A decade growing an F&A outsourcing deal reveals a process paradigm.

 
By Russ Banham
 
The business of Business Process Outsourcing is really relationship building—engaging in a joint endeavor with clear objectives, and then collaboratively addressing challenges and reaping opportunities as the journey progresses. In this regard, the nearly 10-year-old finance and accounting outsourcing relationship between Office Depot and ACS is a near-perfect paradigm.
 
As the world rang in a new millennium in 2000, Office Depot, the world’s largest seller of office products (with $14.5 billion in 2008 sales), and ACS, a nascent business process outsourcing (BPO) service provider at the time, struck an agreement. The deal called for ACS to service a single F&A function—accounts payable—in North America for Office Depot. Not all of AP mind you, just the workflow process. In 2005, Office Depot also shed its credit and collections accounts receivables functions to ACS, and three years hence ACS picked up the AR cash applications process to boot.
 
Driving the long-term deals were efficiency and cost. “We were starting to build in-house processes and solutions, and recognized this wasn’t our core competency,” says Mark Hutchens, Office Depot senior vice president and corporate controller. “Instead we went with an outsourcing solution that was very leading edge when we did it.”
 
What was leading edge in 2000 is not necessarily leading edge today, despite the apparent success of the Office Depot-ACS engagement. The so-called “lift and shift” outsourcing model of lifting a function out of finance and accounting, and shifting it to lower cost servicing offshore seems outdated in this era of multi-process and end-to-end outsourcing, not to mention other BPO service providers offering a “one-to-many” best practices model leveraging common workflows and processes across multiple clients. Now that ACS is likely to be absorbed into Xerox—the latter announced its intention of acquiring ACS for $6.4 billion in late-September—the question is clear: Will ACS stick to its knitting or develop a platform for multi-process outsourcing? (See Copy This.)
 
For now, though, ACS seems inclined to stick with what has worked for it well—a best-of-breed approach to solving Office Depot’s substantial AR and AP challenges. How substantial? Just consider the sheer number of items on sale at its stores across North America, from basic office supplies such as paper and staples to office equipment that includes file cabinets and desks. Now add to this the millions of businesses and consumers that buy these products each day.
 
Office Depot was in the thick of extraordinary growth in 2000, opening new stores each month, acquiring several competitors, and getting its toes wet in e-commerce. Its longtime CEO David Fuente had stepped aside, and new CEO Bruce Nelson vowed to make the company a more compelling place to work, shop, and invest. Nelson focused on invigorating U.S. retail operations, expanding the international footprint, growing the e-commerce business, and building a world-class warehouse and distribution network. In this environment, the F&A outsourcing engagement was signed. “ACS was willing to partner with us to drive innovation in our AP workflow processes, which were pretty manual,” Hutchens says.
 
The first contract called for ACS to handle Office Depot’s AP invoice processing, mailroom, scanning, indexing, and document management services. Among the partners’ early successes was the development of a Total Document Management (TDM) system, a Web-based workflow technology platform that cut costs and increased efficiency. TDM processes more than 1.5 million paper invoice images per year for Office Depot, as well as nearly 5 million electronic data images. The electronic paperless technology helped to reduce Office Depot's turnaround times for invoice processing from weeks to hours. “An invoice goes to an electronic mailroom at ACS, and the tool then flows that document through various approval and review channels,” Hutchens explains.
 
After re-upping the original AP contract with ACS in 2004, Office Depot then turned to the outsourcing provider to assist its AR credit and collections needs. The company had just purchased Viking Office Products, a public company and the world’s leading direct mail marketer of office products at the time. “We approached ACS about a solution,” says Hutchens.
 
The solution was for ACS to administer and manage Office Depot’s credit and collections functions, as well as process the related sales taxes. The new contract also was predicated on reducing cost, in addition to advantaging a more streamlined, automated, and controlled method for handling the credit and collections functions. ACS developed a seamless interface to Office Depot’s existing technology, and sought new technology enhancements to process the functions down the line.
 
As the partners’ relationship burgeoned, they undertook the next phase of engagement—AR cash applications. Cash applications within finance are a complicated, cumbersome process, absorbing enormous amounts of time and energy. “It involves a client that sends in a payment, and now you have to determine which accounts the payment goes toward,” explains Ron Gillette, senior managing director of finance and accounting at Dallas-based ACS. “The invoice may go out one way, and then the client responds with a payment in which there are adjustments for an item that may have been returned.”
 
The client might “short pay” the bill—not pay the full amount, since they believe a credit is due them for the return, he notes. “You’ve got to reconcile all these issues, and it can be pretty tricky,” Gillette says. “When you multiply that by tens of thousands of businesses buying products from Office Depot each day, you get the picture.” (The cash application cycle time was cut by nine days during the last 18 months.)
 
The recession complicated these difficulties. “A business like Office Depot, with so many small companies that do business with it, finds that when there are economic difficulties that the DSO [day’s sales outstanding] payments coming in are later than the contracted terms,” Gillette says. “With the credit markets frozen through much of the last two years, you can’t borrow money, making cash ‘king.’ We worked with them to establish weekly cash goals to keep the cash up. One way was to encourage small business clients to prioritize Office Depot when it came to paying their bills, putting them ahead of other accounts. Consequently, we’ve been able to achieve a significant reduction in aged debt, while driving decreases in DSO.” (The DSO figure improved by six days during the past 18 months.)
 
The solution called for adding more people to the Office Depot account on the collections side (altogether ACS has 150 people working on the Office Depot account), and putting a new leader at top, Gillette adds. ACS also tightened up the cash applications processes with the two banks—Bank of America and Fifth Third—that receive the payments from Office Depot customers. “These efforts have helped significantly reduce the volume of uncollected payments that were going to an outside collections agency to handle,” he says. 
 
Initially, Office Depot sought a global outsourcing strategy for cash applications, but it later rejected the idea because “the economics didn’t suit it,” Hutchens explains. It decided instead to outsource the function in North America to ACS, which offshores the service to its facility on the island of Jamaica. Office Depot retains its shared services approach in Europe and Asia.
 
The real news about the extensions and additions to the Office Depot-ACS partnership is that it underscores the importance of building a long-term outsourcing relationship—even one predicated on a “lift and shift” model.
 
Phil Fersht, a BPO consultant with AMR Research, is not a big fan of the approach, but he doesn’t damn it, either. “It can work if you have the lowest-cost delivery model and aren’t interested in developing a scaleable model,” Fersht says. “It won’t be a long-term winner, but it’s okay as a starting point if the intention is to transform ‘lift and shift’ to a utility model over time.”
 
According to Gillette, ACS will be continuing to pursue added enhancements to its “lift and shift” model. “This is all about continuous improvement and transformation—continually investing in tools, people, and processes to improve the AR and AP functions we service,” he explains. “The immediate benefit may be cost reductions, but there is far more to be reaped. We will continue to work with Office Depot to evaluate other F&A functions that will benefit from an outsourcing model in the future.”  
 
Xerox’s planned acquisition of ACS promises a larger sales force and greater document management skills for the outsourcing services provider, consultants say. The downside is the potential culture clash the merger might instigate. As with any major acquisition, the deal promises both opportunities and challenges. Regarding ACS’ “lift and shift” offshoring model, no one predicts it will change post-acquisition.
The real promise of the planned acquisition is the opportunity for greater sales for ACS—particularly overseas.
 
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“ACS has been a global company in terms of their labor, with 43 percent of their employees located in places like Jamaica, Mexico, and Africa that provide offshore services, but in terms of their top line growth it’s virtually all domestic, with 92 percent of revenue coming from U.S. clients,” says Michael Janssen, chief research officer at The Hackett Group. “Thus, Xerox, which has a larger percentage of its income coming from Europe—roughly $6 billion last year—will help ACS move into the European market via its direct sales force there. The challenge will be the typical one of integration.”
 
ACS is following in the footsteps of other technology services companies—such as EDS, Perot Systems, and PricewaterhouseCoopers’ consulting arm—all of which were acquired by large hardware companies (Hewlett-Packard, Dell, and IBM respectively).
“It was no secret that ACS was shopping itself around in the market the last couple years,” says Robert Brown, a research vice president at Gartner. “ACS had developed their BPO portfolio as their single emphasis, with 79 percent of revenue coming from this area, as opposed to its original focus on IT outsourcing. Xerox, on the other hand, has a strong heritage in document management services, and a large installed base of customers. Where the acquisition makes sense is that ACS knows BPO very well and is very client oriented—bending over backwards to assist their needs. Xerox brings to the table automation and standardization, assisting the evolution of BPO further away from the workflows being processed by humans. The trick always is to figure out a way to get a process e-enabled, where the process flow is less reliant on people. And that’s something Xerox should assist ACS with quite well.”
 
Brown’s only concern is cultural. “”Xerox has a strong sales culture and the worry is that they might snuff out the client-centric focus that ACS does so well,” he explains. “My advice to Xerox is to let the tail wag the dog—let ACS continue to do what it does best in the management of its BPO clients. As for ACS clients like Office Depot, they should expect greater gains in automation and efficiency and less manual intervention going forward.”