Committing ‘corporate suicide’ through outsourcing

The corporate world is replete with management “fad-ism”—MBO, Six Sigma, benchmarking and leveraging. The underlying clinical concept may be valid. But relevance and organization ‘‘fit” is imperative for these concepts to create a better organization. Managing the change and readily responding to needed adjustment in execution, given the corporate culture, are imperative. Organizations are advised not to fall, hook-line-and-sinker, into evolving corporate fads. Outsourcing is recent addition to corporate “fad-ism.’’

As the new chief finance officer, I knew the formidable, worldwide stature of my organization, a byword in its core business. However, its local operation was wanting. Senior management was segmented, the labor union was restless while the accounting system, about to be computerized, was a mess. The banks were demanding loan repayment, the suppliers were pressing collection even as collections from customers were not enough to bridge the cash flow gap. The receivables were substantial and the major stockholder’s weekly monitoring meetings were not yielding substantive progress.

Basic business model

Copiers and printers are sold outright or on financial lease. Servicing the machines is a major revenue source because said machines need replacement toners, drums and related “consumables.” Customers pay their financial and service charges based on the meter readings billed for the month. Collection followed the traditional First-in, First out (FIFO).

The customers treat these charges as office supplies, with a low priority payment. The collection of “aged” receivables became worse because of the customers’ tendency for statements of accounts and reconciliations.

The collection process undertook a paradigm shift, focusing on current billings to eliminate said statements and reconciliation. Collectors’ commissions were improved for current billings, allowing a higher intensity to collect readily collectible accounts. The collectors undertook “mapping” the customers’ payment process to identity key persons who can accelerate the flow of vouchers and checks.

The collectors comprised a critical “nerve” in servicing malfunctioning machines. Customers released payments on when their machines were made operational. The collectors would link up with the company’s highly competent technicians, a competitive advantage, to rush the needed repairs. The informal system of camaraderie, among the collectors and said technicians as labor union members, ensured amazing speed of execution.

Collections started skyrocketing even as the collectors comprising the bulk of the labor union became more inspired in earning commissions on accounts that were more readily collectible. With the improvement in performance and high commissions, union issues were no longer the priority even when morale was high.

The capital restructuring and the high level of collections provided the funds to rationalize the borrowings in favor of the more stable banks that extended prime interest rates.

Double suicide coming from ICU

At this stage, the company was akin to a heart bypass patient emerging from the intensive care unit, recovering from a near disaster, but still being nursed back to normalcy. Running the marathon would have been suicidal, and our company did exactly that when it decided to outsource both the collection and the service functions.

On the myopic premise that the collectors and technicians are “old,” are highly paid for being with the company for years, can be disruptive as labor union members and outsourced collection and maintenance services can be cheaper, the company retrenched in-house collectors and technicians in favor of out-sourced collectors and technicians.

Despite the use of automated meter readers, billing errors increased even for current charges, thereby slowing down collection. The external collectors had to re-build the intimate linkages made through process mapping of critical customers. The collectors’ role in signalling malfunctioning machines was gone, erasing the means for speedy technical services. Worse, the extensive coordination meetings needed for monitoring and control of collections took too much of senior management time.

At the end, the collections went down to levels worse than at the start of the corrective measures adopted.

Conclusion

Firms can avail of external service providers to perform operational processes more efficiently, faster and cheaper. The intrinsic value of outsourcing, after providing for reasonable adjustment, should be clear and achievable within a reasonable period after implementation.

In the real world, outsourcing allows the service provider to bring down costs because he hires workers at minimum pay and perpetuates that cost model by limiting employment to “contract” workers. The absence of legally regularized workers is anathema to society’s protection to labor. Lowly paid, recycled workers cannot be equated to institutional “expertise” that ensures customer satisfaction.

At the heart of the concern for outsourcing is the need for an organization to chart its business model, define its core business, assess the competencies to create and sustain competitive advantage and design the operational processes, including the availment of outsourced services, ensuring that critical functions are maintained in-house and without any extraneous, sporadic experimentation.

The author teaches Financial Management, Business Law, and Taxation at De La Salle University’s MBA Program. He is currently the executive law dean of the University of Perpetual Help, Las Piñas & Biñan and the former law dean and vice president for legal affairs of the University of Manila. He was also executive vice president and chief finance officer of Fuji Xerox Philippines Inc. –Joe-Santos Bisquera, Manila Standard Today

The views expressed above are the author’s and do not necessarily reflect the official position of De La Salle University, its faculty, and its administrators.