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.
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.”
Moving to an outsourced structure came relatively easy for NOL. As early as five years ago, the company had already set up a shared service center in Manila, which it later transferred to Shanghai as China accounted for a greater share of its trans-Pacific and Asia-Europe sales. The center was then handling payables, cost accounting, and documentation, which involved processing bills of lading. Its receivables function, however, was scattered throughout its regional hubs, including Memphis for the US, Rotterdam for Europe, and Shanghai for Asia. Apart from Shanghai, NOL felt the pinch of high wages in the other two locations when it started to post losses.
“As long as you have a lot of activities in a high-cost area, you come to a point that those remaining incomes get expensive on a per-head basis,” says Lim. NOL knew that transferring finance positions to Shanghai was an obvious next step, but the unions overseas were a stumbling block. “If you outsource, the union constraint is more easily tackled than if you were to migrate from country A to country B,” says Lim. That, along with projected cost savings and other benefits, convinced NOL to shut down its shared service center and move its functions to Accenture, a US-based outsourcing and consulting firm which, at that time, was seeking to establish a presence in China.