Working outside the box

C&I Issue 15, 2009

Chemicals company executives are no strangers to cyclical downturns but the current situation is considerably more serious than anything that the industry has encountered before. Since mid-2008, global demand has dropped dramatically, and prices have followed suit. With revenues down by 20-30% and EBITDA down by 20-60% relative to Q1 2008, companies are under unprecedented pressure.

 Nevertheless, this downturn will end. And as companies cope with the cost pressures of today, they also need to position themselves for the economic upswing. Business research by consultancy firm Accenture shows that the way in which a company reacts to a downturn has a clear impact on its long-term success. Those companies identified as long-term winners tended to see the downturn as an opportunity to improve and build, rather than simply surviving. In this context, outsourcing has much to offer. Far from being a one-shot quick fix, business process outsourcing (BPO) can play a pivotal role in optimising business processes, expanding capabilities and building scalable competitive strength.

The time is right
Over the last three years, we have seen companies across the industry using acquisition, divestiture and internal restructuring to move towards one of three business models: feedstock foundation, for example, companies focused on adding value to strong feedstock and technology positions; chemicals platform companies actively managing a portfolio of chemical businesses; and market maker companies focused on specific end markets with significant investments in innovation, brand and distribution.

 Having determined which of these three models is the best fit, these companies have increasingly been able to focus on refining their operating models, often by outsourcing 'non-core' processes. In many cases, this will mean moving beyond outsourcing transactional processes – IT services and employee training, for example – towards outsourcing more complex functions – indirect procurement, finance and accounting, human resources and IT.

 Table 1 illustrates the financial benefits that can be derived from outsourcing, showing the range of spend by business model as a percentage of total revenue for a typical chemicals company with a $2-10bn revenue. By applying BPO across all of the key areas of the business – finance and accounting, human resources and IT – firms could typically expect to see savings of anything up to $200m annually.

 However, the benefits of BPO are not limited to cost reduction. At a time when companies are attempting to optimise their operating models, the introduction of a structured approach to cost reduction creates real value by enabling cost bases to be readily scalable – up and down. And by enabling companies to remain flexible, BPO also equips companies to move quickly when opportunities for growth arise – whether this means winning customers from competitors, acquiring companies, driving innovation or introducing new sustainable products.

 In the chemicals industry, support services have traditionally been buried deep inside companies' business units. But we are now seeing a shift toward end-to-end business process thinking as companies seek to create critical mass and cost effectiveness through increased specialisation or functionalisation.

 At the same time, select indirect processes are being centralised, often making use of shared services arrangements and/or low-cost country sourcing. The standardisation and consolidation of administrative and support functions can result in significant cost savings, particularly for feedstock foundation organisations.

 The move towards functionalisation is key to the successful transformation of support processes. By creating distinct end-to-end business processes, it facilitates smooth migrations to shared services centres which offer greater long-term value than situations where only transactional activities are transferred to new, usually lower-cost, locations.

The benefits of BPO

Every company considering BPO must ask a fundamental question: what do we expect to get out of this? For a typical enterprise, the reasons driving outsourcing may be prosaic. A process is not performing at acceptable levels, it is more trouble than it is worth and it costs too much. So the short answer to the question is simple – get rid of the problem and save money in the process. Immediate cost-cutting benefits are achievable, with business functions costing 30-50% less than before.

 In some less well-organised companies, finance and accounting (F&A) costs can be as much as 50% higher than benchmark. This debilitating expense can be overcome through BPO. When a major speciality chemical manufacturer outsourced its finance and accounting activities to us, we consolidated 15 separate finance systems into the Accenture Delivery Centre in Prague and standardised the company's processes. The result was a rapid reduction of 35% in finance and accounting operation costs, and a permanent cost reduction of 42%. Accenture's Prague facility now handles accounts payable, accounts receivable, cash management, credit and collection, as well as providing general accounting and tax services. This has ensured that users benefit from standardised processes as they leverage scale through high-volume transactions – reducing costs, improving cash position and working capital and achieving operational excellence.

 Of course, BPO can also be delivered for industry specific purposes. In particular, outsourcing of maintenance, repair and operations (MRO) is gaining traction amongst chemicals companies. Often, these responsibilities are split across functional areas, with procurement, sourcing, warehousing and other activities all operating largely independently. A holistic BPO-based approach to MRO can deliver working capital improvements of between 10 and 50%, with companies benefiting from enhanced inventory management, accounts-payable operations and cost reductions flowing from improved data management, data cleansing and better use of catalogues for parts and supplies.

 Other benefits are also on offer, as one client found when it decided to outsource a high percentage of its raw materials in Asia Pacific. Faced with the challenge of lining up the necessary organisations, the firm had partnered with a thirdparty logistics provider. However, this provider lacked the sophisticated planning and order-execution capabilities needed to manage the long lead times and supply chain complexities. By leveraging the Accenture Supply Chain Management Centre of Excellence, the company realised lower raw material and working capital costs and reduced lead-time to three days from more than 30 days.

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