Wednesday, October 29, 2008

CFO Insights—Achieving High Performance Through Finance Business Process Outsourcing


Global Sourcing of Service Delivery

Three Ways To Source Globally
 Option #1: Some large global corporations such as HSBC, British Airways, and GE have retained key F&A activities in-house but relocated their back-office operations to low-cost locations such as China and India. These are what we call ‘captured in-sourced shared service solutions.’
 Option #2: Other companies have shifted their back-office processes to one of the many niche business process outsourcing (BPO) service providers.
These are generally native operators based in low-cost countries such as India. Historically, this strategy has been used most often for IT outsourcing.
 Option #3: Buyers who select this approach utilize the global delivery networks of mega-service providers who operate from multiple locations around the world. By leveraging their outsourcers’ resources, these companies shift back-office work to the geographic-and-skill mix that best fits their requirements.

Why exactly is outsourcing growing in locations such as India, China, Eastern Europe, and the Philippines? Among the most critical factors are:
 Skilled manpower availability: India, for example, has the second largest English speaking workforce and the largest higher education system in the world (250 universities and 10,500 colleges).
 Multilingual proficiency: NOL’s service center in Shanghai, for example, offers 17 languages – and this number is increasing.
 Highly motivated employees: Labor arbitrage, surging productivity, and higher quality levels are all having a profound impact on BPO operations. Centers are attracting better-educated, strongly motivated employees who see outsourcing as a career path.
 Favorable government policies: Tax concessions, telecom deregulation, patent protection, and better policing of software and intellectual property piracy.
 Improvements in telecom infrastructure: Costs continue to plummet in this area (for example, a 45% drop in India in 2002); bandwidth is improving; and cheaper, more efficient Internet technologies are easily available.

To clarify your outsourcing goals, ask yourself the following questions:
1. How much effort is needed to simplify and standardize processes?
2. Are the benefits of scale being reaped; if so, can you get more?
3. Have you taken advantage of labor-cost arbitrage?
4. If you are already in a low-cost location, could costs be reduced still further?
5. Should your outsource goals broaden beyond simple cost reduction?
6. Is there more to be gained from further investment in technology and would it be more efficient if someone else absorbed those costs?

CFO Insights
 The debate on which single country to locate a regional shared service center in, has turned into a debate on which combination of processes should be delivered from a mix of globally interconnected service centers.
 Moving to a new location allows a new service-oriented culture to be created, one that is separate and distinct from the parent company’s heritage.
New employees are not entrenched in old patterns of behavior.
 Consider the range of geographies potentially available. If you focus on one location, you may place unnecessary constraints on the performance results that an outsource solution can deliver.
 Options range from the simple to the complex, including highly customized solutions in which a combination of onshore, offshore, and nearshore locations delivers a unique mix of processes.
 Technology has caused ‘the death of time and distance.’ Physical distance is no longer a barrier to high standards of service delivery – and no longer a crucial issue in offshore site selection. Increasingly, companies are turning to the networks of multiclient service delivery centers run by outsourcing providers.

From Insight To Action
a) DECIDE WHERE YOU ARE ON THE DEVELOPMENT CONTINUUM
Do you have more to do to simplify and standardize your processes? Could you benefit further from economies of scale? Be honest! Evaluate your capabilities to transform. Can you benefit from investments in technology by mega-service providers?

b) DETERMINE YOUR SHARED SERVICE CENTER LOCATION STRATEGY
Offshore, near-shore or in-country? Evaluate your choice of location against cost and capability criteria. Consider languages, cultural fit, local infrastructure, and skills required. Rank and weight your priorities. When you outsource, this becomes an ‘input’ rather than an ‘output’.

c) CLARIFY YOUR LOCATION OBJECTIVES FROM THE OUTSET
Are you looking for labor-cost arbitrage or do you want something more? Be clear. Your strategic options range from a pure play, global full-service provider with transformational process and ERP capability to local offshore lowest-cost outsourcers. Do you want to share a service provider with other clients or follow the one-to-one service model? Be flexible: Do not dictate the choice of location to your service provider.

d) PERFORM DUE DILIGENCE
Carefully evaluate outsourcing providers’ capabilities: process knowledge, infrastructure, quality, and risk management – as well as their financial stability and ability to offer a ‘structured control environment.’ If global sourcing, it may be wise to engage a specialist third party advisor for an independent provider qualification.

e) CONSIDER INTERNATIONAL REGULATORY, LEGAL, AND FIDUCIARY CONSTRAINTS
Different countries have different tax structures, legal accounting requirements, industry regulatory controls, labor laws, and contracting practices. These can change over time and you will need to keep abreast.

f) EVALUATE LOCATION RISKS
Low-cost countries initially seem attractive. However, political and socioeconomic conditions can change unexpectedly. Prepare contingency plans for natural disasters – flooding, earthquakes, and wars. Remember: Your corporate reputation could be at stake.

g) CAPITALIZE ON YOUR SHARED SERVICE CENTER NETWORK AS A GLOBAL ASSET
Benefit from your outsource provider’s investments. Take advantage of geographic spread – interoperability between centers offers workload management, resilience, and disaster recovery. Encourage your outsource provider to grow its capabilities. You’ll benefit from lower unit-cost levels as more companies join with you in leveraging scale.


Ensuring a Successful Transition

Here is some best-practice advice, drawn from practical experience, for successfully managing each of the four implementation stages:
1. Planning – ‘Allow lots of time upfront’ Overall, when we asked what they would do differently in structuring their outsourcing relationships, both buyers and service providers said they would do more up-front planning during the transition stage preceding actual service transfer. Outsourcing is ultimately a big management time-saver. However, launching a program generally demands substantial effort from the executives driving the change – almost
inevitably more than they bargained for. Navigating the approval process, particularly in decentralized organizations, can be a hurdle. Ingersoll-Rand’s shared services group, for example, had to win approval from the presidents, CFOs, and CIOs of each of its four main product sectors before it could finalize a contract.

2. Mobilization – ‘Build a consensus’ Don’t stop at the executive suite. Line managers often bridle at outsourcing because centralization threatens their power and authority. Ignoring this opposition is a mistake. Forcing outsourcing on an organization doesn’t lead to a productive partnership relationship. Building a team is the better approach. ‘You don’t want to do this with just a small core of people,’ says Colgate’s VP of finance, Mr Pohlschroeder. ‘You want everyone involved.’ Finding a few business-line champions who embrace the idea and lobby for adoption is one good idea. Another is to explain persuasively that outsourcing is not a loss of control but rather a form of enhanced control. ‘The major issue for most companies considering
outsourcing is the initial perception of a loss of control,’ notes OneResource Group’s chief operating officer, Mr Reilly. ‘They need to understand that they are not really losing control, but changing the way in which they exercise it. Instead of controlling employees and every step of the process, they retain control by focusing on results and demanding that they be delivered.’

3. Stabilization – ‘ Measure performance’ Metrics not only measure the success of an arrangement, they also provide data to reinforce and protect programs. ‘Benchmarks help us publicize our successes,’ says Mark Abruzino, director of financial shared services at TRW Automotive, a leading maker of automotive safety systems. TRW measures 20 key items for its outsourced payroll and check-printing activities – and keeps a scorecard for each. ‘We are
concrete. We want no gray areas,’ says Abruzino. Quantitative measurements should be combined with qualitative feedback from internal customers. Consumer-satisfaction surveys can assess whether business units are getting the service and information they really need.

4. Integration – ‘Ensure proper oversight’ Outsourcing ultimately enables senior finance executives to focus on critical business issues. But that doesn’t mean they can wash their hands of outsourcing once implementation is complete. Continuous supervision of the relationship is vital; usually this requires minding the broad strokes rather than monitoring the day-to-day detail. ‘You have to stay with it through the whole life of the contract – forever – to make it work properly and get the benefits,’ says one UK finance director. A company can never abdicate responsibility for the function.

People Strategy
The following guidelines will help ensure a well-orchestrated work-force transition:
Design phase:
 Determine the job changes needed to deliver the new process design
 Establish resource baseline to enable accurate labor savings measurement after go-live
 Benchmark workforce reduction efforts and review best practices from other organizations
 Summarize the workforce transition plan impact on timing, contingency plans and implementation sequencing
 Ensure existing workforce reduction plans are compliant and define career options
 Obtain workforce transition plan approval from human resources and business units.
Build phase:
 Develop the communication plan to help local resource professionals manage the transition
 Review process design and workforce impacts with business units and gain buy-in
 Arrange for contingency staffing to minimize the risk of business disruption
 Arrange outplacement services for those employees who will not be offered new positions
 Communicate plans to employees.

Communication Strategies
 Attend to morale: Cost-cutting logic means that outsourcing almost always entails redundancies, particularly of finance and accounting staff who work at the ‘coal-face.’ Even when operations do not move globally and outright layoffs are avoided (in fact, even when finance personnel remain at the same desk in the same building), they generally face the uncertainties of a transfer onto the books and to the authority of a new employer. Morale tends to suffer, threatening dayto-day operations and the transfer of knowledge to the outsourcing provider (or shared service center). This poses challenges for the service provider, who must motivate disgruntled staff – and for the parent firm, which must keep operations running during the transition.

 Communicate the upside: As many companies have found, it is vital to convey that a shift to an outsourcing provider is not a dead end. Far from it! Such a move can offer transferred staff new career opportunities with a company whose core competency is, after all, finance and accounting. MOL, the Hungarian oil-and-gas company, moved 406 accountants to its outsourcing partner. ‘Although there has been a headcount reduction,’ reports CFO Michel-Marc Delcommune, ‘former staff seem more motivated working for the outsourcer than as accountants at MOL.’ Thomas Cook UK found that service center employees initially felt resentment, but soon saw a link between the transfer and their rising skills. This has made them convincing advocates of change for other transfer candidates.

 Stick to specifics: To ensure continuity, affected staff need concrete information about their fate as soon as possible. What really convinced MOL’s staff was a side-by-side comparison of their pay stubs before the transfer with their salaries and benefits after it. Moods improved still further with the provision of a redundancy premium to compensate for lost vested rights. CFO Delcommune says that once employees saw that they were getting a fair deal, ‘all the turmoil stopped and people concentrated on making the project itself a success.’ Where headcount is cut outright, as happens when finance operations move around the world, it’s important to devise an incentive structure that encourages departing employees to train their successors effectively. One firm that shifted finance operations for six countries to a central European center, gave redundant staff nine months to conduct their job searches. Redundancy payments were only awarded only after relevant knowledge had been captured from departing staff.

CFO Insights
 As CFO, you have to stick with it through the transition lifecycle. A smooth, successful implementation requires a structured, disciplined framework – and a holistic view of change.
 The idea of a trouble-free transition sets unrealistically high expectations. If the challenges encountered during the first year are not handled properly, they may become pitfalls that destroy a promising outsourcing relationship. It happens little by little, as unexpected problems occur. Nevertheless, the bumps are controllable – if you are prepared.
 Companies typically underestimate the resources required to deliver a major workforce transition. Surprisingly, a high proportion of a transformation team is devoted to change management – such as organizational readiness – as opposed to purely technical tasks.
 The vast majority of employees find themselves much happier in their post-outsourcing environment. However, the initial outsourcing news is almost always a shock. An effective employee communication program is key to reducing distress and paving the way for a smooth transition.

From Insight To Action
a) START TRANSITION ACTIVITIES EARLY
Allow lots of time. Getting an outsourcing program off the ground generally takes significantly more senior management effort than you imagine.
b) CRAFT A TRANSITION FRAMEWORK
The first 12 months – the transition year – is the most crucial. Put special effort into knowledge transfer and work shadowing prior to ‘cut-over.’ Segment design, build, and roll-out phases. Prepare scenarios to deal with unexpected events, such as high attrition.
c) EMPLOY THE RIGHT LEADERSHIP
Separate the new leadership roles of change management and operations; they require different skills. Win over the ‘bosses.’ Without senior level sponsorship, outsource projects are doomed to failure.
d) HAVE A PLAN AND MANAGE TO IT
Expected project outcomes should be communicated to everyone involved, internal and external. Phased release establishes interim goals and deadlines. Keep pace and intensity high throughout the outsourcing project lifecycle. Manage through regular status and issue resolution meetings.
e) DEFINE BOTH THE SERVICE LEVEL AGREEMENT (SLA) AND THE OPERATING LEVEL AGREEMENT (OLA)
The SLA defines the service levels of the outsourcing SSC. The OLA, on the other hand, defines what is required of the company as whole – including the retained organization.
f) COMMUNICATE! COMMUNICATE! COMMUNICATE!
Attend to employees’ fears early. Prepare your managers to handle resistance to change. Communicate what you expect from people during the transition. Create baselines for current performance levels to demonstrate quick-wins. Make communication two-way.



For more Information:
Business Process Outsourcing, Business Process Management

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