Business process friction can slow organizations, but Swedish manufacturer SKF is hoping its seven-year outsourcing deal will keep the company’s growth ambitions rolling along smoothly.

by Russ Banham

Sweden’s SKF—the rolling bearing king of Europe—is a century-old manufacturer founded by Sven Winquist, an ingenious, resourceful engineer with an “anti-friction” crusade. Wingquist just hated how friction would slow down the operating efficiency of machines. Evidently, his legacy casts a long shadow: Following its recent signing of a seven-year outsourcing contract with Capgemini, SKF is still intensely anti-friction—in this case taking it out of finance and accounting.

In yet another example of the relatively recent flourish of F&A outsourcing in Europe, Capgemini was contracted to manage a broad range of finance and accounting processes for SKF across several countries. The outsourcing services provider will deliver multi-lingual services covering SKF’s accounts payable, accounts receivable, and general ledger. The firm will handle the tasks from its dedicated BPO Centre of Excellence in Krakow, Poland, which boasts more than 1,200 finance and accounting experts serving international clients in 25 different languages.

Factors driving the seven-year F&A outsourcing strategy for SKF include a need for improved productivity, lower operating costs, and the ability “to focus on our core business,” said Tore Bertilsson, group CFO at SKF. During the past 100 years, SKF has distinguished itself by making bearings for virtually every conceivable application, from bridges opening their arches over the Koningshaven in Rotterdam to Charles Lindbergh’s Spirit of St. Louis monoplane that made his famous solo flight across the Atlantic. SKF invented pivotal technologies such as self-aligning, double-row spherical roller bearings, which have dominated the world market. The growing manufacturing concern boasts an array of subsidiaries that include one that makes Volvo bearings, which are widely used worldwide.

Wingquist’s war against friction spawned the company’s motto: “the right bearing in the right place.” F&A outsourcing fits this maxim, offering CFOs such as Bertilsson—under constant pressure to reduce costs, achieve growth, and migrate to more flexible, cost-effective open architectures—an effective way to relieve the tension. F&A outsourcing also addresses another compelling concern—the dire need to meet increased regulatory demands and compliance challenges, including Sarbox-Oxley and European anti-money laundering directives.

Little wonder why there has been a sudden explosion in European F&A outsourcing deals (see sidebar). Technology research firm Gartner’s recent BPO study found that the F&A outsourcing market is “rapidly maturing” in Europe, with “many more BPO providers setting up near-shore delivery centers in countries such as Poland, Hungary, and Ireland. … The provider landscape has evolved to produce specialist firms supporting single processes … and multi-process providers supporting multiple F&A activities.”

SKF falls into the latter camp. The company, which has blossomed from its humble beginnings in manufacturing into a $7 billion knowledge engineering firm that today develops advanced bearings, seals, lubrication, mechatronics, and other customer-focused solutions, has enjoyed a long relationship with Capgemini, which has provided business and information technology consulting services for much of the past decade to SKF. While IT got Capgemini’s foot in the door, Bertilsson said it was the service provider’s “best cost and best perceived service” that nailed the deal.

Why F&A outsourcing for SKF? “In general, you could say that finance and accounting has been run here on the normal basis in the past, with a country-by-country organization handling the transactional parts, while operations and control was handled by the global division.” Bertilsson pointed out. “To support this structure, we needed to have a legal organization in each country, not the most efficient means of conducting F&A.”

SKF reviewed its global finance structure in the late-1990s to determine how best to streamline it. “We looked at launching a common finance system for most of our companies in Europe and less so outside Europe, although this is the direction we are headed globally,” Bertilsson said. “Essentially, we mapped all our processes and defined in an ideal sense of how they should look and what we could centralize. Eventually, we ended up with one center for the F&A transactional processing.”

This internal shared-services platform provided the benefits Bertilsson sought and got him thinking about the next step: outsourcing. SKF sent RFPs to outsourcing service providers, culled this group to two, and ultimately selected Capgemini for the job. The CFO said he expects savings “on the level of 40 percent annually” from the F&A outsourcing strategy, thanks, in part, to more automated processes and reduced staff (Capgemini’s Krakow Centre of Excellence will perform the work previously handled by more than 100 people within SKF, most of whom have been relocated to other assignments). As for quality and reporting standards, “they will become much more streamlined,” Bertilsson added.

MANAGING MEGA DEALS
SKF is the latest in a series of F&A outsourcing mega-deals in Europe for Capgemini, which also put together solutions for Danfoss, the large Danish components manufacturer, Zurich Financial & Farmers, the Swiss-based insurance company, and Tetra Pak, the Swiss packaging giant. “SKF is clearly a good example of the sort of companies we’re looking for,” said Hubert Giraud, CEO of Capgemini Global BPO Services. “Big companies have the same issues, with large networks and subsidiaries everywhere. The cost of managing these networks is pretty high, and they also have some concerns about the reliability of data, face compliance issues, and want to accelerate the homogeneity of processes.”

While manufacturing organizations have improved their productivity and gross margins on the factory floor, in their supply chains, and with their customer-facing systems, their back offices have lagged, Giraud pointed out. “With so many different subsidiaries and all that jazz, companies began to consider centralizing and outsourcing HR, procurement, and have now moved on to finance,” he explained. “This has become standard now at global multinational companies. Look at Unilever: they built up shared services and have now outsourced all their captive centers. There is a very rapid progression in the interest of companies to build internal shared services first and then move on to outsourcing.”

He is not alone in that view. According to Gartner’s December 2006 outsourcing report, cost reduction continues to drive many outsourcing initiatives in Europe. Another driver is the “need to enhance competitiveness in a global economy,” the firm stated. F&A outsourcing offers companies ways to improve operational efficiency, flexibility, and time to market by combining near-shore and offshore locations to gain access to distributed delivery models.

“When F&A is outsourced to a third-party vendor that focuses solely on F&A, inefficiencies and redundancies that often exist within corporations decrease, while quality increases,” Giraud asserted .

As for concerns about regulatory compliance, Giraud argued that using service providers whose processes and documentation policies are already compliant and proven can lessen the burden of compliance. “The alternative is to build costly and time-consuming infrastructure and processes in-house and invest continually to keep them up to date,” he said. “With a third-party provider, the investments and fretting are theirs.”

THE POLISH CONNECTION
Take the case of SKF. Giraud said the company was looking for two things in its RFP: “cost efficiencies and all-around process improvement and harmonization.” To this cause, Capgemini offered up its Krakow Centre of Excellence. In a modern building with floor-to-ceiling windows streaming in the sunshine, Capgemini’s state-of-the-art facility was built around process excellence. It is widely recognized as the leading European F&A center, accredited by the Association of Chartered Certified Accountants and operating to strict ISO 9001 and Six Sigma quality standards.

Krakow is no longer your father’s Poland, under the thumb of the Soviet Union. While the city has a rich history, it sports a modern face today with an infrastructure one would expect from a European commercial hub. There’s a new international airport offering daily direct connections to all major European cities and a rich stew of Ph.Ds, economists, and engineers. More than 180,000 graduates (30,000 of them from Krakow) leave Poland’s universities each year—21,000 of them gripping degrees in economics. Approximately 95 percent of Capgemini’s Krakow staff are university graduates, and 7 of 10 have accounting qualifications.

In Krakow, Capgemini has assembled “everything in one place,” Giraud boasted. Globally, the firm employs 61,000. Approximately 4,500 of them tend to its 30 BPO contracts, processing the full sets of books for these companies in more than 30 countries. Of this group, more than 1,200 work in Krakow, handling F&A operations for more than a dozen U.S. and European multinationals, applying systems for shared processes, standards, and technologies, supported by significant ongoing investment.

Altogether, the staff toils on more than 20 client accounting systems in 25 languages—no big deal considering Capgemini has implemented literally hundreds of shared-services centers around the world. “We offer deep content knowledge with people who literally know absolutely everything around accounting processes,” Giraud said. “They are not surprised by anything, with a ‘been there done that’ mentality. They not only handle F&A for European companies, they’re handling the needs of U.S. companies like International Paper, Farmers, and Dow Corning.”

Overblown? Given that the Centre of Excellence regularly scores more than 90 percent in Capgemini’s surveys of client satisfaction, Giraud can be excused for the hyperbole. “Our success is largely due to our investment in the recruitment and development of our people, which explains why we have one of the lowest staff attrition levels in the industry,” he said.

It also has assisted Capgemini’s rise to the top tier of F&A outsourcing providers. In F&A outsourcing, girth has its advantages. As the Gartner outsourcing study notes, “wide swings occur in the maturity levels” of BPO service providers, which may require companies to retain more internal staff, thereby increasing cost. “Consider this when designing the retained staff organization,” Gartner warns. “Organizations may need to retain more staff than originally estimated, or may need to effect higher levels of knowledge transfer than originally planned.”

THE TREND CONTINUES
Above all, the contract with SKF, said Giraud, “illustrates the rising interest in the Nordic countries towards globalizing processes and taking advantage of transformation delivered through BPO.” He cited expected results that SKF can hope to bank on from outsourcing its finance and accounting processes, including a 30-percent increase in transactions per full-time employee and a 25-percent decrease in costs per transaction. Further improvements can be anticipated in cash flow and cash management. Delinquent accounts receivables reliably improve by 50 percent for money outstanding less than 60 days.

Finally, F&A outsourcing promises greater transparency into data that is useful to run the business and make critical decisions.

While neither Capgemini nor SKF would comment on the service level agreements within their contractual arrangement, one can presume the aforementioned metrics and others are foundational. “The framework for our SLAs derives from each individual client’s service management directions,” Giraud said. He noted that service level agreements are evolving from their strict form a decade ago to a more flexible, customer-focused model.

“Some customers used to put so many key performance indicators that at the end of the day it was much too complicated and introduced too much rigidity,” he explained. “If you insist on too many ratios and indicators, you end up focusing on just those and not the overall assignment. While priorities are important, one can’t lose focus.”

For a company such as SKF seeking the “right bearing in the right place,” a focus on removing the frictional elements of F&A transactions would seem to be a perfect fit. Somewhere, Sven Wingquist is smiling.