At the ONE Conference in Atlanta, experts tackled the cutting-edge questions of finance and procurement globalization. Here are some highlights from the presentations and panels.

by Peggy Cope

Kicking off the ONE conference on finance and procurement globalization, sponsored by FAO Today magazine and The Hacket Group in Atlanta on November 14, Crossing Media CEO Elliot Clark noted:

“If Frank Baum was writing The Wizard of Oz today, Dorothy would have emerged from the wreckage of her Kansas farmhouse and said to her Cairn Terrier, ‘Toto, I don’t think we’re in Kansas anymore.’”

But the Munchkins would have responded: “Big deal! This is not Kansas, and you better figure out how to operate in Munchkin Land. And by the way, being tall will not get you favored treatment. Also, we expect you to obey all Munchkin regulations and respect our cultural norms.”

The tone for the remainder of the conference on finance and procurement globalization was set. The next day-and-a-half would be spent brainstorming and networking in search of better ways to operate in a flat world consumed by breakneck expansion, ballooning productivity, rampant cost-cutting, and all that those developments entail.

First up were Barbara Melby, a partner in the global outsourcing group at Morgan Lewis , and Joseph Marxer, assistant general counsel, quality manufacturing, and commercial transactions, at Eli Lilly , to talk about Lilly’s outsourcing deal with HP and the 10 best ways to achieve a good transformation process. These include:

1. Develop a team that has the ability to make decisions, works well together, and has empowerment from management;

2. Develop a business case, perform internal due diligence, and gather business requirements and assumptions;

3. Identify your objectives, write them down, and use them;

4. Define detailed requirements with respect to services, service levels, pricing, and key business terms;

5. Develop a realistic and flexible schedule;

6. Engage the suppliers. Lilly did a lot of internal homework, then brought in suppliers who educated the company and developed solutions;

7. Build the suppliers’ proposals. In Eli Lilly’s case, the proposals evolved after site visits and internal presentations;

8. Develop a term sheet and negotiate from it. From a legal perspective, it’s easier to work from a term sheet before the master services agreement (MSA) stage, which can be overwhelming because the MSA is often lengthy;

9. Selection and final negotiations:
For Lilly and HP, all the relevant people got in a room for a week to hash out what became an exhausting and “compressed” process to wrap up all the documentation, beyond the MSA;

10. Make the transition a success.

For the Lilly/HP deal, employee communications, management expectations, and meeting objectives equaled success.

Next, Julio Ramirez, managing director at The Hackett Group , provided some perspective on research and how to measure mileposts in his presentation on what the data tell us.

First, he asked, what are the megatrends within globalization? His answer:

• It’s all about world-class performance;
• Lift and shift, your mess for less?;
• Service delivery models go global;
• In search of global hubs; and
• Captives vs. outsourcing, which is better?

Ramirez said that world-class performance is about moving work from high-cost to low-cost geographies. You can move to your own facilities, or you can leverage the services of a third-party service provider that has already built infrastructure and has core competencies. The impact of service globalization is of such magnitude that it stands to fundamentally change the architecture. Every company’s journey must be specifically architected to leverage opportunities to accelerate the realization of benefits while mitigating risks.

He noted that the finance story is the most remarkable in the past few decades. Companies are realizing significantly lower costs, focusing on simplification and standardization, leveraging technology, and achieving faster cycle times with fewer errors. “We have better access to information, not just data,” he said, adding that these trends have facilitated alignment with business priorities. Talent management has emerged as a critical component of success, and business process sourcing alternatives are being aggressively pursued.

According to Ramirez, it’s not just the companies that are having problems looking to outsource—some of the best performing companies are doing it. But several components are required in the journey to achieve world-class performance, including technology optimization and best practices utilization. “In finance alone, 480 best practices have been identified,” he said. “The best performing companies leverage as many as possible.”

To date, the vast majority of FAO contracts have been lift-and-shift transactions focusing on labor arbitrage, without a significant transformation of work before or after shifting to low-cost geographies. The future of companies moving work offshore is looking at processes that need to be redesigned for maximum return. Hackett, said Ramirez, believes you need the right balance between efficiency and effectiveness, and your choice between transform-and-shift and shift-and-transform will depend on your risk tolerance and the current state of processes.

Service delivery models, among the predominant ones include regional (e.g. Pittsburgh, Buenos Aires, Barcelona, Melbourne); global hub with regional spokes based on optimal locations for different types of transaction; and regional delivery centers in areas that meet specialized language and local business requirements plus low-cost transaction process centers (e.g., Bangalore, Chennai, Costa Rica, and Wroclaw).

In the search for global hubs, companies seek the least costly place to meet specific needs, with a central point for all transactional processing. India still has an ability to scale that is second to none, according to Ramirez. But he pointed to China as a “sleeping giant.”

“China will be a global competitor attracting business from captives and BPO providers,” he said.

Meanwhile, in the Philippines, companies are finding a culture that is surprisingly close to that of the U.S., with superb language capabilities and costs that are not far from what you find in India, he noted. That said, he recognized that instability in the Philippines could taint its ability to grow, and it doesn’t have the population to leverage capabilities on the order of India or China.

On captives vs. outsourcing, Ramirez said there is no correlation that says one is preferable to the other. “The devil is in the details,” he said. “Execution separates the best performers from the rest.” Shared services rose rapidly through the 1980s, which led to a rapid drop in prices, but growth has slowed. Many companies lost momentum and even stopped. Outsourcing, on the other hand, started slowly in the late 1990s, then picked up after 2000 with landmark deals.

But with interesting developments on both sides now, Ramirez says he sees aggressive growth in both shared services and outsourcing. The factors to evaluate include process management, knowledge and controls, customer service and change management, cost and quality, set-up and migration, and governance. The choice depends on a company’s needs.

Down the road, Ramirez said we would definitely see more ITO and BPO bundled in transformations, as companies that are missing key components of technology look to fill the gaps. “Leveraging your tools’ capability is key,” he said.

Value Creation
Michel de Zeeuw, Infosys senior executive, and James Schweizer, general manager of shared business services for Philips North America , discussed the values created for Philips through its deal with Infosys, moving from a captive model to an outsourced one. (For more on this deal and its implications, see “Outsourcing Without Borders,” p. 32, in the September/October 2007 issue of FAO Today magazine.) And Bruce Piasecki presented what he referred to as “a report from the field” based on his book, World, Inc.

Piasecki emphasized the need to go green as we go global, as the price of energy rises and new social expectations emerge. “Huge numbers of people across the globe can choose to invest in Prius, etc., and take their money away from the irresponsible oil companies and others without a social conscience,” he said, adding that outsourcing can play a role in that.

Firms of this century will compete in very different way from how it was done in the last century. Social need is becoming a driver on an equal footing with price and quality, and the question will be how fast companies can create products that will meet all the requirements for consumers.

Outsourcing of finance and accounting will further companies’ efforts to differentiate themselves and achieve best practices, optimizing such functions as reconciliation, reporting, and global supply, as companies seek ways to reach billions of people who cannot afford their products yet. Quoting Winston Churchill, Piasecki said: “Out of intense complexities, intense simplicities emerge.” Outsourcing can help lead the charge, he added.

Procurement Potential
FAO Today publisher Jay Whitehead interviewed ICG Commerce CEO Carl Guarino about the future of procurement outsourcing. The resulting Q&A appears on p. 31 of this issue.

In concurrent afternoon sessions, executives from Corning, Marsh Inc., Capmark Finance, and American Express mixed it up with presentations on both insourcing and outsourcing.

In “Delivering Value Beyond the Obvious,” Manish Sahai, VP Service Network Partners, Customer Service International (CSI) American Express , spoke of that company’s “simple but powerful vision to become one of the world’s most respected service brands.” At the heart of that effort, he said, is a rewarding relationship. And what is outsourcing but a long-term, results-oriented business relationship with a specialized third-party services provider?

He attributed a quarter of Amex’s growth between 2002 and 2007 to the offshoring arena and looked ahead to the looming replacement of 75 million Baby Boomers by 30 million Generation X workers. “In spite of rapid skilled worker growth in India and China,” he said, “there will be a 14 million-person shortage of skilled workers globally by 2020.” (Source: 2006 Korn Ferry study.)

The big challenge is to consistently provide value, according to Sahai, with key failure points being unrealistic expectations, no clear strategy, far too many requirement changes, and advisors under-servicing customers and providers in areas of change management and managing transitions. Among the barriers to outsourcing he cited are:

• Lack of sponsorship in the C-suite;
• Loss of control;
• Too complex/critical to outsource;
• Loss of flexibility;
• Negative customer reaction;
• Poor process management; and
• Unclear performance management.

He compared the best practices of outsourcing to the winning traits found in Stephen Covey’s bestseller, The 7 Habits Of Highly Effective People. The winning strategies to outsourcing partnerships, he said, are:

1. Aligned brands;

2. C-level sponsorship—“I can’t stress this enough”;

3. Partner-centric initiative. “Put first things first. It’s not about the outsourcing organization; it’s not about your organization. You have to be partner-centric. Think about how your partner is thinking. Don’t relegate your partner to the corner. Let them use their expertise.”

4. Co-create value. Think win-win. This is the habit of mutual benefit, said Sahai. Share the co-created value.

5. Pay for performance. Seek first to understand the philosophies of the partners you work with. What should you do so they start doing what they do best to benefit your customers? If your partner is going to invest in its own organization so the products that get sourced improve, you will benefit from loyal customers.

6. Champion challenge models. ”This is the habit of synergy. If we go into a market like the U.K., we have a local market partner, a proprietary center, so we champion and challenge all three sites from a cost and quality perspective.”

7. Balance between efficiency and effectiveness.

“Each of us needs to make a conscious choice to become a leader in the outsourcing industry. If we are to be part of inexorable growth, we have to choose to be a leader in the industry,” he said.

Ron Somers, president, and Richard Rossow, director of operations at the US-India Business Council (USIBC), spoke about the future of outsourcing in India. A more detailed discussion of that session and the USIBC can be found on p. 24.

The Finance Futurists
A lively panel discussion pitted providers against one another. David Kaminski (VP, F&A North America) represented Capgemini ; Nagendra Bandaru (VP, Global Business), spoke for Wipro BPO ; Ritesh Idnani (VP, head of global sales) represented Infosys BPO ; George Evans (managing director) opined for OPI ; and Akiba Stern (global outsourcing partner) held forth for law firm Morgan Lewis. Crossing Media CEO Elliot Clark presided.

FAOT: Many companies face the prospect of changing models to shared service centers whether they use an external provider or not. What is the best format to ensure future success—the “Big Bang” implementation or a “pilot”—and why?

GE: OPI says pilot all the way. The days of big bang are over; there have been some brilliant exceptions to that over time, but our read is that the marketplace is consultative, and you have to make an educational sale. Also, most buyers are novice outsourcers…We find there’s an appetite for the cautious approach. We did 30 transactions in ’07, and the average FTE count was between 10 and 100 people. We don’t believe any offshoring transaction is too small. Customers tend to increase scope, so it’s all about starting somewhere.

RI: I agree with George this is the way to go forward. Are companies looking for costs, standardization or transformation? Goals influence choices. Is it about operating in multiple geographies or multiple lines of business? What’s the tech landscape?

All these factors influence the choice between going Big Bang or pilot. Big Bang has many moving parts, so it’s more risky. The bulk of Infosys deals are pilot, but they are scaling up rapidly.

AS: It really is a Big Bang, but with an initial phased approach. You have to find success, which starts a virtuous circle for future growth. On the service provider side, a successful implementation makes them want to stay on that deal and grow it. Nobody plans for a small roll-out, although clients do that to see how it goes. You need proof of the concept and a build-up of positive perception.

DK: We do both. Capgemini in 2004 did the largest BPO deal in the history of outsourcing with TXU. I spent nine years at Microsoft as a client of outsourcing. It’s a better solution if you adopt a pilot mentality, but it depends on function. A lot depends on what the client wants.

FAOT: We have seen providers increase the FAO footprint into the realm of planning support and other strategic thought processes. What is the ultimate reach of FAO, and what is the limit of tactical versus strategic? How can service level agreements apply to these new frontiers?

NB: Regarding the planning and budgeting process, I don’t think those will ever come to an outsourcer. Next year we are starting to get involved in corporate planning processes. It’s very internal, but if the outsourcer is deciding how the company is going to shape up for next five years, the best doctor for that is key management teams within the organization. We don’t think outsourcing has a role to play there.

DK: There’s a practical limit for outsourcing tactical vs. strategic, which varies by client. Service providers have to provide more than bottom line improvement, they have to lead toward improving the top line. We’re just starting to get into that space. It’s more than labor arbitrage. We help the client think through sourcing strategies relative to creating centers around the world and tax planning. Regarding SLAs, more clients insist they are being documented for process improvements. You have to do this, even on a quarterly basis; it’s not enough to come forward once a year.

RI: The key question is, “Am I able to get that offering at a particular location for better or equally quality? If the answer is yes, then it falls within the realm of what can be outsourced. Can you preserve the knowledge associated with this? When you are building leadership in an organization, you need holistic coverage—can you manage that? In a captive environment, many are sending leaders to captive centers to have more rounded knowledge. It’s linked to the business outcome.

FAOT: The war for talent has not ended. Is talent management limiting the scope of expansion here?

GE: Some of this is about the kind of organization you want to build. It’s related also to how complex you want to be in terms of service offerings. We all do market research. We are doing valuations of private companies, supporting investment banks and equity research groups. It’s a function of what you want to build and the people you want to attract. We are seeing this in the world of private equity—when someone has a portfolio of companies, and those 60 companies have to buy everything through one person, they want to talk to us about doing that planning and strategic support across the portfolio. This is the complex F&A front that has not been mined well by the BPO community.

AS: The notion of service levels is to shine light on where there is nonperformance, so you can see what is not right and how to fix it. You can do that on a higher level. It’s more of a quality statement. You can measure it through customer surveys. If you are looking at limits, some things are done in a consultative role. At what point does that become a regular service that you buy, and at what point does the service provider become your partner? When that happens, what’s the skin they have in the game? How does that work?

FAOT: As the labor arbitrage gap narrows, how will shared-service centers in low-cost economies drive productivity and automation in order to maintain competitive advantage?

DK: Providers want to be competitive and bring value, but it’s set up so our job is to come in and have as many heads and generate so much income, and we have to bring efficiencies to the client, including proprietary technology. How do we remain competitive in the marketplace? We’re hearing one thing over and over: technology solutions. All clients want innovative proprietary solutions to be competitive.

NB: The power is in bundling technology with process. The future in low-cost economies is in bundling and adding the platform of procurement. Today we are
not bundled.

RI: Over a period of time, what you expect to see on the supply side in countries where the rupee is appreciating, the focus is on the hope that wage increases will start to plateau, so arbitrage remains constant. But having said that, we recommend you drive productivity and automation and look at the transaction—don’t manage by the number of heads, but by transactions.

GE: I agree with Nagendra about optimizing shift. Culturally, you have to test all of us about productivity. We can talk about process improvement and best practices, but dig down into HR practices around that. The 90-day challenge is our teams are required to bring major process improvement every quarter. We think there are huge benefits to doing different things with different providers.

NB: The entire ERP is where you get efficiencies.

FAOT: What are the legal and regulatory risks of global shared-service centers, and as the world gets flatter, will companies be better off managing these risks themselves, or will they find it’s a better strategy to transfer risk to a provider?

AS: You can’t transfer risk. If you are a regulated business or entity, your regulators say you can’t do it. In pharma, as in financial services, you can’t transfer risk. But when you transfer services, your providers’ acts can cause you to violate your requirements. In your contract, you have to stipulate that they will have to share in any consequences. The classic argument will be who pays? You have to write in that they will share either positive or negative incentives.

DK: Political risk is another real issue. If you set up a center in Guatemala, are you better off handling that center or letting the provider manage the center? We are politically connected with the government there and can help from that angle. We can get things done through our connections that the buyers might not.

RI: Responding to Akiba’s point, where you have a regulatory environment, there’s a cost of risk control, especially in industries where risks are common and standardized; e.g., Sarbanes-Oxley. We’ve built a dedicated practice with resources to deal with this. Providers will set up and support companies more than before. Where risk is not standardized, that’s where providers will be challenged, and it will be cost-prohibitive to step up and do this. It’s better that risk remains in-house with the client organization. There’s an ability on the client side to link absorption with an appropriate reward.

FAOT: We have seen a new trend toward multi-tower deals with finance procurement, HR and even IT processes. For future deals, will providers need to be able to address multi-tower deals to succeed?

DK: Without question.

NB: Absolutely.

RI: I agree we need to have the ability.

GE: No, we don’t think so; It’s the old jack-of-all-trades, master-of-none argument.

AS: I agree with the panel.

BPO Technology: The Next Wave
Early in the morning of Nov. 16, Elliot Clark and two experts examined the question of where the next generation of technology will take finance and accounting outsourcing. Anantha Radhakrishnan, vice president and head of strategic platforms at Infosys BPO, and David Blanc, senior director of business transformation at the Hackett Group, provided their perspectives.

FAOT: With the first wave of savings realized and double-digit wage inflation, many outsourcing buyers are asking what’s next? How will the next generation of BPO technology address the fact that productivity gains from automation will have to outrun narrowing in the labor arbitrage of low-cost economies?

DB: Technology can help eliminate waste, optimize business processes, and automate functions when done in a low-cost economy. If you can get technology to do the reeingineering—you have to be sure you are doing the right things, then speed them up with technology and low-cost labor—you’ll get the highest return on investment and flexibility.

FAOT: Many people see the BPO providers as driving the next wave of technology upgrades as they need to satisfy buyers that they can keep the client’s ERP technology state of the art. Will BPO drive upgrades for their clients?

AR: The important thing increasingly, as ERP technology moves from one wave to the next, is to incorporate best practices and learnings. Many corporations get stuck in a morass. They picked up the last version, significantly customized it in a way that was unique to their business. You need to understand the process that gives the best advantage, but you also need to know the context of the process. Being standardized without customizing is an auxiliary solution to get to the next step; otherwise it’s expensive and lengthy to get to the next step. Clients need to apply innovation through standardization. If you want to get to that next step, you have to work with standardized, best-in-class processes.

David: I agree completely. Technology is expensive, and master data maintenance is expensive. If someone can leverage that across a base of clients, with core administrative services surrounding software, it will be better. If you have an application services provider for ITO and BPO that takes care of all those things concurrently, the cost of ongoing maintenance and upgrades is spread.

AR: Infosys is a strong partner in technology. In procurement we have done more than 100 implementations, and invariably there is a standard for best practices, best-in-class. You can incorporate that and offer it through one model. It’s a paradigm shift. The idea business folks need to understand is there are tradeoffs with standardization. People who make the tradeoff working with a provider that handles best-of-class services on that platform are setting themselves up for less pain in the future. You need to manage stakeholders in a corporation who want customization to balance out the pain and the gain.

DB: Most business processes don’t need to be different. When you look outside enterprise providers to find the most time-effective way to do it, people across the industry go to the same answer.Diversity drives extra cost for enterprises. Standardization leverages cost for everybody. Even more lucrative than the system itself is the business savings that come from doing things the same way.

FAOT: Are software as a service or hosted SaaS applications the real future of BPO technology as providers generate true, upgradable, one-to-many models and create standardization across their client portfolios in process design and software usage?

AR: Absolutely yes. We have created a group with IT as part of BPO. It offers SaaS plus BPO on top. This is a mandate for what we believe will drive value for clients in the next wave. There’s not as much fear of security breaches because it runs out of the same instance. A best-of-class way that is standardized can be encrypted on the platform. Think of it as a restaurant: You can go to the Italian kitchen where you can get things the way you want them, or you can go to MacDonalds and get a Big Mac. You get so many fries, you have two buns—that’s what you get, that’s what you pay for.

DB: The reason why it’s the future is it’s common already. If you are running an ERP system and think it’s a radical concept, people have been doing standardized things on shared systems for 17 years, and the perfect example is the Internet, if you look at Amazon.com or other sites. Millions of people are using the same system at the same time. There’s no reason why businesses can’t do the same.