PricewaterhouseCoopers (PwC) and BP Amoco (BPA) have embarked on a significant outsourcing collaboration that has the potential of being a watershed event. This contract highlights an emerging trend in international business to outsource critical, non-core business functions such as finance and accounting; further, because of its size ($1.1 Billion) and the prestige of the two participants, it is the type of transaction which the industry has been awaiting to validate this new market segment in the world of outsourcing. It has the same elements and characterization as a prior historic breakthrough–the outsourcing arrangement between IBM and Kodak which served as the breakthrough event which validated IT outsourcing.
With the entry of IBM into the outsourcing market (through ISSC, its outsourcing subsidiary at the time), other companies took note. Because of IBM’s excellent reputation as a trusted company, the outsourcing industry gained a strength and credibility that it previously had not known. IBM entered the arena with a huge deal in 1989, providing mainframe computing services to Eastman Kodak. What is especially important about that deal is that the characteristics and strengths of both companies worked together to create a powerful partnership with a great deal of leverage and credentials. Together, they catapulted IT outsourcing as an acceptable and legitimate business strategy into the minds of executives.
PricewaterhouseCoopers, the world’s largest professional services organization, and BP Amoco, one of the world’s leading energy companies, have signed an agreement to expand their global business process outsourcing (BPO) relationship to include the United States. The $1.1 billion, ten-year deal uniquely integrates BPO and application support services into one contract. They have made a substantial commitment to each other, based on their existing, successful, long-term partnership, together with their global reputations and expertise. If successful, their venture will be the seminal event that opens the floodgates for BPO of back-office functions, just as the IBM-Kodak deal opened the doors for IT outsourcing.
The Ties That Bind
When all is said and done, successful outsourcing relationships can point to the “partnering” aspect as the key to success. Indeed, partnership is the distinctive feature of this landmark deal, according to Glen
Peters, global relationship partner for BPA. Peters recalls that the relationship began in 1994 when British Petroleum asked PwC to take over its accounting operations in Bogota, Columbia. “The idea was alien to us at the time,” says Peters. “Why would someone want to outsource something as important as their accounting? But BP knew that the cost of shipping expensive expatriate accountants to Columbia was unsustainable. It also knew that PwC recruited and retained a great number of accountants in Latin America.”
PwC delivered the service to the highest standards and, in fact, their relationship won the InfoServer award in February 1999 for “Best BPO Relationship.” The success in Columbia earned PwC more scope of similar process management elsewhere. BP then agreed to a joint venture with Mobil in Europe and wanted to consolidate five country-based operations into one. They selected PwC to achieve the complex transaction, based on its performance in Bogota. PwC established a Centre of Excellence in Rotterdam and achieved the consolidation and targeted 45% savings in 18 months. “What struck me about the transaction,” says Peters, ” is that BP helped us through a myriad of obstacles and regulatory barriers. It was partnership at its best.”
“BPA is a great partner, but also a tough negotiator,” says Peters. “They negotiate hard but are acutely aware that a service provider must have enough margin and future business potential to make a transaction worth their while. At PwC, we also feel that working in a partnership with transparency and trust is becoming a key competence in this team. “The only limit to growing this partnership is our imagination.”
The U.S. Deal
In 1999 when BP completed its $55 billion acquisition of Amoco (BPA) it created the world’s third largest oil and gas company. The parties had been discussing the benefits of pushing outsourcing of accounting even further in scale and scope. The new $1.1 billion contract and the Centres of Excellence in Tulsa, Houston, and Chicago are the result of those talks. Transformingback-office functions into a more productive source of revenue and value is the focus of the new Centre. Uniquely, the Centre is already designed to operate as a shared services center for multiple clients.
PwC has taken over operation of the Accounting and Application Systems Shared Service Group formerly providing services to the exploration, production, and chemical operations of BPA. That group was operating from three physical locations–Tulsa, Chicago, and Houston. Tom Eubanks and Charles Kafoglis, PwC partners responsible for the Centre of Excellence, point to this strategic play of BPA as part of its decision years ago to focus on its core business and outsource all other functions. “Integrating different outsourced processes plus the applications under one roof is a way to create even greater value,” says Kafoglis, “and that integration can then be taken to a global level.”
Eubanks explains BPO benefits will come from “taking a close process look at how we do things within the Centre. We can supply more value through a more holistic look at the processes and by taking that look from an external provider perspective.” Kafoglis says, “We are shedding people’s accounting or IT labels and getting them to understand they are going after the same objective–whether that is process efficiency or cost savings. They are all incented in the same direction.”
Kafoglis says they have the challenge to double the business in two years. Part of that will happen through improved service generated by the 1,200 employees who transferred from BPA to PwC. Those employees moved from the back to the front office, into a growing services industry with new career opportunities. Employees with high morale are better able to focus on productivity improvement.
The contract calls for PwC to generate cost savings through performance initiatives, added technology, and increased scale by bringing in other clients to BPA. Effectively a cost-plus type contract with shared risks and gain sharing, there are guarantees, targets, and stretch targets. By utilizing its core competencies in finance, accounting and applications support and the skills acquired through this contract, PwC’s goal is to quickly have the Centre delivering services to multiple clients, both within and outside the energy industry.
Also involved is a long-term vision of what can be done with scale of data. “With shared processes and data under one roof (or a virtual roof in the e-business world), opportunities exist that aren’t available while data is stored in separate company silos,” says Eubanks.
Cynthia Murphy Doyle, senior research analyst at International Data Corp., says, “this is truly a big deal. I think this capability of offering repeatable solutions within these hubs throughout the world is a great model that everyone will study.”
With PwC’s network of offices in hundreds of locations, Glen Peters says PwC is positioned to support BPA’s start-up operations as it seeks new assets around the world. “We are currently working on expanding our competence in partnering as a means of leveraging value in new processes such as procurement, supply chain management, and applications support,” he says.
Industry analysts and outsourcing participants will study this transaction. Although the PwC-BPA transaction has a great deal of credibility, we do not yet know its historic impact?just as we did not fully recognize the entire impact of the IBM-Kodak transaction at the time it happened in the 1980s. We believe the PwC-BPA transaction will be the breakthrough in credibility for the emerging trend in international business to outsource critical, non-core business functions such as finance and accounting. If this watershed event develops as we expect, global companies everywhere will be watching and learning from it.