Highlights of the FAO Summit 2008 include success stories, provider panels, and advice on standards and practices.

by Peggy Cope

The FAO Summit 2008 kicked off at New York’s storied Union League Club with a wake-up call from Cynthia Cooper, former CAO of Worldcom, who told her now-famous cautionary tale of what happens when a company doesn’t pay sufficient attention to regulatory compliance. From there, it was one success story after another.

Infosys global sales and marketing head Ritesh Idnani and Sunil Narang, vice president of finance at Level3, talked about their
engagement and the evolution of outsourcing, from all-cost-cutting, all-the-time in the ’90s, to its current state. Now, said Idnani, the “Four Cs” of a working outsourcing framework include cost, capabilities, competitiveness, and change. According to Narang, the goals that Level 3 (an international communications company) hoped to achieve were improved scalability and flexibility; increased focus on the company’s core competencies; the most cost-effective, efficient business structure possible for increased profitability; and better ability to accommodate incremental resource requirements (e.g. unity, mergers and acquisitions, etc.).

In making its provider selections, said Narang, “We reviewed the value add from potential partners, as well as their current capabilities, process synergies, the cost basis, deployment speed, and the ability of our operational teams to meet multiple partners prior to making process awards.”

Level 3’s outsourcing partners—mostly large, world-class companies—must be aligned with its goals of becoming more efficient while reducing its per-unit operating expense. The process selection has evolved to a core vs. noncore philosophy, where a core process:
• Provides a competitive advantage (e.g. strategic network planning);
• Would provide a business risk to the partner (e.g. budget); and
• Involves interaction with Level 3’s most strategic customers.
Noncore processes are based on number of factors, such as:
• Synergies to existing BSP processes;
• Impacts due to changing environment; and
• Number of headcount.
(See more on this in the September/October issue of FAO Today.)

Benchmarking & the Business Case
President and COO of The Hackett Group Wayne Mincey delivered a report on world-class performance in 2008, based on new research and insights, in a session called “Building the Case for Outsourcing – Benchmarking and Other Tools.”

He noted that now world-class companies achieve results based on specific strategies related to outsourcing, although “Costs certainly do matter—even more so in the face of a recession or period of economic slowdown,” he said.

The focus now is on simplification and standardization, as well as leveraging technology, improving cycle times, gaining access to information and effective decision support, managing talent effectively, and sourcing work for the best results. “World-class firms agree that how you source the work is essential,” Mincey noted.

In the early 2000s, the concerns that resulted in Sarbanes-Oxley and other similar pieces of legislation made everyone pause in their annual improvements. “Then,” he said, “world-class companies resumed progress, while peer companies continued to struggle.”

The root of all evil is complexity, according to Mincey, and reducing complexity can put a company on the road to world-class performance. He pointed out that world-class firms outsource a relatively lower portion of their finance costs than other areas, and that a huge upside opportunity exists for more outsourcing of F&A.

He also noted that the captive model is still more mature than business process outsourcing, and that cost remains by far the most important globalization business driver. “It’s about cost, it’s about cost, it’s about cost,” he said, and “BPO is getting greater savings than shared services, despite the disparity of maturity.”

(Read much more about BPO and the results of a brand new Hackett study starting on p. 20 in this issue, the Offshore BPO Special Section.)

Trends & Trajectories
FAO Today publisher Jay Whitehead interviewed Robert Arthur, chief of staff at SourceNet Solutions, about market trends and the development and trajectory of that niche service provider. Noting that accounts payable is still the most popular area of FAO, Whitehead asked what the next frontier will be for SourceNet Solutions. According to Arthur, the company will be looking into processes that haven’t matured yet, such as electronic presentment for payment. “It’s taking its time,” he said.

When asked about the challenges of a large-scale implementation, Arthur remarked on the complexity of an ERP, something he sees all the time. “A company might have three diverse ERPs, but want to consolidate into one,” he said. “They have a timeline of what to do, but they never meet it. We set up pricing, plan the workforce, and implement based on those timelines.” Setting expectations and managing them is another major challenge. “Often they don’t know what’s a reasonable expectation,” said Arthur.

Whitehead asked what role advisors play in SourceNet’s business partnerships and whether they add to the process. “Yes and no,” Arthur replied. “They are involved about a quarter of the time in our deals. We have many uneducated customers come in and make up their own service level agreements.” Arthur added that the industry is evolving, and that other groups besides CFOs are getting involved in the process. “We will see more creative ways to generate working capital through processes,” he said.

Regarding the effects of a slumping economy on the business of outsourcing, he said, “There’s opportunity everywhere, whether things are good or bad. In select industries, such as moving cargo by rail, business is booming.”

Standards & Practices
A panel on FAO Standards, Practices, and Buying Trends featured a group of top supplier executives, including John Willmott (JW,  founder and CEO of NelsonHall), Bob Cecil (BC, EVP of EquaTerra), Bill Frech (BF, SVP of TPI), and David Bickerstaff (DB, engagement director of Everest). The Finance Forum’s Richard Crespin moderated.

Q: What are the chief trends in FAO?

JM: The drivers are the same as always. Cost. And the center of gravity might be in India, or China, but it’s about moving operations to where you want them.

BW: The latest trend is people looking for smaller, shorter-term deals. Then we are seeing shorter-term deals, below the five-year mark. Business is also starting to move into the mid-market. Nobody’s figured out how to support it yet.

BC: People are starting to narrow down a little more to standards. The days of pure labor arbitrage are over. Buyers and providers are industrializing models, moving toward standardization. In a new twist, we see more specialization in terms of industry focus as the market matures. Most of my clients can figure out North America, but Latin America and Asia-Pac are harder to figure out. Everyone is talking about how to serve these markets and get global process standards. That’s the Nirvana for clients, but they haven’t figured it out yet. I think we will see a professionalization of governance.

DB: People are saying, “What can we do to make sure we don’t face this issue again as the economy and business go up and down?” They want quicker savings than they can achieve, and they are also looking at flexibility and how to grow the business. We are seeing providers getting into niches in industry verticals. Each industry has nuances, and if you can focus on those issues and resolve them, your services will be desirable. There is more activity at the larger end of the mid-tier (less than $5 billion in revenue). But can service providers make money on that size of client/event?

Leaders in the Hot Seat
Henry Schweppe (HS, partner, IBM Business Consulting), Ritesh Idnani (RI, global sales and marketing head, Infosys), George Evans (GE, managing director, OPI), Robert Arthur (RA, chief of staff, SourceNet Solutions), and Mark Wood (MW, vice president, Genpact) took part in a session moderated by Jay Whitehead, dubbed: “FAO Provider Leaders in the Hot Seat.”

Q: Why don’t we do a better job of persuading clients that it’s to their benefit to adopt standards?

HS: There’s a difference between customized and one-to-many models that’s hard to track when they don’t understand the work drivers. Due diligence should uncover that.

GE: I think it’s a matter of where they are in the value chain, from least to most complex. We can walk into any shop and talk about our views of what should be going on in this operation, then you overlay custom pieces, and it gets harder as you swim upstream in terms of complexity.

MW: If you have a one-to-many model in 30-plus deals, no one has done the due diligence on our training, which is astonishing. They don’t kick the tires on that. If you understand the platform, you can take down a lot of that cost.

Q: What’s the next generation going to look like in terms of services and contract structure?

MW: If you can get a common platform, have the informatics and the data to mine, then you can create value. We are trying to do it now. Once you have a data-mining capability and can use it to develop some trends, you are creating a lot more value for the client.

GE: It’s very dangerous to put all your eggs in one multi-tower basket. We believe in best-of-breed. Firms will do related processes, but not enterprise.

What’s the pricing model of the future? Transaction based? FTE based? I say it will be a hybrid model.

HS: There will be new and innovative contracts, but I don’t think pricing is what it’s about. It’s about adding value. Clients invest with a partner and work in a partnership—they determine where it will go. The future may be about flexibility.

RI: The future will be about technology, with software-as-a-service kinds of models, and replacing BPO with business function outsourcing.

Q: What’s the future of multi-tower deals?

HS: Twelve months ago I wasn’t sure. I think there will be more, but selective multi-tower deals.

MW: There will still be best-of-breed requests, depending on companies’ needs.

GE: There will be some occasional multi-tower deals, but it will be the exception, and they will be dwarfed by selective-process deals.  

RA: Multi-tower deals are dead. Niche providers will always be needed. We are seeing five- to seven-year deals renewing now.