Folks: I will be featuring several guest posts from experts in the outsourcing industry who I respect. One gentleman whom I have known and worked closely with over the years is SAP’s BPO group leader, Dr Christian Baader. Christian is now the globally recognized thought leader on how crucial technology strategy becomes when companies take on BPO engagaments. Take it away Christian…
There is widespread agreement in the BPO-industry by now, that the traditional, labor arbitrage dominated way of “lift and shift” or “my mess for less” as some pundits call it, is not producing sustainable BPO-situations. Many deals not living up to expectations and meager provider profitability are warning signs of this.Sustainability has become one of the key issues of the industry.
Sustainability should be read as “both sides, customer and provider, achieve their business goals over the deal duration, i.e. the customer gets the targeted improvements in cost and quality of service while maintaining a low risk exposure and keeping long-term options open while the provider makes his margin, and the relationship grows for both sides in value over time.”
A number of factors need to get played well in order to safeguard sustainability of the deal from the start, one of them being the decisions around the technology foundation of the deal on the provider and customer side.
Technology’s influence on deal economics Business decision makers often tend to either leave the technology choice to the provider (an attitude we often see expressed as “we bought a service, now the technology choices are on the service provider”) or treat it as a mere IT-discussion only.Both attitudes however miss the crucial influence, that technology has on the enterprise value of the deal:
·Technology’s influence on the economics for the provider:The design of the processes and choice of technology influences all the fundamental business drivers influencing the providers ability to service the deal efficiently and in a sustainable fashion: Synergizing between different parts within the customer organization as well as between customers for generating economy of scale (“do it cheaper”), ability to automate and optimize processes taking full advantage of future innovation potential (“do it better”), and effectively leverage labor arbitrage (“employ cheaper resources”)
·Technology’s influence on the economics for the customer (ie, incl. the retained organization):The technology choice and platform design of the customer and the provider is very often a shared one, or at least a heavily integrated one – and as such the choice on one end impacts the other end (e.g. when the outsourcing/centralization scope does not include all subprocesses or countries. Common problems include data integrity and ability to keep synchronized over time when the two sides of the fence move in slightly different direction – which might express itself in additional process exceptions requiring manual interventions or inconsistenciesin self service implementations or reporting)
All in all, the appropriate deployment of technology as an enabler of outsourced and retained processes is therefore critical to the sustainable delivery of the BPO services (leveraging appropriately automation, analytics, workflow, authorization concepts etc).
The need for “Design for Manufacturability” of Process solutions
Furthermore, technology deployment cannot be engineered in a silo – it must be considered TOGETHER with the process reengineering, so that the resulting service is not just satisfying the business requirements but is also efficiently manufacturable. I call this the “Design for Manufacturability “-paradigm of BPO-service manufacturing (and it seems high time, that we learn from the lessons of the physical goods manufacturing for the service manufacturing world). Process solution “design for manufacturability” includes the choice of the platform itself, and configuration/customization choices for process adaptation and integration.The advantages of standards-conformant deployment of standard technology (ie, leveraging configuration and avoiding customization) for your process solutions are manifold:
required levels of process integration can be achieved more cost-effectively
the solution is easier to maintain over time – which includes higher quality as well
adoption of innovation is easier
necessary scope-extensions of the platform (be it additional processes, geographies, businesses) are easier to accommodate
finally migrating the platform at the end of contract (to another provider or back to inhouse delivery) will be less risky and painful.
In order to leverage those technology aspects most effectively, decision makers should make sure, that the topic is integrated into the sourcing project from the RFP-design stage onwards and that business and IT-teams are working on this in a highly integrated fashion.
Leave the technology choices to somebody else at your own peril!
Dr Christian Baader is VP of SAP’s BPO Group, and is based in Waldorf Germany
You heard it first here folks…. In 2006 we saw 89 new F&A BPO deals signed (contracts with at least 2 core accounting processes bundled). This compares to 66 deals in 2005 – an increase of 35%. However, when we look at the Total Contract values, the 2006 deals averaged $30 million each, compared to $39 million for the 2005 deals – that’s 30% smaller.
And we have already seen another 24 deals so far in 2007 (until 2 weeks’ ago) – but the deal values are averaging only $24m.
So what does this initially tell us? Let’s get the debate going but my initial analysis is:
The “upper” middle-market is opening up (the 5-10K employee orgs)
Companies are taking the plunge, but scaling back the size of the commitment with fewer processes bundled
The big global deals are getting fewer – and further – between
Onshore/Nearshore services are becoming more critical as deals get smaller and the offshore component becomes less cost-effective in deals of this type. Offshore still plays a major role at the high-end, but to a lesser extent in the middle market
The Rocket goes on….but there’s less juice with the special deliveries
The value proposition of F&A BPO now encompasses many added business benefits beyond a simple arbitrage of labor to help decrease transactional processing costs. Companies are focused on both incremental improvement and transformational innovation, and F&A BPO is a lever that can help drive both without the need for significant investments in people and technology. These benefits can be summarized as follows:
· Access to scarce talent. Many companies today are struggling to find the finance and accounting talent they need. The U.S.-based talent pool has been shrinking considerably, and many companies are finding that F&A BPO service providers can usually offer skills, like payroll and accounts payable, significantly over-and-above basic transactional tasks – and at significantly lower cost.
· Ability to focus retained finance function on mission-critical activities. The retained finance function can focus its time and resources toward driving ongoing quality into its financial processes and staff development and determine ongoing transfer of experience and skills from their service provider. Moreover, the finance function’s retained management can focus time and energy on SLA-setting and rolling out governance programs, while working closely with their supplier. These collaborations are often decade-long “marriages” and require increased energy and focus to achieve effective results with compromise required on both sides on many occasions.
· Continual cost reduction and performance enhancement, taking advantage of process methodologies and standards, namely Six Sigma and LEAN. Companies can often achieve cost reduction initially through labor arbitrage, and then subsequently through increased economies of scale from service providers and increased performance levels from services providers as they continue to mature and further their offshore investment (e.g., China and the Philippines). Contracts are frequently structured to demand annual performance improvement and reduced baseline costs, while expecting the service provider to drive process improvement and innovation. Additionally, today’s companies are quickly realizing that F&A BPO is an opportunity to make rapid, impactful changes to their business and take advantage of the standards service providers are developing. Many service providers are going to market with differentiated value propositions that are geared to moving companies onto their existing delivery models, with a heavy skew toward offshore delivery. They have quickly realized that they need to demonstrate industry-specific F&A process excellence to win credibility. Effective companies are quickly seeing BPO as an opportunity to make substantial structural changes that would be very difficult to achieve if they were not moving into an outsourced end-state.
· Ability to increase working capital and directly impact the bottom line. Experienced suppliers can devote increased resources and generally have more efficient processes for managing cash flow from end-to-end solutions, such as Order-to-Cash and Procure-to-Pay. Improving the effectiveness and velocity of the cash-flow can help improve management decision-making, not to mention the positive impact on working capital.
· Availability of new F&A technologies and bundled solutions. It’s our experience that many of the leading F&A BPO service providers are continually developing solutions that can work in tandem with the company’s technology, or even replace it in certain cases. Service providers are focused on F&A BPO solutions that can be standardized on incumbent ERPs, namely SAP and Oracle, with bolt-on tools and application solutions in discrete areas where value can be reaped. Additionally, solution areas like Order-to-Cash have moved beyond the performance of simple account collections using a billing application. They are frequently now bundled process solutions that often cross organizational boundaries, (e.g., dispute management, cash-flow analytics, and reporting capabilities). The benefits of bundled process outsourcing can include improved opportunities for process redesign and associated cost reduction, synergies from staff working together in the same environment, the ability to create a more leveraged management team, and potentially fewer contact points with external and internal customers.
· Potential to integrate multiple disparate financial platforms, applications and middleware into one common global standard. The cost savings enjoyed through labor arbitrage can offset significant enhancements to financial systems as part of the F&A BPO initiative to achieve a single, unified global chart of accounts. We have seen many companies in the past delay F&A BPO initiatives to resolve inherent issues with their accounting systems, but there is a clear move within many of today’s initiatives to combine systems integration with the F&A BPO transformation, especially where the same service provider can be deployed to improve the F&A systems as part of the BPO initiative. BPO provides the opportunity for companies to make rapid changes to their business, especially where there are multiple silos of financial data strewn across geographies and business entities. Companies have a singular opportunity to address these issues as part of the BPO transition process.
· Transferal of risk to the supplier. Managing offshore resources in today’s business environment can be very difficult. In particular, offshore captive organizations that are not a Tier 1 global brand in lower-cost geographies (e.g. India) will find it increasingly difficult – and expensive – to hire, train, and retain quality staff resources – not to mention accounting for the geopolitical risks associated with owning offshore assets and employing offshore labor. Many companies are quickly realizing they are far better off having experienced service providers take on these associated risks, as they have invested heavily in their staff development and governance programs. This can also save companies hefty management costs in running a captive operation.
· Preparation for a business slowdown. The desirable time to consider creating more effective and efficient F&A processes is when business is good and there is sufficient time to plan and manage the outsourcing transition. When done properly, engaging an outsourcing service provider takes time and is more effective when not executed hastily. Additionally, service providers are more willing to collaborate and share the benefits when you (and other companies) are not feeling immediate cost-reduction pressures.
· Preparation for M&A activity. Outsourcing F&A forces the company to move to standard processes across business units. This can help facilitate future M&A activity by decreasing the effort associated with the integration and by improving the likelihood and accelerating the timeline of realized synergies. It also allows the company to focus on the core business during integration, leveraging the service provider’s skills and platform for integration of F&A.
