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Eager to focus on the things they do best, companies have turned to business process outsourcers for virtually everything else.
Russ Banham, CFO Magazine
October 1, 2001
Last year, General Motors was the world's leading travel agent — or so it would seem. The automaker sent more than 100,000 employees on the road, and that's just in the United States. Its peripatetic workforce racked up an eye-popping array of expenses for airfare, hotels, fleet transportation, entertainment, communications, and other business needs, most of them paid for via four different corporate-card accounts. The mountain of data produced by all that activity required a veritable company-within-a-company to process, flag questionable expenses, and record everything in the general ledger.
Does a company that designs and builds cars really want to devote so many internal resources to the management of corporate travel? In December 1998, GM said no, and shifted the burden to Kirkland, Washington-based Captura Software Inc.
GM is not alone in moving its noncore business processes to outsource service providers. Many companies are following suit, outsourcing a growing list of functions that includes purchasing and disbursement, order entry, billing and collection, human resources administration, cash and investment management, tax compliance, internal audit, payroll, and customer relations. A survey conducted by CFO magazine and AMR Research found that business process outsourcing, or BPO, has already become popular among companies of all sizes for a variety of reasons, and will likely gain steam in the months ahead.
Saving money is a prime motivator, of course, but advocates claim that strategy also enters into the equation. "Outsourcing has moved up the food chain," says Frank J. Casale, CEO of The Outsourcing Institute, a Jericho, New York--based professional association of more than 26,000 outsourcing executives. "It is no longer seen solely as a cost-cutting measure, a last-ditch effort to save money and perform financial triage."
Casale contends outsourcing has become a management tool, freeing companies to build upon their core competencies by leaving the noncore stuff to specialized providers. "There is definitely strategic value here, particularly in the areas of improving quality and service, instilling best practices, and having an expert on tap who will stay abreast of constant change," he says.
The institute estimates that 36 percent of all companies with sales of more than $50 million outsource today, up from 29 percent in 1996; among CFOs responding to our survey, the percentage was significantly higher. Altogether, outsourcing (both BPO and traditional IT) represents some $345 billion in resources that lie outside corporate boundaries, indicating that what was once considered a project-based tactical move is now a standard business practice. "Companies are fed up with managing complicated, messy things outside their core function," says Christine Ferrusi Ross, an analyst with Forrester Research in Cambridge, Massachusetts.
Increasingly, companies are deciding that plenty of things look messy, which is why analysts believe the BPO market will grow faster than the more traditional IT outsourcing market. "Look at the tax laws, for instance," says Ross. "There are thousands of tax jurisdictions in the U.S., constantly changing their rules. Same thing with employee compensation, benefits, and recruiting — what you can and cannot do legally is exhausting, and costly to monitor and manage." Enter BPO, which, she says, can not only alleviate the headaches but also provide "strategic benefit."
Motives and Measurements
But is outsourcing truly strategic, or is it simply a way to rent what you don't want to own? Moreover, how do companies gauge whether or not outsourcing is a better strategy than internal management? Outsourcing consultants concede that because most forms of BPO have been around for a few years at most, calculating their effectiveness is almost impossible. "There's really no way to measure it in an apples-to-apples comparison," says Rita Terdiman, vice president and research director at Gartner, the Stamford, Connecticut-based technology research firm.
John Hagerty, a vice president in the financial services practice of Boston-based AMR Research, says the proper metrics to measure the value of outsourcing are only just being developed. "But even without measurements," he says, "there's no question that outsourcing noncore business functions is a successful strategy. How do I know this? Well, for one thing, I'm hard-pressed to think of any company that has junked its outsourcing strategy. I don't see people abandoning it, because the reasons to do it are too compelling." That's particularly true for CFOs, because, as Hagerty says, "by reducing asset utilization and subcontracting a process to an expert, a company obtains more controllable costs."
GM, for example, estimates it will save $3.7 million a year by outsourcing its travel-expense processes to Captura, representing a 93 percent cost reduction. "We'll be able to take half the people out of the back-end T&E management process alone, from 23 employees down to 11," says Michael Osment, CIO of GM's enterprise activities group. "We're also saving several hundred thousand a year by eliminating paper receipts, and that doesn't even count the people administrating this. Ditto the savings on postage, imaging costs, copying, and just plain keeping track of everything." Even though GM is keeping half its staff, savings will also accrue from substantially reduced or eliminated internal IT support, hardware cost purchase savings, hardware maintenance savings, early corporate-card payments, and better vendor rates.
The capital saved in such arrangements can be strategically redirected. For example, when Wherehouse Entertainment Inc. outsourced its HR, payroll, and payroll tax business processes to Pleasanton, California-based ProBusiness Services Inc., it was able to focus on higher-end employee-relations issues. Like many retail operations, Wherehouse, a Torrance, California-based music CD, video, and DVD retail chain with 550 stores in 34 states, faces a high rate of employee turnover, particularly after the holiday and summer seasons. The revolving-door workforce wrought havoc on the company's payroll staff, which processed between 15,000 and 18,000 W-2 forms last year, even though the company had only 8,000 employees.
"It was unbelievably labor-intensive," says Karen Cass, director of payroll. "We were required to stay on top of the payroll tax laws, which change every day in the 7,600 taxing jurisdictions in this country." Wage garnishments alone, for everything from unions and child support to motor-vehicle obligations, consumed countless hours. And with 30 separate fields to be filled out on each paycheck, Wherehouse was immersed in a clerical nightmare, while such issues as recruiting, benefits, and employee retention got short shrift. ProBusiness not only handles routine functions but also provides high-level data on what Matt Keller, ProBusiness's client support manager, dubs "the true cost of employees," which can help Wherehouse make better decisions on whom to hire and how to staff each store.
Outsourcers often provide a level of IT service that their clients can't match. For example, ProBusiness doesn't delete employee records, even if the employee leaves the firm. That comes in handy, Cass says, because "we've got a lot of employees who are students working during the summer. Their data is never purged from the system — we just update it."
Defining Your Core
Offloading tedious functions may enable a company to focus on more important things, but it's not always easy to determine what to outsource and what to keep. "Look at Ford," says Ross. "It now makes tons of money doing credit financing, and is saving vast sums by leveraging a network of global suppliers. Its core competency is shifting." Had it subcontracted those functions in order to focus on building cars, might it have missed key opportunities?
Casale says that determining core competency is "the biggest struggle in outsourcing. I've been in meetings with six or seven vice presidents in a session designed to facilitate an understanding of the company's core function. At the end of the day, each of those executives swears it's what they're doing — and they're all doing different things!"
HotJobs.com is one company that had no problem divining core competencies from noncore business processes. "We are an online employment exchange with more than 8,000 corporate members," and more than $100 million in revenues, explains Lowell Robinson, senior executive vice president and CFO of the New York--based company. "We aren't, for example, a printing company. Yet sometimes it felt like that."
HotJobs.com had already outsourced its payroll, receivables collections, investor relations, and cash management when it decided to let Servador Inc., a New York--based print outsourcing company, take over "anything and everything having to do with paper and print procurement," says Robinson. "Buying paper and printing stuff like direct-mail advertising just wasn't a core function, but it was taking up time and money," he explains. "As CFO, I'm always focused on the bottom line and ways to do things more simply. Servador convinced me they could do it better and more cost-effectively."
Printing is not a hot topic at corporate strategy sessions, but the $150 billion commercial printing market qualifies as the largest custom manufacturing business in the world, according to Servador CEO and founder Doug Evans. "This is an extremely complex product to buy because of the infinite variables involved, including different sizes of paper, colors, quantities, shipping requirements, special finishings and dyes, and so on," he says. "There are more than 65,000 commercial printers in North America. To source this thing properly, someone has to know what they're doing."
Servador is a one-stop print sourcing specialist. "Instead of having to deal with different printing companies and tracking everything, our clients make one call to us for what they need," says Evans. "We buy directly from suppliers and not salespeople on commission, saving companies at least 20 percent on cost. And since we're buying volume by aggregating all our clients for the spend, we get additional discounts."
Unisys Corp. knows the ins and outs of outsourcing, since it both provides such services and takes advantage of them. The Blue Bell, Pennsylvania-based provider of networking and systems integration services has, during the past three years, systematically outsourced a major part of its HR function.
"We tried to do everything in-house," says Thomas Penhale, the company's vice president of HR client services. "We then began to outsource, starting with our employees' savings plans and 401(k) retirement plans, stuff mostly in the benefits arena. Next we outsourced employee training, domestic relocation services, stock option administration, stock purchase plan administration, and so on."
That created its own complexity, as Penhale eventually found himself overseeing some 40 different outsource service providers and agreements. The solution? More outsourcing. Unisys tapped Exult Inc., an Irvine, California-based HR outsourcing company, to manage all of them. With many large companies as clients, Exult had experience in many facets of HR, including one that was very much on the minds of Unisys executives: how to move employees in and out of international assignments.
"Exult might move 10,000 employees in a given year, whereas we'd maybe move 300," says Penhale. "They can bring this volume to bear in their negotiations with third-party vendors, pitting our previous vendor, say, against their other contracted vendors, and, based on services, terms, conditions, and price, select the appropriate provider."
That gives Penhale more time to focus on the softer side of international relocation. "Instead of making sure service levels are defined and measured, and everything is running smoothly and paid for, which Exult does now, we're giving our attention to real human relations, which is what HR is about anyway," he says. "A contented workforce is a better workforce."
And a contented client, experts say, is one that assesses the burgeoning number of BPO providers as carefully as one might choose a roommate. "Basically, you're picking someone that you're going to live with for a period of time," says Casale.
"It's not about relinquishing control," adds Stephen Klei, CFO of ProBusiness, "but about becoming secure with the idea that someone else can continue your pursuit of excellence."
Finance chiefs seem increasingly comfortable with that idea; nearly two-thirds expect their firms to make greater use of outsourcing in the future. That's a figure that CFO can stand behind, because while we may make an occasional mistake, we're sure that the firm to which we outsource our survey tabulations would not.
Russ Banham is a contributing editor at CFO.
Reasons to Believe
Percent citing each reason as a "very important" rationale for their BPO efforts.
Most widely adopted forms of BPO (% of respondents).
Sources: CFO magazine and AMR Research
BPO Is A-OK
A majority of companies already engage in some form of business process outsourcing:
How do you foresee your firm's overall use of outsourcing?
Does your firm periodically assess the ROI of BPO arrangements?
Sources: CFO magazine and AMR Research