A Philippine fast-food chain looks to multinational expertise for its shared-services initiative. JFC's strategy could hold lessons for other globalizing Asian companies.
By Cesar Bacani
Ysmael Baysa knows more about selling hamburgers than a man should rightly know. As CFO of Jollibee Foods (JFC), the Philippine fast-food market leader, he's confident, for example, that a hamburger cooked less than 12 minutes earlier awaits any customer at Jollibee's 491 teeming yellow-and-orange-themed restaurants. "We know what the sales for a particular day will be per item per hour," he says. Baysa, a slim 48-year-old executive with a serious face but a winning grin, adds: "We have developed our own predictive capabilities."
Smirk if you will, but burgers are serious business, and JFC is one of the few Southeast Asian companies to leverage local popularity into an emerging global enterprise. This plucky firm has toeholds in markets that span from Daly City in California to Brunei to Hong Kong - most places, in fact, where Philippine overseas workers form a substantial part of the expatriate workforce. Its managers' ability to service a customer base that knows what it likes has positioned JFC to extend that knowledge into other markets and other tastes overseas.
The company went all out in March and acquired 85 percent of Belmont Enterprises Ventures, giving it control of 77 Yonghe King fast-food outlets in China. For the first time, JFC bought a ready-made chain targeting the general population in a country outside the Philippines, instead of franchising its brands overseas and limiting itself to Filipino communities abroad. "Ten years from now," predicts Baysa, "we should have at least 50-50" - referring to the ratio of foreign to domestic sales.
This is a big claim, given that today international operations account for just 4 percent of JFC's 21.6 billion pesos (US$393 million) in revenues. But Baysa's confidence is built on more than mere optimism. His keen awareness of the timing and operations at JFC's Philippine restaurants illustrate what analysts frequently cite as the company's greatest asset. JFC is a proven master of harnessing logistics to create economies of scale and squeeze earnings from its thriving businesses. Now its managers want to expand this core competency via technology to operate on a much larger, multinational scale.
JFC's strategists want to wield all the tools that consultants have championed for Western multinationals - shared services in low-cost labor markets and data mining via customer resource management (CRM) software - as a lever into global markets. But there's a twist. The company can buy into an offshore strategy with the eminently satisfying knowledge that it doesn't have to go offshore. JFC is already headquartered in a market famous for lower-cost labor and efficient back-office operations.
In theory, at least, this means that JFC can skip a wasteful stage on the road to globalization. Many Western multinationals have gained a global footprint by expanding with separate systems in separate markets, leading to a costly sprawl. The best of them have then retrenched offshore where labor costs are lower, simultaneously harnessing technology to introduce scalability and growth that doesn't incur wasteful costs.
JFC wants to avoid this pitfall from the word go. It already has a clear advantage in its low-cost base. The trick will be to arbitrage cheap local expenses as it expands in a big way to pricier foreign markets like the US and comparable-in-cost but behind-in-expertise places like China. If it succeeds, the model is sure to be imitated by Asia's newly globalizing companies.
Thinking globally
Baysa will be the agent of this knowledge transfer and deployment at JFC. He was hired in July last year in part because of his experience at Procter & Gamble (P&G), where he spent 23 years. The multinational giant reinvented its operating structure in 1998 along global rather than individual-country lines, in the process also changing the provision of support services by centralizing such functions in an independent shared services center (SSC). As finance director of the Philippine unit, Baysa was a key SSC player because low-cost Manila was chosen as the hub for P&G's salary and travel-expense accounting, purchasing services, banking and treasury functions, and fixed-asset management.
Of course, mid-sized JFC is still a long way from P&G in scale and global reach. But Baysa believes that it makes sense to design and implement shared-services functions at the outset, rather than wait until international operations are fully set up. The timing seems right.
JFC is currently upgrading its Oracle ERP system as it integrates the operations of its acquired local companies. "So we just do not think of the Philippines, we also think of the US, we think of Indonesia, we think of China," says Baysa. "We have to design the house to include all these countries. Otherwise, we will have to redo all of this." The pay-off: significant savings that could then be used for further expansion. International studies have shown that SSC operations can trim expenses associated with receivables and credit services by 25 percent, and by 45 percent for payables and general accounting.
This will not be easy. In fact, if JFC succeeds, it will be a first in Asia, where home-grown companies have not always invested wisely in technology. Many often found themselves with various IT systems that do not communicate well with one another. Their back-office procedures may not be best practice and the employees who implement them may not possess the required capabilities and experience. Writing in The SGV Review, Francis Huang, senior director at Manila-based international consultancy SGV & Co and its Knowledge Institute, warns: "There is a huge risk that service response will be slow, cumbersome, bureaucratic, and result in inefficient processing. Business units that are dissatisfied with shared services may eventually develop their own 'shadow units' that provide the same services as the SSC. In the end, costs escalate rather than decline."
Despite this sketchy Asian track record, investors seem convinced for now that JFC has a strong chance of succeeding. ATR-Kim Eng analyst Martin Enrile, for example, projects that Baysa's efforts will eventually slash corporate overhead expenses related to JFC's various brands from the current 11 percent of revenues to just about 6 percent. Projecting potential benefits from the cost-cutting and expansion programs, UBS Investment Research's Tina Ibarra sees net profit growing at an annual compound rate of 25 percent over the next three years. So far this year, JFC is the Philippine bourse's best-performing stock, soaring 42 percent to 26 pesos as of August 8.
We can do it
Can JFC deliver? Baysa is confident. "From the standpoint of experience, I see no reason why shared services cannot be done," he says. The food company's geographically dispersed operations should benefit from a centralized back office. Jollibee, the burger-and-chicken core brand, has nine of its 491 outlets in California, where there is a large concentration of ethnic Filipinos, and 11 in Brunei, Guam, Hong Kong, Jakarta, and Saipan. Chinese-themed Chowking has 259 stores (six in the US). Pizza-and-pasta chain Greenwich has 213, while bread-and-pastry line Delifrance has 29, all in the Philippines. As of June, Yonghe King opened 14 new outlets, bringing the total to 91. Collectively, the five brands serve nearly 2 million customers every day. The ambition is to bring all these diverse units under the same information platform.
Because JFC grew by acquisitions, each brand has its own IT system, finance department, human resources, purchasing, and other support offices. JFC has allocated an initial 173 million pesos (US$3.2 million) for shared services and related expenses, such as payments to redundant employees. Another 200 million pesos has been set aside for new IT infrastructure, including software licenses and leased lines.
Baysa declines to quantify the targeted cost savings, but given the amount the company is willing to spend, he says they will be substantial. Indeed, when he first came onboard and learned of the original estimates, the CFO felt they were on the low side. The focus was primarily on IT savings. "The shared-services program decided [on] at the time and how it was being rolled out was less articulated in terms of its aim," recalls Baysa. "My role was to articulate it better. What are we after?" The overall goal, he says, is to improve net margins to world-class levels - to double digits from the current 6.6 percent. That means squeezing efficiency from the whole gamut of support services, not just sharing technology but everything else from accounting to human resources, tax issues, legal work, insurance structure, and all the way down to the commissary system.
A key source of the savings would come from arbitrage. "The cost of accounting in terms of employee services in the US is very high," notes Baysa. "Salaries in Shanghai are comparable, if not higher than in Manila, but if you look at how much it costs to process an invoice, then Manila would be cheaper." The differentials are large enough to more than offset new leased-line and other telecom costs. Baysa sees extra scope for savings in Yonghe, which is due to be covered by the shared services scheme in 2006. "Frankly, they are not very efficient because they are not integrated and there is some manual inputting," he says. In the Philippines, every shop automatically captures sale and expenditure transactions and then electronically transmits the data to the head office at the end of the day.
Now for the hard part
JFC has given itself three years to fully implement the shared services program, even though that would mean realizing the cost savings slowly. "There is a trade-off in doing it very fast, say, one year," says Baysa. "If you make some mistakes, then you can have disruptions."
From his stint at P&G, he knows how complicated the process can be. Any number of problems can crop up, such as misaddressed checks because an inherited database had not been properly updated. Morale may also wilt as some support employees are retrenched. But, says Baysa, "it's not necessarily an outright one-to-one reduction, but a combination of attrition, redeployment, and separations." Because the business is expanding, some support staff can be reassigned to store and commissary operations, for example.
One of the toughest challenges will be ensuring that trimming costs does not mean degrading services. This could happen if the initiative is seen purely as a cost-cutting exercise, rather than as a means to a larger end. A shared-services program should free business units from the worries of back-office drudgery. If it impedes their operations instead because of inefficient, delayed, or poor-quality services, then the scheme should be retooled or even discontinued, no matter how much money it is saving the company.
SGV's Huang, whose company is helping JFC with its shared-services program, says the shared-services unit should be able to guarantee a certain level of quality. In units that are structured as a separate entity, such as P&G's Manila SSC, service contracts detail what, when, and how the SSC will service its client business units, and how much the services will cost. JFC is likely to go this route mainly for administrative reasons - it cannot legally require an employee of Chowking, for example, to process transactions not only of Chowking but also of Jollibee, Greenwich, Delifrance, and Yonghe King. Still, simply putting employees from the various units in a central location is also an option. "As long as there is some way to guarantee responsiveness and you get the pooled experience of the different people, this can work," says Huang, noting that some companies may be deterred from setting up an independent SSC because of tax and other considerations.
Baysa says JFC will initially limit shared services to transactions such as IT management and maintenance, general accounting, human resources functions like employee benefits, and some purchasing. These are transactional, easy-to-standardize processes that yield economies of scale. Yonghe and other foreign units will be required to follow International Accounting Standards because that is how Manila-listed JFC reports its returns. This is not really as big a problem as it seems. The industry effort to unify accounting standards is well advanced and IAS is expected to eventually become the global benchmark.
Baysa argues that business processes are basically the same from the standpoint of information. "We look at Indonesia or Hong Kong as another country, but the way suppliers are paid is the same there as here," he says. "If you relax your idea of borders and look at the world as one country, you realize that [operations] should be in a way integrated." JFC's homogenous operations as a pure food company are a big help. Shared services may be more complicated for an Asian conglomerate with a diverse range of products.
Baysa is eyeing other systems. "As good as the profit of JFC is right now, there are still major areas for improvement," he says, pointing to matters like the tax structure, legal services, and insurance issues. In theory, the SSC can also perform these expertise functions, but management consultant Huang says they must not be handled in the same way as transactional services. What would be pooled together are content experts, and so their performance should be measured on business impact and value creation, not low costs and economies of scale as in the case of transactional services. And while general expertise such as editorial services can be shared across business units, niche specializations like Chinese law are best embedded in the operation that uses that particular knowledge.
Analysts have also identified the supply chain as a source of margin improvement. "There are still synergies to be leveraged such as shared purchasing and delivery," writes ATR-Kim Eng's Enrile in a report. Jollibee outlets in Brunei, Guam, Hong Kong, Saipan, and even the US, already source pocket pies from a new six-hectare commissary in an industrial park on Luzon island. Operating 24/7, the highly mechanized facility, JFC's third, bakes 157,000 pies and processes 150,000 pieces of chicken and 480,000 burger patties every day.
Baysa says JFC intends to build a common supply chain. Parts of the process are already being centralized, such as the sourcing and ordering of chicken. "So Chowking could say, 'This is what I will need in the next six months,' and somebody else is going to do the sourcing," Baysa explains. "This group will negotiate with the suppliers [in the Philippines and overseas]. They will have the expertise to manage the exchange rate and contract prices." Will the supply chain be extended abroad as well? Says Baysa: "When the [international] businesses become large, we will have to assess what the optimum sourcing configuration should be."
In aid of expansion
For the CFO, the shared-services scheme is not only cost effective, but also a competitive advantage for global expansion. By itself, each outlet in a particular country may be making money. But taken as a group and factoring in the cost of support services, the stores may in fact be in the red. "It's the back office that brings your business down," says Baysa. "How many stores can support a back office? You can say, well, I need 30 stores. That means you have to wait for the number of stores to go beyond 30 to be profitable. But what if I lower the cost of the back office? For all you know, store number ten would already be profitable. This is what we're hoping to do. We do not see why it would not work."
One litmus test will be Yonghe King. Even with a relatively rudimentary store, commissary, and support systems, the Chinese group boasts net margins close to JFC's 6.6 percent. "Think about it," says Baysa. "If Yonghe has a margin comparable to JFC's with 91 stores, can you imagine what that margin will be with hundreds of stores? With economies of scale, what will be the margin for 400 stores?" - especially if, as he expects, the Manila SSC and operational improvements would really trim costs.
Baysa and other JFC negotiators made sure that there are incentives for Yonghe to perform. They agreed to pay the owners US$11.5 million and promised a bonus of US$11 million more within three years if certain profitability benchmarks are met. The founders, Taiwanese husband-and-wife Lin Yu Au and Lee Yu Lin, still own 15 percent of holding company Belmont. Lin recently became chairman so that Jeffrey Chao, who used to run McDonald's restaurants in Taiwan and oversee Kentucky Fried Chicken stores in China, could take over the CEO post. Yonghe reported first-quarter 2004 sales of US$7.3 million, up 27 percent from the same period last year, when the Sars scare kept people at home.
Yonghe has given JFC a new blueprint for future acquisitions. With shared-services trimming back-office costs, the old strategy of extending brands abroad to service Filipino communities still looks attractive, albeit of limited scope. But the main focus will now be on acquiring an indigenous brand that targets the general population, so long as the target's margins are comparable to JFC's. Both the brand and its stores may be acquired, or just the brand or only the outlets for conversion to JFC brands. A lot of possibilities are opening up as lower back-office costs from shared services makes overseas expansion more feasible. That's food for thought for Asia's other globalizing companies. 
Source:
http://www.cfoasia.com/archives/200409-02.htm
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