Outsourcing as a productivity tool: highlights from a recent forum explore how outsourcing can...

The word "productivity" conjures up dry statistics offered regularly by economists and economic luminaries like Federal Reserve Chairman Alan Greenspan. Broad macroeconomic indices of corporate productivity are widely watched, important and the subject of considerable debate.

But internal

company productivity is clearly more of an issue for company managers trying to drive results. Objectives there often fall into the realm of efficiency -- getting the most bang for the buck by driving the most revenue out of the infrastructure. In recent years, outsourcing has become an important component of that strategy and has become widely seen as a way of both cutting costs and improving efficiency.

At a recent seminar sponsored by Creditek, a firm specializing in outsourcing accounts receivables and related finance functions, a group of experts analyzed what outsourcing can mean, both in general and for improving the finance area. The session, held during the summer in New York, was moderated by Financial Executive Editor-in-Chief Jeffrey Marshall and brought together: Joseph Shalleck, a partner with Marakon Associates; Richard Roth, managing director with Hackett Benchmarking & Research; Corey Torrence, CEO of Creditek; Kathleen McCabe, a vice president with the Corporate Transformation Group at Morgan Stanley & Co.; and Joe Vafi, a vice president and analyst at Robertson Stephens & Co. A similar session was planned for FEI's Forum on Finance and Technology in September.

What follows are excerpted highlights of a transcript from the session.

STRATEGY:

SHALLECK: How do you develop a strategy and deliver that strategy in a way that returns and growth will exceed investors' expectations? That gets into the business models that you develop and the way you implement them... Improving shareholder value is the product of this long chain of activities that actually starts with the capabilities in the organization and stops along the way in the strategies that you choose...

If you're able to manage receivables and working capital better than your competition, that's going to give you an advantage in product markets. So you can set various benchmarks for yourselves and think about improving your service quality and your efficiency relative to those benchmarks...

Another view is: well, let's use outsourcing, but let's use it tactically in areas where, on an individual service basis, it makes sense. And there's a long list of companies that are using a mix of outsourcing and insourcing for their financial processes and back-office operations...

How do you figure out what the right model is? Our suggestion would be to approach this like you would approach any other strategy decision... One thing that we found with many of our clients is that only about two-thirds of those services are under the moniker of the finance organization. There are all sorts of other processes that are related to that, that are marbled into other parts of the organization where people are doing pieces of these processes...

McCABE: We're really seeing a lot of secular and cyclical challenges to the top-line growth that we saw propel earnings growth through the 1990s. As a result, we've seen companies focus more and more on what we call "value chain restructuring," where companies are analyzing what businesses they need to perform and how, and what business don't they need to perform and how. Sometimes it's the unit of growth that comes from the expense-related drop to the bottom line rather than from the revenue-related drop to the bottom line...

In many cases, we're finding that companies are finding it difficult to understand exactly what their CapX [capital expenditure] budget was for their IT department, what their CapX budget was for their various support services. So we're trying to help them through that analysis, to understand if they were actually achieving returns in excess of the cost of capital that's tied up in those businesses...

We're also seeing companies look more to a cost structure that involves variable costs versus fixed costs. And, as a result, outsourcing keeps cropping up, not just as a tactical approach to taking costs out of a business, but really as a strategic tool at the corporate level for value creation...

Some of our clients, like General Electric Co. and British Airways, have really made the determination over time that they're going to build up big offshore service centers to provide services back to the parent company. Not every company is GE or BA and can do that for themselves. So, as a result, we're trying to get them to think about ways they can partner with others to build up the infrastructure they need...

[Our client] Sabre is an interesting example, though, because Sabre, in turn, recently took a look at itself and said, "We've got too much tied up in our IT budget." So [it], in turn, as an outsource provider, went a step further and outsourced a large portion of [its] IT to EDS Corp.

ROTH: To make sustainable change, you really need to look at the organizational and structural changes as drivers in the organization. How am I organized? Do I use shared services? Do I use outsourcing? What best practices do I deploy? What technology platform do I use? Those types of things are more systemic changes and really have broader impact on your organization and, more importantly, on your costs...

The other thing I would tell you about outsourcing is it provides capabilities that you might not otherwise have. We find in the HR space, for instance, that clients are able to adopt self-service capabilities a lot more quickly using an outsourcer than deploying them themselves.

VAFI: when you look at the bottom line in terms of where outsourcing's come in the last 10 years, there's no doubt that outsourcing is difficult and not every situation is successful, or certainly not 100 percent successful. Maybe a lot of them are moderately successful, maybe some of them aren't.

COSTS

McCABE: What's making [outsourcing] attractive to companies is that you're reducing the costs, you're taking the ongoing CapX out of the budget, and you're also increasing the effectiveness of the service that you're providing back to the company... Companies that try to do everything for themselves just won't be able to keep up with the latest technologies, won't be able to afford the CapX to remain competitive, and will slowly lose ground to other competitors who can access these more nimble business models...

VAFI: As we move forward, I don't think there's that much more to cut in terms of the cost structure for a lot of companies. People continue to do it. I think to some degree, you're starting to affect the long-term strategic position of companies and their ability over the long term to actually grow.

To date, a lot of the outsourcing value proposition is focused on cost-cutting. So if you can find the outsourcing solution that helps you focus on some of these balance sheet metrics, I think you've got a potential to create some real value for your company... I don't think companies can cut a lot more cost without really affecting their long-term growth potential. But there's still a lot to do on the balance sheet side of the equation.

TORRENCE: If your value proposition is purely a cost-cutting exercise--whether you close a seven-year contract or not--I guarantee you after three years of cutting costs, you're going to renegotiate your contract in year four. There has to be something that is redeeming. There has to be something that is sustainable value that can be offered to your client base, or you're not going to have that client base.

SHALLECK: What used to be a decision about how we manage costs in our financial processes and how we take cost out of the business office is now becoming a higher-level boardroom, CEO and top executive decision about what activities do we actually want to do in-house. And the criteria for choosing that has changed from what's going to minimize costs to what's going to provide a distinct advantage...

So don't think of this as just a cost decision. Don't even think of this as just a cost and a service effectiveness decision. Think about this as what are the activities that we're really going to perform, that we're good at, that are going to lead us to earn economic returns...

Some organizations that are very performance-oriented are on top of their costs, usually starting with their customer-facing and external businesses. And as you go down the value chain or up the value chain to all of the internal processes that are less customer-facing, very often they're less aware of their costs.

The bigger trouble that companies have in benchmarking some of these financial processes is it's hard to find them all in the company. They're being done in lots of different places by lots of different people, many of whom are not part of the finance organization.

BENCHMARKING

ROTH: Over the past 10 years, for the average company, finance costs as a percentage of revenue have dropped roughly 52 percent, from 2.2 percent to 1.05 percent. The other thing that's intriguing is that there's kind of a belief that to be world-class is expensive. And what we've really shown through our empirical data is that the world-class companies are actually cheaper... World-class companies use centralization much more extensively, 87 percent versus 44 percent for the average company...

World-class companies have 15 percent [of the workforce as] managers, while average companies have 20 percent. Now on its face, you wouldn't say that's a substantial change. But I would tell you that shows that world-class companies have higher spans of control- more people reporting to one person and less of a silo organization. That's very, very important...

The world-class companies deploy 44 finance FTs [full-time employees] per billion [dollars] in revenue, compared with the average company, which deploys 103 finance FTs per billion in revenue. However, I caution you that technology alone does not enable world-class performance...

The other negative to technology is that it tends to focus clients on spending more time analyzing data. And what happens is that the companies that focus on technology as the silver bullet for fixing some of their processes [find that] actually elongates their processor cycle time... World-class companies balance process and technology. So, there is no silver bullet, and you need to really balance the technology and process best practices to achieve world-class performance.

What we find is that the average manager is managing on a monthly basis 141 distinct measures, which is clearly almost in the unmanageable range to be able to deal with. We find world-class companies focusing on a limited set of measures--five, six key measures--to really understand what drives the business and what drives performance.

Technology's value skyrockets when leveraged with other best
practices--standardization and centralization

Average finance cost as a percent of revenue

                             Non-standardized,  Standardized,
                               decentralized     centralized

Total cost of finance              1.44%            0.80%    44%
Transaction processing cost        0.50%            0.29%

Hackett Best Practices

Richard T. Roth I Emerging Best Financial Practices \ 06-27-02

Note: Table made from bar graph