Lacity, Feeny and Willcocks l Transforming a Back-Office Function TRANSFORMING A BACK- OFFICE FUNCTION: LESSONS FROM BAE SYSTEMS' EXPERIENCE WITH AN ENTERPRISE PARTNERSHIP 1 Mary Lacity Executive Summary University of Missouri- Senior executives continue to seek ways to transform back-office functions, such as St. Louis information technology, human resource management, finance, and accounting. Can these functions be managed to simultaneously reduce costs and improve service? David Feeny Historically, senior executives have taken four approaches to transformation: do-it- Oxford University yourself, management consultants, fee-for-service outsourcing, and even the occa- sional joint venture. While these approaches remain viable for various contexts, a Leslie P. Willcocks new one has emerged that warrants attention: the enterprise partnership, where a University of Warwick customer and supplier create a jointly owned enterprise that both services the cus- tomer investor as well as seeks external customers. However, this is not a traditional joint venture with equally shared risks and rewards. Rather, the supplier bears more risk and the primary purpose of the enterprise is to service the customer investor. The enterprise partnership addresses the lack of alignment in fee-for-service out- sourcing while minimizing the customer risks of a joint venture. This paper discusses pros and cons of all five approaches. It then illustrates the new enterprise partnership model by presenting the human resource management part- nership between BAE Systems and Xchanging. It concludes with ten lessons for se- lecting and managing back-office transformations. Many of these lessons are in- triguing because they seem to counter common wisdom, such as selecting a supplier with generic business competencies rather than domain specific knowledge, select- ing a culturally "incompatible" supplier, and delaying due diligence until after the deal is underway. A MAJOR TREND: Consider, for example, Bank of America. Over the past decade, the bank grew by acquisitions, which TRANSFORMING BACK-OFFICE resulted in over-staffed, idiosyncratic, duplicate, and 1 FUNCTIONS incompatible back offices. In HR, executives believed they could achieve significant savings through cen- Given the global economic recession, senior execu- tralization, standardization, and downsizing. They tives more than ever are seeking ways to radically chose to transform their HR operations by partnering reduce the costs and improve the service of back- with a start-up company, Exult. The bank took an eq- office functions, such as information technology (IT), uity stake in Exult in exchange for guaranteed cost human resources (HR), finance, and accounting. savings and significant improvement in HR services, Brave CXOs are not satisfied with incremental im- largely enabled by Exult's proprietary eHR platform. provements to a few processes. They want organiza- The deal, worth about $1.1 billion over 10 years, also tional reformation and cultural revolution in back- provides Bank of America with shares in Exult's reve- office functions. nues from external customers. Thus far, Exult has won significant contracts beyond Bank of America, 1 Jack Rockart was the senior editor accepting this paper. © 2003 University of Minnesota MIS Quarterly Executive Vol. 2 No. 2 /September 2003 86 Lacity, Feeny and Willcocks l Transforming a Back-Office Function including a $700 million deal with Prudential Finan- All five approaches have benefits and risks, as shown cial and a $600 million deal with International Paper.2 in Table 1 (benefits) and Table 2 (risks). These tables present the potential benefits and risks as viewed by Bank of America could have performed the transfor- BAE Systems and other companies we have studied. mation itself. Or it could have pursued other ap- The tables are meant to serve as templates to help proaches, such as contracting with management con- CXOs structure their debates on the relative merits of sultants or fee-for-service outsourcers. But given the the five approaches. We briefly highlight some sig- risks of these approaches, Bank of America instead nificant differences among the five below. chose an approach that more closely aligned customer and supplier incentives through equity sharing. Do-It-Yourself. This approach scores high on retain- ing control and keeping the value of the transforma- We have seen equity sharing before in such IT out- tion within the company. But to succeed, it requires sourcing deals as Commonwealth Bank-EDS, Swiss both funding and appropriate skills, which may be Bank-Perot Systems, and Lend Lease-ISSC. Equity lacking. It is also the option most likely to encounter sharing represents one step toward the sort of relation- internal resistance if senior management does not give ship described in this paper—the enterprise partner- a clear signal of its importance. When other internal ship. But an enterprise partnership goes beyond equity efforts are more important, management may not pro- sharing by creating a unique partnership business for vide this signal. each major customer, with its own joint board of di- rectors, service review board, technology review Management Consultants. This approach shares board, and shared business plan. three major benefits with the other approaches that draw from outside the enterprise. First, it brings in external energy. Second, management gives a clear FIVE APPROACHES TO signal of commitment to the transformation by bring- ing in outsiders. Third, that commitment reduces po- TRANSFORMING BACK-OFFICE litical resistance. FUNCTIONS But this transformation approach does have several The goal of a back-office transformation is to radically major risks. The two most significant ones are poten- reduce costs and improve service. The practices to tial cost escalation and lack of sustainability because achieve these results normally include centralization, the supplier has no long-term commitment. The result standardization, re-orientation of staff, and process can be a reduced sense of accountability and a lack of redesign. In considering which back-office transfor- alignment between the parties. Furthermore, expertise mation approach is best suited to an organization, and knowledge leave when the consultants leave. CXOs should consider the skills and resources needed Fee-For-Service Outsourcing. This approach also to implement these new practices, such as upfront in- has the benefits of bringing in an outsider just noted. It vestment in technology and physical facilities, proven almost always also guarantees one-time savings and management capability, and effective and strongly on-going cost and service improvements. However, motivated staff. Furthermore, they should consider the long-term relationship can be a difficult one. Once which transformation approach is politically feasible the contract is signed, buyer and seller incentives do with the stakeholders, including senior management, not align, and power shifts to the supplier, which can business unit directors, process directors, process lead to premium prices for additional work, reduced staff, and of course, the large body of users. levels of attention from the supplier as time goes on, We have identified five approaches to transforming and an overall deterioration of the relationship into an back-office functions. Three are fairly typical: do-it- “us-versus-them” mentality. yourself, management consultants, and fee-for-service Joint Venture. As the tables suggest, a joint venture outsourcing. A fourth is used occasionally: a joint solves some of the relationship problems through a venture. Most CXOs are familiar with these four. The shared board of directors and a sharing of profits. fifth is very new: enterprise partnership. However, power asymmetries still exist and most of the joint ventures we studied do not guarantee sus- tained improvement. Instead, they rely on nebulous 2 Cagle, Mary Lou, and Campbell, Kevin, “Taking HR from Cost notions of partnership, which can lead to real discom- Center to Revenue Generator at Bank of America,” presentation at the 2002 Outsourcing World Summit, Lake Buena Vista, Florida, February fort between the partners—especially if costs escalate. 19, 2002. One cause of higher costs can be the service and sys- 87 MIS Quarterly Executive Vol. 2 No. 2 / September 2003 © 2003 University of Minnesota Lacity, Feeny and Willcocks l Transforming a Back-Office Function Table 1: Major Benefits of Five Back-Office Transformation Approaches Do-it-Yourself Management Fee-for-service Joint Venture Enterprise Partnership Consultants Outsourcing Realization of all Infusion of external Infusion of external Infusion of external Infusion of external en- cost benefits in- energy and capabili- energy and capabili- energy and capabili- ergy and capabilities ternally ties ties ties Ability of outsiders to Easiest model to Ability of outsiders Ability of outsiders Ability of outsiders bypass political resis- sell to internal to bypass political to bypass political to bypass political tance organization resistance resistance resistance Clear indication that Under complete Clear indication that Clear indication that Clear indication that management is commit- in-house control management is management is management is ted to transformation committed to trans- committed to trans- committed to trans- formation formation formation Guaranteed cost and ser- vice improvements for 5 Most scalable solu- Guaranteed cost and Promotion by Joint years on both identified