“The idea that we had was to simplify the way we did business. What we were trying to do was to make our company operate, in the best sense, the way that the independents operated—to have fewer unnecessary complications, less bureaucracy. We used outsourcing as a tool to enable us to do that, and we began to see the benefits pretty quickly. The immediate reaction was, ‘If they can outsource the accountants, then they’re serious!’”
—Colin Goodall, former chief finance officer, BP Europe
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The ability to achieve cost savings through outsourcing is now so widely recognized and accepted that even Time and other gebenneral-interest magazines have run stories about the phenomenon. Far less publicized, however, is the fact that, for a small but growing minority of companies that have opted for outsourcing, cost cutting ranks relatively low on the list of benefits they seek from these arrangements.
To be sure, given the global business slowdown of the past two years, reducing costs remains a top priority at virtually every company as executives focus their attention more sharply on the need to improve fundamental business performance.
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The ability to achieve cost savings through outsourcing is now so widely recognized and accepted that even Time and other gebenneral-interest magazines have run stories about the phenomenon. Far less publicized, however, is the fact that, for a small but growing minority of companies that have opted for outsourcing, cost cutting ranks relatively low on the list of benefits they seek from these arrangements.
To be sure, given the global business slowdown of the past two years, reducing costs remains a top priority at virtually every company as executives focus their attention more sharply on the need to improve fundamental business performance.
As a result, many companies have looked to outsourcing to wring cost efficiencies out of such areas as application development and maintenance, finance and human resources. Economies of scale, the ability to work without being hampered by internal institutional obstacles, and access to superior technology are among the chief considerations that have helped make outsourcing a very effective cost-cutting tool. In fact, almost two-thirds of respondents interviewed in a recent survey by Accenture and the Economist Intelligence Unit said that cost pressures were the most important motivation for outsourcing, and cost reduction its most important benefit.¹
The experience of many companies over many years leaves little doubt about the cost benefits of outsourcing. In 1991, for example, BP outsourced its finance and accounting (F&A) functions in the North Sea region. Subsequently, five of its competitors outsourced to the same center. Cost reductions for all six companies as a whole have ranged from 30 percent to more than 50 percent.
But for Colin Goodall, formerly CFO of BP Europe, who was responsible for the company’s outsourcing initiative, cost reduction was far from being the most important consideration. Oil prices had fallen sharply and production costs had tripled during the 1980s, a decade rung in by a monetary crisis, rung out by a stock market crash and a recession, and closely followed by a war in the Persian Gulf. This tough, volatile business climate left no margin for inefficiency. Cutting the cost of finance and accounting processes would hardly turn the company around. BP needed wholesale organizational and cultural change.
Yet Goodall and his colleagues recognized that F&A is at the heart of the way an organization is run. A move to outsource these functions, they reasoned, could help mobilize this kind of fundamental change. Outsourcing the company’s F&A processes, recalls Goodall, was “a significant catalyst—not a magic pill, but an important ingredient.”
Strategic Lever
BP was not alone, of course, though it was one of the first companies to act on a new understanding that conceives of F&A outsourcing not merely as a cost-cutting tool but as a strategic lever for organizational transformation.
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This understanding implies a somewhat different way of thinking about business functions. Instead of distinguishing between “core” and “noncore,” Accenture believes it is more informative to draw the line between “differential” and “nondifferential.”
F&A is certainly a “core” activity by any definition of business organization. But F&A is not a customer-facing function, and one would be hard-pressed to imagine a case in which even outstanding F&A performance would, by itself, make a company a much stronger marketplace competitor.
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Of course, companies become great by excelling at the things that differentiate them and by doing a good job at the things that don’t. Particularly in difficult times, they need to focus their efforts and investments on improving the performance that leads to market success. Finance and accounting outsourcing can help tighten this focus. It can also contribute indirectly to excellence in customer-facing roles by making internal processes more efficient and information more accessible to customer-facing functions.
In some cases, it can even directly contribute to customer service and product development, as exemplified by the recent outsourcing program of a major telecommunications company (see below) that outsourced its credit and collection functions. The outsourcing partner has committed to improving the company’s understanding of its customer base and to recommending new approaches to billing and products that are expected to contribute hundreds of millions of dollars in additional value.
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This new understanding of outsourcing is, in fact, radically different from what has gone before. Indeed, companies are not so much outsourcing an F&A function as purchasing an F&A service. Scale, process efficiencies, technology and other economic factors make it unlikely that a do-it-yourself approach will match the purchased service for quality and cost.
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And when a company is willing to purchase an F&A service—a core function generally considered conservative and averse to change—it sends a powerful signal throughout the organization that it is indeed serious about innovation.
Two recent examples show how wide-ranging and powerful the benefits of F&A outsourcing can be.
Thomas Cook UK
Thomas Cook UK began to “co-source” finance, accounting, HR administration and project delivery, as well as information technology functions, in 2002, with objectives that were far more ambitious than cost reduction. “It was always our intention to transform the business,” says Marco Trecroce, the travel services company’s business transformation and operations director. “Our losses were so significant that we knew change had to be radical.”
Founded in 1841 by a British temperance activist who thought travel might help keep the working man’s mind off drink, Thomas Cook had a volatile early history as a commercial enterprise. For much of the past century, the company was owned by first the British government and then by several banks. Given the circumstances, it’s probably fair to say that none of its 20th century owners instilled a shareholder-value, bottom-line-oriented corporate culture in the company. In fact, prior to its December 2000 acquisition by Germany’s C&N Touristic, Thomas Cook really didn’t have a unified corporate culture at all. Employees identified with their business unit—tours or airlines, for example—not with Thomas Cook as a whole.
Moreover, far from being motivated by bottom-line performance, few employees even knew what the bottom line was. Whether it was a result or a cause of the fragmented culture, the Thomas Cook staff saw only select portions of individual unit financials, not those of the overall company. Finance and accounting processes, as well as those for IT and HR administration and project delivery, were handled by a number of centers, and the aggregate bottom line was rarely shared. It came as quite a shock, shortly after the C&N Touristic acquisition, when it was revealed at a meeting of Thomas Cook’s senior managers that the company had been running in the red and was set to lose as much as £50 million in the coming year.
Thomas Cook turned to co-sourcing as the catalyst for the requisite cultural change. The company uses the term transformational co-sourcing to distinguish its program from conventional outsourcing, which had no appeal and little relevance there. The company needed more than a lower-cost way of doing the same business processes it had always done. It was looking, instead, for an investment partnership with shared objectives, shared risk and shared reward. Co-sourcing fit the bill.
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Transformational co-sourcing implied major changes at the company, whose conservative culture at first looked likely to be a significant obstacle. But drastic times demand drastic measures, and Thomas Cook had developed a full transformation plan within four months of realizing it was heading for big losses. When the terrorist attacks of September 11 brought worldwide travel literally to a standstill, there was no longer room to doubt that the company’s survival depended on change.
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Fortunately, a five-year, three-phase transformation program was in place, and the company began to implement it at record speed. The first phase—business recovery and a return to profitability—was completed in only 16 months. It involved closing 13 corporate sites where the company’s various local business units had been doing their own F&A, IT and HR administration and project delivery work and consolidating processes in one UK center in Peterborough.
The co-sourcing arrangement positioned Thomas Cook and Accenture as partners, with the former controlling strategy, policy setting and procurement investment decisions, and the latter handling operations and processes. A single, integrated SAP platform brought finance, payroll, information technology, HR administration and project delivery functions under one roof. This approach made it possible for Thomas Cook to focus the staff’s attention on what Trecroce calls “one version of the truth, only one P&L.”
The second and third phases in the transformation program include performance enhancement and growth. At first, some Thomas Cook staff members were uncomfortable, even angry at the magnitude of the changes. According to company executives, it would have been extremely difficult to embrace these changes without an outside partner. Organizational resistance would almost surely have stalled the effort to close between 10 and 20 sites and bring the work to one center.
Outsourcing, or co-sourcing, broke through the wall of resistance and disbelief. “[Staff] started to see that we are serious about changing the operating model,” Trecroce has observed, “serious about not keeping everything in house, serious about looking at innovative, new ways to provide services—concepts that the business had never heard of before.” Moreover, those who have transferred to the shared services center have been surprised to find their function valued and given adequate investment. The back office had never received much attention under the old regime; now, it’s a key to performance, and a major contributer to the transformation journey.
Exel
Exel, a global leader in supply chain management, took a somewhat different but equally innovative approach to outsourcing. Cost cutting hasn’t been the main objective, though cost reduction has been welcome. In large part thanks to its outsourcing initiatives, says Deputy CFO Paul Venables, “we’ve gone from being a country-driven organization to being a customer-driven organization—and customers are much more important than individual countries.”
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A UK-listed FTSE 100 company, with sales in 2002 of £4.7 billion, Exel is the product of a merger in 2002 between NFC and the Ocean Group. The company employs some 67,000 people in 1,600 locations in more than 120 countries worldwide. Its customers include more than two-thirds of the world’s largest, quoted nonfinancial companies.
In 1996, Exel predecessor company NFC had outsourced the F&A functions of its contract logistics business in the United Kingdom and Ireland to an Accenture-managed shared services center.As a result, at the time of the merger, that outsourcing experience was imprinted on the Exel corporate culture.
Although cost hadn’t been inconsequential in the decision to establish that center, it hadn’t been the most important motive.
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According to Venables, prior to 1996, the NFC unit’s financial operations were spread across 12 different regional centers using an outdated accounting platform. The outsourcing plan was to centralize the finance function and implement a first-class accounting package, supported by the standardization of processes, both in the shared services center and across the then 200 or so UK locations. The primary objective was to significantly improve the quality of the finance operations and actively support the group’s growth aspirations, with cost reduction as a secondary goal.
During the 1990s, the Ocean Group, the other party to the merger that created Exel, had significantly expanded its freight management business throughout continental Europe, which required setting up operations and finance infrastructure in each country. This approach presented no administrative economies of scale—as the business grew, F&A costs grew linearly.
In 1999, Ocean established an internal shared services center in Ireland for its freight management business to confront the problem of duplication. The center was a partial success. It cut costs, but it didn’t achieve the magnitude of quality improvements the company had hoped for. Finally, in 2002, to reap the transformational benefits of F&A outsourcing, Exel opted to outsource the shared services responsibility to Accenture, under a contingent-compensation arrangement that links Accenture’s earnings to quality improvements.
Exel’s own experience as an outsourcing provider made the transformation easier. The company offers a full range of logistic activities that it broadly categorizes as contract logistics and freight management. The contract logistics business involves running warehouses, transportation, delivery networks and other value-added activities for its customers. The freight management business includes air freight, sea freight, customs brokerage and domestic distribution. Exel’s familiarity with outsourcing made the company aware of its benefits but also very sensitive to its risks, particularly those of control and visibility. Finance has important customer implications for Exel’s business. Streamlined, coordinated financial information flows make it easier for Exel to track customer profitability and credit issues, and gain a better understanding of its cost base. This enables line operators to make more informed decisions that benefit both Exel and its customers through more efficient and cost-effective supply chains.
BP, Thomas Cook and Exel are early movers on a path that goes beyond F&A outsourcing to F&A service provisioning as a platform for major change. As such, they are in the vanguard of a movement that many companies are not even aware exists.
In general, executives still view outsourcing merely as a way to respond to cost pressures or achieve competitive economies of scale. The Accenture/Economist Intelligence Unit survey found that more than two-thirds of respondents considered outsourcing appropriate mainly for routine, transaction-intensive F&A tasks.
Competitive pressures may eventually prompt a reconsideration of those opinions. It is increasingly clear not only that the cost and efficiency gains of outsourcing can be dramatic, but also that even more powerful benefits accrue to the growing minority of organizations that outsource F&A not merely to economize but to transform.
About the author
Stewart Clements is the London-based chief executive of Accenture Finance Solutions and is responsible for the company’s finance and accounting outsourcing business. Mr. Clements’ career has focused on improving the finance function, chiefly for multinational companies, with a specialization in change programs, including developing strategies for finance, shared services and outsourcing and the design of business information systems and finance processes.
¹ The survey details are discussed in the Accenture report “Outside Upside: Finding Focus through Finance Outsourcing,” written in cooperation with the Economist Intelligence Unit.
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