VideoTo hear it from Lim How Teck, the days of the finance function as we know it may be over. In his utopian vision, a sizable multinational — say with sales of US$5.5 billion — could get by with no more than a staff of 50, including the CFO, at its global headquarters. "Treasury, management accounting, and financial accounting need maybe only ten people each," says the finance chief of Neptune Orient Lines (NOL), which happens to be a global company that made that much in revenues last year. "The rest will be doing tax, insurance, risk management, and compliance — that's it," he adds, kicking back in his chair.
But what of the staff who deal with the nuts and bolts of working capital and bookkeeping? They can all be based offshore — and not on the company's payroll.
In the controversial world of offshore outsourcing — or offshoring, as some call it — much of the attention has been given to corporate IT systems. Arguably, finance chiefs saw the idea mainly in terms of dollars and sense — how much they can save by moving jobs to remote locations, where the same set of skills can do the same amount of work for a fraction of the local cost. Increasingly, though, outsourcing is reaching familiar territory, and if many a CFO follows the trend, they may soon be practicing their golf swings on what used to be their finance floor — after they've sent labor-intensive finance processes thousands of miles away.
For now, those who have done it are the exception, not the rule. The market for business process outsourcing (BPO) — which includes finance, personnel and call-center functions — is still immature. While some value the IT services market upwards of US$500 billion, the BPO market, says US consulting firm Gartner, should reach just US$130 billion this year. And of this, only US$3 billion would be contracted out offshore, say to India, China, or the Philippines. And while this year's figure is 65 percent greater than last year's, Gartner says operational concerns will constrain the adoption of offshore BPO until 2007, after which a more robust growth is expected.
Two Roads
But those who choose to wait and see may be missing out on further potential savings and improved operational efficiencies — the kind that NOL and Agilent Technologies now claim to be experiencing. The two companies could not have approached outsourcing more differently. The first is a Singaporean holding company whose main assets are run from the US; the other is an American corporation that generates half of its revenues from the Asian region. NOL chose to outsource its finance function to a third-party provider; Agilent went with the "offshore insourcing" model, industry jargon for actually owning the unit that does the work for the other global entities. NOL chose to outsource in Shanghai; Agilent is doing it in a New Delhi suburb.
Both, however, have relinquished completely all finance-related transactional processes to the offshore centers — payables, receivables, financial accounting, and fixed-asset accounting. The results, which both admit are just starting to show, are promising. For NOL, Lim says that an immediate benefit is a saving of around US$100 million a year. For Agilent, Carmelo Leung, financial controller for Asia Pacific, claims a reduction in finance cost from 2.5 percent of revenues two years ago — Agilent's turnover in fiscal year ending October 2003 was US$6.1 billion — to near 1 percent, which he considers the industry standard. "We're a lot more competitive now," says Leung.
NOL turned to outsourcing following a painful lesson in untimely investment. The company, headquartered in Singapore, had bought a fleet of ships that were delivered starting in 2000, just when the US economy entered a period of decline that consequently sent freight charges plunging. NOL suffered massive losses in the succeeding two years, prompting management to restructure the group and cut both fixed and variable costs. NOL sold a number of subsidiaries, leaving only the two American companies it had previously acquired - APL and APL Logistics. "We reached a point when headcount had been stretched so much that there was no more headcount to slash," says Lim. "The next step for us, realistically speaking, was to outsource."
For its part, Agilent, which specializes in communications, semiconductors, life sciences, and test equipment, embarked on an outsourcing arrangement after its spin-off from Hewlett Packard in 1999. Going it alone meant the California-based company had to use the back-end systems employed by HP, even though it was now a much smaller business. "The systems that we used to run out of HP have evolved over time, and we kept on adding a lot of new things to the old house," says Leung. "When we broke out of HP, we knew that not only were the costs (of running the system) phenomenal, but it was also not suitable to our new business condition." That was affirmed when Agilent hired Atlanta-based Hackett Group to benchmark its finance cost, and found that it was spending 250 percent more than its average peer.
Getting There
An offshore outsourcing arrangement would not be possible without a shared service center — something that many Asian companies, and a few multinationals in Asia, are still grappling with. "It's an essential prerequisite to implementing this type of outsourcing activity, which is relatively low-value-added work," says Lionel Smith, regional head of consulting for Asia for JPMorgan in Singapore. "You need the systems and processes that a shared-service environment brings to facilitate this level of outsourcing, and you need the shared-service management structure to lead the introduction and manage the issues day-to-day."
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