Taking the pain out of growth: business process outsourcing.
Global Markets for Shareholder Value
Most companies learn the true meaning of "growing pains" only when they expand into foreign markets. And in the age of global expansion, record numbers are learning how hard it can be to seize foreign and emerging markets and meld efficient global operations. Still, aggressive foreign investment continues, as companies try to build revenue and profit growth in foreign markets including Eastern Europe, Latin America, and Asia Pacific. By 1996, U.S. companies had poured over $800 billion into direct foreign investment -- up from only $270 billion a decade before.(1) Similarly, United Kingdom's direct investment in all countries around the world rose to $334 billion in 1996.(2)
The board of directors' fiduciary responsibility for stewardship of company resources puts major capital spending programs at the top of its agenda. And management is responsible for strategic business plans that create long-term profitability. Both devote time to planning global investments, which offer exciting growth opportunities -- and pose serious business challenges and financial risks for even the largest multinationals. Companies with the speed, resourcefulness, and flexibility to lead domestic markets often find themselves short of all three in foreign markets. Difficulties are multiplied many times by factors companies fail to appreciate initially. Unanticipated obstacles make it difficult to manage the new business, let alone expand it to build shareholder value.
Obstacles to Foreign Market Entry
Some foreign markets are harder to enter than others; none is "easy." Companies that launch foreign operations without the benefit of a joint venture or outside support face the painful, costly process of learning a new culture and business environment. Investment and trade opportunities, restrictions, incentives, and government and regulatory agencies' requirements vary widely among countries. So do import and export laws, labor relations, and finance and accounting requirements. The company must know all the basics before setting up back-office services.
Some companies resolve many start-up issues, move brands and products into foreign and emerging markets, and develop sales and distribution channels. But actually supporting the business is hard from the Stan and only gets harder Many take the first hurdle, achieving financial control over the growth program, whether organic growth, capital investment or acquisition. But as the business takes off, problems escalate.
Busy pursuing opportunities, how does the company perform all the support processes on which it relies? How does it provide standard accounting and management practices in markets that lack trained people? If a U.S. company opts to send more staff to work in Europe or Asia, it spends, on average, triple their total domestic cost; a European company can expect expatriate staff in Central Europe to quadruple its domestic cost. How can management handle human resources programs -- recruiting, training, compensation/ benefits, payroll, expatriate administration -- when each element varies for nationals and expatriates. And how will the company provide the information technology (IT) infrastructure underpinning operations -- when everything from software to training manuals must speak the right language and accommodate currencies, social customs, and local business practices?
Companies that muster the resources to resolve these issues internally do so at great cost. Worse, they expend too much time in the start-up phase, when more nimble foreign and local competitors are gaining share. Whatever the market, finding a sufficient number of people with the right mix of skills to support the business immediately becomes the most painful issue.
Relieving the Pain
Companies may need a local partner in the new territory just to get in the game. Many rely on local joint ventures or acquisitions with established product or distribution channels to help launch the business.
But with so much money at stake, many companies need more comfort. They now look for alliances and new types of business relationships in the area of support processes. Their goal: to turn over responsibility for operating them to partners who take the pain out of growth.
Beyond demonstrated expertise, such partners must offer a critical mass of resources to keep pace with rapid business growth -- relieving the worst pain of expansion. They must offer a core of appropriately skilled staff, including nationals. to handle high-volume transaction processing services and the flexibility to add staff as the venture expands. Effective partners will have a strong local presence, know the ins-and-outs of doing business in that legal and regulatory environment, and be entirely familiar with the culture and customs. Not least, they must provide infrastructure.
To bridge the resources gap, companies increasingly turn to business process outsourcing (BPO): long-term contracting of a company's business processes by an outside provider to help increase shareholder value. The BPO provider smooths the transition from start-up and supplies tailored infrastructure and staff for ongoing support operations. This is the message boards and management want to hear.
International Growth of BPO
As companies penetrate foreign markets and evolve into virtual entities, demand for a new model of support services has made business process outsourcing the fastest-growing segment of the burgeoning outsourcing market. New-model BPO providers are responsible for complete business processes, end to end. To ensure the integrity of the company, they become intimately tied to and a trusted part of the organization. Many industry leaders are signing with BPO providers to cushion growing pains in various foreign and cross-border expansion markets. How much is a soft landing worth? International Data Corporation (IDC) expects corporate spending on all outsourcing services to nearly double over five years. IDC projects that worldwide outsourcing spending will jump from $94 billion in 1996 to $150 billion by the year 2001 (Figure 1). During this period, the business process outsourcing segment will more than double, growing from $10 billion to more than $22 billion (Figure 2). Among recent major contracts fueling this growth(3):
[Figures 1 & 2 ILLUSTRATION OMITTED]
* Swiss firm gains the largest outsourcing contract in the chemical industry, worth about $100 million annually, covering European distribution/logistics for a U.S. chemical company. It will manage road, marine, and air transportation of over one million tons of chemicals and related cargo.
* U.S. commercial bank signs a 3-year, $750 million contract with several computer hardware and services firms to install 50,000 desktop computers in 90 countries and manage various business processes and software applications to support its global expansion.
* U.S. airline signs a 10-year, $4 billion outsourcing contract with an information technology firm, to manage global IT operations in more than 50 countries and manage business processes ranging from fleet scheduling, passenger reservations, and cargo handling to ground operations and aircraft maintenance.
* Government of Australia signs a 5-year, $115 million outsourcing contract with U.S. firm to handle property and facilities management and related financial accounting and administration for more than 30 agencies, 4,000 sites, and 50 million square feet.
* Asian vendors slated to take over manufacturing of some product lines so a U.S. consumer products company can turn its attention from production to building branded leadership positions. Sale of production plants and equipment expected to raise $500 million and cut taxes by up to $50 million.
* Canadian publishing company outsources management of 500 properties worldwide to a U.S. real estate management firm. Global services in dozens of countries include the purchase, lease, operation, and disposition of real estate to support the company's rapid growth in new markets, in the next three years, much larger contracts will follow. Companies that benefit will use BPO repeatedly to further enhance shareholder value, and more companies will recognize the link between the two.
Selecting a BPO Provider
Before selecting a BPO provider, companies should have a sense of their strategic imperatives, on which management must focus. Typically, companies think that 90% of what they do is core to the business -- and only 10% can be outsourced. In fact, the reverse is true. Most have only a handful of core competencies that let them provide higher-value products and services than competitors. These might include patented technology, proprietary products, manufacturing techniques, distribution networks, customer service or other key success factors.
Industry leaders always concentrate management time and investment capital on what they do best in the value chain of their business or industry. This strong impetus to outsource support services now prompts them to outsource work once considered integral to the value chain -- including business in emerging markets, where BPO can lend key quality, performance, and cost advantages.
Who's a good candidate for BPO? An innovator in the marketplace, focused on overall competitiveness and measurable business value. Often, it already outsources payroll, facilities maintenance, IT operations or food services and is comfortable with the notion of outsourcing.
When a company is ready to judge how well BPO providers can support its strategy, it may want to consider the criteria of those with successful BPO partnerships (Figure 3). A few key points in choosing a partner, structuring the relationship, and introducing outsourcing:
What Matters to Companies in Selecting BPO Vendors
% of RESPONDENTS Most Somewhat Neutral Important Important Proven track record 68.7 29.9 0.0 Understood my business 62.7 31.3 6.0 Vendor flexibility 59.7 35.8 64.5 (easy to work with) Business process 52.2 38.8 9.0 knowledge/capability Professionalism 49.3 37.3 13.4 of staff/high quality Financial 46.3 41.8 11.9 strength/stability Interested in having 51.6 29.7 10.9 my business Cultural fit 32.8 43.3 20.9 Total solution provider 32.8 40.3 25.4 Training capabilities 29.2 47.7 16.9 Reputation as 23.9 40.3 29.9 thought leader Low cost provider 25.4 38.8 26.9 Global capacity 19.4 31.3 22.4 % of RESPONDENTS Somewhat Not at all Unimportant Important Proven track record 1.5 0.0 Understood my business 0.0 0.0 Vendor flexibility 0.0 0.0 (easy to work with) Business process 0.0 0.0 knowledge/capability Professionalism 0.0 0.0 of staff/high quality Financial 0.0 0.0 strength/stability Interested in having 4.7 3.1 my business Cultural fit 1.5 1.5 Total solution provider 1.5 0.0 Training capabilities 6.2 0.0 Reputation as 4.5 1.5 thought leader Low cost provider 7.5 1.5 Global capacity 19.4 7.5
Source: Dataquest, a Gartner Group Company
Create a shared vision. "Understand what both parties hope to achieve," says Graham Benning, Control Manager, BP Venezuela. "A win-win partnership based on mutual gain and shared risk and reward works when commercial interests are aligned.
Buy quality: Seek a trustworthy provider who knows the cultural factors inside out. It must offer world-class best practices, continuous improvement, value generation, and a customer-oriented service approach.
Keep the dialogue open. Communicate expected changes and growth opportunities to the service provider well ahead of time, so it can expand its operation and handle the new business seamlessly. Reassess goals regularly in a changing business environment.
Communicate with employees. When BPO involves transferring employees, right from the start, communicate the business logic and its advantages to them, unless restricted by law.
A Global BPO Model
When BPO spans the back office, it offers the greatest business value. Among several firms performing business process outsourcing, Price Waterhouse offers a global model covering the most requested business processes. The Big Six firm is fast establishing Centres of Excellence in the U.S., Europe, Latin America, and Asia Pacific to meet growing demand from multinationals. Grounded on an initial client relationship, each is organized and staffed to manage a broad range of business processes for multiple clients. Designed to act as the Global Back Office[SM], centres are equipped with state-of-the-art systems and feature specialists in business processes, reengineering, change management, applications process, and information technology. The concept is simple. Teams of multidisciplined specialists work with companies to introduce best practices, streamline operations, improve performance, reduce costs, and boost shareholder value. Price Waterhouse is banking on a differentiated offering -- its ability to bring clients a long-term, coordinated global relationship.
"Price Waterhouse is already in those territories and has a large presence," says London-based Richard PB Smith, Partner, Price Waterhouse Global Business Process Outsourcing. "Typically, we're the largest firm, of our kind in those areas. The local culture is our culture, because we already have local skills in every area -- finance and accounting, human resources and expatriate administration, applications process, tax, legislation, legal and regulatory matters, real estate, and procurement sourcing. For us, it's a small step to move all those skills into a BPO partnership with clients moving in -- and take all the headaches out of supporting their growing business."
Currently, Centres of Excellence in Krakow, Caracas. Bogota, Canberra, Houston, Dallas, two in Chicago, and another in Royal Oak, Michigan, provide full-complement BPO services. An international shared-service centre in Rotterdam provides the same services cross-border, spanning cultures, languages, and standards throughout Europe.
Because the Global Back Office[SM] model seamlessly coordinates operations -- local, regional, global -- Price Waterhouse works with clients as early as possible in their strategic planning cycle to project worldwide needs and eliminate any concerns about setting up infrastructure. Among BPO models, it affords real-world examples of how BPO can help multinationals open business units, consolidate operations, acquire companies or form joint ventures worldwide.
Fueling British Petroleums Business
Latin America: Pressed by shareholders to improve profits, BP Exploration made focusing on their core business a worldwide strategy. It extended this focus to its operations in Colombia and Venezuela, countries where globalization and privatization recently opened the door to foreign investments. Having outsourced other areas of their business, BP was an ideal candidate for business process outsourcing. "We can't be best-in-class at everything we do," says David Donald, Manager of Performance Management for BP Exploration. "We're an exploration and production company and that's what we should focus on."
Energy companies have long outsourced drilling and production support and are familiar with the business model of sharing risks and rewards, especially in exploration. They now are moving into support areas of finance and accounting, applications processing, procurement, human resources and other business processes.
Ready to share risks and rewards and gain economies of scale in outsourcing non-core processes, BP Exploration sought a partner with value-added capabilities to generate bottom-line results and improve shareholder value. "The number of service providers, particularly in accounting, was limited, and Price Waterhouse had relevant expertise. That's why we chose diem," says Graham Benning, Control Manager, BP Venezuela. Striking a strategic alliance in 1996, Price Waterhouse created a Latin American arm of its global Business Processing Outsourcing business to serve the new BP operations. This company, PW Gerencia de Procesos (PW GdP) now employs over 150 people, most of whom came from BP Exploration as part of the BPO agreement. In Centres of Excellence in Bogota and Caracas, Price Waterhouse provides financial accounting, accounts payable, inter-company accounting, reporting, payroll administration, revenue, cash and banking, joint venture recordkeeping, fixed assets, and treasury management services.
For a company operating globally, especially in developing countries, BP's strategic focus tells the story. Using BPO, the company concentrates more resources on its strategic mission. "Focusing on core skills frees management time to create shareholder value in the business in which it's really engaged" says Benning. The global BPO model works for BP because the Centres in Latin America share best practices, knowledge, and expertise between themselves and with the global Price Waterhouse firm. "In that sense, we transfer skills as needed and work together as a single global business," says Brazil-based Jorge Manoel. Partner, Global Business Process Outsourcing.
The BPO client-provider relationship serves as a partnership to achieve BP's performance goals. "Business Process Outsourcing helps us secure our strategy in terms of our base and the right to grow through our exploration and prospectivity in the country," says Donald. The BPO provider sets up from scratch a full accounting suite and associated services, providing wall-to-wall process, organization, service infrastructure, and technology. This allows companies to bypass grappling with all the complex regulatory issues, operating conditions, and environmental, labor, and tax laws in each new territory. Companies can then rely on the provider to hit the ground running and initiate service immediately. "It will help us effectively focus on the strategic side of the business," adds Donald. "If you don't do it right, it can take years to recover."
BP appears to be doing it right so far, gaining marked, measurable improvements from the start. For example, in Colombia, PW has achieved a substantial increase in the percentage of invoice payments on time to high-profile suppliers to a point where a little over one year after take-over of the accounting service, the performance target has been exceeded. "PW has also notably improved the internal performance reporting, both in terms of quality of information and speed of access," Donald adds. BP's staff, successfully transitioned and integrated, anchor a group of highly skilled people who are client-focused and productive, enjoying reinvigorated careers. Bringing BP maximum operational efficiency, they are equipped to offer added clients the same economies of scale.
Beyond operational excellence, Price Waterhouse views quality improvement as a provider's next step in adding value. "Above and beyond simply looking at pure performance metrics," says Tim Phillips, Director of Operations for PW GdP, "you have to get closer to the client's business and find ways to actually help the client make a better success of their business."
Central and Eastern Europe: British Petroleum Oil faced a common problem -- coping with success in an emerging market. For the CEO of BP Air, Vivienne Cox, it posed tough questions. With vast opportunity and rapid growth in the region, her support organization was buckling under escalating demands. "Qualified labor is expensive, difficult to keep, and in need of training," she says, so hiring staff was difficult.
Pressured to add 32 service stations to the 18 launched in Poland in as many months, she needed to process invoices, payrolls, accounts receivable and expense reports for 50 operations as the business continued to grow. "We were always behind in getting our services to keep track of our business activity," Cox explains. With her team struggling to bridge the gap, new opportunities went by the board, stalemating business progress.
Cox needed a first-rate support organization in a market with limited qualified workers, offering the flexibility to quickly add staff as the business grows. While the Polish operation grew fastest and did the highest volume of business, the rest of the region could take off as quickly. "I don't know what my business will be like in five years," Cox says. So she turned for help to a firm that's worked with BP throughout Western Europe and Latin America for more than a decade: Price Waterhouse.
Price Waterhouse and BP entered a strategic business process outsourcing partnership, permitting BP to outsource all transactional accounting in Poland to the Price Waterhouse Centre of Excellence in Krakow. With the core controller and finance director positions remaining in house, all BP financial staff moved into the Price Waterhouse organization, where they gain training. The contract specifies strict performance criteria and a flexible organization that grows in with BP's needs. This year, the Krakow Centre will expand to 65 staff to support BP's growth and that of two other multinationals in the region.
"Given the rate at which we were growing and the difficulty of getting and keeping people, we felt it would be better to use a professional provider," Cox says. "The real value-added in financial activity is getting good quality, accurate information. The financial staff must be part of the business team. They have to understand the strategic imperatives, the drivers, and provide quality estimation." Cox finds that Price Waterhouse provides all the support the region needs and puts BP's business back on track. Now, managers can work on revenue growth while internal financial staff focus on strategic issues.
The issue of growth without pain is one that touches firms on a global basis. That's why Price Waterhouse has commissioned one of the world's premier market research firms, Yankelovich Partners, to conduct a major study of issues affecting Business Processes outsourcing worldwide.
This independent survey, of top executives from 300 multinational companies, is the first worldwide study to reach top decision-makers of $1 billion plus companies. Spanning 13 countries, including such emerging territories as Latin America, Asia Pacific, and Japan, this in-depth study will allow company leaders to comment on BPO activities.
Executives will comment on initiatives to increase shareholder value, the perceived advantages and drawbacks of outsourcing select business processes, and which processes seem the best and worst candidates for outsourcing. They will reveal their BPO plans and the relative importance of criteria in selecting a BPO provider.
A summary of the data, with added areas of interest in each country and globally, will be available at the end of April and reported in the next issue of Director& Boards.
(1) U.S. Department of Commerce
(2) U.K. Office of National Statistics
(3) Based on Price Waterhouse analysis of the 200 largest outsourcing engagements worldwide.
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|Publication:||Directors & Boards|
|Date:||Jan 1, 1998|
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