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Outsourcing Matures, Slowly

To make outsourcing deals succeed, CFOs still need to ask plenty of questions – and demand more flexibility in contracts.

In 2007, when European investment firm Skandia began a multiyear push to move away from its paper-based processes and tap the full powers of the Internet, it encountered a problem: the massive project had huge implications for the company’s overall IT infrastructure, including the need to develop a sophisticated data warehouse. But Skandia was locked in to a $175 million outsourcing arrangement with Indian outsourcing-services vendor HCL Technologies that had a number of years yet to run.

Under the terms of the service-level agreement (SLA), HCL had been hired to develop applications and manage the infrastructure of Skandia’s old legacy systems, along with absorbing 250 of Skandia’s IT employees — nothing more, nothing less. At the time it was drawn up, the SLA “was smart,” says Mark Satchel, a 10-year Skandia veteran who was appointed CFO in 2009. “But it later resulted in a great deal of inflexibility.”

Or appeared to. But rather than parting company, Skandia and HCL agreed to craft a new agreement, running to 2012. According to Satchel, Skandia now has much more flexibility to use outsourcing according to the “peaks and troughs” of its needs, while tapping into a range of HCL consulting services that weren’t available under the initial contract.

Although the agreement was rescued successfully, Satchel is circumspect. As he notes, the firm’s various outsourcing arrangements — of which HCL is “by far the largest” — are “under constant review as Skandia looks to do more.” And he sounds a cautionary note for his fellow CFOs, warning them to be cognizant of the resources needed to make outsourcing work. “We spend a lot of time analyzing and documenting what both we and the outsourcers need to do.” Despite all that effort, he adds, “there are times when I wonder whether what you gain on one side you lose on the other.”

While doubts may linger, there is no denying that the pressure is on for CFOs to push outsourcing engagements further, particularly now that most have achieved the cost savings they had targeted. “Just because you’ve saved 20% or 30% by outsourcing, say, aspects of finance and accounting [F&A] doesn’t mean your boss won’t turn around in two years and ask, ‘What have you done for me lately? Where is my next 20% coming from?’” says Phil Fersht, CEO of HfS Research, an outsourcing advisory firm.

“Companies that have already outsourced are continuing to outsource more, not less,” Fersht adds. He cites an HfS poll from 2010 that found that, of 209 firms currently outsourcing some facet of finance, 40% planned to expand the number of F&A processes they outsourced, while fewer than 10% expressed interest in pulling back in-house what they had outsourced.

HfS also reports that between 2004 and 2010, companies entered into 788 engagements that bundled two or more core F&A processes, including an estimated 109 last year alone, compared with 51 in 2004.

But amid that growth, some findings merit attention, notably the fact that average contract values have been shrinking — to an estimated $18.3 million in 2010 from $30.4 million in 2004.


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