Thursday, May 06, 2004

Catalyst for Change
Recognizing that finance and accounting are at the heart of the way an organization is run, a small but growing minority of companies are outsourcing these functions—not simply to reduce costs but as a way to achieve transformational change. Here is how three of them did it.

The ability to achieve cost savings through outsourcing is now so widely recognized and accepted that even Time and other general-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

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.

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.

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.

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. 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.

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