Jay Whitehead07.20.06
The Other Value of Outsourcing: Accountability in a “Sarbox” Era
Jay Whitehead
Here are three scenes from a little movie I call “The Accountables.”
Scene one: my house. The other night I was on the phone with my little brother. He was about to start his new job as the CFO of a big gas pipeline company, El Paso Exploration & Production. A few weeks back, he parachuted out of his old gig as chief accounting officer at Burlington Resources after it got snarfed up by Conoco.
The topic of corporate compliance came up. He immediately got grumpy, mostly because of all the money he says CFOs must now spend on outsiders to check, double-check and triple-check everything.
“Hey, I’m an auditor from way back,” he told me. “But checkers checking the checkers is absurd. Oh, and even the big accounting firms can’t find enough people to do all the work, which just means we overpay for the people they send us. We can’t avoid doing all this stuff. It is totally 100% mandatory, no questions asked. But it feels bad, like a tax.”
By the time we got off the phone, I almost felt sorry for my bro. But then I remembered how much money he makes, and that feeling went away. Quickly.
Cut to scene two: the HRO (Human Resource Outsourcing) World Conference in New York City on April 26, 4:20 pm. I was moderating the annual Presidential Debate with the 13 heads of HRO’s largest firms. More than 800 people jammed the ballroom at the New York Hilton—standing room only. The audience hushed as I turned to Keith Strodtman, head of Ceridian’s HR outsourcing business. Earlier that day, he told me that his clients and prospects are not buying cost savings any more. It’s all about something new.
“What are they buying these days, Keith?” I asked.
“If I had to boil it down to one thing, I would say it is accountability,” he replied. “What they want is for us to keep them in compliance, file everything on time, worry about data security and have somebody else on the hook for HR systems and process integrity. Last year, it was all about the money, and this year it is all about accountability.”
As I looked up and down the line of the 13 panelists, every one of them nodded their heads in agreement.
Flash to scene three: the New York City office of Business Ethics magazine Publisher and Editor Michael Connor. A veteran of ABC News, the Wall Street Journal, CNBC International and television’s “The Wall Street Journal Report,” Connor bought Business Ethics a while back because he felt “a weird accountability vibe in the air.”
Because he is a hard-nosed New Yorker, his “vibe” seemed oddly Northern Californian—in the granola-loving and tree-hugging sense. I gave him a spooky, explain-yourself-or-else look. So he did. As a business reporter, he saw a mega-shift in business attitudes following the dot-com hysteria and in the wake of the Enron-Tyco-HealthSouth-Arthur Andersen-Frank Quattrone-Henry Blodgett-et al scandals.
“This is the kind of shift that makes normally rational people do unreasonable things, like buy magazines,” he said. “Big money is betting big on credibility, ethics, trust. Look at the CSR [corporate social responsibility] movement. Look at General Electric going green. Look at mutual funds going with responsible investment portfolios. Look at the social responsibilities conferences popping up. It’s business realizing that we are all accountable to each other.”
I asked him if he was just having a mid-life crisis. He laughed. Then, without speaking, Connor pointed to the ad on the back cover of Business Ethics. There, in full color, was an ad for Hewlett Packard, featuring headline words “sustainability” and “innovation.” Suddenly, I saw his point.
This is our new movie. “The Accountables” is you, me and the outsourcing industry. And it looks like the movie is boffo box office. As the world gets more crowded, businesses become more interdependent and economies intermingle, accountability has become a value proposition. Surely, my brother knows the costs of buying accountability. But this new data point is even more interesting: today’s accountability industry is a seller’s market.
More important, if you look at outsourcing solely as a commodity, you’re missing the bigger picture. Outsourced service providers—whether they are HR service vendors or contract manufacturers—really take this stuff seriously. In the outsourced HR market, complying with all applicable regulations is a vendor’s price of admission. Clients won’t even speak with a vendor with anything less than a robust compliance system. There’s too much at stake.
Similarly, while medical device manufacturers have traditionally been on the hook for complying with all regulations—whether that’s QSR, Sarbanes-Oxley or the European Medical Device Directive—the trend is to shift as much of this burden onto the shoulders of contract manufacturers as possible. Ask any vendor to the medical device industry whether process validation or medical device history record is important to clients. I suspect in the future the industry will continue to turn towards pressuring contractors to better understand and implement GMP measures in outsourced processes.
The Accountability Factor
There’s no getting away from the fact that all businesses are feeling pressure to be accountable for their actions. Think Sarbanes-Oxley. This has become the No. 1 reason for CEOs staying up late at night in the past several years. Complying with this legislation has not only been a gut-wrenching experience for management, but most CFOs will tell you it’s been an expensive one.
According to a recent study released by law firm Foley & Lardner, Sarbox has significantly driven up auditing costs. Between 2003 and 2005, average audit fees increased an average total of $786,000 for S&P small-cap companies (up 141%) and $1.14 million for S&P mid-cap companies (up 104%). For all S&P 500 companies, audit costs rose 62% during this period. The same study showed—much to the relief of teeth-clinching finance executives everywhere—that these costs dropped by double digits last year.
Don’t celebrate just yet—the good news that Sarbox auditing costs are lower might be offset by more stringent FDA enforcement and resulting higher compliance costs. Corporate compliance is never easy in a regulated industry.
Reducing Burdens With Outsourcing
How can outsourcing help you minimize this burden? On the operational side, finance and accounting outsourcing is giving CFOs everywhere an opportunity to come up for air. Following the Enron fiasco, any outsourced service provider would be foolish to cook the books for one client. Contract service providers are giving VPs of manufacturing the luxury to leverage the best practices and production expertise these vendors have built over the years and who, in some instance, have invested million in their quality systems. Very few medical device manufacturers have the deep pockets or domain expertise to sink that kind of dough into what is quickly becoming a non-core functions. And full-service manufacturers—the likes of Accellent, Avail, B. Braun and others—sometimes serve as the quality and compliance resource that many overworked and under-staffed OEMs look to for answers.
And therein lays one of the least touted values of outsourcing—helping you, the buyer, to keep a clean house. Yes, many companies outsource to cut costs or get access to new technology, but the underplayed card many vendors inadequately trumpet—and their customers fail to realize—is that outsourcing partnerships can help keep buyers on the straight and narrow, at least in some aspects of their operations.
So the next time you consider outsourcing, kick the tires, check under the hood and make sure you understand all the well-documented benefits that comes with it—you know, the cost savings, manufacturing expertise and other good stuff. Don’t forget the understated value proposition: outsourcing may be your get-out-of-jail ticket in the compliance realm.