation, go-to-market capability, and scale.

One of the enablers — innovation — became a core priority for P&G under Lafley’s reign, so much that Lafley eventually wrote a book, The Game Changer, about how P&G used innovation to spur company results. He wrote, “In an innovation-centered company, managers and employees have no fear of innovation since they have developed the know-how to manage its attendant risk; innovation builds their mental muscles, leading them to new core competencies.” Shortly after becoming the CEO, Lafley set out to reinvent the company’s innovation business model in radical and precedent-setting fashion. Questioning the sustainability of the conventional in-house-do-it-ourselves model, Lafley determined that looking beyond P&G’s walls could produce highly profitable innovations.

Product innovations were initially targeted. He set a goal to acquire 50 percent of innovation from outside the company. The strategy was not intended to replace P&G’s capabilities, but to use them more effectively and synergistically. “Half of our new products” Lafley said, “would come from our own labs, and half would come through them.” He challenged P&G to embrace the idea that the P&G’s 7,500-strong R&D organization could leverage the skills of some 1.5 million people from outside the company’s walls, with a permeable boundary between them. P&G identified promising ideas throughout the world and applied its own R&D, manufacturing, marketing, and purchasing capabilities to them to create better and cheaper products, faster.

Applying Innovation to Real Estate & Facilities Management
To achieve its overall growth objectives, P&G knew it needed to have available resources applied to the areas most certain to strategically impact top-line growth. Filippo Passerini, who led the company’s Global Business Services unit (encompassing human resources, accounting, facilities management, and IT), understood there were tremendous opportunities for improvement, and he and his team set out to change the game of GBS management.

The challenge faced by the Global Business Services and Facilities Management team was how to apply innovative principles to real estate and facilities management services. The task for the P&G global business services team — 7,000 in all — was to shift from focusing on simply keeping the lights on to business innovation. Under Lafley’s direction, P&G was transforming itself to concentrate on core competencies of marketing and product development.

Passerini and his GBS team needed to transform their organization at a faster pace if they were going to keep up with the business needs. The option to outsource P&G’s huge facilities management operation was explored. P&G believed that by collaborating with a world-class outsourced service provider it could drive costs lower and ensure that its individual service offerings remained on the leading edge of best practice and the use of outside innovation techniques.

Outsourcing As the Answer
In 2003, P&G entered into $4.2 billion worth of outsourcing partnerships in IT infrastructure, finance and accounting, HR, and facilities management. HP took over the development of IT applications and the operation of data centers and IT support, as well as key elements of accounts payable. IBM won a contract to provide employee services such as payroll, travel support, and expatriate services.

On the facilities management side, Jones Lang LaSalle (JLL) took over the management of offices and technical centers, including maintenance and security. This was a groundbreaking deal that spanned more than 60 countries and included facility management, project management, and strategic occupancy services.

P&G brought its focus on innovation to its facilities management relationship with JLL. The size and complexity of the deal was a first for both companies, as was the approach for the commercial contract. Simply put, P&G wanted an outsourcing relationship that challenged JLL to not just take care of its buildings, but to take charge of the buildings.

The companies created a commercial agreement that was “Vested” in nature, meaning that they collaborated to produce win-win results by sharing and creating value through innovative, performance-based goals.

The companies flipped the conventional outsourcing approach on its head: P&G developed a business model around contracting for transformation and results instead of contracting for day-to-day work and transactions. In all, nearly 600 P&G employees were “re-badged” as JLL employees as part of the outsourcing effort.

Winning as a Shared Experience
Both companies had a long history of delivering results that add real business value to their bottom line. But the P&G and JLL relationship had a new twist. They understood winning needed to be a shared experience — that in itself is a fairly innovative mindset! Creating a true win-win mentality meant changing the rules of the game so that P&G and JLL shared in the risk and reward associated with facilities transformation efforts. Instead of thinking about “what’s-in-it-for-me” (WIIFMe), the organizations adopted a “what’s-in-it-for-we” (WIIFWe) approach. Starting with values and moving through day-to-day operation, P&G and JLL set out to achieve alignment on a grand scale to create a winning partnership.

Instead of the usual tug-of-war between a company and service provider or buyer and supplier, P&G-ers describe this approach as pulling the rope together. The traditional approach is to have a buyer and supplier tugging on each end of a rope, with each party having a give and-take as they negotiate. The P&G way is to have suppliers on the same side of the rope as P&G, with both parties pulling in the same direction to achieve P&G’s cost and service objectives. The result was a “Vested” agreement that was designed for transformation and structured with enough flexibility to allow the companies to embrace whatever dynamic changes came their way.

Larry Bridge, the P&G leader in charge of contract governance, said, “As much as we give credit to relationships, we have a really good contract. It is simple and drives the right behaviors. The transparency, cost pass through, and incentives features allow us to be aligned versus being on opposites sides of the table negotiating.”

What were the secret ingredients to achieving a contract that drives collaborative and innovative behaviors? In short, P&G and JLL established a business agreement where both parties are aligned and vested in each other’s success, by employing the “Five Rules of Vested” as shown in the accompanying chart.

While P&G deems all of its outsourcing successful, the business relationship with JLL has been, by all measures, highly successful. In just five years, JLL went from being a new supplier to P&G to winning “supplier of the year” among 80,000 suppliers.

The P&G/JLL deal demonstrates that it is possible to develop an innovative, win-win partnership. JLL proved it can balance what some might see as a paradox: achieving high service levels while reducing costs. Meanwhile, P&G proved it could outsource facilities management and innovation by managing the what not the how, to the benefit of both companies.

P&G says the Global Business Services unit has reduced cost as a percentage of sales by 33 percent for its outsourced operations. And these savings were not achieved at the expense of customer satisfaction. P&G’s “customers” — the employees that use the facilities — are the real customers of JLL.
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