Getting Started with Finance and Accounting Process Outsourcing
In a recent interview withFORTUNE Magazine, management wizard Peter Drucker commented that, “Most look at outsourcing from the point of view of cutting costs, which I think is a delusion … I believe you should outsource everything for which there is no career track that could lead into senior management.” Managers engaged in business process outsourcing today would undoubtedly disagree with Drucker about its cost effectiveness, but nevertheless his remarks cut to the core value prosition of outsourcing.
The rationale for business process outsourcing is that it is better to have an expert service provider perform non-strategic activities than it is to maintain them in-house. The outsourcing company leverages the service provider’s technology and expertise to offload low value and/or non-strategic functions and focus more sharply on its core competencies. In the past, data entry, payroll processing, and customer support have been popular targets for outsourcing.
In contrast, finance and accounting processes traditionally have been viewed as poor candidates for outsourcing due to their complexity. Today, this attitude is changing rapidly. Encouraged by the success of early shared service center and business process outsourcing initiatives, corporate managers are taking a hard look at options to outsource specific finance and accounting functions. They are discovering that it is, in fact, advantageous to outsource lower value, transactional functions like invoice management, T&E processing and payment to a specialized provider, yet retain higher value, analytical functions like supplier and spend management in-house.
A number of factors are driving corporate managers’ interest in financial process outsourcing (FPO). First, CFOs and finance managers are under immense pressure to reduce costs, increase efficiency, improve internal controls and ensure compliance with external regulations like Sarbanes-Oxley. As they fully exploit traditional cost containment and incremental process improvements, they are turning to FPO to achieve their objectives and make their businesses more competitive (see Figure 1).
Second, finance and IT managers are both attracted to FPO as a way to sidestep the high costs associated with technology solutions, including expensive upgrades and ongoing support. Third, FPO is gaining support as a tool to improve customer service and responsiveness.
None of this would matter were it not for the advances in Internet and telephone communications that now enable outsource service providers to deliver paperless solutions from almost anywhere in the world without loss of control for the outsourcing company. Our research indicates that this value proposition is compelling enough to persuade companies of all shapes and sizes to adjust their processes – something they have resisted doing in the past.
The biggest challenge to FPO is inertia. Staff who are set in their ways or anxious about their jobs are capable of throwing up numerous roadblocks. Some objections, insufficient time, money, or resources for example, are easily handled through wise project management. Other challenges – for instance, claims that outsourcing violates certain laws, undermines internal controls, or poses a security risk – are equally specious, but more difficult to turn back. The best antidote to these and other obstacles to FPO is effective project management, solid business case analysis, and the visible, vocal support of senior management.
Managers investigating FPO face a dizzying array of options that include insourcing, outsourcing, offshoring, nearshoring, and multishoring. Which is the most appropriate model? Further, what is the best strategy for transitioning to an FPO environment? Should you outsource functions as the need arises, follow a phased approach, or outsource a full range of functions all at once? Ultimately, your choice of a strategy will depend on your organization’s culture and capacity for change.
The first step toward choosing the right FPO strategy for your business is to define the scope of the project. Which finance and accounting functions should you consider outsourcing? To answer this question, have an experienced third-party vendor conduct a benchmarking survey and best practices evaluation of your finance and accounting operations. Ensure that the vendor you select has an expert understanding of finance and accounting, as well as a robust benchmarking database that pertains to your line of business.
At this point, the business process leaders from all of the areas that will be affected by your outsourcing initiative should be brought into the project. Their participation is crucial from a planning perspective, but giving them a direct stake in the change management process will also increase your organization’s prospects for success. Depending on the functions you are considering outsourcing, you should also seek the input of your customers or suppliers (e.g. from suppliers for an accounts payable initiative).
You must have a thorough understanding of your own processes before you can judge the wisdom of outsourcing them or evaluate service providers’ ability to manage them, so take the time to document your current state processes and future needs. In addition to helping you evaluate the business need for FPO, documenting your processes will also sharpen your understanding of the costs involved and ease the vendor bidding and service level agreement (SLA) process later on.
Now you are ready to begin evaluating outsource service providers. Rather than boilerplate RFP responses, focus on key questions like the service providers’ financial strength, experience in FPO, human resource capabilities (i.e. employee retention rate and training capability), and capacity to improve your outsourced processes. Ask for complete client lists and do not restrict your investigation to their reference accounts. To get beyond marketing fluff and identify the vendor that best meets your needs, visit their facilities and speak to the people who will be doing your work.
The vendor you finally select should present your project team with scenarios that reflect varying degrees of change and risk, as well as timelines. Review every assumption to ensure that they are both realistic and in line with your own analysis and assessment. To ensure that you are prepared to do this, perform your own analysis of the project – limited to a five-year time horizon and inclusive of employee serverance costs. Then make sure that there is consensus between your staff, the outsource service provider and any consultants who may be assisting you.
Similarly, it must be crystal clear where your organization’s responsibilities end and the outsource service provider’s begin. You can establish accountability by measuring and tracking the service provider’s performance through SLAs that include quantifiable metrics (e.g. the number of days to resolve invoice disputes) and create consequences for under- and over-performance. The SLAs that encapsulate your relationship do not have to be lengthy – 3 to 4 pages may suffice – but you should be aware that managing the relationship (i.e. pure relationship management, back-office administration, and ongoing risk management) typically costs 5 to 7 percent of the total contract cost.
Finally, it is critical that you manage the communication process effectively from start to finish. Be up front and honest with your staff, and prepare them for the changes that are coming. Failure to do so may demoralize and demotivate your people or, worse, cause them to resist the initiative. Get your human resources department involved and plan early for the training and redeployment that will become necessary. Likewise, you must keep you customers and suppliers in the loop about what is happening. Interestingly, it is also important to balance your desire for swift action and thorough due diligence for your consultants’ and outsource service provider’s sake. It will take some time for both to gain an understanding of your business, and they will need your time to do so.
Currently, the companies engaged in FPO number in the hundreds, not the thousands. This will change rapidly however, as FPO matures from shared service centers and point solution outsourcing into a tool for process improvement. Ultimately, the type of transactional finance and accounting process outsourcing that companies are considering today will become commoditized. Our research indicates that the global market for FPO solutions will reach $80 billion by 2008 (see Figure 2). During this time, finance executives at most medium and large size companies will evaluate FPO in some form.
Despite political pressure to the contrary, outsourcing in the form of offshoring will record particularly impressive gains during the next five years. Annual wage inflation is running as high as 15 to 30 percent and staff attrition can reach 30 percent, but companies will continue to find the cost savings of offshoring irresistible. For many companies, there is simply no argument when data entry costs $2 per hour in India and $20 per hour in the U.S. Even when administrative costs are factored in, firms still find that offshoring work to low wage countries drives cost savings of 45 to 55 percent.
On the other hand, offshoring finance and accounting processes is a new phenomenon and the FPO market is still immature. It also remains to be seen whether the high staff turnover rates in many developing countries will have a bigger impact on finance and accounting jobs than generic activities like data entry. This is why standard processes like accounts payable and T&E processing are moving offshore today, while unique processes like financial analysis are being kept safely in-house. Finally, there are the geopolitical risks associated with offshoring work to developing countries that have different languages, cultures and legal systems.
The debate about the merits and morality of offshoring work to low cost developing countries is not likely to abate anytime soon. The bottom line is that it will be the appropriate decision for some companies, but not others. This article has described the overall rationale for outsourcing finance and accounting functions, highlighted the most frequent obstacles to FPO initiatives, and provided a framework for managing the process so that you will prepared to answer that question if and when it arises at your organization.