A Journey to Outsourcing




After a few relatively unsatisfactory years of running a SSO which had been stretched by acquisitions, Federal Mogul took a long hard look at shared services as a part of an overall corporate cost cutting strategy. As a result, and with support from senior management, the company embarked on what would become a multi-year outsourcing arrangement utilizing service delivery centers in four different countries.



Back in the mid 1990's a US$2bn publicly traded auto parts company decided to triple in size by making two, almost concurrent, acquisitions. Along with the acquisitions came the pain of integration (not good), several strong brands (very good), a shared service center (started out very bad) and an asbestos problem (really bad… but that's a story for another article).

That company is Federal-Mogul (FM), a US$6bn global manufacturer and distributor of automotive parts for both the original equipment and aftermarket segments, FM has approximately 46,000 employees and 150 locations worldwide. While only hard core auto junkies will know many of the FM brand names, most of us drive our cars every day blissfully unaware that we're driving with FM parts under the hood. Parts include pistons, seals and gaskets, valve train components, ball joints, universal joints, brake drums, brake rotors and brake pads, just to name a few. Some of the brand names most consumers will recognize are Champion spark plugs and Anco wiper blades. FM supplies many of the large automakers like GM, Ford, Daimler-Chrysler, BMW, Toyota and VW, as well as several major aftermarket parts chains including Autozone, NAPA and Murray's.

But back to shared services. The shared services operation FM acquired served all of the U.S. and Canadian plants (about 30 locations) which came along with that particular acquisition. The center included General Accounting, Inventory Accounting, Fixed Asset Accounting, Accounts Payable and Payroll. Travel & entertainment (expense report audit and card administration) and procurement card audit and administration were added not long after. The center now accounts for approximately one third of FM's total revenues and has grown to process all of FM's domestic payroll (approx. 55 locations) and approximately US$1.5billion in annual vendor and other payments.

FM also created a start-up shared services center in France to serve French plants, modeled somewhat after the North American center, but also having applied some lessons learned. The French site was significantly smaller (12 locations), but was meant to be a springboard for shared services in Europe. The focus of this article will be on the experiences in the North American center.

For a long time, the North American center was considered to provide a level of service and quality that was below par, did not have well documented processes, had frequent leadership changes and an undermotivated staff. The center languished for nearly five years under various leaderships, until FM decided to get serious about shared services. After about four years, and with mounting market pressures – price pressure from customers and administrative costs out of the quadrant vs. benchmarks and peers – FM stepped back and took a long hard look at shared services as a part of an overall corporate cost-cutting strategy. With some management changes and most important some focus from the top, FM was finally on its way down a path that would lead it to a multi-year outsourcing arrangement with a Tier 1 provider, utilizing service delivery centers in four different countries.

It certainly was not the largest Finance & Accounting outsourcing deal, but it was unique in a few ways. At the time FM contracted for its outsourcing deal the company was operating under Chapter 11 bankruptcy protection (due to the asbestos problem mentioned earlier). In addition, it was a presidential election year (2004) when every other political television commercial talked about jobs leaving the country and sending work off shore. And finally, FM was one of very few automotive industry companies to outsource a significant portion of it's F&A business.


Keys to the Deal

Support From The Top

FM had several failed attempts at shared services before finally gaining the right focus, management group and support from the top to make the initiative work. Support needs to exist at the most senior levels of the company – from the beginning, through the tough times during transition, and into future waves of the initiative. If top-down support ever falters, or gives an impression of indifference for the initiative, the investment in shared services, and outsourcing, will fail. This is exactly what happened in earlier attempts at making shared services a more broadly used platform in FM. There were several mid-level managers working at furthering the shared services initiative, but without support from the top, it was met with resistance from operating groups and plant locations. These plants and groups were allowed to dissent to the point that they stalled the initiative because their bosses were not supportive. So although there are several important aspects to an outsourcing deal and shared services in general, nothing is more important than support at the most senior levels of the company.

Internal Process Stabilization

The time FM spent between 2000 and 2004 to improve its internal shared services environment was key to being able to execute a "lift and shift" of its F&A operations to an outsource provider. The "lift and shift" model contemplates taking existing processes and transitioning them to a provider, initially, prior to any major process re-engineering.

Let's face it, the initial draw of outsourcing is a significant downward step-change in cost. Most companies don't even come to the table on an outsourcing deal unless there are cost savings to be had. Had we not spent the time working on process improvements, customer service, stabilization of the control environment and creating a set of metrics on which to manage the operations, the cost involved in outsourcing would have been dramatically higher in the initial years, and the business case for outsourcing would have been far less favorable. Outsource service providers work in a very strict rules-based environment, so anything a company can do to drive consistency in practices, to whatever level possible, will help the transition and keep transition costs down.

HR Planning… A Delicate Balance

Outsourcing by its very nature means the loss of jobs. In many cases, an outsource provider will offer positions to some members of an existing staff in order to leverage the knowledge at the company and help to mitigate the loss of "tribal knowledge" but in other cases an entire staff is displaced. Either scenario requires some focus on managing the human resource element throughout transition. The strategy starts even before contract negotiations begin by engaging human resources, legal counsel with a specialty in employment law, and some level of corporate communications staff.

The human resource element unfolds in three phases. Planning, post-announcement and exit. In the planning stage decisions are made as to the make-up of the HR plan in an outsourcing scenario. Will some staff be offered positions with the outsource company or not (this is generally a mutual decision between the client company and the outsourcer)? If no offers are to be made, often times a legal arrangement called secondment is considered. In this case, key employees are retained and kept on the client company's payroll, but are effectively managed by the outsourcer. And finally, as in most outsourcing cases, a good severance plan must be crafted to strike a balance between keeping employees motivated during the necessary transition period, and the cost/risk profile their departure could create.

In my experience, a strong severance/ retention package is necessary to keep employees motivated while they "teach someone else their job." The transition process, by its nature, has staff dealing with the impending loss of a job which puts them all at different places in the cycle of dealing with grief and loss. During this time, however, you need these staff members’ support and focus to assist with the transfer of knowledge, as well as their motivation to keep the normal day-to-day activities up and running. A delicate balance of severance and retention benefits, plus wellness activities and some sense of normalcy in the work environment, help to keep staff as positive and motivated as possible considering the circumstances. The sensitivity of the vendor’s staff conducting the transfer of knowledge also is important.

In the end, at least in our situation, we found that most staff were very cooperative and as positive as one could expect, given the situation. Most moved on to new jobs, either within or outside the company. Some took it as an opportunity to make a change and pursue an entirely different avenue. But the keys to the HR component of a deal are to measure twice, cut once. Plan, plan, plan and then plan some more and when you’re done doing that, over-communicate all relevant aspects of the deal, its timing, how it will impact staff and most important, what's in it for them. At this point, there is really only one motivation to stay…money. This decision is personal to staff members and their first instinct will be to plan for what comes next. It's the management team's job to anticipate questions and be as open and honest about the transition period as possible. This up-front work and planning will help alleviate bumps in the transition process…at least from an HR perspective.

See The Bigger Picture… Process Transformation

Transformation was not the carrot that caused us to send RFP's to various outsource providers; it was not what we initially considered in determining whether to go forward with the selection process; it was not what we spent most of our time on, during the initial phase of paring down vendors. It was, however, something we came to focus on more, as the numbers started to crystallize and our focus changed from short-term to long-term.

Process transformation is the engine that keeps outsourcing going, in my opinion. It's difficult to cultivate Six Sigma process experts internally; and costly to staff fulltime project and process improvement resources. "It's not what we do," is something I've heard a number of times during our contracting process. FM realized that if we wanted a best-in-class shared services operation, we either had to expend the capital and resources to build and develop that core competency internally, or we had to seek help. FM decided that it was not in the business of performing processing activities. It was in the business of making auto parts and that is what it wanted to focus its resources on.

Going to an outsourced provider allowed FM the flexibility to tap in to quality and process experts as needed without having to staff them on a full-time basis. It allowed for flexibility in project staffing. In general terms it gave FM a virtual bench to put into the game when projects came up, but the added flexibility of not paying for them when the project was complete. While FM is focused on improving its business and cutting costs to remain competitive, a third party provider is focusing on improving business processes.

These business process improvements have a two pronged benefit. First, they allow the outsourcer to provide a contractual yearover- year fee reduction, and second, they provide upstream efficiencies elsewhere in the company by replacing an inefficient process with one optimized for efficiency (at least within the constraints of your ERP or legacy system).

Hitting the Bail Button

Something you hope you never have to do, after spending all of the time and energy contracting a deal with your chosen vendor, is walk away from the deal. But after spending all of the time and energy contracting a deal with your chosen vendor, the last thing you want is a legal and financial nightmare if you don't have appropriate exit provisions in the contract and exit becomes a necessary strategy. Exit provisions generically include termination for convenience (purely at the will of the client company) and termination for cause (generally based on one or more defaults of some kind by the vendor). It's best to engage local as well as special legal counsel in determining these exit clauses, and of course they will have to be negotiated with the vendor.

Governance

Once the deal is done, and processes begin to stabilize, having a strong governance organization and a set of governance operating procedures will keep the deal on track. In FM's model, the governance organization is comprised of a lean layer of management at FM, paired with like management at the vendor. The governance organization can be put together several ways, but the way FM did it is as follows: A global lead, a regional lead in North America and Europe, a finance manager, a project manger and part of a supply chain resource for contract changes. This is augmented by legal counsel from a firm specializing in outsourced deals, and which we use as needed for contract questions and clarification; the legal counsel was also party to the original contracting process.

Governance is first about running the operations, but also about resource deployment, project prioritization and relationship building. The governance organization must work together on both sides (client and vendor) in order to maximize the chances for success of the initiative. One piece of valuable advice we received from our legal advisors and consultants throughout the contract period and into the transition stage was that you need not be afraid to have difficult discussions or to say "no" to each other once the contract is signed. The difficult discussions generally revolve around additional fees for services or the scope of services provided. Depending on the level of diligence during the contract phase, and the level of familiarity with the contract at the client company, these discussions can either turn into long drawn out discussions about fees and compromise, or can turn into short discussions if 1) the services are clearly covered and you can prove that by referring to contract wording, or 2) the services are really incremental and you can agree on an adjustment. Either way, the key is being knowledgeable in your contract verbiage, which starts with being diligent in the contracting phase.

Although we are relatively new to the world of outsourced F&A services, the experiences described in this article are real, recent and were either lessons learned before, during or after the transition period. So take these tips to heart, and if you think outsourcing is an option also consider hiring outside help to contract a deal. There are legal and consulting firms specializing in all types of outsourcing deals. Whether your focus is outsourcing for F&A, HR or IT there are legal and contractual pot holes that a seasoned expert can help you navigate.

I surmise that our consultants and legal advisors paid for themselves versus trying to do the deal without them. So if you think outsourcing is right for you, get that senior management support, build your team, find qualified consultants and legal counsel, pick a provider and hold on. It's a difficult process, but the flexibility it can provide, combined with the potential for significant cost reductions, may be enough for you to jump into the fray. If you do, best of luck.