Lufthansa Leads the Way with Global Support Services

Regional centers to drive standardization and cost savings across four functions "The multi-tower approach was core to the project design and setup. It was important to us that we made a clean break with the past, where Shared Services was not mandated and where business units felt free to renegotiate with the service centers. We wanted to project one clear plan. GBS now has one structure, one framework, and one vision. It's very important that we support Lufthansa’s international business through standardized services that are aligned to corporate goals. Managing process and controlling technology is all part of achieving that." Astrid Hartman, Senior Vice President and Managing Director, Lufthansa Global Business Services Airlines have had a bumpy ride over the last two decades. With costs rising and margins falling, not to mention the emergence of low-cost players, Lufthansa, like many, finds itself today stuck between two pressure points: on the one hand it is feeling the heat from low-cost carriers who are aggressively plying for much of the airline's European business; and on the other, it is having to fight for long-haul business in the face of stiff competition, particularly from some of the government-owned airlines in the Middle East. Passengers and margins are both in increasingly low supply. The company operates from a relatively high cost position vis-á-vis some of its competitors, and as a result "cost" has been under the spotlight like nothing else. While the direct costs of food and planes are fairly unshakable, administrative costs offer opportunities that the airline's management is keen to grasp hold of. It's this kind of thinking that led the board to commit to Global Business Services, last year. Astrid Hartman, Senior Operations Executive with a mission to "Transform Operations, Improve Processes, and Outsource to Propel Revenue/Profits", speaks with SSON’s Barbara Hodge about how Europe’s leading airline is leveraging a different kind of support service to navigate the skies ahead. Q: What is the state-of-play for Lufthansa's support functions today? Why was GBS seen as a strategically valid solution? A: Lufthansa was one of the first German companies to adopt Shared Services type of thinking. We have been utilizing the Shared Services model for over a decade now, establishing three regional centers in Poland, Mexico, and Thailand, and consolidating mainly accounting transactions from outside Germany. Europe of course, presents the greatest volume for our business, so the center in Krakow plays an important part in our strategy to reduce the transactional cost of finance activities. Shared Services has been a slow journey, however. While never strongly mandated, it has grown bottom-up, starting with just one business unit, albeit the company's largest: the Passage Airline. With external market pressure unrelenting, management recognized that there was potentially a lot more value that could be driven out of the support processes. About three years ago, therefore, a new project was initiated, resulting in Lufthansa Global Business Services (LGBS) emerging as a separate legal entity. From the start it was agreed that GBS would encompass not just finance but also HR, revenue accounting, and procurement of indirect goods and services. So we effectively set ourselves up with four functional towers, and a geographic footprint that includes Germany as well as the international business. In contrast to the more conventional approach, however, GBS is not just about operations, but includes process management and IT. This marks a significant departure from the tradition of handing Shared Services pieces of a process to optimize operationally. With a carte blanche for process management and technology, we now have all the tools we need to drive a more effective services delivery strategy across the entire business. What is crucial is that we are able to influence the process so that it's not just about how quickly or how cheaply something is done, but it’s about whether we need to keep on doing it that way at all. As I’ve mentioned, we are starting with the Passage Airline Business Unit, which covers over 60% of our volume. After that, we will define a path towards the other BUs. Q: As a traditional company operating in a highly competitive environment, and headquartered in Germany, what has been the greatest hurdle in adopting Global Business Services? A: I would have to say decentralization. This structure is fairly common across German businesses, and the prospect of centralization and the associated loss of influence or power on the part of business owners is a significant barrier. Lufthansa's multiple business units have been used to operating independently and most have implemented their own systems as they evolved. If you consider the multitude and complexity of what this implies, it's a fairly staggering challenge to take on. To give you an example, many Business Units have their own PC infrastructure model. That means, in the center, we currently run six different PC models. Some people need more than one PC to do their job for several Business Units. Q: You have worked all over the world and spent a lot of the past 15 years in a Shared Services environment. What stands out in your role at Lufthansa? A: Germany is, without doubt, different to most other global markets. Our companies like to keep their Shared Services close by; so even shifting business processes into captive near- or offshore centers marks a significant change. When we were assessing GBS, we considered long and hard. The plan we wanted to implement, the one we believed would make us competitive and which would best sustain Lufthansa’s evolving business, was going to impact approximately 700 people in-country. These jobs were at the time providing financial and cost accounting, revenue accounting, payroll, and HR services from a number of dispersed domestic centers. A key challenge to driving Shared Services-based efficiencies through a German enterprise is that the Works Councils have a very strong, protective voice, and aim to keep as many jobs in Germany as possible. While it is certainly possible to shift jobs from one in-country location to another, that was not the optimal solution for us for the long run. We took a deep breath, therefore, and decided to proceed. Although we were certain that the GBS model – and shifting work from Germany to regional centers – was the right course, it took us over a year to negotiate with the Works Councils and reach a conclusion that allowed us to progress with our plan. There is a lot of complexity in negotiating with Works Councils, especially in terms of their information requirements, much of which is not readily to hand and has to be researched first, for example: process splits and role descriptions of the new positions, etc. The level of detail required was very time-consuming. In addition, the consultants that were hired by the Works Councils constantly came up with alternative solutions, which needed to be evaluated, discussed, and then negotiated all over again. The biggest sticking point related to negotiating the "social package", which covers benefits and pay-offs and is a fairly lengthy legal process. An added layer of complexity was added as each legal entity or location impacted deals with a separate Works Council. In our case, as our plans impacted four different locations, we also negotiated with four different Works Councils. Moreover, Works Councils are not only alerted when we discuss migration of jobs out of Germany, they are also concerned about transferring employees of Lufthansa AG into the new Shared Service entity of Lufthansa Global Business Services. We are making a lot of effort to support staff whose jobs are impacted, engaging a consultancy to help them look for new positions, supporting their applications for other internal positions for which they were qualified, and offering training where new skill sets were required. Only once all of this was agreed could the actual migration start. Q: What were some other complexities that arose during this process? A: One of the issues we came up against was that there are very strict regulations in Germany concerning who may "touch" employees’ personal data. So we had to negotiate a delicate balance with the Works Councils in agreeing whether existing staff, who now had different roles and titles, were still allowed to touch this data, as well as whether and when new staff in the regional centers would be allowed to access the same files. As simple as it sounds, it presented an enormous bottleneck to us. This kind of legal wrangling even forced us, in some cases, to go to court for settlement. Another challenge we encountered was that our staff was obviously aware of the changes. The delay in negotiating with the Works Councils meant that a large number of our in-country support staff – nearly 50% in some cases – left to take alternative jobs. Our challenge was to maintain quality levels in a situation where half of our services team had been with the company for less than a year. This kind of turnover had a direct impact on service delivery. The issue is, therefore, that the new operation starts with a bad reputation. However, we are now live with the first wave of implementation and are getting some good results. It will be worth it in the long haul. Q: In a decentralized environment, many processes are tailored to a given business unit’s needs, which is not always efficient. Did you make an attempt to drive some standardization through these services prior to transitioning them into the GBS centers? A: That is an excellent question and I would like to answer yes. In reality, there were neither the skills nor the resources available to work at the individual business unit level to guide them through that kind of a change management – which in itself would have been extremely painful, in a situation that was already stressful enough. Q: Is third-party outsourcing part of the GBS solution? A: Yes. It had been decided from the start that Revenue Accounting would be outsourced to India. While that involved a lot of work, it is a fairly straightforward transition, as the majority of the work was already stable and centralized in Germany. Less straightforward is Procurement, which we brought into scope and decided to outsource – not just operations, but also including tactical and strategic buying for indirect materials – to a BPO providerpartly operating through a near-shore center in Budapest. As a result of our decentralized structure, the LH Group Companies traditionally run their own tools and processes, which made it difficult to manage the categories across the businesses. Building group-wide sourcing strategies for indirect material is still at an early stage of development and there is, in fact, very little centralization across the enterprise. We are dealing with quite a lot of skepticism regarding this project at the moment, not just because of GBS but also because of outsourcing. Right now, it is the hardest thing we are doing. On the positive side, however, we have hit all our timelines, the systems are where they should be, and the transition has been well orchestrated. We had only four months for the migration and that part ran very well. The couple of issues that did emerge were on the provider side and they being are rectified at the moment. The main challenge we have encountered in shifting Procurement into GBS is that it goes straight to the heart of the perceived loss of control over purchasing, information, and data. As we negotiated with each business unit, the list of products or services they were willing to hand over to us was whittled down, until what remained was significantly limited, with the result that the savings and benefits we were targeting won’t be immediately as obvious. [eventpdf] Q: What has your experience with shifting Procurement out of house taught you about how to approach outsourcing? A: There have certainly been some valuable lessons. First of all, it's difficult to outsource something that is not really in existence. What I mean is that indirect procurement is not really on management's radar as far as costs are concerned. So getting the mandate or even the support from the top is not that easy. Their attention is focused on growth. Secondly, it would have been better to consolidate inhouse before handing the processes to a service provider, but that was not an option. The required buildup of capabilities both in Germany and Krakow would have been too costly and time-consuming. Our belief was that others could do it better. In addition, there was a certain impatience to progress and end the circle of "analysis-paralysis". We wanted to start executing, and then adapt where necessary. Q: How is the new services delivery model supporting Lufthansa in its operations? A: The multi-tower approach was core to the project design and setup. It was important to us that we made a clean break with the past, where Shared Services was not mandated and where business units felt free to renegotiate with the service centers. We wanted to project one clear plan. GBS now has one structure, one framework, and one vision. It's very important that we support Lufthansa’s international business through standardized services that are aligned to corporate goals. Managing process and controlling technology is all part of achieving that. Q: What are the key "levers" that have enabled you to drive improvements through the business? A: The first lever was centralizing GBS in as few places as we could, so that we could move away from the fragmented approach to service delivery. Even the Krakow center, pre its GBS status, was organized by business units and customers, not by process, and was therefore fairly disjointed. Today, for the first time, we have all Accounts Payables teams working together as one. The synergies and benefits are obvious. Another lever that we are using is standardization. The underlying system is a significant enabler in this case. We are still in process here, and have not quite pulled the lever yet, but we hope to be moving forward with this soon. Finally, by shifting work from the various centers in Germany to the GBS, we are able to combine the power of process with the knowledge of our technical teams in one place. This will also present an enormous opportunity for driving improvement. Q: How would you quantify the benefits for Lufthansa to date, as a result of GBS? A: In monetary terms, we will be achieving €100 million run rate savings over five years, predominantly as a result of labor arbitrage and spend savings. We have also built a 6% efficiency per year assumption into GBS, which means we will achieve 30% efficiency over that same time period. And let me add that there is so much that can be done with Lean, Kaizen, Robotics and other methodologies that will drive these improvements. Q: What have been the most persuasive levers for getting the business to trust and support a services delivery model? A: It's really down to numbers. When we were presenting our project we included a "value promise" to the business units: We would cost them less than they were currently paying; and we would deliver the same or better quality. In a decentralized environment such as ours, "cost benefit" is the most persuasive lever. However, we still face some resistance because we are seen as overhead, or individual business units want to negotiate prices directly. The most effective approach is to move step-by-step. The important thing is building trust. Once the business understands and believes that our goals are aligned with its goals, and that we really do want to do a good job for them, our work becomes much easier. I have a great advantage in that I report directly to the CFO. This means I have a senior champion for my cause, and her insight and support is very important to me. Access to someone in that position works as an enormous enabler. Q: There are many innovations coming into the market. What you think may have the most impact on services delivery? A: I think the kind of automation represented by the robotics movement today will be interesting to track. I have set up a task force to see how we could benefit from implementing this kind of desktop automation within our operations. I think that there are certainly real benefits from that kind of technological innovation, but I am concerned that by constantly applying "Band-Aids" to get solutions, we are effectively destroying our case for a new system. The rate of return for fixing the underlying system becomes less and less, because you are constantly coming up with workarounds. In other words: by fixing problems through robotics, we run the danger of neglecting to maintain the underlying system, which is important after all.

Lufthansa Leads the Way with Global Support Services

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