Business process outsourcing is reshaping companies in fundamental ways -- and raising new, complex questions that transcend cost savings.
Business process outsourcing enters its second decade as a substantially changed animal, far more complex than the single-process, single-location arrangements that marked the early years. BPO now commonly entails outsourcing multiple functions, often to a single provider, with the work performed in multiple locations spread around the globe or "co-sourced" at hybrid-model shared-service centers. At the same time, finance and accounting (F&A) processes have emerged as prime candidates for BPO.
During the 1990s, many companies adopted an internal shared services approach for F&A work, consolidating all divisions' finance and accounting processes in a separate center. Today that growth in internally managed shared services is giving way to direct outsourcing to external providers and to some interesting internal/external hybrids. Travel company Thomas Cook UK, which has 14,500 employees and 1,000 locations worldwide, recently opened a new shared-service center in Peterborough, England, under a 10-year co-sourcing agreement with Accenture. The agreement gives Thomas Cook UK's management full control over the center's strategy, policy, investment and procurement, while responsibility for operational management rests with Accenture.
"We co-sourced the entire IT, finance and HR administration functions, not just some of the processes," explains Thomas Cook UK's Ian Ailles, who was the company's finance director during the structuring of the arrangement with Accenture and has since moved up to become managing director of specialist businesses. "We knew that co-sourcing would enable us to create a single administrative focus, with a single set of information systems under the management of experts. It would allow our own management to concentrate on our core competence: selling holidays. This was the ideal opportunity to get synergy and drive savings. The Accenture solution, which included SAP software, was a key part of the answer."
The new co-sourcing arrangement is part of a major business transformation that Thomas Cook UK launched in 2001. The company set a 2001/2002 fiscal year target of achieving £140 million in cost savings and dramatically improving the effectiveness of its vertically integrated travel business. The results are impressive. During 2000, the company reported a substantial loss, but 12 months into the transformation program, it was turning a considerable profit. "A fundamental part of this success was the co-sourcing agreement with Accenture," says Ailles.
Vendor selection, he notes, hinged on four equally important criteria: speed to implementation, skills and expertise in streamlining back-office systems and processes, the ability to smooth out the profit impact of the transformation, and contract flexibility. "This partnership has not only delivered financial benefits, but also significant business efficiencies," he reports. "A superior level of service in the areas of IT, finance and HR administration is now delivered to the business."
Turning Over the Reins
General Motors Corp.'s 10-year agreement with Affiliated Computer Services Inc. (ACS), contracted in 2001, reflects some other hot trends in BPO. As part of this long-term, far-reaching contract, GM outsourced a collection of finance and accounting functions -- including accounts payable, accounts receivable, payroll, travel and expense, and cash management -- for North America and Europe. ACS provides the services from centers in Arizona, Jamaica and Spain.
"We have achieved considerable cost reduction and improved quality and control from our outsourcing agreements," says Delle ZurSchmiede, executive director of global financial shared services for GM in Detroit. "The process has allowed our business units to focus on strategic aspects of operations and more effectively manage the business. We are leveraging ACS's full capability to perform transactional activities." GM monitors the quality of ACS's work, she says, "with numerous controls in place: service level agreements, desk procedures, internal and external audits, on-site quality assurance teams, segregation of duties, delegation of authority, and process risk validations."
ACS is a Dallas-based BPO and IT outsourcing company with 40,000 employees operating in more than 100 countries. Like the other big BPO providers, it sees finance and accounting as a high-growth area and has set its sights on large-scale, multifunction contracts. Also like the other big firms, it has grown and prospered through the economic downturn, as more and more companies have turned to business process outsourcing to cut costs and implement rapid organizational change.
"Based upon our conversations with clients and industry analysts, we anticipate a continued interest in and growth of BPO," says Stewart Clements, managing partner, finance solutions, for Accenture in London. His firm sees the greatest interest in finance solutions, human resources, customer relationship management and procurement. In fiscal year 2002, outsourcing accounted for 23 percent of Accenture's total revenue of $11.57 billion, up from 17 percent in 2001. "BPO, a key element of our growth strategy, helped us achieve an overall 33 percent growth in outsourcing for the fiscal year," Clements reports.
Another outsourcing heavyweight, Plano, Texas-based EDS, is also seeing rapid expansion in all BPO fields despite the economic downturn. "EDS has made the BPO market space a major focus," says Dan Henderson, president of business process services. "The reason is obvious: BPO was a $180 billion global market last year, and we expect it to exceed $250 billion by 2005. EDS has 26,000 employees delivering BPO solutions from over 230 locations in 33 countries. This effort brought revenue totaling $3 billion in 2002. Growth in this space is essential to EDS's future success."
Variations in F&A Outsourcing
Finance and accounting outsourcing is now one of the fastest-growing segments of the BPO market. In 2002, F&A services accounted for $40 billion of total BPO spending, up from $36 billion in 2001, according to IDC. That firm expects the F&A segment to reach $65 billion by 2006. "All F&A functions lend themselves to outsourcing -- everything from general accounting services, such as accounts payable, accounts receivable, to treasury and cash management services, to industry-specific services, such as passenger revenue accounting," says Clements.
"We're seeing several trends in the finance and accounting area," reports Matt Appel, president of BPO finance and accounting with EDS. "One is an increase in bundling of IT outsourcing with F&A outsourcing. Another is a stronger reliance on the use of offshore resources in an F&A solution. Both of these trends are driven by the ongoing search for more cost-effective solutions. A third trend is an appreciation by clients that effective transaction processing can lead to a more comprehensive use of F&A outsourcing."
Reflecting the broader trend in BPO, F&A outsourcing work is not isolated in one geographical area; transactions are handled by global locations in multiple regions of the world. Improving efficiencies, Clements says, "means thinking and acting globally and providing the right mix of people, skills and capabilities -- and cost structures -- from a worldwide network of resources, not a single city or country." Accenture handles F&A outsourcing work through 21 delivery centers in the United States, Ireland, Spain, Slovakia, the Czech Republic, Hungary, India and China.
In November 2002, EDS announced a new strategy that it calls "best shore," which involves rotating services for the same client among sites around the world so that the outsourced function is available 24(sum)7. This approach follows a broader trend to diversify risk by moving work through low-cost facilities in multiple regions around the world. According to EDS, cost savings for its BPO clients fall in the 10 percent to 35 percent range. EDS outsourcing locations now include Argentina, Brazil, Canada, Hungary, India, Mexico, New Zealand and South Africa.
To a large extent, BPO growth means growth in offshore work, but heightened concerns about security and geopolitical instability have caused near-shore sites in Mexico, Costa Rica and Canada to multiply. Although the cost savings are not as great in near-shore locations, Mexico and Canada in particular have benefited from increasing unease with distant, lower-cost areas such as the Philippines and Malaysia.
However, new interest in China as a potential BPO location, particularly for Asia-based multinationals, has emerged in the past year. In March, Accenture opened a new facility in Dalian, China, which offers both software reengineering and BPO services.
Because of anxieties about political unrest in Asia, some vendors are pushing Eastern Europe as a secure location for BPO services. "The key benefit of outsourcing to Eastern Europe is its geopolitical stability," says Mark Christiansen, vice president of marketing for Exigen Group, a San Francisco-based BPO company with outsourcing centers in Latvia, Lithuania, Russia and Canada. "This stability, which is the most important factor for CFOs to consider in selecting a location for business process outsourcing -- coupled with strong language skills, low cost of living, and proximity to the U.S. and Western Europe -- creates an unrivaled opportunity for offshore outsourcing that begins to be more reasonable than near-shore outsourcing." Christiansen estimates that a financial services company that outsources its cash management function to an offshore location such as the Baltics or Russia can expect cost savings of 20 percent to 30 percent.
Michael S. Duffey, executive vice president and CFO of Covansys Corp., a Farmington Hills, Mich.-based consulting and technology services company, argues that India remains a better location for BPO than Eastern Europe. Covansys runs three outsourcing centers in India. "The biggest issue surrounding outsourcing in Eastern Europe or other offshore locations is language," he says. "Whereas English is commonly spoken in India, Eastern European countries do not have strong English-language skills. Taken into consideration with India's infrastructure strength, top-notch education system and long-standing government support for the development of their IT industry, India is clearly the superior choice."
Cost savings for companies outsourcing work to India vary depending on the type of work outsourced and the cost of the domestic resources the company is replacing. "In our experience, savings generally range from 20 to 40 percent," Duffey says. He discounts the idea that geopolitical instability creates high risk for BPO in India. "Although India has experienced periods of geopolitical unrest, I am not aware of any recent instance in which the borders were closed. In fact, during the 12 years of our operations there, we have not experienced any disruptions of our operations."
Near-shore locations may save less money, but they do offer some offsetting advantages. Mexico has several inherent benefits, such as close proximity for travel from the United States and good language skills -- advantages that are amplified in cities along the border. Although many types of services in virtually all industries are being outsourced to Mexico, the most popular are customer service, technical support and help desk functions. "Cost savings vary significantly based on the company and its operational processes," says David Allen, CFO of The Telvista Co., a Dallas-based outsourcing provider, "but a recent quote for a client for an inbound customer service program indicated a cost savings of 30 percent, which can be used as a rough standard gauge."
BPO continues to evolve, Accenture's Clements says. "One of the most interesting changes in BPO is increased client acceptance of outsourcing as a vehicle to deliver transformational change. Business transformation outsourcing is intended to help businesses achieve a rapid, step-change improvement in enterprise-level performance that will reshape the business in a fundamental way. This approach is significantly different than a dozen or so years ago when the outsourcing emphasis was on cost reductions." Accenture's 2002 study of companies using BPO found a strong trend toward outsourcing processes of high strategic value and even greater globalization of outsourced work, marking the next stage in the BPO evolutionary process.
Considerations Beyond Cost Savings
As business process outsourcing becomes a largely offshore function, legal issues and quality considerations multiply. "Obviously, the rates being charged for the services are the most important element, but the CFO has to look beyond the rate card and consider the hidden costs," says John K. Halvey, New York City-based head of the global technology transactions group at international law firm Milbank Tweed Hadley & McCloy LLP. For example, the CFO should have a clear understanding of what his or her company will owe if it decides to exit the relationship or move some of the work to another vendor. "This is important to give the organization leverage to negotiate price reductions or quality enhancements as the market changes over the term of the agreement," Halvey notes.
CFOs should also consider their company's intellectual property rights to the work product. "A new trend among some vendors is to grant only copyrights, while retaining the patent rights -- which means that the price doesn't include full rights to use, modify and leverage the work product during and after the outsourcing relationship," Halvey warns. "These are the kinds of costs that are difficult to quantify at the beginning of a relationship, so they are often ignored. But they can have an enormous impact on how cost-effective a deal really is."
Before outsourcing finance and accounting work, executives must consider several pressing privacy and security issues, as well. "There have been two strong and not necessarily consistent trends in data privacy and security over the past few years," Halvey says. "On the one hand, you've got Gramm-Leach-Bliley, the European Union Data Protection Directive, and the Health Insurance Portability and Accountability Act, which impose strict privacy requirements and liability for breaches on entities transmitting personal data. Because so many of these deals are really global in nature, it is hard to ensure that data flows are localized in a way that avoids the broad reach of these statutes. On the other hand, you've got the USA Patriot Act, which requires that certain disclosures and representations be made with respect to certain types of cross-border financial transactions. With the pace of outsourcing accelerating at this time of heightened concerns about national, industrial and financial security, I expect that there will be much more attention paid to the privacy and security implications of sending vast amounts of financial data offshore."
William A. Tanenbaum, New York City-based partner and chair of the technology, intellectual property and outsourcing group with Kaye Scholer LLP, an international law firm, advises CFOs to include privacy-related stipulations in offshore outsourcing agreements. "The outsource customer must know what legal privacy obligations it and its own customers are under and then contractually and affirmatively impose the obligations on its outsourcing provider," he says. To be effective, the contract must have remedies, not just obligations. "Agreements must prevent the provider from combining the data collected according to different requirements of different countries' laws with unregulated data," he cautions. "Such a combination would destroy the legal status of the data." The contract should also specify how the provider will handle cross-border transfers and how the customer can audit those obligations.
For outsourcing finance and accounting work, "the contract should impose physical and computer security requirements on the provider and provide the customer with the right audit security compliance," Tanenbaum says. "The provider should have access to the customer's system only through authorized gateways. Its employees should have access in accordance with the principle of 'least privilege' so that individuals have only the access needed to discharge their responsibilities." In addition, customers should require criminal and other background checks for offshore employees of their outsourcer to protect against the risk of computer or data sabotage.