In our first post in our vested outsourcing in logistics and supply chain, we first introduced and answered “What is Vested Outsourcing and How does it Work in Logistics Outsourcing?” and then we covered the 3 Benefits to Vested Outsourcing. We wanted to conclude the series by outlining a real world successful case study which is the epitome of a vested outsourcing business model by featuring the story of Microsoft and and global firm, Accenture.
A Case Study in How to Achieve Vested Outsourcing Results
Bucking the Status Quo of Traditional Outsourcing
In 2006 Microsoft decided that it needed to completely revamp its major global finance processes and operations. The reason? Its global system was a patchwork of inefficient and disjointed processes. For example, Microsoft found that it was using 77,000 active procurement vendors and its finance operations used up 370,000 hours annually simply producing reports. It also discovered that its Procurement and Finance Operations did not have any processes that were considered “best practice.”
Obviously a better system was needed. Senior management determined that outsourcing would help improve quality and cost structures. But Microsoft wanted to go beyond the conventional notion of outsourcing, or as is commonly said, merely shifting the “mess for less.” Microsoft’s vision was to shift the focus from transactional accounting to a more strategic approach that would leverage “business insight.” It also wanted to achieve consistency and standardization worldwide. This project became the OneFinance initiative.
Microsoft’s light-bulb moment was to shift the emphasis to business insight rather than lowest price bean-counting. The company determined it needed an unconventional approach that was not simply about outsourcing work, but about outsourcing a transformation of the work by achieving desired outcomes and by changing its definition of winning to create a mutually beneficial win-win mentality. It also needed a partner it would share that vision with over the long term, one with a vested interest in achieving that win-win mindset. That partner was Accenture.
Microsoft and Accenture kicked off their agreement in early 2007, with an original contract term of seven years at a value of $185 million.
The contract spanned Microsoft’s entire back office finance processes, including: AP – Expense reports & invoices, requisition to Purchase Order process and general accounting. The result was a Vested relationship that has proved powerful in helping Microsoft transform it’s finance operations. The OneFinance relationship fully embodies the five rules of Vested Outsourcing.
How Microsoft and Accenture Play by the 5 Rules of Vested Outsourcing to Achieve Results
Rule #1: Focus on Outcomes, not Transactions
Microsoft’s vision was for a single, global finance solution with effective, consistent processes across the world, with a focus on optimizing resources, improving service to employees and responsiveness to partners and clients, enabling strategic sourcing worldwide, and establishing a robust controls environment.
Simply put – Microsoft wanted transformation of their financial operations– not just someone to process their backoffice financial transactions.
While the Accenture team initially considered a conventional resource and transaction-based model, it realized this approach would not provide the needed economic incentive for the service provider to improve the process. To achieve success against their vision, they needed to shift to an outcome based business model. The solution was to develop a business model aimed at contracting for outcomes while relying on the service provider to determine the best way to achieve those outcomes. This would require Microsoft to adopt the Vested Outsourcing Rule #2 – Focus on the what, not the how.
Rule #2: Focus on the What, Not the How
In order to achieve its desired outcomes Microsoft had to have faith that the service provider would use its expertise to transform the work. A key component for Microsoft was to focus on WHAT needed to be done, while leaving the HOW to its partner.
Microsoft set the tone by shifting away from a detailed Statement of Work and instead created a taxonomy for understanding roles and standard processes. The taxonomy identified the end-to-end processes and focused on roles and accountabilities rather than detailing out how the work should be done. Microsoft’s business – Accenture – was then responsible for develop detailed work procedures.
A second key component was the emphasis on the fact that work would change. After all, Microsoft bought transformation of their backoffice financial operations. Transformation would require change (and change takes time but oh so worth it!). Under the agreement, Accenture’s was accountable for driving dramatic improvements and process efficiencies.
Rule #3: Agree on Clearly Defined and Measurable Outcomes
Metrics are crucial in any outsourcing partnership, and this is especially true for the Vested model. But all too often companies can go overboard and focus too heavily on detailed Service Level Agreements (SLAs), although they are VITAL, an SLA should focus on strategy and results, rather than than HOW.
The team agreed from the start on clearly defined and measurable desired outcomes. But this was only the beginning because while metrics matter, the types and scope of the metrics employed matter even more. The challenge was to understand how the metrics would interrelate, and how they would be impacted by Microsoft or the service provider. Microsoft created a “layered” approach to measuring the business using operating metrics, KPIs and SLAs. Together, Microsoft and Accenture worked out how they would measure the success of the project they called “OneFinance”. While the SLAs were fully in Accenture’s control, the “bigger picture” required Microsoft and Accenture to work closely together to achieve success. This “together” attitude helped the companies get beyond the “I-win-you-lose” approach typically associated with outsourcing agreements focused heavily on SLAs.
Rule #4: Optimize Pricing Model Incentives for Cost/Service Trade-offs
Due to the sheer size, complexity and scope of Microsoft’s operations, pricing was a tough challenge. The vision of transforming its back office finance processes would hinge on getting the pricing model economics right. It was imperative to design the pricing model aimed at compensating Accenture for achieving transformational results beyond simply performing base services.
After extensive deliberation, the team agreed on a strategy to use a hybrid pricing approach that included four building blocks—base services, other services, infrastructure and incentivized transformation. The building blocks, when combined, created an overall pricing model that would not only be fair, but would provide significant incentives to drive productivity and transformation efforts.
Elements of the process model included use of a global pricing model with a local adjustment; a fee at risk approach using a productivity index to ensure productivity gains; volume-banding to allow for flexibility and to capture the effect of fixed asset volumes and use of a gain-share incentive structure. (These elements are discussed at length in a University of Tennessee white paper on Microsoft OneFinance.)
Rule #5: Establish a Governance Structure that Provides Insight, Not Oversight
Getting the business model and contract right was only the first step. A successful outsourcing relationship is only as good as the governance that follows the signing ceremony. What happens after signing is what matters, most especially in a Vested partnership.
The OneFinance team believed if they did a good job picking the right partner, a trusted expert in its field, they would manage the business with a minimal headcount. Microsoft decided to invest in a sound and flexible governance structure would be used in lieu of paying employees to watch over Accenture doing the work.
Microsoft wanted to stress insight and transformation, not oversight. Microsoft and Accenture purposefully and strategically crafted a governance structure that would best allow for this to happen. A key component of the governance structure was balancing regional execution needs and corporate needs to drive standardization and transformation. The parties moved beyond lip service of saying they wanted transformation and invested in a resources and process that would drive transformation. Microsoft and Accenture also invested in a “2 in a Box” peer-to-peer governance structure to foster decision making, encourage timely issue resolution at the lowest possible levels, and drive consensus on implementing changes in their transformation initiatives. The peer-to-peer relationships proved to valuable in ensuring the companies stayed in alignment.
The companies also invested heavily in communication tools and processes that allowed the parties to work transparently.
The Proof is in the Results
Today the OneFinance initiative outsources back office finance transactions in 96 countries to Accenture, but ultimately it is the results that matter. Within the first two years the team had reduced the number of systems used to manage finance operations from 140 to less than 40 and achieved impressive operational service levels at 99.5%. By year five the duo had achieved over 75% standardization across all processes, yielding productivity gains of 18% and an additional costs savings of $63 million for Microsoft. But the best result comes from getting to sleep at night. Together Microsoft and Accenture have conquered compliance. They increased Sarbanes Oxley compliance from just 15 large subsidiaries to all 96 subsidiaries within the first two years and are proud to report zero un-remediated S-Ox 404/302 audit control deficiencies.
Today, the OneFinance book of business is valued at $330 million and runs through 2018. Accenture has a future revenue stream as part of a long-term contract that most service providers would envy.
The OneFinance contract is the essence of a Vested relationship. While Microsoft believes it is on the path to achieve what it set out to achieve, it did it with the help of a business partner. Using the Vested model, Microsoft and Accenture share a vision and they share success. They are on the same creative and innovative journey, working together to drive out waste and create world-class financial processes and a sustainable infrastructure for the twenty-first century.
The real-world OneFinance lesson is clear: Those who challenge themselves to follow Vested’s rules and component elements can create innovative solutions and shared value that resolve the conflicting goals so often found in conventionally outsourced business models.