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Finance & Accounting Outsourcing

Outsourcing finance functions — like auditing, tax consulting and payroll processing — has been going on for many years. But today, companies increasingly are asking solution providers to manage business processes on more of a turnkey, full-service basis, rather than transnational or processing services. Suppliers like Exult and others lend credibility to the value that many companies have seen from outsourcing portions of their finance procedures.

The finance and accounting (F&A) business process — including accounts payable, accounts receivable, order management and tracking, treasury functions, financial reporting, tax consulting and internal audit services — is expected to be one of the most widely outsourced business process categories in the near future. One industry estimate pegs spending on F&A outsourcing services at $65 billion by 2006, a 12.3 percent five-year compound annual growth rate. Even Dun & Bradstreet”s Global Barometer for Outsourcing predicts that F&A outsourcing will represent 10 percent of the total worldwide market for outsourced services by 2005.

All of this data shows the growing importance of F&A outsourcing and makes it one of the fastest-growing segments of the business process outsourcing (BPO) industry.

To understand what finance professionals — as the buyers of these services — truly think about F&A outsourcing, Financial Executive partnered with Ross Research of Cambridge, Mass., a firm noted for its research into outsourcing practices. Working with principal Lisa Ross, we developed a questionnaire on the subject that was emailed in December 2003 and January 2004 to FEI members. More than 100 members responded. Ross then tallied and interpreted the results and drafted a full report. Two sponsors, Exult and the law firm of Hunton & Williams, supported the research; neither organization was involved, directly or indirectly, in this project or the analysis of results. (For more about the methodology, see the box, “The Research Methodology.”)

Why Outsource F&A?

A myriad of factors drive companies to outsource F&A. The most important reasons listed by study participants indicate a growing sophistication on the part of outsourcing buyers – cost savings is no longer the preeminent reason for outsourcing, though it is still an important consideration. The most important reasons that executives said were primary drivers in their decision to outsource F&A include:

Access to better technology and systems

Cost savings (reduce and control operating expenses)

Increased service levels

The table below illustrates the importance levels that senior financial executives place on each factor as being a driving force behind the decision to outsource F&A functions.

Finance & Accounting29%
Human Resources29%
Customer Service/Call Center21%
Logistics21%
Procurement16%
eLearning15%
Training11%
Other22%

Source:  Ross Research and SBPOA, September 2003, from Ross Research report titled: “BPO Buyer Demand Exposed: Buyers Reveal Their Readiness to Purchase”

What is Being Outsourced?

The types of F&A functions that have been outsourced to date, as noted by the senior financial executives in our study, represent relatively simple types of processes. The most widely outsourced F&A functions are:

Tax consulting
Payroll (Note: Some companies include payroll as a finance function, while others categorize it as part of the human resources business process.)

Two additional F&A functions that CFOs and other financial executives might consider outsourcing, if they are not already doing so, include:

Travel expense reimbursement
Risk management

The top three F&A functions that respondents would not outsource include:

  1. Financial management activities (operating budgets/ forecasts, capital investments, treasury functions, equity financing/debt, cash management, budgeting, performance analysis, investor relations)
  2. General accounting (general ledger, cost accounting/revenue, equity accounting/debt, statutory accounting, fixed asset accounting, business unit accounting)
  3. Financial reporting and accounting We were surprised, frankly, at the high number of F&A activities that CFOs and other senior financial executives would not consider outsourcing; yet, we believe that over the course of the next year or two, smart organizations will change their minds and elect to outsource more of these F&A functions. Why? Three reasons:

Transactional F&A functions — like accounts payable/receivable, leases, order management and tracking, billing/customer invoice, customer credit and expense reporting — are becoming increasingly commoditized, making them ripe for outsourcing.
Today”s worldwide economic realities and competitive business environment are forcing finance departments to operate in a more strategic and “lean” manner.
The challenges of Sarbanes-Oxley compliance — both current and “Year 2” — make outsourcing of certain F&A processes an extremely sound business decision.

Outsourcing service providers are typically in a better position to meet Sarbanes-Oxley compliance issues than the client company, according to sourcing advisory firm EquaTerra, since outsourcers already have to document workflows and processes. Service providers will not assume fiduciary responsibility, but will be responsible for the processes instituted during an outsourcing transition that enable the company to insert control points for far less cost than if implemented on their own.

Difficult Phases

The largest number of financial executive study participants believes that transition/implementation is the most difficult phase of the F&A outsourcing process. This phase is where the “real work” begins and everything starts being gauged — from the quality of the contract to service level agreements to the true capabilities of the service provider and the relationship between buyer and outsourcer. The next “most difficult” phase, according to respondents, is ongoing operations, followed by negotiation/agreements.

What ONE phase of the F&A outsourcing process do you feel is the most difficult?

% of total

Information Gathering7%
Strategy Formation9%
RFP/Provider Selection3%
Negotiation/Agreements11%
Transition /Implementation41%
Ongoing Operations21%
Exit or Renegotiation6%
Total Respondents98%

The transition/implementation stage is of utmost importance because it represents the first real task that the outsourcer is assuming on behalf of the client, so expectations of the client company”s financial executives are extremely high. Change is almost always difficult, but such a huge change — coupled with new processes, cultural issues and new worries about managing a function not in their control, so to speak — is particularly worrisome.

Some financial executives who participated in this study offered the following verbatim responses as to why the F&A outsourcing transition/implementation has been the most difficult phase for them:

Implementing change to internal processes

Cultural issues

Important to get it right and keep it transparent with our customers

Steep industry learning curve, coupled with adverse affect on morale

Risk of noncompliance if implementation is flawed or fails

Change management of our employees and their willingness to assist in the knowledge transfer process

This is the area where it will work or it would not.

Is F&A Outsourcing Working?

Despite some challenges, nearly all financial executives (90 percent) indicated that they are satisfied with their current F&A outsourcing arrangements. In addition, nearly half, or 42 percent, of study participants have every intention of outsourcing additional F&A functions. The executives noted that factors contributing to their satisfaction include: improved handling of the outsourced functions, cost effectiveness and delivery of reliable results.

They also are pleased that they can leverage their in-house staff and take advantage of specialized services from the outsourcer when they cannot afford a narrow expertise. One study participant even stated, “The board applauds the improved reporting,” demonstrating that F&A outsourcings benefits can be appreciated at an organization”s highest levels.

Not all, not surprisingly, are completely satisfied with their outsourcing arrangements. Several study participants indicated that their outsourcers lack industry specific skills. Others noted that their service provider “lacked intuitive knowledge of our company and related operations.”

What Will Make It Work Better?

Nearly half of all study participants said that they might hire an external sourcing advisor (lawyer, consultant, research firm) to assist their company with the F&A outsourcing process, while another 28 percent said they definitely would do so. These third-party advisors assist with the outsourcing lifecycle – from how it may fit into an overall business strategy to choosing a vendor, signing a contract and ultimately managing the deal.

According to an earlier Ross Research study, the “value” that external sourcing advisors bring to the table can be expressed in a number of ways: time and money saved, clarifying objectives, risk mitigation, instilling a methodology to the outsourcing process (including tools and templates) and leveraging experience. As a result, these financial executives must believe that by using an external sourcing advisor, they would get a better overall contract.

Hunton & Williams finds that customers are using more savvy and thoughtful deal processes to make sure that only the right vendors get selected, which ultimately leads to a more satisfying arrangement. “Old-fashioned planning, careful RFP [request for proposal] construction and focus on value become more important than ever in assuring that the deals that get signed actually deliver what they promise,” says Scott Hobby, one of the firms outsourcing attorneys. The firms attorneys often find themselves spending as much time thinking about the strategic elements of a transaction as the legal issues.

How to Ensure Success

Peer-to-peer recommendations about F&A outsourcing can serve as incredibly valuable sources of information. If you are considering outsourcing F&A or just are interested in “lessons learned,” consider the advice given by several participants in our study. We asked them to share with us what they like/do not like about their F&A outsourcing experiences and offer advice as to how prospective buyers should capitalize on this opportunity.

Moving Forward

The drive towards cost cutting and better financial reporting and regulatory compliance will force more chief financial officers than ever before to consider outsourcing finance and accounting (F&A) business functions in 2004 and beyond. Additional motivations include access to better technology and improved service levels. F&A outsourcing increasingly is being used as a tool not only for cost savings but also for business transformation. The industry is still in its early stages; yet, by all analyst accounts, and as shown by participants in this study, F&A outsourcing increasingly will become a more popular business and operational strategy for companies around the world.

Many organizations clearly embrace F&A outsourcing as a strategy for improving service levels, reducing expenses, increasing stakeholder value and gaining a greater competitive stronghold in their marketplaces.

“Our experience is that companies should approach BPO outsourcing like one would approach a marriage.” wrote one FEI respondent — “expensive to enter, more expensive if it ends in a divorce. To date, we are very pleased with our partners performance and look forward to a long relationship.”

Nonetheless, many organizations have yet to acknowledge the inherent value in outsourcing transactional F&A functions to an external service provider.

The word “transactional” is critical here: it would be difficult to find anyone who would advocate outsourcing highly strategic F&A processes. But outsourcing the transactional elements of F&A is not only a sound business decision but also one that should result in success- if researched, defined, contracted for and managed properly. The overall key to success, however, is building a strong, trusting relationship with a competent service provider that has deep process knowledge and is flexible enough to work within your industry”s and company”s constraints and guidelines.

To purchase a copy of the full 28-page research report, go to rossresearch.com

The Research Methodology

Of the 100 executives who filled out the questionnaire, which consisted of multiple choice and open-ended questions, nearly all represent chief and senior financial decision- makers within their organizations. CFOs represent the largest number of participants, and nearly 70 percent of participants hold the responsibility of recommending their company”s decision to outsource F&A functions.

They work for companies ranging from fewer than 1,000 employees to more than 75,000, with the largest number having between 1,000-5,000 employees. A wide range of industries is represented, with a particular concentration in the manufacturing and business services sectors. Among these were: ING U.S. Financial Services, Lillian Vernon Corp., Binney & Smith, Earle M. Jorgensen Co. and Solvay Pharmaceuticals.

Ross Research is the only outsourcing-focused market research and advisory firm in the industry. Since 1999, it has provided the outsourcing vendor community with actionable intelligence to get the most out of their business, marketing and sales initiatives. Ross Research focuses on four distinct topics and has deep expertise in each: Finance & Accounting Outsourcing, Human Resources (HR) Outsourcing, Offshore Outsourcing and Sourcing Advisor Research. It publishes research reports on a monthly basis and provides custom consulting services – such as marketing strategy advisory, competitive intelligence, virtual analyst time, webcasts and on-site sessions – for outsourcing service providers and advisors. Its products and services are available via an annual subscription package or off the shelf.

Clients include: Accenture, Caspian Group, EDS, Extreme Networks, Exult, Fidelity Investments, HROToday Magazine, Hunton & Williams, International Data Corp. (IDC), IT Services & Marketing Association (ITSMA), Kennedy Information, Lexmark, McKesson HBOC, Mellon HR Solutions, Rockwell Automation, Shaw Pittman, Sybase, TPI, Williams Communications and Wipro Technologies.

Survey Sponsors

Exult Inc. is a market leader in HR-led business process outsourcing for Global 500 corporations, with U.S. headquarters in Irvine, Calif., European headquarters in London and client service centers in North America, South America, Europe and Asia. Through its proprietary Exult Service Delivery ModelSM, Exult offers comprehensive, scalable process management solutions designed to manage clients Human Resource and related Finance & Accounting and Procurement functions.

Exult uses its expertise in HR and F&A functions, process management, MultiDeliverySM shared client service centers and its myHRSM Web-enabled applications to help Global 500 corporations improve productivity, reduce costs, streamline processes and provide superior HR services to their employees.

Hunton & Williams LLP is a U.S. law firm, founded in 1901, with a significant international presence. More than 850 attorneys serve clients in 80 countries from 17 offices around the world. The Outsourcing/System Integration Practice Group at Hunton & Williams assists its clients worldwide in executing large-scale BPO and ITO [information technology outsourcing] transactions, ASP [application service provider] arrangements, system integrations and voice and data network procurements.

Over the past 20 years, the group has completed dozens of transactions for the worlds largest utility, consumer products, aerospace, technology, insurance, financial services and other companies. The firm says, “We understand our clients demands for integrated solutions that quickly deliver reduced costs, improved performance and process transformation while maintaining core business operations. We share our experience in achieving these goals at every stage of each new deal, from pre-RFP planning through post-contract relationship management.”

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