Farewell, Finance

A Singaporean holding company whose main assets are run from the U.S., and an American corporation that generates half of its revenues from the Asian region, have taken very different approaches to offshoring the finance function.

To 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.”

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.

The move immediately cut down the number of people on NOL’s payroll by at least 200, and more are expected by the end of the year, when the last 20 percent of the countries the company operates in joins the outsourcing structure. Following its spin-off from HP, Agilent decided less than three years ago to set up an outsourcing facility in India. Called Agilent Technologies International (ATI), it was originally meant to support headquarters’ engineering services, R&D and IT systems. “We did think that finance could be one of [the functions ATI could support], knowing that India has a lot of accounting folks,” says Leung. Within a year, the company, which at that time had more than 40,000 employees, began to move certain functions to India, starting with those that are internal to the company such as expense reimbursements.

Next, Agilent eased in what it calls its key business flows: procurement to payment, quote to collection, and accounting to reporting. The first, says Leung, covers the procurement process, from doing a tender, to getting a quote, to placing an order, to paying suppliers. The second covers processing invoices, collections, and matching the remittances with the original invoices. The third involves “all accounting entries — to a point where we could close all the books [until we're ready to] report the financial statements both internally and externally,” says Leung, who is based in Hong Kong.

This meant moving most of the jobs to India from Colorado (until then the hub of Agilent’s transactions processes) and from smaller regional hubs such as Tokyo, Barcelona, and Singapore. ATI then became the company’s new global hub for finance. “We hired a team in India and gave them classroom-type and some hands-on training on our systems,” says Leung. Agilent also sent the new staff to Colorado for further training with staff there. Of course, the US and other workers eventually lost their jobs, but they got “a very competitive severance package,” says Leung.

Prior to outsourcing, Agilent had 1,800 employees directly related to the finance function. This, says Leung, was 210 percent more than the average world-class company as surveyed by Hackett. Leung declined to disclose how many finance employees were made redundant — overall, Agilent lost a third of its workforce to some 29,000 now — but ATI currently employs around 900 people, including both R&D and shared services. The regional offices, meanwhile, still hold about 50 people each.

A Stitch in Time

Leung calls the finance offices in the various regions “centers of expertise” that do higher-level finance work. Singapore, for example, is in charge of treasury and cash management. “As we went to a global hub structure, we still kept these places, doing work that is best done in a country outside of the hub for coordination; for proximity to a business or customer,” he says. This approach is similar to NOL’s, which also does cash management at the headquarters in Singapore, and keeps what Lim calls “centers of excellence” overseas.

The difference is that NOL’s centers can have a headcount of as few as one person, mainly to deal with problems that may be too complicated for the Accenture staff handling their account. “Usually, complications start when customers create customized payment structures,” says Lim. For example, the final destination of a container shipment may be Malaysia, but the payment-processing center of the receiver may be in Singapore, with no advance instruction given. “If the customer also has a processing base in Singapore, Accenture may not understand exactly what’s happening,” says Lim, “so the end receiver [of the invoice] may not be the one [in charge of] paying.”

In a bid to prevent similar problems, NOL worked with Accenture to make sure that clients have no problems with invoices before payment is due. Some clients overshoot the 30-day payment deadline. “You go to a client and the client says, ‘I don’t agree with your US$5,000 (invoice), I think it should be US$4,500 because I actually got a rebate,’” says Lim. By the time the issue is cleared up — which may or may not result in a full payment — another 35 days have lapsed, leading to a deterioration of NOL’s days sales outstanding (DSO).” The solution: If there are disputes, Accenture gets in touch with the client around 15 days after the invoice is sent. “You want any problem to be highlighted before the credit is due, which could be a big improvement since it will bring down your DSO,” says Lim.

Another benefit to outsourcing, he adds, is that it could prevent the incidence of fraud. The reason? Third-party service providers tend to be more stringent in following their clients’ compliance standards. “If they don’t comply, they can get sued,” says Lim. “Whereas if one of our internal finance staff doesn’t follow certain rules and because of that a fraud occurs, we can fire the staff, that’s about all. But we can’t claim the money back.” He adds: “Somebody who is a third-party outsourcer will have insured himself against such negligence or non-compliance.”

Great Save

Lim and Leung are quick to admit that cost savings were the motivation for going offshore. Apart from payroll cuts, Lim says NOL is no longer spending US$100 million a year to upgrade the IT system that supports finance functions. “Most shipping lines spend 2.5 to 4 percent of their revenues on computer systems,” says Lim.

There are other potential gains. In the case of NOL, the deal with Accenture involves a built-in incentive to continue the search for savings. NOL pays Accenture a monthly charge, according to Lim, based on a cost assumption — or projection — of what NOL would incur if it were to run the shared service center itself. If Accenture does better than this target, the two companies share on the savings. If costs are higher than target, NOL will share with the extra cost only up to a certain amount, after which Accenture bears the cost.

For Agilent, the outsourcing center could prove a source of future business as well as savings. Says Leung: “If we feel that we are doing such a good job, then who knows, after two years or three, we would have such a good infrastructure that we could do the outsourcing for other people.” Another route to future benefits from outsourcing/insourcing could involve a build-and-sell scenario. Jimmy Yap, head of Asia Pacific cash management at Deutsche Bank in Singapore, says some offshore insourcing arrangements of large US multinationals, notably in India, evolve to be sold to dedicated outsourcing service providers after three to five years of operation.

In the meantime, finance chiefs and their colleagues can savor the added professional benefit of outsourcing: more time for more analytical tasks. “It’s not very fulfilling if you spend a disproportionate amount of time on data mining instead of analysis,” says Leung. Lim says managing transactional processes used to take up to 50 percent of some of his senior finance staff’s time. Not anymore.

“We’re now making better use of the time … to be partners with the business units, and to offer more analysis and financial support.”.

Abe De Ramos is executive editor of CFO Asia in Hong Kong.

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