Chemical Executive Series

Transforming business processes in the chemical industry: Unlocking business value to achieve high performance

Part of a series of papers focusing on fresh ideas for the chemical industry

The outsourcing of activities in the chemical industry is not new. Third parties have long been contracted to deliver activities such as maintenance, warehousing, distribution and site security in the plant. The industry has a history of working with outside parties to support business processes in and around the supply chain. What is new, Accenture believes, is the industry’s increasing uptake of business process outsourcing.

Outsourcing is evolving from a pure-cost play into a strategic management tool—sophisticated, well conceived and superbly executed—for optimizing business processes, building global and scalable capabilities, building competitive strength and refocusing on the core business and on customers. As chemical companies drive to achieve high performance, they will increasingly implement business process outsourcing for activities in the areas of indirect (non-productrelated) procurement, finance and accounting, human resources, and information technology. To design, transition and successfully implement outsourcing on a global scale, companies will want to consider tapping into the experience, scale and strategic focus that a thirdparty supplier can provide. The responsibility of an outsourcing provider is to deliver leaner, faster, more robust processes, costeffectively, through both process design and improvement. 2

Why the time is right for business process outsourcing in the chemical industry The evidence of gains that can be made through outsourcing is clear. Still, many chemical companies have remained reluctant to hand over an entire business process to an outsourcing provider. Instead, companies in the industry have tended to opt for out-tasking activities, such as information technology services and employee training, where the business case is clear and service providers have proven track records for delivering quality at reduced cost. In recent years, however, the state of outsourcing has matured, and so, too, have the conditions for its adoption within the industry. Far from being a one-shot quick fix or financial trick, outsourcing is playing a pivotal role in optimizing business process, expanding capabilities and building the competitive strength of an enterprise.

In short, chemical companies can position themselves for global growth by outsourcing key business processes to improve performance and achieve greater flexibility and scalability. The emerging shape of the chemical industry makes outsourcing more attractive today than it was even as recently as three years ago. Many companies are now at a point where their strategic agendas are behind them and they are converging toward a new business model. This evolution provides both the strategic thrust as well as the operational “bandwidth” to redesign the operating model. The convergences of these conditions put chemical companies in a better position to move beyond outsourcing transactional processes to outsourcing more complex functions. By reducing controllable costs and improving efficiencies, business process outsourcing has the potential to offset the impact of challenges facing the industry.

Improved performance possible through outsourcing in the chemicals industry: • Significant cost reduction relative to baseline through Accenture’s Global Delivery Network approach • Improved transparency and control of end-to-end process allowing better demand management, contract and business process compliance • Building global and scalable capability • Ability to manage future fixed cost inflation through continuous productivity improvement • Accelerated integration of activities and entities from mergers and acquisitions • A renewed focus on the core business and on customers

Accenture observes chemical companies moving to one of three business models, which we have labeled feedstock foundation, chemicals platform and market maker (see Figure 1). As companies determine which of these three models is the best “fit,” they can focus on those aspects of the business that will support high performance and shed those elements that hinder it. Given this business model evolution, companies can then much more precisely refine their operating models. In so doing, in many cases it makes sense for companies to separate “non-core” processes from “core” processes and leverage outsourcing to optimize operating models.

Figure 1. Emergence of new industry business models Value chain positioning and profitability 25

Market makers

20

25 20

Chemicals platform EBITDA (%)

15 10

15 10

Feedstock foundation

5

Energy

ROIC (5)

5

Petrochemicals

Industrial chemicals

Performance chemicals

End markets

Chemical industry value chain

Accenture research has highlighted that high-performance businesses typically boost superior people productivity (revenue over fulltime equivalent), as well as demonstrate lower selling, general and administrative costs (as percentage of sales). Depending 3

Business process outsourcing can act as a catalyst for wider organizational change An Economist Intelligence Unit survey on outsourcing commissioned by Accenture reveals different viewpoints geographically about the benefits of business process outsourcing.1 While lowering costs is still very important to European executives, they value it relatively less. They also regard reducing capital assets as significantly more important than their counterparts elsewhere in the world. In North America, lowering costs is regarded as more important than it is in Europe, and accessing best-of-breed talent and technology is of relatively higher importance than it is in Europe or Asia Pacific. Asian executives attach more value to sharpening the focus on their core business and accelerating business processes such as product development. The ability of business process outsourcing to act as a catalyst for wider organizational change, for example, is barely recognized—not a single one of the respondents identified this as a benefit, although it has been recognized and embraced in other industries. 1 “Outsourcing Lifts Chemical Company Performance,” survey by the Economist Intelligence Unit for Accenture, 2006.

on a company’s starting point in terms of performance in these areas, business process outsourcing can yield substantial improvements across business processes. Moreover, the unprecedented economic downturn and resulting cost pressures are putting chemical companies under intense pressure to improve productivity and cost performance. This is driving many companies to consider expanding the scope of business processes to outsource as a way to reduce costs, deliver performance improvement, and deliver sustained cost reductions year in and year out. Figure 2 illustrates potential financial benefits from outsourcing. Outsourcing can also enable companies to remain flexible so as to seize global opportunities when they arise.

Figure 2. Considerable financial benefits from outsourcing (Data as percentage of revenue, indicative ranges) Range of spend by business model as percent of total revenue

Functional area

Feedstock foundation

Chemicals platform

Market maker

F&A

0.5%–1.0%

1.0%–2.0%

1.5%–3.0%

HR

0.4%–0.8%

0.5%–1.0%

1.0%–1.5%

IT

0.6%–1.2%

1.0%–2.0%

1.5%–3.0%

Indirect procurement

4.5%–6.0%

6.5%–10.0%

5.0%–7.5%

Total spend

6.0%–9.0%

9.0%–15.0%

9.0%–15.0%

Typical savings range driven by outsourcing these functional areas (as percent of total revenue)

0.5%–1.0%

1.0%–1.5%

1.5%–2.0%

Source: 2008 Accenture High Performance Business Research

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In summary, there is a huge potential for chemical companies to raise their performance levels through outsourcing key business processes. The improved efficiency, effectiveness and quality of business processes achieved through strategic use of outsourcing have a dramatically bigger payoff than the benefits that were at the core of early outsourcing efforts. Seasoned business process outsourcing providers with a proven track record and deep industry knowledge provide measurable—and guaranteed— outcomes that improve business performance and reduce costs.

Shift to end-to-end business process thinking in the chemical industry facilitates the transition to business process outsourcing Support services traditionally have been buried deep inside business units in the chemical industry. Based on our dialogue with clients, however, we observe a shift toward end-to-end business process thinking taking hold in the chemical and life sciences industries. This trend is one toward increasing specialization—or “functionalization”—of business functions. Companies are driving for larger-scale business units to create critical mass and cost-effectiveness. At the same time, select indirect processes are being centralized, often making use of a shared services arrangement and/or lowcost country sourcing. Shared services—the standardization and consolidation of administrative or support functions into a single entity that provides common services—has become a powerful value creator for enterprises over the past couple of decades. The magnitude and pace of change appears to depend on the company business model, with feedstock foundation organizations leading the way.

The move toward functionalization is proving to be important to the successful transformation of support processes. Functionalization creates distinct end-to-end business processes that can be transitioned more smoothly to shared services centers and ultimately to business process outsourcing. A shared-service center approach offers greater value in the long run than situations where only transactional activities performed are transferred to a new, usually lower-cost, location. The transition of end-to-end processes also allows companies to capture cost advantages. Equally important, this approach opens a range of simplification, industrialization and automation opportunities. Increasingly, shared services are yielding to business process outsourcing to drive continuous value, new capabilities and other business benefits. Every company considering making the transition from shared services to outsourcing must answer a fundamental question: What precisely do we expect to get out of this?

and integration for an enterprise. In addition, collaborating with an outsourcer gives access to best-inclass knowledge, talent, processes and technology that would be too costly to develop in-house. Outsourcing end-to-end processes across a range of functions—finance and accounting, information technology, human resources and procurement—offers a company the opportunity to achieve mastery of those processes and a level of performance that could not be achieved on its own. For many companies, outsourcing over the past decade has brought about outstanding advances in efficiency and effectiveness. In the evolution from shared services to outsourcing in the chemical industry, Accenture sees companies implementing both horizontal and vertical business process outsourcing.

For the typical enterprise, the reasons driving outsourcing may be prosaic. A process is not performing at acceptable levels, it is more trouble than it is worth and it costs too much. So the short answer to the question becomes simple: Get rid of the problem and save money in the process. Over time, however, business process outsourcing offers the potential to achieve gains beyond cost reduction by offering the opportunity to transform processes while also enabling sustainability of benefits achieved. Outsourcing offers a way of helping raise performance levels, combat cyclical variations, introduce a way to sustain improvements and spur growth. The customized delivery and continuous improvement of processes enables companies to focus on their core competencies and achieve high performance at lower cost. As a result, companies often benefit from process standardization, automation 5

High-performance businesses leverage outsourcing to build process excellence Through wide-ranging studies of companies in many different industries and from Accenture’s continuing research into the characteristics of high-performance businesses, Accenture has discovered a common pool of critical characteristics among companies that consistently outperform their sector peers. These overachievers all share the ability to create processes that accelerate insight into action, as well as the ability to achieve competitive advantage through the value chain. Accenture’s scrutiny of such companies suggests that a significant reason these enterprises achieve high performance is because they know how to build effective outsourcing relationships. The best operating models found among highperformance businesses leverage the strengths of suppliers and business partners to create best-in-class capabilities where it does not make sense to invest internally for those capabilities. These are the situations where outsourcing helps strengthen the competitive essence of a company. Outsourcing can affect an existing business model in many ways: by reducing cost or adding competency, by improving or extending the model, or by radically transforming it. By mastering and competing on differentiating competencies and then outsourcing or seeking alliances or teaming opportunities for business processes, companies build process excellence into every aspect of their operation, and position themselves to achieve high performance. Process excellence achieved through outsourcing helps these companies reach the peaks of high performance by helping every business process to run at optimal efficiency and effectiveness, thereby generating greater value.

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Horizontal outsourcing opportunities When a major North American diversified chemical company embarked on addressing a number of information technology needs, the company and Accenture created a project and support center. The center is a completely new strategic sourcing model—a business performance partnership—one that strikes a winwin arrangement built on a foundation of mutual incentives and a focus on a common set of goals and outcomes. Today, three strategic project and support centers specially designed for high productivity serve as “delivery centers” to handle all of the company’s global systems development, support and implementation. Additionally, the project and support centers provide development, support and implementation for the company’s shared services work processes. By teaming with Accenture, the company has achieved a significant increase

in information technology savings, projects completed, productivity, quality and user satisfaction. This success led the company to renew its co-sourcing agreement with Accenture through 2011. When a major specialty chemical manufacturer outsourced its finance and accounting activities to Accenture, we consolidated 15 separate finance systems in the Accenture Delivery Center in Prague and standardized the company’s processes. The result was a rapid reduction of 35 percent in finance and accounting operating costs, and a permanent cost reduction of 42 percent. The Prague facility now handles accounts payable, accounts receivable, cash management (payment and receipt), credit and collection, as well as provides general accounting and tax services, with resources fluent in more than 10 languages. The outsourced financial and accounting services provided at the delivery center in Prague enable users to benefit from standardized

processes as they leverage scale through high-volume transactions— reducing costs, improving cash position and working capital, and achieving operational excellence. In yet another example, a large specialty chemical company is working with Accenture to improve strategic sourcing and implement a new global procurement organization. The effort includes the building of global business processes and supporting IT capabilities, and providing extensive training for supply-chain professionals. With its new approach, the company expects to see improved contract compliance, increased productivity in procurement, more effective sourcing of direct and indirect materials, and more accurate spend reporting to help drive continued improvements.

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Vertical outsourcing opportunities Similarly, outsourcing services can be delivered for industry-specific business processes. Maintenance, repair and operations are areas that are gaining traction among chemical companies. Often, those responsibilities are split across functional areas, with procurement, sourcing, warehousing and other activities all operating more or less independently. The net result is that most companies lack capacity and visibility into most indirect spend categories. A holistic BPO-based approach to maintenance, repair and operations (MRO) provides end-to-end support for the entire spectrum of MRO processes, helping companies to work with an integrated strategy and consolidate management. Accenture’s integrated approach to these areas gives companies greater visibility and control. To help companies rein in maintenance, 8

repair and operations costs, Accenture applies rigorous, proven processes and tools to improve, centralize and manage sourcing, procurement, inventory and warehousing processes. Issues at all levels—managerial, strategic, tactical and operations—are addressed. In our MRO work, we have found that clients have experienced working capital improvements through better inventory management, accountspayable operations and cost reductions due to enhanced data management, data cleansing and better use of catalogs for parts and supplies—all of which helps lower procurement spending—and operating costs as well as inventory levels. Clients also have experienced sourcing and procurement cost reductions through the ability to leverage aggregated spending with vendors, improved strategic sourcing capabilities, optimized contract management and coverage, and shorter payment cycles and lead times that result in the need for less inventory. And, they have experienced

reduced fulfillment costs due to lower logistics operating costs, optimized inventory levels, and optimized distribution and transportation. Low-cost country sourcing represents another opportunity for vertical business process outsourcing. In today’s interconnected world, sourcing products and raw materials for low costs, high quality and reasonable lead times to achieve bottom-line savings is common. Lining up the necessary organizations, however, can be a challenge, as one global manufacturer found out as it decided to outsource a high percentage of its raw materials in Asia Pacific. To help set up an efficient, workable sourcing process that would yield the intended benefits, the company partnered with a third-party logistics provider. The provider offered reliable logistics capabilities with infrastructure around the world to build the required logistics network, but it lacked the sophisticated planning and orderexecution capabilities to properly

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Figure 3. Multi-tower outsourcing overview Customer contact services (Employers, suppliers, end users, channel partners)

Finance services Order to cash

HR services Cash and banking

Acquire to retire

Record to report

Procure to pay

Payroll

Recruitment

Compensation and benefits

Time and expense

HR 3rd-party spend management

Learning administration

Employee services

Content development

Business interlock

Procurement services Sourcing and category management

Learning services Service management

Content delivery Reporting

Business insights

Learning technology

Application services Infrastructure services

manage the fundamental issues of long lead times and increased supply chain complexity. Accenture was able to leverage its Supply Chain Management Center of Excellence to provide world-class supply chain planning and order-execution services. This global manufacturer realized substantial benefits from its global-sourcing program, including significantly lower total raw material cost, reduced working capital cost and reduced lead time to three days.

Multi-tower outsourcing As outsourcing continues to evolve, it is morphing into bundled or multitower outsourcing approaches to produce high performance. In our work with chemical companies, we see a growing interest in organizations taking a cross-functional approach toward global shared services. Multiprocess or multi-tower outsourcing is an arrangement where an organization outsources several business processes across multiple functions at one time 10

to a single service provider, which enables executives to “connect the dots” between different business functions, sharing resources, applications and platforms (see Figure 3). Over the long term, the business benefits may be much greater than single-point solutions. A multi-tower approach allows an organization to continuously drive down costs, improve performance and gain global competitive advantages. Regardless of the type of outsourcing arrangement created, up-front planning is key. Entering an outsourcing arrangement as teaming partners with a shared view of the relationship and a readiness to be flexible is important for both parties. Performance and relationships are critical to the success of any contract.

The window of opportunity for outsourcing The chemical industry is well positioned to take advantage of the improved performance possible through outsourcing. As business process outsourcing gains acceptance in the industry, a number of factors are likely to drive adoption. These factors include increased cost pressure, the ability to leverage the improved expertise and tools from a service provider, lower cost as result of increasing scale of providers, increased global competition, increased acceptance of business process outsourcing, as well as increased regulatory compliance burdens. Accenture believes the window of opportunity is now, and that chemical companies increasingly will turn to outsourcing to optimize their processes.

Enabling high performance through outsourcing Accenture’s research indicates companies experienced with outsourcing look at outsourcing from end-to-end, emphasizing long-term relationships, change management and continuous innovation over time. An emerging consensus among experienced executives highlights distinct best practices in four key phases of the outsourcing life cycle: Phase 1: Planning for business outcomes Cost savings are useful for all companies, but alone are not a sufficient definition of success. Executives who are experienced with outsourcing aim ambitiously for business performance improvements, strategic capability building and the other targeted outcomes they seek. Phase 2: Partnering for performance Effective outsourcers work to create mutually beneficial relationships with trusted providers that understand their industry, respect their corporate cultures and put mutual interest before self-interest. Outsourcing insiders report that such life cycle factors as cultural fit, partner expertise and flexibility often outweigh initial price when choosing a partner. Phase 3: Strong governance for smooth transition The work only begins when the contract is signed. Clear communication, skillful team building, and strong change management and governance are indispensable for a smooth transition. Phase 4: Execution with innovation Experienced outsourcers capitalize on early success by looking for new levels of innovation, and build their expectations into the contract and governance. Many of these best practices are consistent with Accenture’s own outsourcing experience. By teaming with clients to drive innovation throughout their organizations, Accenture has helped numerous companies optimize business processes and jump-start the journey to high performance.

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About the authors Theo Jan Simons is the global lead for Accenture’s Chemical industry group. In addition to working with chemical industry clients, he has worked with companies in the energy, life science and health care industries His experience includes roles leading engagements on business strategy and benchmarking/ performance assessment; IT strategy and governance; post-merger integration; supply chain, including customer service, procurement and manufacturing; shared services; and business process outsourcing.

Copyright © 2009 Accenture All rights reserved. Accenture, its logo, and High Performance Delivered are trademarks of Accenture.

ACC09-0481

Richard Blanc is the lead for Accenture’s Business Process Outsourcing business for the chemical, energy and natural resources industries. In addition, he also manages Accenture’s relationships with Private Equity in providing enterprise transformation in these industries. His experience includes roles leading engagements in mergers and acquisitions, divestitures and post-merger integration. He has led many successful business processing outsourcing engagements in areas including customer service, finance and accounting, information technology, procurement and manufacturing, human resources, and supply chain transformation.

About Accenture Accenture is a global management consulting, technology services and outsourcing company. Combining unparalleled experience, comprehensive capabilities across all industries and business functions, and extensive research on the world’s most successful companies, Accenture collaborates with clients to help them become high-performance businesses and governments. With more than 181,000 people serving clients in over 120 countries, the company generated net revenues of US$23.39 billion for the fiscal year ended Aug. 31, 2008. Its home page is www.accenture.com.