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 -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

The ability to achieve cost savings through outsourcing is now so widely recognised and accepted that even Time and other general-interest magazines have run stories about the phenomenon. Far less publicised, 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 motivations for outsourcing, and cost reduction its most important benefit.

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 centre. Cost reductions for all six companies as a whole have ranged from 30 per cent to more than 50 per cent.

But for Colin Goodall, formerly CFO ofBP 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 stockmar-ket 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 (F&A) processes would hardly turn the company around. BP needed wholesale organisational and cultural change.

Yet Goodall and his colleagues recognised that F&A is at the heart of the way an organisation is run. A move to outsource these functions, they reasoned, could help mobilise 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 organisational transformation. This understanding implies a somewhat different way of thinking about business functions. Instead of distinguishing between “core” and “non-core,” Accenture believes it is more informative to draw the line between “differential” and “non-differential.” F&A is certainly a “core” activity by any definition of business oiganisation. 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 programme of a major telecommunications company that out-sourced 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 organisation that it is indeed serious about innovation. Three 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 several banks. Given the circumstances, it’s probably fair to say that none of its 20th century owners instilled a shareholder value, bottomline-ori-ented 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 bottomline performance, few employees even knew what the bottomline was. ‘ Whether it was a result or a cause of the fragmented culture, 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 centres, and the aggregate bottomline 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 programme 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.

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 realising 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.

Fortunately, a five-year, three-phase transformation programme 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 centre 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 programme 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. Organisational resistance would almost surely have stalled the effort to close between 10 and 20 sites and bring the work to one centre.

Outsourcing, or co-sourcing, broke through the wall of resistance and disbelief. “[Staff] started to see that we were serious about changing the operating model,” Trecroce has observed, “serious about not keeping everything inhouse, 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 centre 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 contributor to the transformation journey.

Exel’s transformation

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 Ven-ables, “we’ve gone from being a country-driven organisation to being a customer-driven organisation – and customers are much more important than individual countries.”

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 non-financial companies.

In 1996, Exel’s 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 centre. 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 centre, it hadn’t been the most important motive. According to Ven-ables, prior to 1996, the NFC unit’s financial operations were spread across 12 different regional centres using an outdated accounting platform. The outsourcing plan was to centralise the finance function and implement a first-class accounting package, supported by standardisation of processes, both in the shared services centre 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 centre in Ireland for its freight management business to confront the problem of duplication. The centre 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 out-source the shared services responsibility to Ac-centure, under a contingent-compensation arrangement that link 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 logistics activities that it broadly categorises itself 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.

How AT&T did it

Customer issues of a slightly different cast contributed to US telecommunications giant AT&T’s recent decision to outsource some of its financial functions. AT&T’s business model has undergone dramatic changes over the past two decades, as deregulation first removed the company’s monopoly on long-distance services, next, created the Baby Bells and then, in 1996, opened local telephone services to competition.

Now that AT&T competes for customers, it faces risks it never had to deal with before. One of the most significant is consumer creditrisk. Generally speaking, people make long-distance telephone calls before they pay for them, and hence every call effectively represents a credit risk to the phone company. In olden days, a telephone company might threaten to disconnect the service to those who did not pay, thereby reducing its risk. But now, as telephone companies proliferate, that threat is all but meaningless.
Shortly after the US Telecommunications Act of 1996 was enacted, allowing AT&T to compete in local markets, the company recognised that it would need credit and collections expertise. Brent Bostick, a banker with 15 years’ experience in the credit-card business, joined AT&T as director of credit accounts receivables management. Bostick saw that AT&T faced risks similar to those that confront any consumer lender. Some proportion of customers will default; some proportion will commit fraud. And those sorts of customers are, distressingly enough, among the most likely to respond to overtures from a new service provider.

It’s possible to reduce the default rate by tightening eligibility requirements and making fewer offers to a more carefully screened prospect base. But that approach means that the company will sacrifice business opportunities. AT&T, like a credit-card company, must find a way to balance the value of new business and the risk of default. Traditionally, striking that balance has involved a tug-of-war between marketing and credit functions.

Some leading consumer lending companies have learned how to build dominant market positions on the basis of their proprietary credit scoring and marketing technology. Instead of simply disqualifying customers who don’t meet standards for a particular offering, they try to develop offerings for which those customers might qualify. AT&T is now beginning to approach its business in much the same way, through an outsourcing arrangement with the potential for creating hundreds of millions of dollars in new value.

In April 2003, AT&T launched its new credit accounts receivables management outsourcing programme. It was, Bostick notes, the third time that the company had considered outsourcing. The first two times it opted not to proceed, because the outsourcing proposals promised merely to lower the cost of collections. Since AT&T already runs an efficient operation, the cost reductions would not be enough to justify the organisational disruption that outsourcing would have involved.

But the new programme goes beyond mere cost reduction. As Bostick explains: “Eighty percent of it has to do with providing new tools, information and insights to marketing.” Accenture will work with AT&T to mine customer data and discover new ways to provide service to more customers, with less risk. It will explore new modes of payment, including various forms of prepayment. The emphasis is decidedly on strategy and transformation – not on cost cutting.

The vanguard

BP, Thomas Cook, Exel and AT&T 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 Ac-centure/fconomi’st 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 organisations that outsource F&A not merely to economise but to transform.