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Keep the finance, lose the function

Fifteen years ago, no large company outsourced their finance and accounting function. Today, business process outsourcing is a huge, global business. Gartner estimates the overall BPO market in 2000 was worth around $120bn, and predicts it will be worth $230bn by 2005. Capita’s CEO Paul Pindar puts the UK market at $50bn.

With a market on that scale, it comes as no surprise to find BPO outsourcing vendors are currently growing their businesses at an astonishing pace, despite the downturn in IT spend in virtually every other area. Growth figures in excess of 40% year on year, are not uncommon. Both Capita and Liberata showed this kind of growth through 2000 and 2001.

However, while at the lower end of the scale BPO seems to be a game that any number of vendors can play, at the top end, where vendors aim to win significant business from global multinationals and government departments, a handful of players now dominate the scene. PriceWaterhouseCoopers, Accenture, Capita, IBM Global Services and CSC seem to hold the lion’s share of the business.

David Narrow, PwC partner with global responsibility for finance and accounting outsourcing, says there is an inevitable and logical developmental sequence for BPO vendors. Following this course has its own challenges, most notably in terms of the scale of the investment that needs to be made, but the potential rewards are vast.

“What you find is that to gain the maximum efficiencies of scale, you have to look to develop global processing centres,” he says. “However, you can’t just have a one-tier global model, where you run everyone’s processing from a single centre. Some activities are best handled at a local level. Others involve country-specific issues and are best handled regionally. Belgium’s VAT, for example, is a complicated area and you need local expertise to handle it. German fiscal arrangements are also difficult. For this reason, we see ourselves moving to a three-tier model, with a global hub supported by regional centres and with a thin, local model where this is called for.”

Since bog standard commodity processing can be done anywhere, vendors will look to use the power of distributed processing and fast communications links to establish processing “factories” in low cost areas such as India.

However, where a wide range of European language skills, for example, are required, India is probably not the ideal bet. PwC set up a pan-European BPO centre in Rotterdam specifically to exploit Dutch linguistic skills, where graduates regularly speak up to five European languages fluently.

“The first stage in the evolution of BPO involved vendors taking over client staff in situ, and then putting best practice disciplines in place to drive savings. The next step was to consolidate staff in regional centres and we have pretty much done that. The global processing hub is our next target,” Narrow says.

One of the big problems BPO vendors face is the plethora of accounting and ERP systems in use by prospective clients. PwC has had a multi-company working party called Proteus set up for some time. This committee has been charged with identifying all the “touch points” and possible data items an accounting system receives and passes through an all-singing, all-dancing enterprise requirement planning system. “We’ve identified a maximum of 106 data items. We are working towards standardising the form and interface of these items. This will help to drive down the cost of BPO even further,” Narrow says.

Standardisation will also bring in what Narrow calls “collaborative processing” in BPO, creating huge savings. Collaborative processing draws on the fact that when company A creates a sales order to company B, that order is a mirror image of company B’s purchase order to company A. If a BPO vendor can persuade both A and B to give them the outsourcing contract it can cut the combined cost of this kind of dual transaction by as much as 75%.

Clearly, this is a powerful message. Of course, the tangled nature of client-supplier relationships puts some barriers in the way, as does the fact there is still a long way to go before PwC and others achieve the standardisation in software they are looking for.

Jonathan Guppy, vice president at Cap Gemini Ernst & Young, which partners with Vertex on BPO deals (it delivers the IT infrastructure while Vertex does the transaction and people management side), reckons companies need to give very careful consideration to BPO before they go into a deal.

“This all comes down to the CFO’s appetite for risk and change, versus his appetite for benefits. It is always worth remembering that there is a cost to BPO. Essentially you are giving the BPO vendor a chunk of the 30% to 50% cost savings that can be achieved by streamlining non-core processes. In return you get some standardisation and risk management, plus you free up management time. Inevitably, however, you sacrifice flexibility,” he says.

What FDs have to decide is how much value to place on flexibility and on their attachment to what might loosely be called “non-standard processes” in finance work. Iain McIntosh, CFO of BPO vendor Liberata, points out that moving to standardised processes is a large part of what drives cost savings in BPO. Therefore, if a company wants to hang on to unique and idiosyncratic processes it needs to be clear about the value it is deriving from them. Much the same goes for systems. Moving to the vendor’s standardised system is often a very good way to ensure that you get the full benefit of whatever cost reductions are going.

“We do not absolutely say to clients: ‘Thou shalt use X or Y system,’ but there is clearly a major advantage in going with a standardised product. With every departure, we lose efficiencies, so costs go up,” McIntosh says.

Narrow points out that much of the confusion about the value of unique processes or special requests vanishes once the vendor is able to demonstrate their underlying costs. “Until you can do a full costing of every element in the process, the standardised processes subsidise everything else.

If you can say to someone, fine, we can tell you every time your company raises a manual payment, but it will cost you $75-a-time, as opposed to two cents for a standard transaction, it helps them to decide if they really get that much added value from the distinction,” he says.

This can sound a little like the vendor cramming the user into a straight-jacket, and there is clearly scope (with some concealed costs) for vendors to be more relaxed about allowing certain items at less than cost, as loss leaders to help secure the contract and please the client. Pindar argues that the best approach is to operate a transparent charging structure.

“Let them see what your margins are, and don’t think you can hit them every time there is a variation. Companies need flexibility,” he says.

John Reeve, a partner with Deloitte Consulting’s financial services division, admits Deloittes rather missed the bus as far as BPO was concerned. “We took a decision 10 years ago which perhaps, in the light of the current size of the market, we wouldn’t take today,” he says. “We are revisiting the area and we have a committee looking at the market now. It seems inevitable companies will continue to focus on their core competencies and will increasingly seek to outsource everything non-core, which makes this a very attractive market.” However, Reeve warns that there are plenty of examples of companies getting it wrong. “We see people with global outsourcing contracts who are experiencing substantial pain and are perpetually trying to renegotiate contracts.

These are long-term deals and any mistakes you make, either as a vendor or a client, you have to live with for a long time,” he says.

Ian Leask, executive consultant at Compass Management Consultancy, agrees. “BPO deals come in a variety of flavours. Clients need to put in a good deal of work to ensure they pick the vendor and the deal that is right for them,” he says. However, Leask points out that one of the benefits of BPO is that companies can move to it in chunks. “We see FDs outsourcing a bit at a time, then going further when the vendor delivers the anticipated benefits. Companies need to be aware of the fact that, as with IT outsourcing, this is a difficult thing to unwind and bring back in-house,” he says.

Case Study: BPO at BP

There is near universal agreement that BP began the corporate business processing outsourcing trend in 1991, when it outsourced its North Sea accounting function to Accenture. Since then, BP has outsourced all its financial and accounting work, employing both PwC and Accenture to ensure it retains some competitive tension between outsourcers. BP gives PwC its downstream work in Europe, and Accenture its downstream work in the US. The latter does the exploration finance in the UK, the former in the US.

Mark Spelman, head of resource Industries for the UK and Scandinavia at Accenture, points out that the results achieved by BP as a consequence of its innovative approach to BPO more than bear out its success. “Today BP’s costs in accounting are less than 50% of what they were in 1991, despite very substantial increases in the work load, and the acquisition of large companies such as Amoco and Arco.” When Accenture took over BP’s finance functions in Aberdeen, the company had 14 to 15 disparate accounting groups in locations all round the UK.

Accenture pulled them all together in a singe data centre in Aberdeen and took on some 320 BP staff. Its initial cost reduction target was 30%, but as Spelman explains, BP’s central objective was to achieve a more holistic approach to running its back office.

This contract laid the foundations for Accenture’s BPO venture. Since then the Aberdeen centre has expanded substantially. As Spelman notes, other oil companies followed BP once the value of BPO began to be obvious.

“If you look at the cycle of the last 10 years, we had BP renewing their contract in 1994, Conoco signed up in 1995, Talisman in 1997 and BP renewed again in 1999. At the same time several other oil companies have signed up and the BPO model has extended out to other industry sectors.”

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