By Kate Vitasek and Karl Manrodt
Even huge companies with lots of brainpower sometimes face difficult situations. A telling case comes from software giant Microsoft, which found that its rapid growth had created major inefficiencies in its pathwork of inefficient and disjointed back-office finance operations, which included 140 disparate systems and that required its finance operations to spend 370,000 hours annually simply producing reports. In 2006 Microsoft decided to completely restructure its major global finance operations.
Microsoft’s senior management determined that outsourcing would improve quality and cost structures. But it wanted to go beyond the conventional approach to outsourcing, or merely shifting the “mess for less,” and from transactional accounting to a more strategic approach based on business insight. It also wanted to achieve consistency, standardization, and world-class compliance of its finance processes worldwide. Microsoft called the resulting project the OneFinance initiative.
Microsoft determined it needed an unconventional approach that was not simply about outsourcing processes, but about outsourcing for transformation of their processes. Transformation was defined as 1) powerful business insight and performance management, 2) process standardization, reduced complexity and flawless execution, and 3) efficient compliance processes that improve the control environment.
Once Microsoft knew their strategic direction, they chose Accenture as an outsourcing provider who would take a vested interest in achieving a collaborative, win-win mindset.
A Vested Transformation
The partnership began in early 2007, with an original contract term of seven years at a value of $185 million. The contract covered Microsoft’s entire back-office finance processes, including AP – Expense reports and invoices, the Requisition to Purchase Order process and general accounting. The result is a relationship that has proved powerful in helping Microsoft transform its finance operations because it embodies the five rules of Vested Outsourcing.
Rule 1: Focus on Outcomes, Not Transactions: Simply put, Microsoft structured their outsourcing agreement around the achievement of their desired outcomes, not simply the outsourcing of finance transactions. They wanted to improve on the conventional resource and transaction-based model, realizing it would not provide the needed economic incentive for a service provider to achieve transformation. After all, why would a service provider radically improve efficiencies and eliminate non-value added work if they were getting paid by the transaction? Microsoft set out to contract for outcomes while relying on Accenture to determine the best way to achieve those outcomes.
Rule 2: Focus on the What, Not the How: In order to keep the focus on outcomes, Microsoft had to have faith that the OneFinance team would use its expertise to transform the work. This meant leaving the HOW to Accenture. Rather that create a detailed Statement of Work prescribing all of the work Accenture would do, Microsoft chose the radical approach of creating a Statement of Work with just fourteen pages that clearly outlines accountabilities of key processes. The thinking? Why document every process in detail when you know you want the processes to be transformed.
Rule 3: Clearly Defined and Measurable Desired Outcomes: Early-on the OneFinance team agreed on clearly defined and measurable outcomes. However, this was only the beginning because while metrics matter, the types and scope of the metrics employed matter even more. Microsoft and Accenture developed a “layered” approach to measuring the business using operating not only SLAs but metrics and KPIs. This was because focusing on SLAs alone might achieve a green scorecard showing all SLAs had but met, but not measure the end- to-end business requirements such as standardization, world class compliance, and internal satisfaction.
Rule 4: Pricing Model with Incentives to Optimize Cost/Service Trade-offs: Microsoft’s mission to transform back office finance processes would hinge on getting the economics of the pricing model right. It was imperative to design a pricing model that would compensate Accenture for achieving transformational results beyond simply performing base services. The team agreed on a hybrid pricing approach that included four building blocks—base services, other services, infrastructure and incentivized transformation. When combined, they established an overall pricing model that both sides felt was fair and that provided significant incentives to drive productivity and transformation efforts.
Rule 5: Insight versus Oversight Governance Structure: A successful outsourcing contract is only as good as its relationship governance structure. Microsoft and Accenture developed and invested in a sound and flexible governance structure with the goal of providing insight versus oversight. Simply put, it created no value for Microsoft to waste time to oversee Accenture’s employees; rather they viewed governance as a way to join forces and tackle the tough business problems facing the duo. For example, Microsoft and Accenture employed a tiered management structure to ensure alignment at all levels. They also deployed a peer-to-peer “2 in a Box” organizational structure that put Accenture staff within Microsoft offices. That drove accountability at the lowest levels to solve problems and implement new ideas. In addition, they created clear roles that focused on their critical joint initiatives.
Today the OneFinance initiative outsources back-office finance transactions in 96 countries to Accenture. Its book of business is valued at $330 million and runs through 2018. The partnership has won awards from the Outsourcing Center, the Shared Services Outsourcing Network and the International Association for Outsourcing Professionals.
There were challenges, of course. One is that “Most procurement professionals are hard-wired to win. The problem is that Microsoft’s conventional definition of winning means that if Microsoft wins, the supplier loses. For Microsoft to succeed, we needed to redefine winning,” said Tim McBride, Microsoft’s general manager of finance operations and former chief procurement officer.
Microsoft’s Taylor Hawes, general manager of corporate finances and services, has shared other lessons. They include the need for:
• Executive support for this new way of doing business.
• Careful measurement.
• Clear change management and constant communications, both internally and with the outsourcer, and
• A relentless focus on execution and delivery by all involved.
The bottom line: Vested outsourcing can work, but it requires work – and following the proper processes and disciplines.
Kate Vitasek is a faculty member at the University of Tennessee’s Center for Executive Education and author of Vested Outsourcing: Five Rules That Will Transform Outsourcing and The Vested Outsourcing Manual. Contact Kate at firstname.lastname@example.org.
Karl Manrodt, Ph.D. is a faculty member at Georgia Southern University and is co-author of Vested Outsourcing and Vested: How P&G, McDonald’s, and Microsoft are Redefining Winning in Business Relationships (for release this September).