As Seen in CFO Studio Magazine Q3 2016 Issue
A BRIEF CASE STUDY OF NEARSHORING
-By Julie Barker-
In the summer of 2013 Agfa Graphics North America undertook a close examination of the costs it might save by outsourcing its U.S.- based centers handling customer order entry and certain financial processes. These departments were then under the leadership of Gunther Mertens, Vice President and CFO, since promoted to Regional President for North America. In an interview with CFO Studio magazine, Mertens explained the reasons for exploring nearshoring of some functions.
“As we are largely operating in a mature business with strong competition, there is a lot of price pressure in the market, so our margins are always under pressure. We were looking for cost-saving opportunities that do not affect our go-to-market approach and do not affect our customer-facing operations, otherwise known as our salespeople,” he says.
The company looked at costs and advantages of moving certain operations to a country where there is a skilled workforce, but where wages are lower than in North America. Communications and security were of paramount importance. A certain loss of direct control over the resources might be anticipated. For that reason, it was operations with recurring processes that the Agfa team first considered: accounts payable and collections. Later, certain lower-level accounting functions, dealing with account reconciliations and bank reconciliations, were put on the list to nearshore. Weighing expected costs and savings, then-CFO Mertens determined that those finance functions alone would not save Agfa sufficient money, not enough “to justify going forward with a project of this magnitude,” he says.
Like large companies everywhere, Agfa Graphics employs a customer services team. “Some people would call it a call center, but in our world it’s a little more complex than that,” says Mertens. “It’s really a connection between our customer and our supply chain organization.” That group, customer order management, was not an easy choice for nearshoring, but in the end the Agfa team decided that with sufficient training, personnel working for the outsource partner could do the job.
A vendor whose core business is providing the functions of accounting and customer service, as opposed to Agfa, whose core business functions are R&D, manufacturing, and selling to the graphic arts industry, can implement technologies and gain efficiency improvements thereby, says Mertens. “We were looking for creative solutions in cost savings without negatively affecting our customers. But [because Agfa employees would lose their jobs,] nearshoring is not a solution that we particularly enjoyed coming to.”
Once the financial calculations of anticipated savings were done, it was time to select a vendor, says Mertens. The Caribbean, with an educated, largely English-speaking workforce, was his top location choice. The Bahamas, the Cayman Islands, and Jamaica lie in the same time zone as Agfa’s major U.S. facilities. Proximity for training and ongoing management was also important. The team conducted due diligence and site visits between the fall of 2013 and February 2014, when Agfa signed a letter of intent with its partner, Sutherland Global Services, which would run the operation in Kingston, Jamaica.
From February to May, Mertens and his team worked on contract negotiations and ultimately signed a contract. In May 2014, an announcement was made internally that the work would be transferred to the Jamaica partner’s facilities.
Mid-May to late August, Mertens’ team worked with the vendor to put the infrastructure in place. The customer order management inbound telephone calls would need to be forwarded from phone numbers in New Jersey, California, and Illinois. The accounting operations would need SAP and other software. Redundant phone lines and backups needed to be put in place, so Agfa would have a contingency plan if a hurricane or other disaster occurred. Meanwhile, the vendor began recruiting personnel.
In June and July a team of Sutherland Global Services employees traveled from Kingston, Jamaica to Elmwood Park, NJ to conduct “a knowledge transfer, sitting side-by-side with our own internal staff, the subject matter experts, and learn the jobs,” says Mertens. When those trainees returned to Jamaica, using a train-the-trainer approach, the remaining people who had not traveled got instruction.
Training was complete and the partner started handling the day-to-day work in September 2014.
Not Without Difficulties
Looking back just over a year later, Mertens assessed what was gained. With labor arbitrage being the single biggest cost benefit, “we have achieved all our goals in the cost-savings area,” he says. But the customer order management group got off to a rough start. Stabilizing it, he says, took a bit longer than expected.
The group was answering calls and processing orders, but the quality was not immediately there, he adds. The fault proved not to be with the new vendor’s vetting or training processes. Rather, “some of our people had what is known as ‘tribal knowledge’ or ‘institutional knowledge,’ meaning something they know without having it clearly documented. That is always more difficult to transition.”
Mertens says the 80-20 rule applies here, as to so much else. “The 80 percent you transfer fairly well, but the 20 percent can be a problem. If you do not keep enough people on hand for a long enough period of time to help with that knowledge cascading and stabilization, then you’ll have a problem.”
He says that the missing “tribal knowledge” buffeting the new trainees’ job performance was not an issue with accounting functions, just with customer service.
The last of the former Agfa employees stayed on until March of 2015, with all who left having received severance. Those who helped with the knowledge transfer received additional compensation. All employees did an outstanding and professional job during the transition.
In response to a question on morale, Mertens says that at first, Agfa’s remaining workforce was “dismayed about [the decision to outsource] because these are their friends and colleagues who have performed well, and the reason they’re being let go is just a cost-savings process the company is executing. But once the project was up and running, and they saw that people were being dealt with in a professional manner, and they started working with the vendor and saw what the vendor could bring to bear in new technologies, such as CRM, call recording, and service-level agreements, they were reenergized to bring renewed efforts to work on making the business better.”