Shared Services & Outsourcing Network

The Evolution of Captive and Outsourced Delivery

Models for Business Processes

In or out: what's right for your company?

By: Graham Russell

Head of Global Transaction Processing
Astra Zeneca
(Issue Details: May 2008).

History

Birth of captives

Once upon a time, global and pan-regional companies operated as a collection of

single country businesses. Their back-office financial support was organized in the
same way, with processes and systems being developed at a local level in each
country. In the eighties, new global companies such as Microsoft entered the
scene and were able to quickly organize their businesses and their back-office
support services in a different manner since they were able to start with a clean
sheet of paper, making them appear lean and nimble.

By the late eighties, the more progressive companies, now often challenged to
compete with new market entrants, began to realize that they had been diluting
the effectiveness of their IT spend and, perhaps more importantly, were unable to
respond consistently to their new, more global customers who were frustrated by
different billing systems, account collection approaches and settlement
methodologies. Similarly, on the supply side, these companies were struggling to
take advantage of their global spend with
global suppliers due to their inability to easily consolidate information on spend
patterns. Meanwhile, they often had resale inventories stranded in countries, with
each country business unable to view that held by other countries, leading to
overall inefficiency in the supply chain. In addition, country-based financial
organizations were limited by their pyramid structure, typically with suboptimal
spans of management and insufficient specialization due to the variety of tasks
being performed by the relatively small country-based staffs.

The pioneers in this area set about creating accounting centers, usually at
regional level, which eventually grew up to become fully-fledged SSCs (also
referred to as captives). These centers operated with one support structure and
quickly learned the value of standardizing processes. In time, with the
advancement of technology and the introduction of networks, the “islands” of
information became readily available in one regional data warehouse, further
enhancing the value to the business. The organization structures at these new
centers flattened out the structures of old, allowing specialization in the various
functions and an improved management span due to the critical mass created.

Over time, these centers began to move to locations with lower cost and
multilingual talent, allowing them to serve broader geographies, for example
Amsterdam, Dublin, Singapore, and later India, Czech Republic, Poland, etc. Over
time, internal control became strengthened as a result of “one way of working,”
and the most forward-thinking companies started to move their regional centers
to global centers, to further benefit.

Birth of outsourcing

In the seventies, many companies realized that there was value in outsourcing
functions which were not core to their business. Payroll was often the first
function to be performed outside of the business. Companies such as EDS applied
the outsourcing approach to IT support and so the models began to evolve. In the
early nineties, British Petroleum (BP) often labeled as the godfather of business
process outsourcing (BPO), entered into an arrangement with the then Andersen
Consulting (now Accenture) to outsource many of its back office financial
functions from its quickly developing North Sea Operations Center in Aberdeen
Scotland. BPO as we know it today, was born!

Outsourcing offered many, if not all, of the benefits identified under the
inhouse/captive model described above, but introduced the new notion of service
performance levels being defined with the external provider. Moreover, the service
provider often had greater experience hiring and retaining local talent, could offer
‘round the clock support with its global delivery infrastructure, and took on the
risks associated with running remote service centers (currency fluctuations, wage
inflation, local political, legal and tax issues, etc.).

Over the past decade, outsourcing providers have expanded their BPO offerings,
with finance as the “hub” function, but offering HR, inbound customer support
and industry-specific processes, such as insurance claims processing or clinical
data management, in addition to finance support. The leading providers are also
offering “hybrid” solutions that include management of the software applications
underpinning the outsourced processes, whereby they can help deliver the
synergies of tightly aligned IT and business processes within an outsourced
model.

Many of the early BPO pioneers saw outsourcing as an opportunity to out-task

non-core back office processes and re-focus their in-house staff on managing
service levels, higher-value controllership activities and other functions that had
greater alignment with the core business. However, as they ventured into
outsourcing relationships, they also found several challenges with the model,
namely getting constant, ongoing value, cost-reduction and innovation from
service providers, who often provided a reactive service based solely on
contractually-agreed terms. BPO adopters quickly had to learn how to manage
their outsourcing providers effectively, and acquire the right skills and experience
to do so.

Markets like India and the Philippines offered significant cost advantages over the
typical European locations like Dublin and Amsterdam, which flourished in the
early captive days. In time, GE became an outsourcing provider through the
creation of its GECIS subsidiary (now Genpact), and new companies, such as
Hewlett Packard, ACS, CapGemini and IBM entered the market. More recently,
newly established providers have emerged from the outsourcing boom, namely
Indian-owned companies operating services from India, such as Infosys, Wipro
and Tata Consultancy Services. We are even seeing a further wave of offshore
outsourcing providers making attempts to enter the global BPO market, for
example Satyam, Cognizant and Patni.
Operating models

These models can help companies improve effectiveness, reduce costs and
improve internal control. Over time the functions being handled by these models
have also moved up the value chain from simple accounting or transaction
processing to most back and front office support functions. For those companies
not quite sure about outsourcing, hybrid or “virtual captive” models have been
developed by outsourcing providers, allowing for a middle ground which selects
benefits from both models.

It is not unusual for companies to start with a captive model, and move to
outsourcing later; others go straight to outsourcing. However, those with
significant experience in developing a captive model have found the transition to
a fully outsourced model less complex and arduous, as some degree of
standardization is already established. The key drivers to selection of the
appropriate model include the following:

Availability of talent

Company size - is the company large enough to attract, retain and develop the
best workforce in a given location?

University access - does the company have access to the best universities to
attract the new graduate population in a given location?

Retention programs - can the company offer sufficient career opportunities either
in the SSC environment or in the business, at the given location? Some
outsourcing providers have 10,000+ seats and multiple clients, which almost
guarantees an exciting career path for successful young graduates.

Given their size, outsourcing providers usually have the advantage in the most
popular offshore or nearshore markets, such as India and Eastern Europe, but the
captive can usually hold its own in the onshore markets.

Business control

Flexibility - many companies require a degree of flexibility, which may not be

available in a strict outsourcing scenario, so propensity for control and flexibility
becomes a key selection factor.

Process documentation - although Sarbanes Oxley has helped improve this for
everybody, outsourcing providers tends to be more rigid in process and control
documentation for no reason other than this forms the basis for training their
employees on how to support clients

Degree of flexibility required will be the key determinant in this area.

Continuous improvement capability

Lean/Six Sigma skills - this has become a core competency for outsourcing
providers and is necessary to drive the productivity improvements and
consequent cost reductions that are designed into outsourcing contracts.
Organizational culture around improvement - while many companies have a like
appetite for continuous improvement, it is not the norm for all companies.

Best practices across client base - the outsourcing provider has the advantage of
being able to draw upon best practices from multiple clients.

The outsourcing provider usually has the advantage here.

Technology and infrastructure investments

This is an ongoing requirement for outsourcing providers in order to drive

productivity. Technologies such as scanning, OCR, etc., are easier to justify over a
greater population and never suffer from the inevitable capital expenditure
squeeze. The majority of today’s top-tier outsourcing providers now offer
technology workflow tools that can help integrate financial data across disparate
systems and geographies, and provider dashboards for in-house financial
management to gain quicker access to data.

Contingency planning and back up – many companies even with shared services
models do not invest fully in this area. For the outsourcing provider, it is an
imperative, otherwise reputations can suffer and costly contract penalties can trip
in.

The outsourcing provider usually has the advantage here.

Deciding whether finance back office is core

The finance back office is the business of the outsourcing provider and since it
represents its product or service, it has to be good or better to stay competitive.

If the company decides that it does not want its employees, customers or
suppliers dealing with a third party for back office support, it will have deemed
these functions as reasonably core and will most likely find the captive model
more appropriate.

Decision here depends on consideration of what is core.

Service level – internal vs. external

Capability to measure – as outsource contracts often have gain sharing or

risk/reward clauses, representing compensation for the outsourcing provider,
there is usually a robust set of service levels clearly defined and measured. While
some companies are good at doing this internally it still marks a “luxury” for
many.

Reporting forums/mechanisms – in order to share the results of performance

measurement, outsourcing providers tend to have portals and formal monthly
meetings to review findings. This may not be the case with captives.

Performance penalties/incentives – these usually help influence the right

behaviors with the outsourcing provider, and may provide a stick or carrot not
always available under the captive model.
Benchmarking – although not offered or used by all outsourcing providers, the
existence of such a clause in an outsourcing contract should allow the client
company to stay abreast of market developments and take advantage of new
practices such as pricing models or latest cost structures in a given location. This
may be much less formal or appropriate in a captive model.

The outsourcing provider usually has the advantage here.

Conclusions

While I am not a spokesperson for outsourcing, I do believe that outsourcing

offers a distinct advantage for many companies seeking to take full advantage of
lower-cost resources and the process acumen offered by many of today’s
maturing outsourcing providers. However, the captive model is still a preferential
delivery model for a company believing support functions are core to the
business, preferring support functions to remain in the same onshore geography,
or not having an appropriate plan for displaced employees. Each of these factors
will need to be considered, along with the cost models and goals for productivity
and efficiency improvement, internal control improvement and service culture.

(Graham Russell would like to credit Phil Fersht of AMR Research for elements of
the material in the sections on outsourcing.)

Copyright © 2008 SSON. All Rights Reserved.

About the Author

Graham Russell is the Head of Global Transaction Processing at Astra Zeneca.

His earliest experiences in shared services were at NCR Corporation and
subsequently AT&T Corporation where he pioneered the shared service
operations in Latin America. Russell subsequently moved on to Equant (now
Orange Business Services) where he architected the shared services model and
implemented the global processes and systems to support it. In time, he took
over the operational responsibility for the global shared services organization and
after a period, outsourced the majority of the work to an outsourcing provider
using locations in India and Poland.

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