Software Outsourcing : Leaps of faith
As companies get more involved with strategic outsourcing, they
realize that when they work together as a team, they get far
better results. But that takes a real leap of faith. Here are
three companies that have made the leap - and will leap again.
When British Petroleum Exploration (BPX) outsourced its
financial management and reporting services in 1991, it was the
first such strategic sourcing arrangement in Europe. Skeptics
shook their heads: Working with drilling and engineering
contractors was one thing; handing off responsibility for such a
critical financial business process was another. It was too
different - a breach in the wall that separates a corporation
from the outside world, and it couldn't last.
But BPX was looking for something different. In its North Sea
oil-field operations, the $18 billion ann of British Petroleum
(BP) had seen production costs triple and the price of oil
decline by nearly half in 10 years. As a result, executives
wanted to cut costs in business-support processes and focus the
company's energies on finding and extracting oil.
To do so, BPX went far beyond the traditional arm's-length
outsourcing contract. Financial reporting and the handling of
some 13,000 invoices a month were taken on by a shared-services
unit created by Andersen Consulting; BPX continued to set policy
and make key decisions. The two organizations also developed a
common mission statement and a set of shared objectives to guide
the partnership.
The arrangement turned out to be "highly successful,"
says Colin Goodall, CFO of BP Europe. "It enabled us to
concentrate on our core business of exploration and production,
and resulted in substantially reduced costs." Indeed, as
processes were streamlined, the speed of payments increased and
costs dropped 40 percent. Three years into the arrangement,
BPX's financial operational costs were just half that of the
average North Sea energy firm.
That groundbreaking arrangement has not only lasted, it's grown
into an increasingly sophisticated network of relationships. A
number of other oil companies are now using the shared service.
Andersen Consulting has also started handling financial
administration for all BP companies in the United States.
Late last year, BP took this trend to the next level when it
partnered with Mobil in a refining, distribution, and marketing
joint venture. By joining forces, the two created a $5 billion
organization with 12 percent of the service-station business and
18 percent of the lubricants market in Europe. "The goal was
to take two organizations that are not in themselves market
leaders in Europe and bring them together to get scale benefits
as well as scale economies," says Goodall.
A third ingredient in the BP/Mobil venture is a seven-year, $240
million agreement that has Andersen Consulting handling seven
financial processes for BP/Mobil in 11 countries (BP/Mobil has
struck a similar deal with another outsourcing firm in several
other countries). This has allowed the new venture to get up to
speed quickly and to focus on its customer-oriented business
processes without the political and organizational strain of
merging the two oil companies' in-house financial operations.
BPX's experience has shown there are several key factors that
help such long-term relationships work - starting with
flexibility. "The agreement presumes that market conditions
will cause us to respond and change what we are doing," says
Goodall. "So it's important for us to share our plans and
expectations, and to try to give our partners early warnings and
signals as things change."
That communication begins at the top. In working with outside
firms, BPX sets up high-level joint-governance boards made up of
members from all companies involved in an alliance. At another
level, Andersen Consulting has taken on about 500 employees from
the oil companies, meaning BP will still have access to the
knowledge these employees have accumulated. What's more, those
employees now have a more secure future: If BP had consolidated
in-house operations, jobs would have been lost, says Goodall.
But now, those people work for a company where their skills are
at the heart of the business.