The Hackett Group's 18th Annual Best Practices Conference examines the future state of business while offering success stories and advice for surviving the economic downturn and thriving in the days ahead.

by Peggy Cope

According to Ted Fernandez, CEO of The Hackett Group (pictured at left), the 20/20 Vision theme for its 18th Best Practices conference in April was appropriate, given the changes being encountered in the marketplace and with competitors. As Fernandez extended his welcome to 400 attendees from 175 companies, he said, “The state of the global economy set the stage last year. Is the wind behind our backs or in our faces?”

Fernandez had a few salient observations to make on the state of the industry. As we entered 2007, he said, the economy was already going slow, and the impact of the housing bubble was being felt. Perhaps that was not difficult to understand, given the very surprising, giddy values that housing had risen to and the accompanying euphoria. What was harder to fathom was the rising commodity prices.

As corporations grappled with the effects these developments had on the global economy, everyone expected the U.S. economy to slow, but most anticipated that growth in Europe and Asia would soften the blow. Hackett saw strong growth in 2007, more than it expected. But in the fourth quarter, reality set in.

“You can’t have all these things happen and have the economy continue to grow,” said Fernandez. The question now is, how bad will the economy get? The subprime crisis is still playing out, and its full impact is not yet known. As corporations plan for volatility, we must expect the unexpected.

“Everyone’s jobs have just gotten a little tougher,” Fernandez warned. “The best way to summarize the situation is to say that continuous improvement, or having an organization that has the ability and agility to react to a changing market and conditions, isn’t an option, it’s a requirement. It’s time to get to work.”

In a session on sustaining growth by lowering costs and improving performance, Steve Klinger, president and COO of the Smurfit-Stone Container Corp. , talked about the phenomenal turnaround his company has made by “transforming G&A (general and administrative) functions to get them delivering value.”

The four stated goals of the company were to reduce debt, lower costs, invest in manufacturing facilities, and right-size the organization. Chanting the mantra “Simplify, standardize, and automate,” the company closed four mills and 29 box plants, and it reduced head count by 21 percent. Reducing the population of the human resources side of the company pushed remaining staff into more strategic areas, while pushing transactional work into shared services centers.

How to be World Class
Wayne Mincey, president of The Hackett Group (see more on Mincey, a keynote speaker at the FAO Summit June 2-3, on p. 10 of this issue) spoke about what separates winners from losers in today’s marketplace and moving ahead into tomorrow.

“More clients are asking about effectiveness, compared with a focus on cost in the past,” he said. He also cited a link between reducing complexity and achieving world-class performance, noting that the average company has three ERP technology platforms on a global basis, whereas a world-class company would have only one.

Mincey also talked about the use of shared services among world-class organizations, a phenomenon he said is well known. However, he noted that the
functions outsourced or put into shared services are becoming more sophisticated, comprising business analysis and planning functions.
“These are not your father’s shared services any more,” he said. “They are extending to things that add more value.”

Among all the other ways corporations can gain world-class status, sourcing was one that Mincey emphasized. “If you can’t get it all done yourselves, take some pieces offshore to a partner to let you focus on things you need to change. World-class companies will take advantage of
sourcing opportunities.”

Outsourcing Success
In a session on improving operational performance while reducing costs via outsourcing, Matthew Idle, head of credit operations of Great Britain’s Centrica , had a few pointers to share for companies hoping to make the most of their sourcing deals (see details of the Centrica contract in the May/June 2007 issue of FAO Today).

Hackett research shows that 26 percent of world-class companies outsource at least 25 percent of their finance transactions already. And with an eye to the future, 44 percent of world-class companies plan to increase their finance outsourcing by at least 25 percent in the next two years.

Idle discussed the key elements of a great partnership in outsourcing, among them:
• Engage key stakeholders early and take them on the journey with you;
• Be honest with yourself and your chosen partner;
• Decide your scope early and don’t deviate from it;
• Rigorous planning and flawless execution are essential;
• Communication and engagement are key to success;
• Plan ahead. “Don’t stop at the migration stage, think through the retained organization you will need and how this will interface with the outsourced team in a business-as-usual environment,” he said. “We didn’t do this the first couple of times, we got fixated on migration activities, the puzzle parts, but that’s only half the story. You have to understand how you are going to operate over the coming months and years.”
• Be single-minded but flexible.

In entering an outsourcing arrangement, Idle noted, you must identify the key stakeholders before you start planning. In addition, you have to win over the senior management who need to buy into the principles and the employees who will be affected. “Don’t forget support activities,” he noted, whether it’s information systems, commercial teams, auditors, or other working parts in the organization.

Identifying an executive sponsor and using them to secure the right resources can be of enormous help, he said, recommending companies “use a senior stakeholders/sponsor in the project governance—your success must become their success.” If you explore options with your stakeholder group, they will be far more committed to a successful outcome if they took part in the shaping debates.

When entering an outsourcing partnership, said Idle, be honest and clear about why you are outsourcing. What is the primary driver? Is it cost or service? Communicate the answer clearly to all involved.

Beyond that, don’t pretend your systems, processes, or staff capability are greater than they really are. Share your assessment of your capability fully with your chosen partner. Share any concerns with your partner at the planning stage, so you can mitigate risks. Planning gaps will always be uncovered during migrations anyway. No surprises mean happy stakeholders and great partnerships. And don’t let your quality or service lapse.

“I’ll be honest, all of our outsourcing decisions were purely driven by cost, but don’t let your service deteriorate,” said Idle. “If cost is your primary reason, be honest about it. Don’t drive your service provider choice by quality if what you really want is cost reduction. But we don’t want the cheapest cost—we want value for the money.”

Idle noted that Centrica used to live in something of a state of denial. “We used to pretend our processes and services were better than they really are, but it will catch up to you. When we outsourced F&A activity, we wasted 12 to18 months talking among ourselves because we weren’t being honest about how good our finance systems, processes, and people were.” They broke that cycle by initiating a Hackett benchmarking study. Hackett broke the news that Centrica was a long way from world class. Fourteen months passed while Centrica fixed the existing problems.

The good news? “If you know about problems, you can mitigate them. If you try to stick them under the carpet, it will come out eventually, and you’ll have very little scope to recover,” said Idle.

When it comes to determining the scope of an outsourcing engagement, Idle recommended you “find out the art of the possible.” investigate what suppliers do for other organizations, talk to other companies that have already outsourced, and learn from their experience. “F&A is just another set of rule-based processes; nothing your organization does is special or unique,” he said.

Next, decide on your risk appetite and plan accordingly. Engage affected stakeholders in the decision-making, but be sure to have the difficult conversations early. At Centrica, one stakeholder was holding out for two months, saying he didn’t want to outsource. It turned out he only disagreed about the outsourcing of five specific people in one area he supervised. He agreed with the outsourcing choice 98 percent, but those five people were holding it up. The company agreed to keep those people, and he became outsourcing’s strongest advocate.

Decide on your transition model: transition then transform, or fix and transition. Different models are right for different situations and risk appetites.
Do your due diligence thoroughly, starting with current performance as a baseline. Test IS solutions, and think through information security. Most plans look great on paper—it’s only when you test them that the cracks appear. If you find them in the planning stage, it’s easier to fix them.

In addition, involve potential suppliers in the scoping debate; there is no point in deciding on a scope that your supplier can’t deliver.

Practice Makes Perfect
Be sure to plan rigorously if you want flawless execution, he advised. Do not cut corners or try to save money on project management. You need a dedicated team that has credibility within the business. “You’ll probably get this wrong the first time or first couple of times, but the third time you do it, you’ll get it right. Use your executive sponsor to secure the right resources,” Idle said.

Develop migration plans jointly with your chosen supplier, manage stakeholder expectations, and communicate the plan widely and thoroughly. (Don’t expect employees all to be reasonable about what they want… there will always be some who aren’t, and sometimes they will even know they are unreasonable and not care.)

Be realistic about the timing of key milestones, set stage gates, and establish go/no go criteria in advance. And be sure to set rigorous governance around your project from Day One. Some people try to avoid this, but if you do it right, it’s a help, not a hindrance, said Idle.

In any organization there are two kinds of people: those for and those against outsourcing, according to Idle. It’s a very emotive subject and polarizes opinions. One bank in England openly says it will never outsource, and this makes the bank very popular with its clients.

In an unusual move, once Centrica decided on the scope, it told the functional managers from those areas it was thinking of outsourcing their departments. The company made those leaders responsible for making final decisions on scope, and they led the communication and engagement efforts with their people. They are far more credible than anyone else would be, standing up with their own people. Idle led the outsourcing activities, but only by facilitating.

Involving the team leaders helped pave the way to a smooth transition with fewer surprises.

Be open and honest about your outsourcing plan, and communicate frequently with your staff to avoid rumors and misunderstanding of facts.
“Treat your staff as adults. Don’t duck the hard conversations or avoid the difficult messages,” Idle said. “We avoided some confrontation and walk-outs by engaging the staff early and honestly.”

Plan for the Migration
The stage that involves migration of work is difficult and carries risk, usually requiring the most planning of any outsourcing stage, said Idle, who noted that most outsourcing projects fail to adequately plan for the retained organization and how it will interface with its outsourcing partner. The outsourcing company will need a clear decision-making authority, clear roles and responsibilities, and proper change control processes in the business-as-usual operating model.
Retained staff will need to deploy new and different skills associated with supplier management. The company must consider whether to retrain or replace those skill sets. It also will need to plan a new operational model in conjunction with the migration plan.

In summarizing Centrica’s journey and providing pointers for other companies with the goals of meeting customer demand while reducing costs, Idle recommended the following:
• Be clear what you are doing and why;
• Manage customer expectations. Com-municate openly with them and acknowledge feedback;
• Involve your stakeholders; they care about results and want a successful outcome;
• Work in partnership with the supplier to deliver what you said you would do…meeting customer demands; and
• Remember, the key word is “partner.”
Said Idle, “You are outsourcing the responsibility for doing the F&A activity. You are not outsourcing your risk or absolving your organization from its fiduciary duties to your internal and external customers or shareholders.”