Establishing First Steps in Outsourcing

What are the key first steps in establishing a successful outsourcing relationship? Service Corporation International (SCI), the largest provider of funeral, cremation and cemetery services in North America, had been outsourcing its finance and accounting services related to the administration of trust funded, pre-need funeral and cemetery contracts for three years – but in February 2003 the company awarded the contract to a different service provider. SCI learned two important lessons from its previous outsourcing relationship: what can go wrong when an outsourcing contract is not properly structured; and the importance of establishing ‘first steps’ at the implementation stage.

What Can Go Wrong

When SCI put its outsourcing contract up for bid the second time, the company was already convinced of the value of the concept and better prepared for the new outsourcing relationship to succeed.

The size and complexity of the trust administration processes, however, still presented unique challenges – first of which was to define the statement of work (SOW). The SOW defines what services are within the scope of the outsourcing agreement and how services out-ofscope are to be billed. SCI’s experience taught management that cost-savings can quickly be marginalized when a particular process or project is determined to be out of scope. The previous outsourcing relationship was based on a "clientvendor" rather than "partner" model. As a result, the relationship was often contentious, particularly around inscope versus out-of-scope work and related change-order billings. Accordingly, establishing a true partnership relationship with the outsource provider was of paramount importance.

Another lesson SCI learned was the importance of aligned financial interests. Lack of transparency in pricing of services and cost drivers contributed to an environment of distrust. SCI often believed (rightly or wrongly) that it was not receiving adequate value relative to the fees invoiced. In addition, the gain-sharing elements of the former contract did not accurately capture or reflect the contributions of either party. Consequently, SCI wanted to establish a closer alignment of the profit motive of the service provider with SCI’s objective to reduce costs, while maintaining or enhancing service.

Applying Lessons Learned

The strength of the current partnership is driven by an unwavering commitment by both parties to a long-term relationship, supported by the following principles:

1. Contract Flexibility
The outsourcing contract contains standard industry language regarding SLAs and SOW. However, SCI and OPI recognized from the beginning that the contract must support a partnership relationship. Both sides understood that the standard SOW could only be used to define a broad range of activities and tasks that would be performed by OPI, and could not be viewed as the definitive list of "in-scope" activities. As partners, SCI and OPI agreed in advance to collaborate when unexpected projects or challenges arose, to determine the best course of action and most appropriate use of resources. The usual outcome of these efforts is a re-prioritization of tasks and re-deployment of personnel, thereby avoiding changeorders and associated incremental costs. By allowing the statement of work to be a guide in the relationship, and not its definition, SCI is able to make better business decisions without worrying about contract price escalation. And OPI is better prepared to make good business decisions without concern about scope-creep.

An example of contract flexibility is OPI’s plan of operations. Early on in the engagement, OPI realized that its original plan of operations for the first year of the contract would negatively impact SCI’s implementation of a new software package. OPI raised its concerns with SCI. Both parties then worked together to develop an alternative solution. Although the alternative plan was not economically beneficial to OPI, OPI realized that it was the most prudent course of action for both companies.

2. Pricing Transparency
The outsourcing contract is built upon a cost-plus model. Both parties agreed up front on the critical costcomponents of the contract, including the fixed mark-up percentage, what costs were subject to the mark-up, what constituted a permitted/reimbursable expense and how OPI calculated its hourly professional rates. This transparency allowed business interests to be more closely aligned and allowed each party to become comfortable with the nature of the other’s costs.

3. Governance Structure
SCI and OPI demand open dialogue between the companies, reenforcing the concept of "partnership." Both convene a weekly operating committee meeting to discuss operational issues, upcoming or unexpected projects and priorities. This regular meeting provides an excellent opportunity to raise issues and concerns early on – thus avoiding problems becoming too significant and negatively impacting the relationship between the two organizations.

Both parties also convene a monthly management committee meeting to discuss the progress of the relationship, OPI’s performance against contractual requirements, and to plan the strategic direction of the Trust Department. The management committee is comprised of senior executives from both companies, thus bringing the right people to the table to address true business challenges. The governance structure reinforces the partnership relationship and encourages insightful and strategic dialogue on improving overall performance.

Drivers for Outsourcing

SCI’s decision to continue to outsource was based upon a number of factors, in addition to the projected cost savings of 35 percent versus maintaining the service internally. Also significant were the challenges to staff appropriately. SCI recognized that attracting and retaining a core staff of quality, motivated professionals was critical to the trust administration department. However, SCI also recognized that there was limited upward career mobility within the company. By turning to an outsource provider that specialized in finance and accounting, SCI could avail themselves of the other’s expertise and offer a challenging career path to SCI staff hired by the outsourcing provider. Additional factors, in descending order, included: relationship style; technology innovation; process/function expertise; employee retention/development; level of service offered; reputation/previous experience; and industry knowledge/expertise.

First Steps

Trust
The success of the relationship as it has evolved is based upon a level of trust and cooperation between the two organizations, rather than simply a customer/supplier dynamic. The recognition that neither party can be successful without the cooperation of the other is pivotal – a relationship style that establishes a partnership to address challenges together. As a tribute to the success of their outsourcing relationship, OPI and SCI have been selected as finalists, out of 100 nominations, for the 2004 Shared Services & Outsourcing Excellence Awards in the Best First Steps category.

Technology Innovation
In addition to labor arbitrage realized via OPI’s offshore facilities and professionals in Bangalore, India, technology innovation has played an important role in the outsourcing partnership. End-to-end process solutions were customized for SCI, utilizing such technology solutions as document imaging and web-enabled workflows to improve SCI’s processes. Akey consideration for SCI was the fact that OPI’s facility in India is ISO 9001:2000 certified, supported by state-of the-art redundancy and security. OPI’s model, which is platform independent, also allowed SCI the ability to leverage its existing systems and investment in technology – further contributing to cost savings.

An important consideration for SCI involved the professionals on the account team. Whether staff transitioned from SCI to become outsource professionals working onsite, or whether employed by OPI from the start, the establishment of a collaborative work environment was central to success. Every project plan incorporates change management techniques and proactive communications to keep everyone informed about jobs and overall project plan. This, in turn, has resulted in a low, unplanned turnover rate – below 10 %.

Staying Close to SCI The outsourced services are supplied by approximately 220 people, representing 140 in the U.S.A. and 80 in India. In addition, key outsourcing professionals were based within SCI’s finance and accounting department, ensuring constant access to industry knowledge and experience. In short, employing professionals currently managing the process and functions for SCI was much more preferable than attempting to transfer knowledge – which often gets lost in translation.

Results

Since signing the five-year outsourcing contract, people within SCI’s organization have noticed an improved attitude and quality of service from the Trust Department, which the company attributes to the collective (SCI and OPI) focus on process improvement – and a commitment to making the Trust Department a "good place to work."

In a short period of time, OPI has greatly changed SCI’s expectations of what can be achieved through outsourcing. Complicated processes have been documented and successfully migrated to India, resulting in future savings opportunities. SCI and OPI have created a strong partner relationship.

With so much news in the press about what can go wrong in an outsourcing relationship, the SCI and OPI partnership serves as a model to be emulated.

Peter Mares is Managing Director of Outsource Partners International in its Washington, D.C. office, where he has overall responsibility for the company’s outsourcing methodology and quality control program. Peter co-founded KPMG LLP’s Business Process Outsourcing (BPO) practice in 1997 and was Partner-in-Charge of the practice for the Mid Atlantic region. KPMG’s BPO practice was aquired by Outsource Partners International in May 2003. pmares@opiglobal.com

Sara F. Beaves is Managing Director/Trust Administration for Service Corporation International, where she is responsible for the outsourcing relationship with Outsource Partners International, Inc., overseeing the accounting and compliance work for SCI’s prearranged funeral and cemetery trusts (market value of approx. US$2.5bn). Sara joined SCI in 1992 and was previously project director for a global implementation of Oracle Financials. sara.beaves@sci-us.com