OUTSOURCING: 'A NEW ERA FOR BUSINESS'

The Surrey accountancy practice of Gibson Hewitt & Co and the City giants, Andersen Consulting, are both involved in providing outsourcing services. Nicholas Fogg discovers that their conclusions are surprisingly similar.

In a sense, 'outsourcing' - the delegation of certain aspects of a business to outsiders who can handle them better - is something that we all do. We outsource the care of our money to banks and many of us outsource the management of our personal finances to accountants. Every time we call in a plumber or a builder, we are, in a sense, outsourcing the maintenance of our homes to people who we hope can handle things better than we can.

Some forms of outsourcing are commonplace in business practice. More firms now contract out their cleaning to outside specialists and catering is another area which is frequently contracted out.

Andersen Consulting - one of the UK's most successful providers of outsourcing services - defines outsourcing simply as 'the movement of business systems, technology applications or entire business processes previously performed internally to an external centre of excellence in order to gain a strategic advantage.'

There is little doubt that outsourcing represents an area of huge potential strategic growth in the world economy. A recent survey conducted by Dataquest, G2 and the Gartner Group anticipates the growth of the market for Financial and Administrative outsourcing from $US40.6 billion in 1995 to $US71.5 billion by the year 2000. A survey by PA Consulting, published in 1995, found that 80% of the UK's largest organisations have now outsource or are considering outsourcing their IT services.

Why do companies outsource? Many of the leading ones are doing it, including BP, the Stock Exchange, the Halifax Building Society, Microsoft and ICI. Independent studies of the UK outsourcing market by Harris Research found that 74% of companies that had outsourced claimed unexpected benefits. Cost reduction was an important factor, but, increasingly, companies seek improved service, access to expertise and greater flexibility.

Once companies tried outsourcing, they took a different view of what constituted core business. Payroll was considered 'core' by only 19% of respondents that outsourced, but 60% of those who did not do so regarded it as a core process.

This shift also applies in training, which 30% of outsourcers rated as core versus 60% of others and IT (44% versus 80%).

Yet the PA survey quoted above, also revealed that 26% of respondents were planning to bring back services in-house (those which have done so include the RAC and Virgin Direct). The most significant drawback, mentioned by 44% of companies, was damage to staff morale, closely followed by problems in maintaining a good quality of service.

According to David Martin, spokesman for Andersen Consulting, one of the leading exponents of IT and Business Process Outsourcing, problems arise if insufficient background work is not undertaken. 'Outsourcing is radical. It is not a step to be taken lightly, nor quickly. In the early days, it was a step taken by companies that needed to restructure their balance sheets or turn around their performance. Outsourcing today is less a tool for achieving quickfix financial objectives than a strategy adopted by already strong and successful companies to enhance their competitive positions.'

Lynn Gibson, partner in the Surrey accountancy practice, Gibson Hewitt & Co - one of the first of the smaller, regional practices to establish an outsourcing service - concurs with such a view:-

'The culture, if not the structure, of every company is different, so it's very important to tailor the outsourcing service to clients' requirements. We carry out an initial review of the present systems and then, in full consultation, we identify and agree requirements and the most effective working practices. It is vital that all commercial decisions remain with the client - and we advise that this should be the case. Otherwise, the wrong message is given.'

To outsource or not to outsource?

So when does it make sense to outsource? Lynn Gibson considers that there are many reasons why financial outsourcing can improve a company's performance. 'It can improve profits. information gained is on tap for vitai decisions; access is gained to specialist information and advice; resources can be concentrated, costs reduced, the quality of service measured and available space increased.

'Such issues as Health and Safety and Employment directives and new demands of the Inland Revenue can be met through access to expertise as part of the package.

'Best of all, there are fewer surprises: financial overheads are known in advance - and there will be less worry about staff illness and holidays.

'Obviously, not every factor applies in every business, but few business people can truly say they are fully satisfied with current performance in every one of these areas.'

Andersen Consulting specialises in the outsourcing of 'non-core activities' which it defines as 'business-critical but not proprietary or essential to the company's competitive position in the marketplace.' Such activities include IT, financial systems, logistics and human resources and they often tend to consume a disproportionate share of management resources.

With IT Outsourcing the provider may deliver all services directly, or a range of'specialists may be brought in. Andersen Consulting advises companies to outsource total IT management where practicable since it builds continuous change into their total IT strategies, enabling them to escape fi-om the confines of outmoded platforms, implementing new technology rapidly and protecting against short technology life cycles.

The Stock Exchange

to take nine months to complete at a cost of £1 million.

Upgrading and replacing the systems was expected to cost a further £40million. Some highly public failures to develop new systems on time severely undermined credibility and began to threaten long-term viability in the face of aggressive international competition.

To break this vicious circle, it was arranged that Andersen Consulting took responsibility for running the Exchange's IT services. A new approach was devised to service management which would give the Exchange far greater control of IT's contribution to its business. The proposal focused on reducing costs dramatically to give it more control and flexibility over its deployment of discretionary expenditure and to release funds to finance development of new services. The IT was focused purely on delivering service to the Exchange and its customers. High quality, flexible services were developed to work first time, on time, all the time. A high level of customer involvement minimised problems following go-live.

In 1992, service at the Exchange was ill-defined and where there was definition there was no measurement. Today the relationship between service delivery components and cost is well understood. The Exchange has stated that it now has more understanding of, and control over, IT services than before they were transferred to Andersen Consulting. In four years, fixed costs have fallen ftom £55 million to £35 million, creating funding for new development. In 1992, the number of service failures averaged 20 per month. In 1995, there were five per month, despite a 48% rise in volume.

In 1992, the Exchange was under intense pressure to bring new services to the market with no clear way of establishing them. Two new markets and a series of new trading and information services have been successfully introduced on time and have worked reliably from their first day of operation, The Exchange can react quickly and cost effectively to future change.

Thus the Exchange has been able to re-establish its reputation and has the resource to sustain and improve its service over the long term. It is ready to face the future with confidence.

BPExploration

Following the decision to outsource its UK accounting services to Andersen Consulting in 1991, BPX has now achieved annual cost savings of 40%. The partnership was forged against a background of maturing fields, increasing operational complexity and rising costs for BPX.

Under the agreement, some 320 BPX staff from six locations transferred to the new Andersen Consulting operation, AC Aberdeen, in 1991. The process ran so smoothly that the transition phase ended four months ahead of schedule.

Tight definition of roles, responsibilities and service levels, coupled with continuous performance measurement underpin the agreement. While BPX retains control of policy and interpretation of information, AC Aberdeen handles all accounting functions. Key aspects include joint venture accounting, provision of management information, tax reporting, the preparation of group and statutory accounts and processing and paying around 13,000 invoices a month.

The contract is managed by a joint Review Board of three representatives from each company who have shared business objectives and a common understanding of critical success factors. The arrangement was extended in 1994 to incorporate accounting for BPX Norway and the Sullom Voe Oil terminal in the Shetland Isles. In 1996, accounting for all BP companies in North America was contracted to Andersen Consulting.

The Smaller Business

'Take the practice of dentistry. This has been transformed over the last 20 years. Whereas most dentists were previously part of the NHS structure, most now run their own partnerships. Thus prime time and attention is increasingly spent on activities which do not represent the thrust of thejob.

Chris Chapman, Gibson Hewitt's Database Manager, explains how simple the process is:

'Effective working practices are achieved through the kind of modern technology that most progressive firms already possess. Such a real-time system ensures that information can be accessed at any time and from anywhere in the world by using a PC, modem and telephone line. There is instant access to such facilities as accounts and stock records. If a sale is about to be made, it is possible to access immediate data on levels of in-house stock and projected delivery dates.

'Data can be input for processing at any time and the clients can organise print-outs of any data that may be required in their places of business instantly. If additional information or interpretation that is not on the system is required, expert staff are on hand to help.

'The use of technology in this way will save the client considerable costs. The technological costs of.'oining the system are low and it will no longer be necessary to undertake the hugely expensive process of computer upgrading, since all that is required is access.

'The data is completely protected by passwords. Variable access can be given to individuals within an organisation. A client's accounts are held within a completely separate section of the computer.'

To Lynn Gibson, financial outsourcing can represent a potential boon for small business. 'It's the dawn of a new era. It seems a novelty now, but I've got a hunch that it's one of those things that will soon seem commonplace. Our aim is simply to make this service available to the many ambitious businesses outside the mega bracket.'

Gibson Hewitt offers a free consultation on outsourcing. Please contact Fiona Hunt at Gibson Hewitt, 5, Park Court, Pyrford Road, West Byfleet, Surrey, KT14 6SD:

Tel:01932 336149

Fax: 01932 336150

e-mail: lynn@gibsonhewitt,co.uk: www.gibsonhewitt.co.uk

Nicholas Fogg has published a number of books and has written extensively in a wide variety of publications, including The Times, The Daily Telegraph, The Guardian, The Sunday Times.

As a consultant to the high-tech industry, the companies he has worked with include Kinesis Computing, Cambridge Parallel Processing, the Denbridge Corporation, Pegasystems and the Goldfish Corporation. He has also worked with the John F Kennedy School of Govemment at Harvard University. Nick Fogg lives in Marlborough and began the town's celebrated Jazz FestivaL

'The Culture, if not the structure, of every company is different, so it's very important to tailor the outsourcing service to clients' requirements. We carry out an initial review of the present systems and then, in full consultation, we identify and agree requirements and the most effective working practices. It is vital that all commercial decisions remain with the client - and we advise that this should be the case. Otherwise, the wrong message is given.'

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