Outsourcing: Leveraging the Cloud
Over the past couple of years, business process outsourcing (BPO) has frequently been touted as a way for companies to improve their business processes. But how should it be set up? There is no universally accepted answer. For a start, the definitions are changing. They now include web-based solutions, such as application service provider (ASP) set-ups where the software is run by another company, as well as the relatively novel concept of ‘cloud’ computing. Thus the concept of outsourcing is changing and widening, and the cloud has become an important complement to traditional outsourcing activities such as hiring a provider to run back-office processing.
It is generally agreed that BPO, including cloud technology, is part of the wider trend of globalisation which has helped create an environment that has changed the treasury function from process- to strategy-oriented. Over the past decade, many large multinationals have incurred a monumental per capita cost to achieve global process harmonisation, putting in place enterprise resource planning (ERP) systems, shared service centres (SSCs) and payment factories.
According to the gtnews 2010 Cash Management Survey, in association with SEB, there is a growing move towards payments and reconciliation centralisation. The survey showed that 39.6% of companies surveyed intended to use a regional structure in future, and 24% predicted a move to a global structure, while only 14.5% of companies said they would continue to use a decentralised structure in future.
However, mid-sized corporates and smaller firms have lacked the critical mass or scale to justify rolling out the technology required for widescale process harmonisation. The rise of web-based solutions, effectively allowing firms to rent a system, has lowered the barrier to harmonisation, allowing smaller firms to put this in place. Most banks, IT vendors and general BPO companies now offer solutions that also allow mid-sized companies to build efficient treasury departments, creating end-to-end processes, as well as improving the supply chain. By outsourcing to a professional provider, a company can access technology systems, documented processes, back-up facilities and contingency routines much better than they would have been able to if they had built it themselves. As well as reducing software fees, corporates can also reduce implementation, maintenance and staff costs.
In addition to cost and efficiency, operational stability is another benefit of outsourcing. The biggest BPO players have multiple processing centres, global systems, back-up sites and often a real-time replicating service, which ensure that data is protected. They have the scale to build secure and reliable systems.
For the smallest companies, outsourcing can also benefit their finances as well as their business processes. One example of this is factoring, which is effectively setting up supply chain finance through an outsourcing provider. An increasing number of small and medium-sized companies are starting to build outsourcing into their processes in a bid to increase efficiency. For example, many are now beginning to regard factoring not only as a working capital financing technique, but also a de facto way to outsource parts of the accounts receivable (A/R) process, whereby the factor handles the invoices in return for a fee. Factoring is therefore about more than the ‘money on the table’, it also provides a way for a medium sized company to build an efficient and secure process.
A strict line must be drawn between what is retained in-house and what is outsourced. There are certain things a company can never delegate, such as policy and strategy decisions. The group treasurer needs to be the one setting the group treasury strategy, priorities and vision. They can’t delegate responsibility – the buck literally stops with the treasurer, and it will continue to do so regardless of what has been outsourced. Decisions about what level of risk the company is comfortable with should always be taken in-house. The choice of banks and suppliers should also be taken internally.
Fundamentally, BPO is much more about the evolution of best practice and standards than technology. That includes determining which processes are core and which are not. This will change over time, as the emphasis of treasury practice itself changes. For example, 15 years ago, entering into a foreign exchange (FX) forward contract was considered exotic enough to hire specialists for; today, such transactions are considered to be plain vanilla. This reflects treasury’s move from transaction execution to becoming a strategic partner in the business focusing on managing risk instead of executing transactions. As a result, transaction execution is increasingly being outsourced.
Striking the balance between outsourcing too few processes to be able to increase efficiency and too many to retain strategic control can be a challenge. Segregation of duties and maintaining both execution expertise and strategic advisory skills can be particularly difficult in a treasury operation that can only support two or three treasury staff. To ensure that the treasury department can fulfil its objectives while not paying for resources that may at times lie idle, a good balance could be to maintain two staff members with the necessary business acumen, financial skills and the risk management knowledge and buy in the treasury accounting and back office execution of day-to-day liquidity management.
Examples include transaction execution and process management, as well as IT. For example, rather than running a treasury management system (TMS) internally, it makes sense to buy access to an online service hosted and maintained by a specialist provider.
Some companies consider the wage arbitrage found in emerging economies to be a key reason to outsource (this is really more about offshoring than outsourcing, but since outsourcing often means a de facto offshoring, the term ‘outsourcing’ can also be used). However, this by itself is not sustainable since somewhere cheaper will always emerge. Staff cost is indeed less per capita in emerging markets than in developed countries. However, a company will eventually have to move its global processing centre to a cheaper country when wages rise – and when that becomes too expensive, to somewhere cheaper still. Instead, companies should consider what else they can achieve from BPO, such as globally harmonised and documented processes, contingency routines and strong back-up facilities and then consider any salary arbitrage as an added bonus.
When a company outsources its treasury back office, the maintenance of its TMS, or the accounts payable (A/P) function, it may not immediately have a profound effect on the company’s overall business model, but this is likely to change over time. For example, in outsourcing its back office, a treasury team changes from being transaction execution-oriented to becoming more of a strategic force within the business. This will, of course, have an impact on the composition of the team. The company will need to assess which skills it needs to retain for a seamless process with regards to the outsourcing company. And the more processes that are outsourced, the greater the resulting impact on the larger modus operandi of the company. The direct impact on the treasury may be greater than what the company initially envisages. By thinking more carefully about its priorities, an organisation will eventually be able to focus on its core activities.
When preparing to outsource a process, a company should start by considering how well this process works. It is important to note that outsourcing a defective process will not in itself make the process more efficient. Before you ask someone else to manage a process for you, you have to know exactly how it works today, what could be improved and identify key performance indicators (KPIs).
Because the outsourcing provider does not have ownership of the end-to-end process, it will be difficult for it to optimise parts of the existing process, as it is interlinked with the previous and subsequent steps of the process. Clearly, few companies outsource the order-taking process because customer relations are a core asset for any business. If a company outsources A/R, for example, the risk is that if they don’t get paid, the outsourced call centre’s customer handling skills in trying to rectify the problem could affect the core client relationship. However, it might be possible for the outsourcing provider to advise on certain processes, for example by comparing them with other clients and a best practice benchmark, but it would be very unusual to outsource the entire end-to-end process. For example, in the order-to-cash (O2C) cycle, the invoicing, cash application and accounting part of the process are often outsourced, whereas dunning and credit management are retained in-house as they are closely tied to the customer relationship, which are considered a core asset of the company.
While security concerns are always on top of the agenda when considering various forms of outsourcing, they may be less of an issue today than previously. The outsourcing industry has been through a number of years of establishing appropriate routines, security protocols and due diligence processes, building up credibility in the process. Anyone looking to outsource business critical and sensitive processes will need to have security as one of their key evaluation criteria when selecting providers.
One development, which could be of concern, is that some outsourcing companies buy IT processing capability from the lowest bidder. This gives rise to the question of who an outsourcing provider is outsourcing to, and what control the company has over its data and how it is being distributed. It remains to be seen whether the outsourcing providers have built a secure environment with enough controls to prevent this becoming an issue.
Outsourcing has become a vital part of business process structuring, particularly for small businesses. However, the outsourcing process must be handled in such a way as to add value to the company’s processes as a whole, rather than just to focus on cost. Outsourcing comes in many forms, whether using a BPO provider to perform administrative tasks, or using an ASP to run the TMS. It can even entail using a bank’s factoring solution, giving financing solutions to optimise working capital as well as access to efficient A/R processes. Ensuring that the company keeps a strong strategic focus is, however, key, whichever form it takes.
To learn more about SEB, visit the company’s gtnews microsite.