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Hernan Lopez Varela, Senior Director, Microsoft Alliance at Yahoo discusses the initial challenges of outsourcing to a BPO Provider and the importance of building a strong partnership.
By: Niamh Byrne, Online Editor, Shared Services & Outsouring Network (SSON).
SSON: Can you start by giving an overview of the order-to-cash services Yahoo is currently outsourcing to Genpact?
Hernan Lopez: Yahoo has outsourced everything to Genpact; from order entry, credit management, billing collections, cash applications, reconciliations, credit card management to just small admin parts that they perform for us. Currently they serve the US market, most of the European countries and India. We have two centers - one in Romania and the other in India. Most of the US processes are served from India and the European ones from Romania.
SSON: Why did Yahoo start outsourcing those services? And what were the reasons for selecting Genpact as a partner?
Hernan: In 2007 Yahoo started to review outsourcing for the finance organization. We saw the growth that Yahoo was experiencing and realized the difference in terms of needs in the business units, for example, display is a really low volume high dollar type of business, whereas search is a combo. Then we did an online job for Kelkoo – the comparison website, but it was the other way around, high volume low value.
We decided to start looking for outsourcing to support these businesses better because from a credit and collections point of view we always focus on the big dollar, thus we were not providing the same type of services to customers. This led us to realize that if we worked in outsourcing we could provide the same sort for services to our customers and forget about the dollar value. We could also keep the in-house teams, focusing on the high-end tier customers while Genpact focused on the lower-end tier customer.
To answer the second part of the question; we reviewed different types of outsourcers and BPO providers during 2007. We decided to go with Genpact because they were highly recommended by other companies. They were young and they were eager in getting into the media/Internet industry. They didn’t have any online customers at the time, so they fought really hard to get our contract. They were very accommodating in terms of the different set-ups that we were exploring for the order to cash ventures. In 2008 we signed a contract with them initially it was just for order to cash for Europe and the US and since then we’ve been working closely with Genpact in making those teams more successful.
In December 2008, we expanded those services, not just to order to cash, but also to accounting, procurement, outsourcing, pay role and to other types of financial related activities. The engagement went from less than a hundred people to more than two hundred and we are constantly working with them in different types of solutions.
SSON: Was it ever an option to set up an shared service center rather than an outsourcing to a BPO?
Hernan: We actually do have shared services centers in Dublin, I was based there before. In the US we have a similar set up. We don’t call it a shared service center but it’s centralized in Silicon Valley. We also have most of the finance teams here so we do have a shared services strategy. The challenge was Ireland enjoyed a significant growth since 2000 so the salaries started climbing. That forced us to start exploring lower cost locations.
SSON: That explains your strategies, why did you decide not to put order to cash into the center? Did you choose outsourcing because of the lower cost locations?
Hernan: Yes, we actually have the OTC team in the shared service center, so historically we were doing cash and collections from Dublin for the mere region. But the first transition we did from the local countries into the shared service center was back in 2003/2004. From 2003/2004 to mid 2008 we performed credit and collections from Dublin and from 2008 on we moved some of those processes to Romania. We still have teams in Dublin today performing types of credit and collections activities for tier one accounts. The same applies to the US, we used to perform most of the activities from Silicon Valley, but now most of them are in India. We still have a small team here in Silicon Valley, less than 20 people performing order to cash related activities.
SSON: The end of 2008/2009 was a tough time for organizations commercially and I believe your cash flow for operating activities for 2009 decreased. Can you explain how this affected the business?
Hernan: There were different reasons why cash flow, not just for Yahoo, but for all companies declined. We had declining revenues, in Yahoo particularly, we restructured, we had a work force realignment, we spent a lot of money getting advice for the Microsoft deal and at the same time we were exploring an agreement with Google, so we spent a lot of money on advisors as well. Having said that, it was a terrific year from an order to cash view, the teams over-achieved all the targets and they actually managed to keep the DSO flat, or I think we dropped one day and they didn’t hit the VAT debt expense. Even though it was a tough financial year for Yahoo, the order to cash managed to contribute to the P&L and make things a little better from that end.
SSON: Can you tell us a little bit about the initial results you saw when the partnership was established with Genpact, what strategy was applied and how long did it take to see those results?
Hernan: When we initially started working with Genpact, we were surprised how much we like working with them, there was a kind of push back approach, they had a methodology for the transition that they were not going to compromise on.
From a timing point of view we were pushing Genpact to do the migrations much earlier and more short term; Genpact wasn’t really negotiating on that term. That’s something that impressed us because we said okay these guys are experienced and they know what they are doing. The migration took a while and we actually divided the migrations into regions, we started with the US, and then within the US we split it by processes as well. Some processes were migrated earlier than others.
Genpact has a methodology which they call ‘tollgate,’ they have 5 tollgates, where we have different types of sign off, which they have to reach before we can carry on to the next one. The methodology we followed was ‘lift and shift,’ so we took the processes as they were in-house and we moved them directly to their centers. If we felt that some processes were weaker compared to the other ones we moved them to the end of the migration. Thus, if the cash applications team was experiencing some issues in applying cash, we said ‘okay let’s first start with the billing or let’s start with credit.’ And that’s what we did, so by the time the migrations were finalized, things were up and running in their centers pretty smoothly.
In our experience the migration went really well, then we experienced a plateau where things didn’t improve as fast as we needed them to improve. Thus, we needed to get more involved in micromanaging Genpact for a certain period of time until their operations manager got up to speed. After that things started to slowly improve and today almost two and a half years after we made the first migration things are going really well. We rely on Genpact a lot, we work very closely with them even though it can be hard to work with them when they are not here with us.
SSON: On that point Hernan, how difficult was it to agree a governance structure with Genpact and how easy was it to implement that?
Hernan: It was very easy because they are very experienced and they proposed the governance for their company and our company and the timing for meetings. I think the challenge was more on the Yahoo side, to ensure that we aligned our structure to their governance and the reason behind this was the engagement went from OTC to wider finance.
Initially there were only 4 main stakeholders in OTC, when we expanded our teams we went from 4 to probably more than 10 people. Just like other companies there were some processes more engaged than others. Something that didn’t work so well on the Genpact side was we had a lot of turnover in the leadership positions in Genpact, mainly in Europe. That was a difficult for us after spending time building relationships for people to leave. But since then things have improved and are working well so hopefully we don’t see that kind of turnover anymore.
SSON: What were the main challenges for Yahoo when the initial outsourcing of services began, was there any change management issues to handle?
Hernan: From a personal point of view it was losing really good employees, we had a really solid team here at Yahoo and unfortunately we had to say goodbye to some of our friends. The second one was to getting buy-in from our business units who used to deal with the team here. It had always been really easy for them to pick up the phone and call the team, they already built that relationship which meant they had a really good rapport. So it was difficult getting the buy in from sales, second management and the different teams who needed to work with the OTC department.
Then communication was tough, again I would have needed to just walk to somebody’s desk to get a job done, that changed and had to happen by email or by phone, so that brought some challenges as well for us to handle. Once you outsource you change the way you are managing people and managing a resource and PI, but you lose control over the day-to-day running of the department.
Those were the main challenges and at the same time, one aspect that I didn’t mention but it’s very important is the amount of time that this relationship takes, people underestimate BPOs and program. They think that once it’s outsourced it takes care of itself, but that’s not true. You need to invest the same or even more time in this relationship to make sure that people are updated with what’s going on in the business. Base-lining took a lot of time. We had to ensure that we built a robust report and KPIs. Those things were very challenging for us, when the cooperation between Yahoo and Genpact started.
SSON: What order to cash business challenges are you trying to solve with technology today or looking to solve within the next 12 months?
Hernan: Technology is something that your team needs to drive because we are pretty much a transactional environment. The main issues that we had before is very particular to our industry, they indicate how business has evolved in the last couple of years. Now agencies and some customers would like to get bills based on third party numbers. We have our own display engine that tells us how many impressions they just had.
In the last couple of years, agencies have requested to use third party services such as Atlas to measure how their ads were doing on those websites. In 2007 those were some of the first requests we got from agents saying ‘I don’t want Yahoo to build on Yahoo numbers, I want you to use third party numbers’. That generated a lot of noise not just within Yahoo but within the industry, because that was something completely new to everybody. It took a couple of years to get an agreement on what was the right thing to do for our customers.
We developed an internal system called ‘Third Party System,’ that takes the numbers from the third party servers that I mentioned before and produces a reconciled report with back-up information. We spent a lot of money and time on developing this system in the last couple of years. I think that from a technology point of view it was a great year for our teams and for the sales teams in coming up with this technology.
Now specifically for order to cash, we don’t have a robust collections systems, we use standard Oracle, which is really good for tracking collections performance. The department here uses spreadsheets and they spend a lot of time manipulating the data. Having said that, we do have an Oracle Advanced Collections module which we bought a couple of years ago, but we haven’t implemented that yet. We want to start using this now. But the challenge is priorities, every time we start looking at it something happens either we sign a company or we sign a deal with Microsoft or we sell a company, so priorities constantly change within Yahoo. We have to constantly postpone this system. Having said that since we outsourced to Genpact the need is not as strong as it was before, because now most of the tasks are performed by the Genpact team, they can handle it either by adding more people to the team or by looking at different ways of doing things.
SSON: Are any of your customers asking for self service environments for ordering products, receiving invoices and processing payments?
Hernan: Some of them do, our industry is very particular. We deal with a lot of agencies, which are simply much more paper based. I spent the last two and a half years meeting our agencies and talking about EDI and electronic solutions, but the needs of the customers are completely different. Some of them would like to get more electronic information others would like to get paper-based information.
On the search side of our businesses we do have a completely automated environment, people can go online and print statements, invoices, make credit card payments and so on. On the display side it is not as evolved as such, we have been thinking of extending, but the weaknesses are so different and the agencies handle information in such a different way that it hasn’t really made a lot of business sense yet. But we did role out e-billing. We send out electronic billing to our customers, we send them electronic statements, we allow them to make secure credit card payments as well as online for our search products, so on a scale from 1 to 10 we are probably a 6 in terms of electronic and self service tools.
SSON: What is the number 1 priority for your company in 2010 and what is the number 1 order to cash priority?
Hernan: We have 6 priorities which our CEO set for us:
Then from an OTC point of view, our number one priority is to support those initiatives, again ensuring that we collect on time, we provide a good service to our customers and that we deploy a good service with Microsoft, and ensure that we support a wow customer experience.