Stef Mason: We're here today to discuss what makes a successful outsourcing relationship – and by implication, what the opposite looks like. Let's assume that I am the tax director of a global group. I've decided to outsource corporate income tax compliance and some routine consulting and advisory support services. I expect my provider to support my head office and regional functions, but where I really need help is outside the small number of countries where I have significant in-house resource. I've selected my preferred partner. I've invested time and effort and I have agreed to invest financial resource. I want to make this work. What should I be looking for from my partner to ensure we both get the value we want out of this arrangement?
Ken Brown: Let's start at the beginning. We'll take it as read that you have made a wise decision and your preferred provider has the people, the processes and the technology to be able to deliver. Your first joint challenge is to test your understanding of what it is that's being delivered. The basis of a positive and constructive relationship between the business doing the outsourcing and the professional services firm which is taking on the work is mutual understanding – of deliverables, shared risks, risks retained, and so on. That's more than having a clear definition of the engagement, and clearly agreed terms and conditions. It means a shared knowledge and appreciation of each other's responsibilities, the corresponding tasks and the mutual benefits that completing the tasks successfully will produce. So you have both to move beyond high-level scoping and definitions and identify, on as granular a level as you can, what the provider is actually going to do for you.
Ian Sadler: In an ideal world, the process of constructing a contract would ensure that both parties had a shared understanding of the engagement before the contract actually commenced, but of course we know this doesn't always happen. Incomplete scoping can happen for all sorts of understandable reasons: time pressures, lack of knowledge, assumptions about what is meant....even if you are outsourcing the whole tax function, what do you mean by that? Box up the tax function and forget about it, box it up but get regular status reports? And if you do box it up, does the fee you pay the provider cover everything? What about a major restructuring event that you haven't defined?
Marijke van Beesten: We shouldn't give the impression that all ambiguities can and should be removed. We have to deal with some factual uncertainty, especially where the engagement concerns large, complex multinational groups. These groups change and grow all the time; at any given moment, the head office may genuinely not know every last detail of the corporate structure in every country. You and your provider should have a good sense of where these blurred edges are – it's your job to give them as much clarity as you can, and theirs to deal with what they find on the ground.
Mason: OK, so I reckon I've got my contract properly scoped, I'm confident I haven't mislaid too many subsidiaries in far-flung corners of the world, and my providers are raring to go. Can I get on with adding strategic value and leave them to it?
Brown: Sorry, Stef, but no. You and your provider have agreed what they are going to do, but there is another crucial building block you have to ensure is in place. And that is measurement. Your provider should have the processes in place to enable them to demonstrate to you that they have fulfilled the goals set out in the contract and delivered to you the value that you want from it. How you measure success will depend on the specific circumstances of the engagement. Measures can range from the very process-driven, such as the timely completion of returns and the avoidance of interest and penalties, to the more value-driven, like the reduction of tax-related effort by business units or the provider's contribution to creating tax value within your business. So take the time now to ensure that when you review this engagement at the end of a year that you can see clearly what has been gained from it.
Van Beesten: I know people tend to groan a bit at the word scorecard, but you've got to have one, or something else that does the job. What you also need is clearly understood escalation procedures that everyone understands and uses.
Mason: So I should be very clear about where the tax function is currently at in terms of efficiency, tax risks which may exist, and areas where we can add value. This also means I must understand the tax value chain for my organization and where my staff can best add value so we can define appropriate targets. I agree with everyone that if the basic contract isn't right for both parties then there will inevitably be issues that have to be resolved later on. And if the contract is right, and it has made adequate provision for managing areas of disagreement, any issue that does arise is much more likely to be solved without too much grief for anyone. Let's assume for the moment, though, that we've done everything we can to make the terms of engagement realistic and watertight. What is the next challenge? Getting started, I guess.
Van Beesten: Well, you may be very keen to get going and do something more interesting – that may be exactly what you may want from this relationship. But I think it is incumbent on you to do some communicating first. You need to make sure that every one of your locations within the scope of the contract knows what is going on. It's a bit like the contract itself: a little work upfront is worth an awful lot later on. You may be in the situation where people are transferring to the provider, and it's natural (and probably legally vital) that you communicate with them fully about the outsourcing proposal. It's potentially much less clear cut where what's effectively happening is that one provider is taking over work which has previously been carried out by many different external providers.
Sadler: If you and your provider can work together to ensure that local management is aware that you have agreed at head office to outsource compliance work to a single provider, aware of the terms of the agreement and the procedure for handover, aware that they have to honour it, and understanding of the benefits it confers, you will minimize the scope for turf wars and non-cooperation.
Van Beesten: I'm sure we all recognize that this is a big "if" and perhaps the single biggest challenge even the best designed outsourcing engagement will face. Getting the buy-in of local management, and regional management where that's relevant, is key. Human nature and the law of averages tell us that some people will be upset at losing local relationships perhaps going back many years, and some people may feel threatened. The provider has to find ways of helping these people understand and embrace the change. And to do that for you, your provider must make sure they understand your corporate culture. To put it bluntly, if your culture is highly decentralized, maybe highly acquisitive (so the centre is focused on transactions and basically leaves the acquired business to run itself) then your provider should have asked you some tough questions about your ability to keep your side of the bargain in terms of information flow and cooperation.
Mason: Well, that's telling me!
Van Beesten: I'd probably phrase it slightly more tactfully in the real world!
Mason: Clearly for the whole arrangement to be successful I have to mobilize internally to support my provider. As we discussed earlier, a mutual understanding of what needs to be done is critical, as is a combined effort to implement. You are telling me that if I do not contribute to the relationship it is likely to fail. But outsourcing may be my strategy to achieve cultural change within my organization. Achieving or accelerating change is one of the reasons many companies outsource – a provider often can help them accelerate process or technology changes they have been seeking on their own, but have not fully achieved. The provider can often help the company get to the next level of automation or efficiency – but they still need the teamwork and support of their buyer to get there.
Brown: It cuts both ways. Essentially, Marijke is right. There is an obligation on the buyer to strongly communicate and reinforce the benefits from the relationship, seek feedback and deal with any issues before they get out of hand internally. But the buyer has expectations too. Your provider should be able to control and coordinate this transition process. Sure, every transition has its own challenges and problems, and some will take longer to solve than others. You have the right to expect your provider to have a methodology that works, and people with the change management skill set to apply it. They have to be capable of controlling and coordinating the transition process.
Sadler: They also have to be excellent communicators. Although it's up to you the buyer to decide the level of interaction and feedback you want, both during the transition phase and actually in delivery of the service, it's up to the provider to put in place channels to make this happen.
Mason: I was waiting for that word to come up again. OK Ian, what does an excellent communicator do that differentiates him or her from the rest?
Sadler: The frequency and format of communication from the provider will normally be set in terms of the agreement that covers the delivery of in-scope services. Indeed, adherence to these terms will go some way towards good communications. But let's go back to the buyer's driver to outsource – if you want value out of the arrangement then the provider should have a communication process that focuses completely on communicating that value to you. A lot of buyers have an overriding aim to get value out of compliance activities beyond the sheer fact of not having to cope with the nitty gritty of tax return completion. They may think of this value in terms of time, or activity, or information. They may regard it as risk mitigation. It's our job as providers to recognize those value needs and act as enabler to ensure they're fulfilled. I also think it's important that we don't just discuss communications in terms of what I, as the engagement partner, might say to you as the tax director: good communications practice should permeate the entire team. There's not much point in my meeting you weekly if neither of us is aware that there's been a major communications breakdown in a subsidiary. Or if one of us knows but doesn't tell the other!
Brown: We've talked a lot about communication as a critical factor in the success of an outsourcing engagement. And we've focused on communication around the transition and service delivery generally. But I'd just like to take a step back here. Good communication is founded on a mutual understanding of what is going to happen when an outsourcing contract is put in place. Things will not stay the same for you, Stef, now you've moved to this model, and this is a key message for your provider to help you address. To start with, most companies choose to outsource because they want to achieve some level of transformation or change within their tax function. Outsourcing portions of your tax operation can help achieve this change, often very rapidly. So most companies have other changes to make and to communicate. 75% of an outsourcing operation is not about tax return completion. It's about all the processes, the technology and the communications – everything that goes to put the return together. Hiring a tax adviser to do your tax returns is not really outsourcing. The provider has to be able to use their processes to the full to enable your business to identify and implement planning ideas and solutions. You can't do that if nothing changes. Frankly, if all an outsourcing engagement does is remove people from your headcount, so you've got the same staff doing the same tasks in the same way, just doing it on the provider's payroll, you've missed the real value and opportunities that a state of the art tax outsourcing solution – what we would call an operate solution – can provide.
Van Beesten: It's also not good for the people who have transferred. They need to become part of the provider's culture, so they can benefit from new career development opportunities and the sheer efficiency of using state of the art technology.
Sadler: I know exactly what you mean. The efficiencies may mean that someone transferring from a buyer to a service provider may still be able to do his original job as well as acting on a separate assignment for the provider without any reduction in service delivery standards.
Brown: Sure – that's the provider's take on it, but as we said earlier, it does mean there's an importance in buyers and providers having aligned values. I don't mean by this that they are seeking to get the same leverage out of the engagement – they can't be because their positions are different. But if I'm talking to you as a tax director, Stef, you should be looking for someone whose processes and metrics you are comfortable with. You don't want to see your own technology spun back at you, just like you don't want to see your own processes. You've got to be comfortable that these people have solutions that are a good fit, that their processes and technology are scaleable to what you want from them, and they have a track record of delivery in businesses like yours.
Mason: Well, we seem to be back at the pitch for some reason here, but let me put what you've all been saying in the context of an ongoing relationship. My provider should be aware of what I want, should be checking I've got what I want, and should be demonstrating by the technology and process improvements he's making to my tax return completion cycle that he is investing in this relationship. If anything does go wrong, we both know what procedures to take to identify the problem and resolve it, so there are no nasty surprises at the year-end. I also need to invest in the relationship and reinforce the benefits as appropriate internally. Sounds good to me. It also sounds quite simple. So why do outsourcing engagements sometimes go wrong? One reason each.
Brown: No clear definition of the engagement at the outset.
Van Beesten: Change management issues over the transition.
Sadler: This conversation has mainly been about the buyer's viewpoint and what providers should do to ensure the relationship works well. There is one overriding issue which can make or break the project from the provider's viewpoint, and it goes right back to something Stef said at the outset. He said that buyer and provider should be working together to ensure each gets the value they desire out of the arrangement. Aligning the benefits, the risks and the rewards on both sides is really, really important. If the provider is put in the position of delivering something, and the value received is simply not commensurate with the effort required or risk involved, you will get loss of motivation and an unwillingness to invest on the provider's side. And sooner or later, you, the buyer, will lose out on some of the value you thought you were going to receive. I'm not saying don't negotiate; I'm not saying don't get the best price you can; but I am saying that a win/win mentality underpinned by pragmatism on both sides has to prevail.
Brown: This also goes back to my point about the importance of corporate alignment between the provider and the buyer. In essence, an outsourcing relationship works best where there is a defined future state both parties buy into, the provider has the change management skills, the processes and the technology to deliver or achieve the future state, and that future state meets the corporate objectives of the buyer. If you've made the right choice as a buyer, then the process should – if you take it as a whole – feel natural and right.
Mason: As a buyer I want the provider to join with me on a shared journey where the investment, risk, value and effort is understood and shared by both sides. This understanding needs to be embedded throughout the processes, systems and arrangements that support the relationship. And on that comforting note I think we should end. Thank you all.
Kenneth C Brown
Tel: +1 214 969 9760
E-mail: ken.brown@ey.com
Stef Mason
Tel: +61 3 9288 8000
E-mail: stef.mason@ernstyoung.com.au
Ian Sadler
Tel: +44 20 7951 8127
E-mail: isadler@uk.ey.com
Marijke van Beesten
Tel: +44 20 7951 4346
E-mail: mvanbeesten@uk.ey.com
