When Thomas Cook sought to reduce back-office spending, it turned to outsourcing

by Russ Banham

In 2001, Thomas Cook U.K. & Ireland, one of the world’s best-known names in travel, was making its own journey—towards potential bankruptcy. The Peterborough, U.K.-based diversified travel concern was sinking fast, losing $90 million (£50 million) and facing significant potential losses in the coming year. Prospects were bleak: of the four major travel businesses in the United Kingdom, Thomas Cook, once the crown jewel, had fallen to fourth place, beleaguered by fragmented operations, legacy reporting systems and functions, and other inferior business processes.

Today, Thomas Cook is a high-performance organization and the envy of the travel business in Europe. The 163-year-old company’s cost model is one of the lowest in the industry, and its profitability seems sustainable over the long-term. Thomas Cook chalks up its turnaround to two factors: a realignment of its product base to increase gross margins and successful efforts to take costs out of the functions supporting the front office. Key to the latter was the critical decision in late 2001 to outsource finance and accounting functions to a shared-services center operated by Accenture. The deal also included outsourcing both information technology and human resources to the service provider.

Thomas Cook’s back-office functions previously were maintained in triplicate across various business units, which operated out of 22 locations. Decentralized accounts payable, accounts receivable, credit and collections, general ledger, and other back-office functions defied a shared business culture and required inordinate attention and effort. Today, these processes are centralized at Thomas Cook headquarters in Peterborough and supported by an integrated SAP platform. For the first time, all Thomas Cook units are grounded in a common financial language, technology base, and financial reporting structure.

The changes have proved spectacular in terms of Thomas Cook’s financial outlook. In the first 19 months since outsourcing F&A functions to Accenture, back-office costs were pared by more than 30 percent. By the end of 2002, Thomas Cook bid goodbye to losses altogether, earning some $54 million (£30 million). This year, it expects to fully double that amount or more.

But this is not a story about a corporate turnaround as much as it is about the importance of relationships in an outsourced service agreement. New to F&A outsourcing then, Thomas Cook in 2001 signed an agreement that called for a review of the contract with Accenture, with possible termination this year. Both companies consider the review period the “break-even point.” Although pleased by the financial rigor and successful cost savings that Accenture brought to bear, Thomas Cook had the option to renegotiate its contract and interview competing providers. Accenture had the dubious distinction of bidding again for Thomas Cook’s business alongside its competitors. The provider won an extended contract by unveiling another way to reduce Thomas Cook’s transaction processing costs—leveraging Accenture’s multi-client, global delivery center network located in Bangalore, India.

Roughly three-quarters of the F&A work previously handled in Peterborough, as well as half the IT and HR transaction processing, are being handled in Bangalore in a more cost-effective manner. Financial and management reporting are slated to follow in this phased-in offshoring project. “What we’ve left in Peterborough is the high-touch, strong service-related work—the people sitting around the management reporting packages or looking over balance-sheet reviews,” said David Rowlands, an executive director at Accenture Finance Solutions in London. “But, they’re empowered with a global delivery team in Bangalore.”

Thomas Cook adopted the offshoring strategy for a simple reason—the need to further trim expenses in the highly competitive travel business. “When we first did the Accenture deal, we were one of the first businesses in the U.K. to do F&A outsourcing,” noted Colin McKinlay, who came on as Thomas Cook’s CFO in 2004. “Once we demonstrated the significant cost savings we had anticipated, and generated a gap in the cost of processing a transaction between ourselves and the competition, our competitors started to close the gap.”

McKinlay said Thomas Cook is always on the lookout for ways to further reduce the cost of its transaction processing functions. “We took the opportunity to look at other outsourcing providers and went through a robust process to consider other outsourcing providers, but were happy with the discipline Accenture brought into the business,” he added. “The offshoring concept became a key feature in our decision making to further reduce costs. It represents another phase in the strengthening of our relationship with a company we truly see as our partner.”

Rough Sailing
In the United Kingdom, Thomas Cook is synonymous with travel, thanks to the inspiration and dedication of the company’s founder. Thomas Cook began his international travel company in 1841, with a successful one-day rail excursion in the U.K. at a shilling a head from Leicester to Loughborough. From these humble beginnings, Thomas Cook launched a new kind of company that was devoted to helping Britons see the world.

Today, Thomas Cook is a diversified enterprise employing 11,000 people. The company is vertically integrated, owning many of the components that make up the vacation experience. Principal operations include more than 600 shops selling travel services and foreign exchange, 121 separate bureaux de change, seven travel warehouses, 10-tour operating brands, three call centres, and Thomas Cook Airlines, the U.K.’s second largest leisure airline. In addition, Thomas Cook has its own television channel, runs Thomas Cook publishing, and manages thomascook.com, one of the most popular U.K. travel web sites. The company is owned by Thomas Cook AG, formerly C&N Touristic AG, the German company that acquired Thomas Cook in 2000. Thomas Cook AG is the third largest travel group in the world.

At the time of the acquisition, Thomas Cook’s reputation for service and its well-known brand remained stellar, but the company needed to dramatically upgrade internal processes and organizational structure to leverage these competitive advantages in the face of a global economic downturn and an increasingly competitive environment. Among Thomas Cook’s three business units at the time—sales, tour operations, and the airline—each had its own management board and infrastructure, performed its own financial processes, undertook independent initiatives, and utilized legacy IT systems. The events of September 11, 2001 only exacerbated these concerns.

“We set out on Thomas Cook’s behalf to take a traditional SAP shared-services direction, and then 9/11 happened, and the bottom fell out of the travel market,” says Rowlands. “Things soon got worse with SARS and tanks lining up at Heathrow Airport. So we took our business case to the Thomas Cook management team and proposed to share in the risk—and reward—of bringing all 22 back-office locations into Peterborough, with 400 staff providing services across finance, HR, and IT, since these services complement each other well.”

Accenture basically is Thomas Cook’s financial information provider, handling financial reporting, management reporting, and daily and weekly reporting for Thomas Cook management.

“What Thomas Cook does with that information is a Thomas Cook function, but we’ve added value, discipline, and service management,” Rowlands explained. “We also worked with Thomas Cook on how they shaped their retained finance function, from a consulting standpoint. We’re in partnership here to make the whole of the operating model work well. There is a danger if you take too commodity a view of outsourcing. We didn’t want any duplication of effort. For example, we found on Thomas Cook’s retained side that some management staff was touching the same data and re-manipulating it through our general ledger and through to management reporting. We ended up reengineering that.”

The initial outsourcing agreement called for taking 300 of 600 people who handled finance and accounting functions across the various business divisions and transferring them to the new shared-services center in Peterborough. Ultimately, Thomas Cook was able to realize a 33-percent savings on headcount in those services. Many Thomas Cook employees decided not to relocate to Peterborough, “and we were actually in a position where we were recruiting,” Rowlands noted.

The change management process was a challenging exercise, given the magnitude of the changes affected. Organizational resistance would have stalled the effort to close various sites and bring the work to Peterborough, but McKinlay said Accenture planned the transition carefully. Gradually, it became apparent that Thomas Cook was clearly turning the tide. The standardization and simplification of processes, the financial reengineering, and the application of best practices took root, stemming the red ink. “We are a high-volume, low-margin business, and we need to drive up the yield and have a lower-cost base to maintain growth,” McKinlay commented.

Outsourcing F&A provided both—reducing costs and ensuring that management’s attention was focused on those activities in the business that had the most value. “We were able to hand over certain routine, high-volume transactional processes and processing functions to a provider of expert services,” the Thomas Cook CFO said. “This enabled management not to devolve itself of responsibility for these functions but ensure that the controlled environment that ran those functions was being maintained with a lot of focus on driving increased margins in the business.”

By 2004, Thomas Cook had achieved the goals of the co-sharing agreement—greater focus on customers, now that employees spend less time on back-office processes; more flexibility to adjust to business changes; and improved operational efficiency by virtue of having the lowest-cost operating model in the industry.

“Instead of the retail outlet pulling in a different direction from the tour operations, they’re all pulling together,” Rowlands said. “We helped them drive forward their business agenda, which is driving results to the bottom line.”

Break-Even Point
The novel contract between the companies included the aforementioned break-even point in 2005, as well as four metrics governing success (one of them, interestingly, was “innovation”).

The provider’s innovative approach was evident in the ideas it presented to Thomas Cook at the pause in their relationship. “We wanted to offer a proposition that would deepen the savings to Thomas Cook, and we did that by leveraging our multi-client centre network in Bangalore, which would operate at a lower-cost base than Peterborough,” said Rowlands. “This further rationalization had an immediate impact on the P&L.”

Rowlands said he believes the relationship Accenture engendered with Thomas Cook during the previous three and a half years was equally pivotal to continuing the outsourcing agreement. “We have had a good relationship throughout the senior management team of Thomas Cook,” he said. “That shows that outsourcing can be something that is stable, consistent, fact-based, and controlled. And it does not waver to the whims of new executives coming in and out. We’ve now had our original 10-year deal extended to 13 years, and we want this to be a legacy that outlasts any of us.”

He added: “When we set out on this journey, it was in a highly collaborative partnering and sharing relationship, where each party was jointly incentivized to make the business case, by bringing the strengths from each organization to bear. No one knew how successful the transformation would be, so it was a good idea to incentivize everyone to make this as deep as possible. Now that we know the service is stable three years and running, we’re trying to industrialize the capabilities and benefits from Accenture’s assets that are shared across clients [in Bangalore]. This is a different phase in our relationship, one where we are taking on responsibilities for delivering service at a given price that falls over time as we deliver continuous improvements.”

McKinlay added that Thomas Cook will carefully monitor the transition to Bangalore over the next 6 to 12 months. “We approach change with the mindset that is open to it but are also cognizant of the risks of changing a process or a structure within a business,” he said. “We will always continue to look for ways to innovate the business, as we have demonstrated in the recent past.”