HOME | ABOUT US | CONSULTING | RESEARCH INSTITUTE | JOURNAL | EUROPE | PAPERS | SUPPLIERS | FOCUS AREAS | EVENTS | NEWS | CONTACT US

Current Stories
More Stories

The fortune at the bottom of the Fortune...

Billing Strategies for Innovative Business Models: How Boring Old Billing Could Be the Competitive Advantage You Never Knew You Had

Recipes for Bundled Finance and Accounting Outsourcing

Profit Recovery and Finance & Accounting Outsourcing

2008 Market Predictions: FAO, Global Sourcing, HRO, ITO, and PO Markets

Outsourcing Order-to-Cash (O2C) and Procure-to-Pay (P2P)

Finance and Accounting Outsourcing (FAO): Global Sourcing in FAO

Finance & Accounting Outsourcing (FAO) Market Update - Global FAO Supplier Landscape Preview Deck - June 2007

What Buyers Need to Know about Accounting for Outsourcing Implementation Costs

Financial Accounting Outsourcing (FAO) Annual Report - January 2007

FAO Market Update - Everest Research Institute - November 2006

Mellon Treasury Insights

The CFO - Moving from back-office to frontline strategy

You are convinced outsourcing a non-core business process will help you compete in this tough market. You have specific requirements for your BPO supplier. You've searched the supplier database and can't find the right company with the requisite experience or adequate leverage to handle your needs. What should you do?

BPO is definitely a buyer-driven market. Especially today, there is more demand than suppliers. Two factors have caused this imbalance. At one end of the spectrum, many of the early BPO start-up suppliers are now in the process of recapitalizing. A few have disappeared, like Phoenix-based LeapSource.

At the other end, some of the most astute outsourcing suppliers are those who came from the Big 5 accounting firms. However, the SEC is beginning to pressure the firms to divest their consulting practices. I expect some of them will head out on their own because of the federal regulators.

Actually, buyers who can't find the right supplier have a lot of choices besides abandoning their outsourcing effort.

Choice No. 1: Start Your Own Supplier

Buyers who believe they have a first mover advantage can capitalize on this opportunity. If you think a larger market will develop, you can create your own outsourcing company with 100 percent ownership.

Creating your own outsourcing company works only if the board and the senior management clearly understand the outsourcing model. These groups must be willing to make the capital investment to generate the kind of leverage that makes outsourcing so attractive.

Everest has worked with many corporations that have created these shared services companies; we were called in when the business situation began to deteriorate. As we've seen again and again, it's unlikely these companies will succeed unless the board is willing to make the proper investment in its new supplier.

But when the management is enlightened, these new suppliers do extraordinarily well. A shining example is Dallas-based MTech, a data processing supplier created by Mbank, a Texas-based bank holding company that has since been purchased. The financial institution bought an existing BPO supplier and put in place a strong governance vehicle. Top management wisely allowed its BPO supplier to operate unencumbered from the operations of the holding company.

ACS is a similar success story. The Dallas-based IT supplier was an offshoot of First Gibraltar Savings and Loan in Dallas, another financial institution purchased in the early 1990s. First Gibraltar partnered with a seasoned outsourcing management team who understood the requirements of BPO. Just as important, it had a strict and fair governance program in place.

Unfortunately, the list of success stories is short. For example, Pittsburgh-based Mellon Bank's attempt to start its own outsourcing business did not meet with long-term success. Once again, the top executives and the board must support the model or the 'do it yourself' option won't work.

Choice No. 2: Bring In Outside Capital

You have the processes. Find someone with the equity and form a partnership. This allows outside capital to flow to your process. Another prerequisite: select a seasoned management team that understands outsourcing principles and has experience in governance.

A great example is the partnership that British Petroleum (BP) created with Exult, a California-based human resources (HR) supplier. Exult, then a start-up, had its management team in place but had no customers. BP liked Exult's HR process and became its first customer. It also took a 20 percent equity stake in the new supplier, which it was instrumental in creating. BP accomplished its immediate goal of dealing with a world-class outsourcing supplier while at the same time creating equity and value.

I'd like to point out this partnership worked because BP has been a leader in BPO outsourcing for years. Its leadership understands the model and knows how to govern its suppliers. This is crucial when creating a new supplier.

Choice No. 3: Form a Joint Venture

A variation of this theme is to form a joint venture with an existing supplier or a consulting group that wants to become a BPO player.

A good example of how this works is One Resource Group, a finance and accounting supplier in Hong Kong. It is a partnership of Dairy Farms of Hong Kong and Ernst & Young Cap Gemini. This partnership allowed Dairy Farms to drive down its finance and accounting costs and improve its processes. Its success attracted a second buyer to use the new supplier's services. The resulting economies of scale allowed Dairy Farms to lower its costs even more.

Joint ventures only work when a strong governance program is the glue that holds the partnership together. Governance is where joint ventures crack; it's like watching a sausage being made and then having to eat it. Be wary that conflicts may arise if the process owner wants to own all the equity in the new supplier. Joint ventures can also have trouble sustaining capital formation unless the partners have agreed in advance to these continuing expenditures for process improvement.

Choice No. 4: Gain-Sharing

In this scenario, the buyer is not interested in owning the company. What it wants to own is a portion of the success the outsourcing supplier earns by bringing something new to the marketplace. Buyers simply want to be compensated for the risks they shoulder in the work of the new venture.

This is the easiest route to success for a buyer and also the fastest. Buyers can achieve their goals of lower costs and improved service much more rapidly. The supplier bears the risk and shares the upside potential.

In addition to private equity firms, companies with a well-honed core process that are eager to enter the outsourcing world are good gain-sharing partners. These companies want to become suppliers by wrapping an outsourcing offering around their process.

For example. Everest is currently working with an insurance company that partnered with a medical lab. This lab tests blood and urine that the insurance company requires to underwrite its life policies. The lab made a large capital investment in its process and the insurance company guaranteed enough volume to justify the expenditure. Together they will share in the gains as other insurance companies send their business to the lab.

The message is: If you can't find the right supplier, you can create one. Not outsourcing is rarely a good option.

Lessons from the Outsourcing Journal:

• If you can't find the right supplier, you have four choices:
  1. Create your own and take advantage of being first to market with a new process.
  2. Partner with a firm that will make the capital investment needed to create the leverage necessary for outsourcing.
  3. Form a joint venture with an existing supplier.
  4. Try gain-sharing with a supplier that will bear the risk and share the rewards.

Publish Date: December 2001

For more information...
Printer friendly...

Related Articles
Best Practice Tips from the Ottawa Manufacturers' Network: 4 Steps for a Successful Relationship

Copyright © 2001 - Everest Partners, L.P.

[Previous] [Next]