A Scottish surgeon had a vision of being able to improve the health of people in Hong Kong by supplying them with cows’ milk kept free from contamination. To that end, in 1886, he and five Hong Kong businessmen incorporated Dairy Farm and imported a herd of dairy cattle in order to lower the price of milk, thereby increasing profits for company shareholders. By 1892, consumer demand had risen, and transportation of milk by handcart from the farm to the customers was no longer efficient. Dairy Farm began importing frozen meat and opened its first retail store by 1904 and had three retail stores with an expanded product range by 1957.
Today, Dairy Farm employs more than 74,000 employees and is a huge $7 billion conglomerate of more than 1,350 retail outlets of supermarket, drug store and convenience store chains throughout eight countries in Asia-Pacific. As in its early days of transporting milk, the company has sought opportunities to achieve greater effectiveness, improved efficiency and lower costs in these times of global competitive challenges. It strategies for those objectives center around OneResource Group, a joint venture formed in March 1999 between Dairy Farm International and Ernst & Young.
Plans for the JV company are first to “get it humming” inside the Dairy Farm organization and its parent company (Jardine Matheson group). “After that, the major strategic initiative,” explains Andrew Shephard, CEO of OneResource Group and former director of finance for Dairy Farm, “is to sell the services we perform for Dairy Farm to other companies around Asia. There are many companies that need to have a presence in Asia for strategic reasons, but their bottom line does not support the investment. If OneResource Group can provide services to accomplish that, we would be an outstanding outsourcing solution for those companies. This is a growth area, and we will be the first there.”
The Birth of OneResource Group
Dairy Farm operates in New Zealand (Woolworth’s), Australia (Franklin’s), Singapore (Cold Storage), Indonesia (PT Hero Supermarket), Malaysia (Geant), Taiwan (Hypermarkets; Wellcome), China (7-Eleven), and Hong Kong (Wellcome; Mannings; 7-Eleven and Maxim’s Caterers Ltd). Dairy Farm’s strategy is to offer value for money through low-cost, efficient distribution of high-quality fresh foods and fast-moving consumer goods. Its goal is to be the leading food and drugstore retailer in the Asia-Pacific Region in terms of sales and long-term shareholder value creation. The strategy for reaching that goal includes excellence in sourcing, technology, logistics, and finance.
Shephard says that Dairy Farm was engaged in a shared services initiative in its Hong-Kong operating units, pulling the back office functions of all units together. The company then decided to form the joint venture (JV) with Ernst & Young, placing just the accounting, financial and non-trade procurement services functions into the responsibilities of the new JV company. The financial functions had to be transformed as quickly as possible and at a speed that could sustain and support the rest of the changes taking place within the Hong Kong operations.
Participating in more than six major JVs, Dairy Farm is accustomed to forming joint ventures and, in fact, made history in 1980 by becoming the first company to enter into a JV with the Chinese government. Ernst & Young (E&Y) had been brought in to do a standard consultancy engagement on the shared services initiative. E&Y had previously formed a JV with Farmland (OneSystem Group) and another with Shell (TASCO). “When we began to think about how to get everybody fully aligned to make this thing happen, and how to link reward to performance for both parties,” explains Shephard, “we both came up with the idea of forming a JV.” Management structure and the board of directors are half Dairy Farm and half E&Y. The structure leverages the strengths of both organizations. “We are locked at the hip as to how we go forward on all issues,” says Shephard.
Kudos for Ernst & Young
“E&Y was brought in because of their expertise in this field,” says Shephard. “They have been responsible for most of the transformation and have played a significant role.” Both parties affirm that they are ahead of schedule on achieving initiatives. That is one of the unexpected benefits of the relationship, Shepard says. “There are always cultural issues in Asia, but we got down to the head count number we required very quickly, very smoothly. Even more important is the fact that through OneResource Group, we’ve got our finance people focusing on the outside rather than seeing themselves simply as a cost center. We still have some work to do there, but they have made the step from being a small department within a large employer out into the real world of selling something to somebody every day.”
Keys to Success
Both parties attribute the quick success of OneResource Group to the shared alignment of interests that come through using the JV structure. Shephard describes their contract as complex and voluminous. “We did an awful lot of homework before we jumped into bed together,” he says. “We each understood our costs and what we would be getting out of this. So when it came to marriage, we knew precisely what was going to happen. Personally, I think that’s the secret of doing a good JV or a good outsourcing deal—to spend an awful lot of time up front working on the contract.” William Frech, COO, OneResource Group (formerly with E&Y), adds that it is because of all the up-front work that they two parties now have a very clear common set of goals and objectives.
Those goals have been exceeded already. OneResource Group had been slated to expand its scope and bring offering its services to other companies in the Asia-Pacific Region in the latter part of 2000. Frech says, “Since we are ahead of schedule, we are talking to customers at this moment. In early to mid 2000, we should start to expand.”