Accounting, Financial Services, Outsourcing

Accounting Outsourcing – a Case Study

The accounting requirements of big business can often be a headache, but when big businesses merge the pressure to ensure adequate functionality can sometimes be too much to bear. Outsourcing may be the answer, suggests Daniel Stewart-Roberts as he discusses the beneficial effects Accenture has already had on MOL, Hungary’s oil and gas provider, as well as the benefits yet to come.

Introduction
MOL Hungarian Oil & Gas Company has outsourced its accounting function to Accenture, the first significant company in any of the former communist bloc countries to do so. In this paper I will examine why MOL decided to go down the outsourcing road, focusing on the expected benefits and the extent that these benefits are actually being realised a year after the start of operations. I will also look at some of the lessons learned along the way and so hope to be of use to others planning a similar move.

About MOL
MOL is Hungary’s largest company by turnover with revenues in 2000 of USD 3.5 billion. Its activities encompass oil and gas exploration both in Hungary and abroad, refining and petrochemicals production in Hungary and Slovakia and the operation of 800 filling stations in eight countries in the Central European region. It also owns the Hungarian high-pressure gas transmission and storage system.

MOL has been through major changes since the fall of communism. It was created in 1991 by the amalgamation of several state oil and gas enterprises, which had previously operated independently of one another. It was privatised in three stages between 1995 and 1998 and almost half its shares are now held by international institutional investors.

A new senior management team was appointed in late 1999 and adopted a strategy of regional expansion, focusing on core competencies and efficiency improvement. MOL recently acquired a major stake in Slovnaft, the Slovakian oil company, the first significant cross border M&A transaction in the region and similar potential acquisitions are currently being actively pursued elsewhere in the region. Very considerable efficiency gains and headcount reductions have been achieved since 1991.

About the Outsourcing Project
The outsourcing project involved transferring over 400 staff in 14 locations across Hungary to Accenture for an initial period of six years. Activities transferred included basic accounts processing (general ledger, accounts receivable and payable, fixed assets, inventories and cash), management and external report preparation and tax compliance activities.

Transfer was on an ‘as is’ basis. Pricing is on a cost-plus basis, but with a target charge set for each year, with a variance sharing mechanism designed to motivate both parties to minimise costs. The level of target charge reduces year on year for the first four years to reflect the efficiency improvements that Accenture are committed to achieving. The transfer took place in late December 2001, just over four months after the commencement of detailed negotiations with Accenture.

Why outsourcing?
The decision to investigate the benefits of outsourcing was a logical extension of the new strategy. The CEO and CFO had both experienced the difficulties of post-acquisition integration, particularly in functional areas such as accounting. Both saw the establishment of an independent accounting unit operated by a recognised service provider as a way of increasing the flexibility to cope with organisational changes. They did not consider accounting to be a core competency and felt that passing the work to a company, whose business was accounting, would have a positive impact on service levels and efficiency.

A specially established team (which included several of the managers who would transfer to the service provider if the project went ahead) identified numerous further benefits, some general in nature and some arising from MOL’s particular situation. Site visits to several service providers were a helpful part of this process.

Entrepreneurial, customer-oriented, approach
Given MOL’s past it is perhaps not surprising that there existed an unfortunate front officeback office tension, common to many large companies. The business units perceived the back office functions to be bureaucratic and adding no value, while functional staff were so far removed from the profit generating activities that this perception was not entirely invalid.

The team felt that as outsourcing turned accounting into a profit generating activity, the unit managers would take a more entrepreneurial approach to service and cost conscious approach to running their business.

Clarity of service levels, through regular measurement and reporting
The front officeback office tension just referred to often manifested itself in complaints about poor service performance. In most cases these were ill-substantiated and often resulted from problems with the supply of input data by the business units.

It was quickly recognised that the emphasis (driven by the nature of the contractual relationship between client and service provider) on developing properly documented and agreed service level agreements and reverse service level agreements, and on regular measurement and reporting of service performance, would go a long way to dealing with this issue. The team also saw that regular performance measurement would enable problems to be identified and resolved much more quickly.

Predictability of cost
Outsourcing was seen as providing the possibility of fixing the cost of accounting services over a number of years and locking into a commitment by the service provider to reduce costs year on year.

Cost reduction through improved efficiency
With MOL undergoing a major process of change and expansion, process optimisation would be a higher priority for the management of the outsourced unit than it could realistically be for MOL’s own management. There was therefore a greater chance of pushing through the changes necessary to streamline the organisation.

Enhanced control
While a common first reaction to the outsourcing idea was that control would be lost over a vital part of the company’s activities, on further consideration it was realised that there are no real control issues that cannot be resolved with a properly constructed contractual framework. In fact, the project team soon rejected the initial concept of a joint venture between MOL and the service provider, as it was quickly realised that far from ensuring that MOL would retain some control, the conflict of interest between MOL as client and MOL as service provider would make the contract a less effective tool for managing the relationship. On a practical level control, in the sense of being confident that the provider would react positively to service requests, would clearly be improved by the existence of a real client-provider relationship.

Best practice processes, through access to the expertise of the service provider
MOL had no illusions about the quality of its processes or about its ability to improve them using its own resources. It was felt that a provider already operating many accounting sites and at the forefront of future development would be able to do so far more effectively. The priority given to continuous improvement by the potential service providers visited by the project team was also a very positive sign.

Opportunity to spread costs and safeguard jobs by creating a Multi-Client Centre
MOL’s own accounting unit, while established as a quasi-shared services centre for the various business units of the main company, did not serve any other members of the MOL group, each of which had its own accounting apparatus. It was felt that establishing a separate accounting unit would facilitate the integration of the other companies in the group.

This was particularly relevant to two key parts of the group with significant minority shareholders, whose concerns about such a move would be reduced by the involvement of a recognised service provider. As the quality of the existing service team was not in doubt, the idea of building up a third-party client base, to utilise the staff who would be no longer required to serve MOL after already planned system improvements, was also attractive. As well as being good for the staff, this would help to reduce overheads.

Both multi-nationals and large local enterprises were seen as potential customers. Many multi-nationals setting up in Hungary have found building up a good finance function one of their biggest headaches, due to the high demand for and limited supply of suitably qualified staff. Many large local enterprises, on the other hand, suffer from similar cultural and structural problems to those that MOL is seeking to solve by outsourcing.

Positive cultural change effect on the whole MOL organisation
The opportunity to take 400 staff out of the company culture already described above and to immerse them in the culture of an international service provider was expected to change the way those people worked far more rapidly and effectively than any internal cultural change programme could possibly achieve. As many of the staff would continue to be visible to the remaining MOL employees, it was hoped that the positive effects would be noticed and open the MOL staff up to similar change.

Experience in practice
We have been very satisfied with the experience to date. Most importantly, costs are in-line with budget.

Much more quickly than we ever expected, the key middle management group, who transferred from MOL, have all adopted the hoped for entrepreneurial, customer-oriented approach, to an extent that has been noticed and commented on by their MOL counterparts – a rarity in an environment where positive feedback is rarely provided. A multi-level system for communication between MOL and Accenture has been established of which the key, and best received, element is a network of customer service representatives, with each business or functional unit representative paired with an Accenture manager. The representatives meet regularly to monitor performance and to deal with issues. Such a system is not rocket science, but attempts to establish something similar internally had met with failure.

This is just one of several process changes that could in theory just have well have been implemented in an internal shared service solution, but which in reality would not come off without the rigour imposed by the real contractual relationship, or if implemented would not be sustainable. Service performance measurement is another.

I would also highlight the ability to achieve cost reduction through improved efficiency. Several months after the transfer it became apparent that the implementation of MOL’s new ERP system, on which many of the planned efficiency savings were based, would be delayed by several months. The service provider, being motivated to achieve the planned savings anyway, reacted to this setback by successfully identifying alternative ways of achieving the necessary headcount reduction.

Had the accounting unit remained within MOL, management would not have been able to devote the time and resources to this effort and most, if not all, of the savings would have been delayed along with the ERP project.

Lessons learned
With the benefit of hindsight I would like to finish by highlighting some of the key factors that can make a project such as this a success.

Communication
It may sound like a cliché, but nothing will make a bigger difference than a properly thought out and implemented communication plan. There are many audiences: directors, management, the affected staff, unions and works councils, infrastructure providers, customers and suppliers, to name just the main ones.

Communication as early as possible in as much detail as possible is a good general rule. There is a risk that as a project develops it can become inward looking and concentrate on contact with those needing most attention – most obviously the directly affected staff and their representatives – at the expense of others. In our case, we found on day one that we had achieved a very high level of employee buy-in, but faced users with many unanswered questions.

Proper project management
A project as complex as this needs full-time project management and access to proper Human Resource and legal expertise.

Client and service provider project teams should work together as much as possible. Keep working groups small, especially when it comes to contract negotiation, where the time taken to reach agreement is directly related to the number of people involved – one key person from each side appropriately empowered and with the necessary legal support should be sufficient.

Clear top management support
Outsourcing means huge changes for many people and there will always be resistance. This can only be countered effectively provided it is clear to everyone that top management fully supports the project.

Conclusion
Almost one year on MOL is satisfied that it made the right move by outsourcing its accounting function. Our key objectives have either been met or are on target and nothing has caused us to change our view that it would have been very much more difficult to meet those objectives with an internal solution.

Outsourcing will never suit everybody, but I hope that I have managed to convey some of the potential benefits in a way that will enable you to consider whether they would apply to your company.