How do you decide whether outsourcing is right for your company and what are the pitfalls in the decision-making process? By Alexa Michael, information specialist, CIMA.
Finance and accounting outsourcing (FAO) is increasing throughout the world - especially in Europe. The global FAO market is now estimated to be over £24bn.
The number of large contracts (valued at over £25m and/or where at least five processes are involved) has increased by nearly 50% since 2005.
A survey of global chief financial officers by CFO Research Services in 2006 found that 73% were interested in outsourcing at least some finance and accounting functions.
There are three stages in the FAO process: making the decision, selecting the provider, and managing the relationship (see diagram below). This article concentrates on decision making. Selection and relationship management will be addressed in future issues of Insight.
The benefits
Why are so many companies attracted to FAO, either in whole or part?
Cost
The main reason is usually cost savings. These are driven through economies of scale and lower cost environments. For example, there are obvious advantages in moving the accounts payable function to a dedicated accounts payable operator who can add volume at a low marginal cost.
Staffing
FAO could provide skills and talents that are not available in a company’s in-house staff. It can help to address staffing issues and labour shortages. Successful FAO may result in existing in-house employees being reassigned to higher value activities.
Technology
FAO can allow access to superior technology, which helps to improve processes and productivity.
Service quality
Many companies do not have core skills in finance, so FAO can help to reduce the risks associated with ineffective in-house processes. An outsourcing provider allows a company to use a dedicated financial service, leaving it free to concentrate on core business. Finance will then help to drive the profitability of the business.
Before outsourcing any processes, finance and accounting leaders should identify their company’s strategic drivers. Crucially, they need to ascertain how FAO would complement the overall corporate strategy. For example, FAO activities might involve reducing or reassigning staff. How would this align with the company’s strategic objectives?
‘At its simplest level, outsourcing is a trade off between cost and quality,’ said John Gibson, director of Simple Quality Solutions. ‘Everything boils down to these key elements. If you get the balance wrong, you will not achieve the benefits, either in cost or management terms.’
The risks
Companies also need to assess the risks involved. FDs must ask whether a third party will look after their finances as well as they do. How will they manage a remote operation which they don’t have direct control over? What level of cultural change is likely to result from outsourcing? They should also be able to guarantee that data integrity is maintained, given the statutory requirements in terms of data protection.
At this stage, companies must evaluate all their available options. Usually, there are three to consider:
1. leave processes as they are
2. improve the processes or reorganise them into an internal shared services model
3. outsource the processes.
It is unlikely that a business will seek to outsource its entire finance function – normally a small part will be retained in-house. Companies should look at the function as a whole, but realise that there are different elements within it and consider how they will manage the whole operation.
Managing the transfer
Most companies considering FAO will assess their internal capabilities early in the decision-making process. To be effective, assessments will not only consider FAO execution, but also look at managing the transfer of a process to an outsourcing provider, and then monitoring and managing the relationship.
Finance and accounting leaders must establish whether the company has the expertise and staff to operate the preferred process. What is the likelihood of retaining its expertise in future? They must decide if they are able to select an outsourcing provider, and manage the transitional process. Can they monitor and manage the outsourcing relationship until it is renewed or terminated? Do they possess the necessary technology?
’You need to be clear about the current state of your business, what you are trying to achieve and whether FAO will help you to achieve it. The devil is in the detail,’ said Nick Jarman, a partner with PwC Consulting who has been involved in both sides of the outsourcing process. ‘It’s also crucial to understand the market and the differences between the various service providers.’ Jarman advised companies to draw up a list of criteria and hold the process to those criteria.
The most crucial part is to ensure that the FAO decision has ‘buy-in’ from all key stakeholders. There needs to be consultation with everybody who will be affected by the FAO process. The company must allow sufficient time to communicate the reasons for outsourcing and to ensure that staff and other stakeholders understand what will happen. It also has to engage with potential suppliers.
‘Businesses commonly underestimate the time needed to consult with stakeholders and put the necessary processes in place,’ said Jarman. ’I know at least two companies who decided that FAO wasn’t right for them after very long discussions with the relevant people.’
Is FAO the answer?
Gibson agreed, and stressed that FAO cannot repair a fundamentally broken process. ‘The key question to ask is: “Is FAO the right answer?” If the root cause of a problem is failure within the company’s management structure, then outsourcing won’t help.’
Lastly, finance and accounting leaders must finalise their business case, and determine the scope and logic of outsourcing. They should remember that it is not always sensible to outsource non-core processes. It is more effective to evaluate the ‘outsourceability’ of a process than to make core versus non-core distinctions.
The crucial question is: how appropriate is a process or processes for outsourcing, given the company’s strategy, capabilities and other unique characteristics?
Companies need to take a balanced approach. It is important to use experienced resources, including those who have entered the business recently. However, it is crucial also to listen to people who have lived with the results of previous decision making.
Links
This article is based on ‘Outsourcing the finance and accounting functions’, a Management Accounting Guideline by Eric Krell, published by CIMA, the American Institute of Certified Public Accountants and the Society of Management Accountants of Canada. CIMA members can access the full version at the CPD Centre.
Topic gateway on finance and accounting outsourcing
The Finance Function
The Outsourcing Center
The Outsourcing Institute
National Outsourcing Association
European Shared Services and Outsourcing Week
May 2009