“It’s not always easy to be a service provider to a company that is as performance focused and cost focused as British Petroleum (BP) is, especially when the company has more than doubled in size over two years,” states Alan Eilles, vice president and chief financial officer for BP’s downstream business. “It tends to be a little disruptive for people working with us, because there is no such thing as stability. We work in a relatively volatile business environment and, therefore, change quite frequently in both small and in big things; so we need a service provider that responds to us flexibly.”
They found that – and much more – in Accenture in their very first outsourcing arrangement a decade ago.
But the story of BP’s 1991 partnership with outsourcer Accenture is more than a tale of flexibility. It’s the story of an industry leader reshaping itself to gain competitive advantages and, in the process, changing an entire industry.
Realms of Possibility
BP’s aspirations for the Accenture relationship begun in 1991 were that, over time, the outsourcer might provide services to other oil companies and actually create an industry solution center. Five years later, it happened just as BP had dreamed. As Sun, Conoco, and other oil companies came into the arrangement, BP’s unit fixed costs were reduced because of the economies of scale the outsourcer was then able to leverage. Moreover, as some of those customers arrived with SAP, Accenture standardized all of its customers on SAP, providing synergies in terms of cost and performance for all of the customers.
“There clearly are benefits that we have received over the past several years that were only at the aspirational level when we put the deal together,” says Eilles. “If you keep something in-house, you can never access economies of scale that can be created only in a free marketplace.” According to BP’s CFO, the petroleum leader has seen cost reductions every year for all 10 years of this outsourcing relationship. “In fact, in just the first seven years, the volume of work that Accenture performed for BP doubled because of taking on new oil fields in the UK; but the costs halved because of efficiencies and the economies of scale from bringing in new clients,” claims Eilles.
In 1991, BP Exploration’s new CEO made a seminal decision to radically transform the way the company conducted its exploration and production business. It was too hierarchal, too bureaucratic, had too many employees and employed processes that were too costly and tradition bound – all suicidal in the changing business world. For six months, as part of the overall change program, a handful of BP’s top executives explored with Accenture the idea of outsourcing BP’s accounting processes. Although outsourcing a financial organization had never happened before in any industry, they determined that it was doable. Kept top secret until it was announced to the unsuspecting BP world, Eilles says the outsourcing decision was a “huge shock.”
Until 1987, the British government still owned a significant equity stake in BP, which was part of the reason for the corporation’s bureaucratic culture. People were seldom fired and rarely left the cradle-to-grave company until retirement. “The announcement was intended to be a shock,” says Eilles. “It was a radical signal to the employees that the world had changed and our corporate culture was also changing.”
Against that background, a further shock came when 200 employees learned that European legislation forced them to transfer to the outsourcer and receive no severance package from BP. Eilles recalls it was an emotional time and it took “a while to get through it.” He credits much of the successful transition to Accenture’s heavy investment in measures to stabilize the situation.
The 1991 agreement for all of BP’s accounting operations for the exploration and production business for Europe accomplished three important objectives. The outsourcer consolidated all of BP’s accounting centers (and 200 people) throughout the UK onto a single accounting system and at a single site located about five miles from BP’s head office in Aberdeen, Scotland. That four-year contract was renewed one year ahead of its expiration date for another five years, then subsequently renewed for an additional five-year term.
In the next phase of the dream, BP’s employees in its U.S. operations saw the handwriting on the wall when Eilles was transferred to the States in 1995. By then he had a reputation and a lot of experience in outsourcing with several global deals. In early 1996, they received the announcement: BP would be outsourcing the accounting functions for its U.S. upstream, downstream and chemicals businesses to Accenture. Eilles says that transitioning employees in the U.S. was easier, however, because of fewer legal restrictions. They were given the choice to join the outsourcer or accept a generous severance package.
Three years later, BP merged with Amoco, the first step in more than doubling BP’s size; and overnight the scale of operations was radically changed. Because of the enormous scale of operations worldwide from the merger, BP also changed its outsourcing strategies at that time, deciding to minimize risk by dividing the upstream and downstream business operations into two separate outsourcing providers. In the U.S., Accenture retained the downstream business (now centered in Houston, Texas) and, in Europe, it kept the upstream business. The upstream business in the U.S. (now centered in Tulsa, Oklahoma) was shifted to PricewaterhouseCoopers, which was also given the downstream European business. Shortly thereafter, BP underwent another growing spurt with its acquisition of ARCO in 2000.
This latest U.S. contract also implements two new strategies that enhance the value for both parties. This contractual agreement sets aside a number of days for BP to benefit from Accenture’s consulting time for innovation and new ideas, new applications and new technology. In a sense, this is an investment that Accenture makes in the deal, since BP is not charged for these consulting days. It’s also a built-in annual commitment to spend time thinking about new and better ways of doing things.
The contract is also structured on a risk-reward arrangement. The parties agree annually to cost and service level targets. Accenture is entitled to additional financial rewards when those targets are achieved. This tactic guarantees more of a total performance in terms of service delivery.
More Than a New Badge
“The way you manage the transition of the work is critical,” Eilles says. “You want things to happen soundly and peacefully and not be aware of any change. If that doesn’t happen, the impact on the possible success of the relationship and deal will get off to a really, really bad start from which it’s tough to recover.” He adds, “I believe Accenture does an outstanding job at transition management.”
With the ARCO acquisition, for example, there were a handful of people who would transfer from ARCO’s Los Angeles, California location to Accenture’s Houston accounting center in the January 2001 cutover. In addition, 100 new employees were recruited in the Houston area and then sent to L.A. to work side by side with the ARCO people, learning the work. For the prior five or six months, Accenture had a team of its people in L.A. doing the solution planning, process mapping and roles and responsibilities. After the cutover, a few key people who had chosen to leave ARCO still kept flying in to the Houston center for a few weeks to make sure everything was running just fine.
BP’s strategy is to get its key employees – core players – to transfer to the outsourcer, because their knowledge, skills and corporate history go with them. “But we want a balance,” explains Eilles. “We want to blend in people from the outside in order to create a new culture and do things differently, not just replicate the old culture. Otherwise, all you do is take BP people and give them a new badge.” Accenture, he says, works very hard at accomplishing this blend desired by BP.
At the End of the Day
Eilles’ advice to companies considering an outsourcing initiative is to invest “serious” time and energy in developing and maintaining the relationship. Both parties must be treated as equals. There will always be changes and difficult times, but he believes that, “at the end of the day, the quality of the partnership within the relationship will have a significant impact on the financial success of the deal.”
Eilles, who has a decade of experience arranging some of the world’s largest accounting, HR and IT outsourcing deals, cannot speak highly enough of the partnership and original deal with Accenture. “Ironically, the deal we did with Accenture 10 years ago may be the single most successful deal that BP has ever done – in any function, anywhere. And that’s deeply laden with irony, because your first one out of the box is the one you’d expect to be where you’d make all your mistakes. But we got it right, and it has been a tremendous success.”
Lessons from the Outsourcing Journal
- It’s a complex activity to make sure all the work is transitioned from the buyer to the supplier and have it work seamlessly the next day; so it’s crucial to choose a supplier that has expertise in managing transitions.
- When constructed most effectively, a risk-reward agreement aligns the interests of both parties (revenue for the supplier and the desired quality of service for the buyer).
- Outsourcing can be used as the catalyst to change corporate operations and also bring in external people for a new blend of culture.