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Outsourcery

In these days of furious consolidating, outsourcing is the way to go for both corporate giants and small outsourcers.
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Company Story

When Robert Strickland walks into the headquarters of $9-billion Food Lion, he flashes his company badge, attends strategy meetings, and flies off on the corporate jet. The only thing he doesn't do is work there

AN INDUSTRY UNDER SIEGE: In the eyes of a traditional grocer, a supermarket is little more than a warehouse for food. Products enter through the back door, go onto the shelves, and exit through the front doors in the carts of shoppers. Selling groceries amounts to a high-volume, low-margin proposition; the typical supermarket chain nets less than a penny of profit on every dollar of sales.

Despite those threadbare margins, that economic model worked pretty well until about a decade ago, when competition on various fronts began to eat into the supermarkets' territory. Hyperefficient, high-volume retailers such as Wal-Mart, with their sprawling "supercenters" and their companion discount "clubs," began capturing more of the market. Then came the "category killers," specialty superstores stealing business in higher-margin goods such as health and beauty aids, and pet food. More recently, the trend toward eating out at restaurants and taking home ready-to-eat meals from operations like Boston Market has also taken its toll. The warehouse, alas, is under siege--and things aren't about to let up.

The industry is now furiously consolidating, in the prospect that an oligarchy of no more than 10 chains will one day rule the U.S. market, squeezing any competitor or vendor smaller than economy-size. Then there's the fickle consumer. Cooking is a dying art, and time a dwindling commodity, making convenience all the more precious. And what about grocery shopping on-line? One industry trend watcher predicts that within 10 years every supermarket in America will be on the Internet; of course, she adds, at that point there will be only half as many supermarkets around.

In an effort to win back business, the grocery industry has counterattacked--most notably by installing, over the past decade and a half, the delicatessen-bakery sections that nowadays no self-respecting supermarket is without. Many are elaborate, with seductive open kitchens behind the counter, and everything from goose-liver pÂtÉ to individual ready-to-eat servings of veal marsala displayed in front of it. Between 1982 and 1992 the percentage of U.S. supermarkets with deli-bakery sections rose from 50% to 80%, an increase from 14,000 units to almost 23,000. This year Wal-Mart alone will install 100 new bakeries in its stores.

But deli-bakeries--as they are known in the trade--are creating more consumer excitement than actual sales. They account for only about 5% of average store volume. Moreover, they're notoriously hard to run because of their high variable costs. "A lot of these delis don't make money," says Jerry Weil, president of St. Louis-based Swiss-American, a cheese processor and importer. "They add some icing to the cake, but they're also a drain on cash and energy."

Still, tacticians believe the fate of the supermarket may hinge on making the deli-bakery concept work. And store operators are turning to anyone whose help might better the odds.

THE FIXER: All this turmoil is not necessarily bad news for Robert Strickland, who this day is standing, tall, slim, and boyishly enthusiastic, in a Food Lion supermarket in Charlotte, N.C. Ask Strickland about deli-bakeries and soon you realize you have met a man who is master of all he surveys. His thoughts emerge as a rapid-fire jumble of jargon, acronym, and social science. "You shop the deli with your eyes," he says. "The strongest impulse occurs when you walk in the door." That's why the deli ideally should appear "first in line"--to the right of the front door. To lure stray shoppers to the deli, Strickland will often "dislocate" an item--put it elsewhere in the store--and "bogo" it.

Bogo?

"Buy one, get one."

When Strickland walks into Food Lion's headquarters, up the road in Salisbury, he flashes his company badge, logs into the company's database, attends strategy meetings with the top management, and flies off on the company jet on short notice. The only thing Strickland doesn't do at Food Lion is actually work for the corporation. Rather, he runs his own food-brokerage business, R.C. Strickland Co., in Charlotte, whose $2.5 million in sales (produced by 25 employees) would represent little more than a rounding error to Food Lion, whose 1996 revenues amounted to $9 billion.

So why then would mighty Food Lion, with all its resources, mess with a speck of a company like Strickland's? The short answer is that Strickland knows deli-bakery--very, very well. He has become a fixer of sorts to the chain, an outsider who knows the vendors he represents as well as he does the retailers he sells to. "We are able to provide value in the food manufacturer­retailer relationship," says Strickland. "There's a huge void between the two--of communication and trust, of understanding about how to market the product, of understanding about each other's financial objectives. We are able to fill that gap."

The deli director at a large North Carolina­based grocery chain says of R.C. Strickland: "They're a go-between for us. They do all the legwork, put programs together, bring them in, and roll them out to all our stores. That's a lot of work." She adds that Strickland, unlike most other brokers, specializes in only one area, deli-bakery, and has developed a focused knowledge that other brokers haven't. "This is not like putting a can of green beans on the shelf."

If her company brought that work in-house, she says, it would inevitably cost more and be less effective. "Once you're inside the company, your perspective inevitably gets broadened. We can't get focused enough like Strickland can." She cites her chain's move to sell quiche, for example, a problematic effort that required a major campaign. R.C. Strickland obtained the mix and the pie shells. It briefed and debriefed the stores' chefs, wrote cooking instructions, did market research, and analyzed sales data. And quiche was just one of some 20 similar "programs" Strickland organized for this chain last year.

OUTSOURCING, OR "OPR": In a broader sense, R. C. Strickland, whose sales have grown by better than 22% in each of the past four years, is one more emphatic example of a fast-growing business phenomenon--outsourcing. R.C. Strickland is a small company with specialized skills that has positioned itself to deftly serve much larger companies buffeted by a turbulent market. Though outsourcing has always been around in some form, it has gathered momentum in recent years and has come to involve increasingly smaller companies.

Frank Casale, executive director of the Outsourcing Institute, in New York City, estimates that the U.S. market for outsourcing services will grow to more than $300 billion by the year 2000, up from $100 billion in 1996. He says that five years ago the companies that typically outsourced were large companies in trouble. Now, says Casale, "more and more small and medium-size hypergrowth companies have leveraged outsourcing as a growth enabler. It's the new growth weapon for the small company."

In the past, he says, a traditional manufacturer that was growing would add to its fleet of trucks to distribute products. But in the current highly competitive, just-in-time economy, demand is far likelier to surge and collapse on short notice. Today's asset can be tomorrow's millstone. In this scenario, that manufacturer is far better off establishing a relationship with a trucking company. "That resource becomes a 'utility,' " explains Casale. "Now it's just a matter of flipping a switch. You need 10 trucks this month and 22 the next. The how is someone else's problem; you focus on the what."

Casale points to three convergent forces that are driving the spread of outsourcing: a need to get to market very fast, the fact that processes inside companies are now highly complex, and a high rate of change. He concludes that for the typical company, which is just trying to make sales--let alone turn a profit--"it's the worst of all possible worlds." To overcome such harsh circumstances, every company needs to leverage all the expertise it can. "In the past, one of the keys to growth was to use other people's money--OPM. Now it's to use OPR--other people's resources."

And as it turns out, making resources available to other people is what R.C. Strickland is all about.

RESOURCE MANAGEMENT: What exactly does R.C. Strickland do? In simple terms it's a food broker, but cofounder Strickland, who launched the company six years ago, rejects that label. A broker, he notes, is the proverbial middleman between manufacturer and retailer, earning a small percentage on sales for putting the manufacturer's product in front of the retailer and hoping he will bite. It's a relationship long on volume and short on loyalty: food vendors can be quick to sign up with the next broker, who's always promising better access to bigger retailers.

Strickland has turned his back on such an arrangement (what he dubs "a bastard's business") and set out to craft interdependent relationships with those he does business with. The company currently works with 40 food producers and retailers (primarily supermarket chains in the Southeast). With R.C. Strickland you don't just get cheese delivered on time. You get a range of services, which include cost analysis, market research, strategic planning, and training. It's a system Strickland calls "resource management," and it offers a menu of services that support the sale of the product.

Strickland says the objective is not only to provide value-added services of the client's choosing but also to measure performance. "We get paid only for services we provide," says Strickland. "We fully disclose all commissions earned from vendors." A percentage of those commissions is then allocated to an account that both the vendor and the retailer, separately or jointly, can draw on to "buy" R.C. Strickland's services . (Strickland will not disclose the exact percentage.) He says, "We have a simple investment formula: 'Here are the resources we will make available to you.' We have a way of providing full accountability for every dollar we spend."

If customers invest in the right services offered by Strickland, then volume at the retail level should rise--in turn pulling more products out of the manufacturer's warehouse. Strickland then gets paid more as the vendor's sales rise, thereby allowing him to set aside larger sums to service the account. Resource management is a strategy that binds vendor, broker, and retailer in a common cause.

In a typical example, Food Lion recently sought to determine if it would be more profitable to shift the preparation of frozen desserts, handled on-site, to an outside contractor. Using its resource-management "credit" with R.C. Strickland as though it were drawing down on a bank account, the chain commissioned the broker to study the issue. Strickland recommended switching to an outside source. Says Strickland's vice-president of marketing, Alan Hamer: "We concluded that we could improve quality and availability while not harming gross margins." Experience has since proved Strickland's assessment correct.

Hamer describes the theory behind resource management as "open book and clear," which "encourages additional business." He says that traditional brokers, doing an unvarying amount of business with a client, haphazardly throw in money to support the account--a system Hamer describes as "being as coherent as airline-ticket pricing." In R.C. Strickland's case, he asserts, "it's a clear, ongoing business relationship."

In addition to masterminding a number of projects at the store level, Robert Strickland supplies Food Lion with a broad range of what he calls "management services." He says: "We have become an active part of their management team. We give them advice on strategic direction, the decision-making process, and what information systems they might need." (Food Lion declined to be interviewed for this story.)

A large chunk of the services Strickland provides to Food Lion is training. Last November and December, Food Lion opened 65 stores. Strickland, with just 25 employees, still provided personnel to train bakery employees for a week at each new store. He was able to cover all bases by borrowing 6 employees from Rich Products, a major R.C. Strickland vendor, which sells a lot of goods through Food Lion.

Peter Fleischer, former vice-president for strategic planning at Buffalo-based Rich Products, says R.C. Strickland helps Rich customize its product. With more than $1 billion in sales, Rich is one of the world's largest producers of frozen dough--among other things--which it sells in 61 countries. "They have added value on both sides of the equation by having an intimate knowledge of Rich's customers' needs and problems," says Fleischer. "They're able to really help get inside and do a lot of number crunching and market analysis that the chains don't have the time or ability to do. They make it possible for Rich to provide products that solve some kind of problem."

As Strickland adds value for his clients he is able to command more value for himself. The typical food broker earns between 1.5¢ and 3¢ per pound of commodities--cheese, meats, and so on--it distributes. R.C. Strickland, for taking a value-added initiative, can earn as much as 5% of the total market value it distributes, which works out to a margin that is three times the industry average in that particular area. Robert Strickland says he earns so much more because "we are asked to provide a lot more input." In some instances, his company serves as the complete sales arm of its vendor clients.

A FRESH EYE: R. C. Strickland has succeeded because its strategy drives down costs for both vendors and retailers--a feat that's critical in today's competitive economy. It does so by being consumer driven, not retailer driven . "In our business the old paradigm is that the manufacturer would come out with a product, and the brokers were driven to show it to every retailer," says Hamer. Strickland turns that notion around by selectively targeting products to the retailer to meet specific consumer wants.

Jerry Weil of Swiss-American says of Robert Strickland: "He sells a product as well as anybody. What he's really selling is knowledge about it." Weil adds that what deepens that knowledge is Strickland's experience from the seller's side of the counter. (He spent 14 years in deli operations, 5 of them at Piggly Wiggly, a chain of supermarkets primarily in the Southeast.) The partnership between Swiss-American and R.C. Strickland is yet another case of Strickland's casting a fresh and discerning eye on a client's business and finding an underused asset to be newly leveraged.

Swiss-American markets its domestic cheeses under the Dutch Garden label. When Strickland started working with the company, he believed the management was too focused on its core business. "They were trying to exploit a brand name," he says. "They wanted to be a Budweiser." Strickland, meanwhile, was more intrigued with the company's distribution facility in Charleston, S.C., through which it imports specialty cheeses. He knew through his alliances with Harris Teeter and Food Lion, the two largest supermarket chains in North Carolina, that there was a burgeoning market for specialty cheeses in the state. Why not use that distribution facility to better serve that market, to which Strickland had terrific access through those two blue-chip retailers? Since Swiss-American began working with Strickland, six years ago, its share of the specialty-imported-cheese market in North Carolina has risen from zero to 80%.

What made that possible was that Strickland saw that the Charleston facility had the ability to cut, hand-wrap, price, label, and deliver cheese. (He knew through experience that consumers would pay a premium for hand-wrapped, as opposed to machine-wrapped, cheese.) In effect, it could offer retailers a highly customized product that would meet a range of consumer tastes--and deliver it as often as four times a week throughout the state. That capability, meanwhile, stripped labor out of the retailers' deli-bakery operations, a major cost component.

Recalls Weil: "Robert saved the stores labor; the cheese looks better and lasts longer; and we deliver three or four times a week." There was a subtler dividend, too, adds Weil. Workers in the stores, busy preparing the cheese, often had their backs to customers at the counter. With the cheese delivered prepacked, deli workers could face the customers and provide better service.

Strickland, not one to sit still, now wants to further leverage the Charleston distribution facility. He will distribute other specialty foods such as olives, hummus, and herring into the North Carolina market. Weil, who says he is in the cheese business, initially balked. "It was a bone of contention between us," he says. But Strickland kept after him and forged a deal whereby he and Weil would spin off the Charleston operation as a separate business, of which R.C. Strickland would own 80%.

WORLD WIDE WEB: Frank Casale of the Outsourcing Institute says that a bird's-eye view of the economy today would reveal a complex web of companies ("resources," he likes to call them) connected through myriad alliances not unlike R.C. Strickland's interwoven relationships with both vendors and retailers. This sharing of resources represents what he labels "a modular approach" to business that eschews building infrastructure inside a company. He says that the "resource web" will grow only denser as business alliances proliferate and strengthen. Vice-presidents who once ran divisions inside companies will now be "point people" to outside organizations, producing what he calls "the real worldwide web," which will be strengthened by the far better known electronic version. Says Casale, "Many of these people will have more interaction with people around the world than with some of the people in their own building."

Just as outsourcing has challenged the conventional wisdom about organizational structure, it has also challenged how one might think of traditional measures of business success and value. Casale says that what matters today is not so much indicators of brute proficiency such as how many employees a company employs or even how fast they have grown sales. One should pay attention to certain ratios, which at their base are indicators of leverage. Revenues per employee, return on assets, and economic value added (a measurement of net operating profit to cost of capital) are some of the indicators that merit closer scrutiny.

Says Casale: "I don't care how many employees they add, the nature of these companies is changing, the measures are changing. In fact, a company with too many employees and too much infrastructure could be going the wrong way.

"That could be a sign of lethargy."

Edward O. Welles is a senior writer at Inc .


Resources

The best single source of information on outsourcing is the Outsourcing Institute, in New York City, which disseminates independent information on the strategic use of outside resources. The institute publishes a quarterly management newsletter, The Source. To subscribe or get other information, call the institute at 800-421-6767.

Also, International Data Corp., in Framingham, Mass., a leading provider of information-technology data, analysis, and consulting, has recently produced 1996 Worldwide Outsourcing Markets and Trends. For a copy, call 800-343-4952.

One consulting firm that specializes in outsourcing is Michael F. Corbett & Associates. It puts on intensive three-day seminars called "The Disciplines of Outsourcing" and distributes Outsourcing: The U.S. Business Revolution, a 400-page review of the history and future direction of outsourcing. Corbett can be reached by E-mail at mfcorbett@corbettassociates.com or by phone at 914-463-1110.

OUTSOURCING INSTITUTE, Frank Casale, 45 Rockefeller Plaza, Suite 2000, New York, NY 10111; 800-421-6767; fcasale@outsourcing.com 54

R.C. STRICKLAND, Robert Strickland, 2900 Westinghouse Blvd., Suite 100, Charlotte, NC 28273; 704-588-1908 54

SWISS-AMERICAN, Jerry Weil, 4245 Papin St., St. Louis, MO 63110; 800-325-8150 54

Last updated: Apr 1, 1997




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