The Perils Of Outsourcing

COMMENT

The perils of outsourcing
When BA sold off its catering operation eight years ago, it believed it was following an Adam Smith edict. But it forgot one important principle. By Steven Downes, Business Editor, Times Online

Whenever there's a shelf to put up at home, or a small plumbing job needs doing, and Mrs Downes is beginning to get a little, shall we say, impatient, I refer her to the patron saint of economists.

"It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy." Entirely unaware of my personal shortcomings as a handyman, this was the view of Adam Smith more than two centuries ago. The same rule applies chez Downes today, which is also why we buy our clothes in high street shops and do not raise our own livestock or grow our vegetables in the back garden, and never do I attempt any routine DIY.

Modern life is all about outsourcing - "What is prudence in the conduct of every private family, can scarce be folly in that of a great kingdom," old Adam said as well, sagely. But sometimes, you get let down by your suppliers, as the British Airways management know only too well.

Outsourcing has become something of a dirty word, especially among consumers, such as bank customers or anyone who has tried to use the services of an outsourced call centre. Complaints about poor service have often followed stories of large-scale redundancies among British-based workers, who have been replaced by low-paid workers in various far-flung parts of the world.

And the choruses of "I told you so" were also heard loud and clear when news agency Reuters moved one of its departments to India, and someone there pressed the wrong button at the wrong time, releasing to the world sensitive business data 24 hours ahead of time.

This is a business that should have been put into administration six or eight months ago, but we have continued to fund it. We are no longer prepared to fork out cash from our pocket just for the privilege of serving BA

But where British Airways has got things horribly wrong is by thinking that in outsourcing its in-flight food catering, it could rely on a single supplier - indeed, the very same operation that it outsourced eight years ago. And what is now at stake in the terrible industrial triangle of the "world's favourite airline's" dispute with caterer Gate Gourmet and the Transport and General Workers' Union is something potentially irreparable: BA's reputation.

Gate Gourmet’s low-slung grey buildings at the south western edge of Heathrow airport were originally BA’s own in-flight kitchens. In 1997, as part of a £1 billion cost-cutting and outsourcing drive led by Bob Ayling, then the airline’s chief executive, they were sold to Swissair. Its Gate Gourmet catering arm was the second largest in the world, with nearly 30,000 employees in 29 countries.

Swissair paid £65 million for the operation, and received a guarantee from BA that it would continue to use Gate Gourmet for ten years. As with so many problems highlighted within the airline industry, though, fundamental problems in the business were brought to light by the 9/11 attacks in America. Swissair went bust in 2002, and Gate Gourmet - its UK operations virtually unreformed as a business since the 1970s - was put up for sale.

Texas Pacific Group, a secretive venture capital operation run by David Bonderman, stepped in to buy up Gate Gourmet. With experience of making money, and heaps of it (Bonderman infamously blew a cool $10 million on his 60th birthday party in Las Vegas), from airlines (Continental and Ryanair) and catering (Burger King), and with a captive audience and commanding market share, it seemed like a good fit.

They got it wrong, and the experience with Ryanair ought to have tipped them off. Their £482 million investment has struggled, because despite air travel recovering, demand for in-flight meals has not. With margins under pressure, conventional airlines have slashed their catering on short flights and cut back their offerings on long-haul services. They squeezed their suppliers as hard as they could. Senior sources at Gate Gourmet suggest that when BA renegotiated its deal - as it was entitled to because of the change in ownership - it extracted a "double-digit decrease" in the contract's value.

“BA out-negotiated them. They had enormous leverage, and they used it,” the source said.

Gate Gourmet has been squeezed so hard, indeed, that were they still able to afford to place lemon slices alongside fish dishes in first-class, the pips would most likely squeak. Last year, Gate Gourmet lost £25 million, and this year, its losses were estimated to be running at up to £1 million per day.

“This is a business that should have been put into administration six or eight months ago, but we have continued to fund it. We are no longer prepared to fork out cash from our pocket just for the privilege of serving BA. We have been stretched to the point of indifference,” Dave Siegel, Gate Gourmet's chairman, told the Sunday Times at the weekend.

How counterproductive has this outsourcing adventure been for BA? In the midst of the peak summer holiday season, it inconvenienced at least 100,000 of its own passengers, plus countless others with associated airlines. With the bank holiday weekend looming, more disruption is feared.

Analysts have today been slashing away at their earnings estimates for the airline. And how many potential passengers of BA have been deterred from booking flights because of uncertainties over the standard of service, or potential delays, that they might encounter?

For although the airline has been working on contingency plans against Gate Gourmet going under - which may happen come 5pm today - it would struggle to find a replacement. Airline executives say that whatever the outcome of today's brinkmanship talks, BA’s catering could be severely disrupted for several weeks, with the long-haul business traffic that is the carrier’s lifeblood likely to switch to rival airlines. There is also the prospect of more unofficial industrial action in support of the Gate Gourmet workforce, action that could again see the airline grounded and its passengers left in the lurch.

And the crucial mistake in all this? Ever since spinning off its catering operation, BA has effectively relied on the same, single supplier. The supply situation never really changed, just the mechanism for controlling it. Adam Smith would not have been impressed.

!!!
Posted by Picasa

.