Fallen Angels Catalyze Change

Traditional outsourcing often involves moving back-office functions and processes to a third-party company to improve costs, focus, productivity, service quality, and flexibility. Some organizations outsource the same operations in a way that makes it transformational. These companies are failing to thrive. They’re comfortably settled into the wrong performance trajectory, and they need strong action to change their tack.

Executives use this kind of outsourcing to communicate—and to catalyze—a broad organizational change. As with any other type of transformational outsourcing, it is not the only initiative executives have under way. It can, however, symbolize the depth, speed, and extent of change that executives intend.

Executives at British Petroleum, for example, describe their transition from a stodgy, bureaucratic oil company to a nimble competitor.^[4] In 1987, the Thatcher government sold its majority stake in BP to the public, completing the company’s privatization. According to one executive at the time, ‘‘The company had a history of being managed in a bureaucratic, cumbersome way.’’ Between 1990 and 1992, more than 22,000 jobs wereeliminated, layers of management were removed, the corporate headquarters staff was slashed, and BP experienced its first financial loss in 80 years.

At the time John Browne led BP’s upstream business—oil exploration (BPX). According to one colleague, ‘‘He needed to shake up the organization to communicate that things were going to be radically different.’’ To redirect his organization, he cut staff and refocused capital expenditures in order to ‘‘spend less to find more.’’ In addition, he undid BPX’s traditional hierarchical management approach and created separate business units, each with its own accountable executive. Instead of having control over only 40 percent of their spending, Browne’s autonomous ‘‘asset managers’’ each had personal authority over 90 percent of their costs, and they had the freedom to do what it took to make money.

Overhead support, like finance and accounting personnel, was part of the revolution, but in a very different way. Browne believed that finance and accounting was not an area in which BPX could create a competitive advantage. He did not just paint a cost-cutting target on it, though. He teed it up for radical change to make a point to the rest of the organization. In a bellwether deal, BPX consolidated all the accounting outposts that dotted its far-flung empire and outsourced the entire process. His immediate goal was cost reduction, and he believed that economies of scale would deliver these results. However, his aspiration did not stop at the company borders. Browne reasoned that if he could get his competitors to use the shared service center too, his costs would improve even more.

Ultimately six oil companies and several other services companies joined the North Sea finance and accounting center in Aberdeen, Scotland. By 1997, BPX had cut its finance and accounting costs in half, while its volume of work doubled, for a breathtaking improvement in productivity. BP has gone on to outsource a wide range of activities that it considers distractions, just as it shrewdly sells properties that no longer produce profitably. Changing these ‘‘noncore’’ and ‘‘no-longer-core’’ activities is only part of the transformational agenda, but it is an important part. These moves send a clear signal to the rest of the organization about where and how the company does distinguish itself. Just as surely as firing an executive who fails to meet her numbers, these actions help remaining employees who understand what happens to operations that don’t create value.

Going beyond the obvious benefits of wake-up calls and cost improvements, fallen angels often look for deeper impacts as well. When they make management information clean and visible; for example, they can improve the quality of decisions. How? The senior team stops arguing about what the results are because that is no longer in question. For the first time, they may be able to see which of their products or services are actually profitable. They can turn their attention to what they should do about it. They can also tap off-balance-sheet financial slack to fuel innovation. And, unlike out-of-nowhere start-ups and crouching tigers, fallen angels are likely to keep outsourcing relationships in place over the long term.

^[4]Jane Linder, Sam Perkins, Srinivasan Rangan, Philip Dover, ‘‘The Drug Industry’s Alliance Archipelago,’’ Accenture Institute for Strategic Change research report, November 2003.