Beyond Labour Arbitrage: The New F&A BPO Frontier

Progressive companies are looking to achieve rapid business transformation through outsourcing that they have been trying to realise for years via process redesign, ERP implementations and shared service initiatives. Realistic alternatives now exist as suppliers have rapidly and effectively developed and improved their global outsourcing acumen, resources and process knowledge.

However, while in theory F&A BPO can bring rapid change, cost savings and business benefits to companies, it also comes with many other challenges which companies must address to determine whether outsourcing is the right option for their business today.

WHAT HAS CHANGED?

CFOs know their own business processes best and, to date, it has proved hard to convince many of the business benefits of F&A BPO. The initial slow growth of F&A BPO has allowed suppliers to learn from other outsourcing solution areas how to develop a workable model, both in terms of business processes and technology enablement.

Moreover, these lessons learned appear to have yielded a great deal of pragmatism, resulting in much more realistic outsourcing objectives. In spite of this slow start, early deployments have largely been effective in our experience, although some did have rocky beginnings.

The new wave of CFO confidence in F&A BPO has resulted in a dramatic increase in the amount of F&A sourcing activity over the last two years, with the number of multi-scope contracts more than doubling and more than $2bn being spent on multi-scope F&A BPO engagements last year, based on research being conducted by Deloitte Consulting LLP's outsourcing advisory services.

These early F&A BPO deals focused largely on the supplier managing the company's tactical F&A processes with limited process change and bundling. This all came at a lower cost due to cheaper labour resources and the economies of scale of delivering F&A services on a multi-company model.

As a result, in many cases, it took several years for companies to achieve a satisfactory level of service delivery as they were merely trying to mirror what they had done before with many new challenges introduced into the mix: namely training a service provider to learn their own process flows and run these in an outsourced environment on whatever technology platform the company was using.

Recently, the developments of new standards, methodologies, and process rigour that have been introduced by service providers deep-rooted in a finance heritage have helped forward-thinking CFOs explore process transformation in their efforts to achieve breakthrough process redesign on a global level.

ACHIEVING BUSINESS VALUE BEYOND SIMPLE COST SAVINGS

In today's globalising economy, we believe companies should understand how to use offshore talent and the latest technology platforms and applications to help achieve finance operations excellence at lower costs.

Competitive companies can quickly grab a cost advantage by adopting the most effective F&A sourcing model, which can be particularly important in such industries as consumer products, financial services, energy, and retail where costs of compliance, industry regulations, and cheap foreign competition are increasingly digging deeper into profit margins.

As depicted above, the value proposition of F&A BPO now encompasses many added business benefits beyond a simple arbitrage of labour to help decrease transactional processing costs. Companies are focused on both incremental improvement and transformational innovation, and we believe F&A BPO is a lever that can help drive both without the need for significant investments in people and technology.

These benefits can be summarised as follows: access to scarce talent; ability to focus retained finance function on mission-critical activities; continual cost reduction and performance enhancement; taking advantage of process methodologies and standards, namely six sigma and LEAN; ability to increase working capital and directly impact the bottom line; availability of new F&A technologies and bundled solutions; potential to integrate multiple disparate financial platforms, applications and middleware into one common global standard; transferral of risk to the supplier; preparation for a business slowdown and preparation for M&A activity

ACCESS TO SCARCE TALENT

Many companies today are struggling to find the finance and accounting talent they need. The US-based talent pool has been shrinking considerably, and many companies are finding that F&A BPO service providers can usually offer skills, like payroll and accounts payable, significantly over-and-above basic transactional tasks – and at significantly lower cost.

FOCUSING ON MISSION-CRITICAL ACTIVITIES

The retained finance function can focus its time and resources toward driving ongoing quality into its financial processes and staff development and determine ongoing transfer of experience and skills from their service provider. Moreover, the finance function's retained management can focus time and energy on SLA setting and rolling out governance programs, while working closely with their supplier.

These collaborations are often decade-long 'marriages' and require increased energy and focus to achieve effective results with compromise required on both sides on many occasions.

CONTINUAL COST REDUCTION AND PERFORMANCE ENHANCEMENT

Companies can achieve cost reduction initially through labour arbitrage, and then subsequently through increased economies of scale from service providers and increased performance levels from services providers as they continue to mature and further their offshore investment (e.g. China and the Philippines). Contracts are frequently structured to demand annual performance improvement and reduced baseline costs, while expecting the service provider to drive process improvement and innovation.

Additionally, today's companies are quickly realising that F&A BPO is an opportunity to make rapid, impacting changes to their business and take advantage of the standards service providers are developing.

Many service providers are going to market with differentiated value propositions that are geared to moving companies onto their existing delivery models, with a heavy skew toward offshore delivery. They have quickly realised that they need to demonstrate industry-specific F&A process excellence to win credibility. Effective companies are quickly seeing BPO as an opportunity to make substantial structural changes that would be very difficult to achieve if they were not moving into an outsourced end state.

ABILITY TO INCREASE WORKING CAPITAL

Experienced suppliers can devote increased resources and generally have more efficient processes for managing cash flow from end-to-end solutions, such as order-to-cash and procure-to-pay. Improving the effectiveness and velocity of the cash flow can help improve management decision-making, not to mention the positive impact on working capital.

AVAILABILITY OF NEW F&A TECHNOLOGIES

It's our experience that many of the leading F&A BPO service providers are continually developing solutions that can work in tandem with the company's technology, or even replace it in certain cases.

Service providers are focused on F&A BPO solutions that can be standardised on incumbent ERPs, namely SAP and Oracle, with bolt-on tools and application solutions in discrete areas where value can be reaped. Additionally, solution areas like order-to-cash have moved beyond the performance of simple account collections using a billing application.

They are frequently now bundled process solutions that often cross organisational boundaries, (e.g. dispute management, cash-flow analytics and reporting capabilities). The benefits of bundled process outsourcing can include improved opportunities for process redesign and associated cost reduction, synergies from staff working together in the same environment, the ability to create a more leveraged management team, and potentially fewer contact points with external and internal customers.

INTEGRATION POTENTIAL

The cost savings enjoyed through labour arbitrage can offset significant enhancements to financial systems as part of the F&A BPO initiative to achieve a single, unified global chart of accounts.

In the past, many companies have delayed F&A BPO initiatives to resolve inherent issues with their accounting systems, but there is a clear move within many of today's initiatives to combine systems integration with the F&A BPO transformation, especially where the same service provider can be deployed to improve the F&A systems as part of the BPO initiative.

BPO provides the opportunity for companies to make rapid changes to their business, especially where there are multiple silos of financial data strewn across geographies and business entities. Companies have a singular opportunity to address these issues as part of the BPO transition process.

TRANSFERRAL OF RISK TO THE SUPPLIER

Managing offshore resources in today's business environment can be very difficult. In particular, offshore captive organisations that are not a tier one global brand in lower-cost geographies (e.g. India) will find it increasingly difficult, and expensive, to hire, train, and retain quality staff resources – not to mention accounting for the geopolitical risks associated with owning offshore assets and employing offshore labour.

Many companies are quickly realising they are far better off having experienced service providers take on these associated risks, as they have invested heavily in their staff development and governance programs. This can also save companies hefty management costs in running a captive operation.

PREPARATION FOR A BUSINESS SLOWDOWN

The desirable time to consider creating more effective and efficient F&A processes is when business is good and there is sufficient time to plan and manage the outsourcing transition.

When done properly, engaging an outsourcing service provider takes time and is more effective when not executed hastily. Additionally, service providers are more willing to collaborate and share the benefits when you (and other companies) are not feeling immediate cost-reduction pressures.

PREPARATION FOR M&A ACTIVITY

Outsourcing F&A forces the company to move to standard processes across business units. This can help facilitate future M&A activity by decreasing the effort associated with the integration and by improving the likelihood and accelerating the timeline of realised synergies.

It also allows the company to focus on the core business during integration, leveraging the service provider's skills and platform for integration of F&A.

F&A CONSIDERATIONS

There is significant hard work involved in making F&A outsourcing deals work. Similarly to other outsourcing areas, problems are encountered throughout the F&A BPO lifecycle: namely planning, sourcing, transition and relationship management. Critical potential missteps include:

Vague initial outsourcing objectives. Many companies have found that because they did formally establish these early in the process they ended up with very different relationships than those expected. Not understanding the processes being outsourced. This is not to be confused with transforming processes before outsourcing them. In fact, the preferred approach is to outsource first and then reengineer in order to accelerate the benefits.

Lack of senior management buy-in and sponsorship .Outsourcing relationships, like any business partnership needs governance and support from above.

Inadequate due diligence in choosing vendors, locations or establishing growth plans. The F&A BPO vendor space is maturing but remains complex. Different companies have different needs and must select vendors and locations that match their requirements and risk profiles.

Lack of sufficient retained organisation to maintain client strategy and direction. The skills required to manage the vendor are very different from those used to execute the processes.

Complex technology issues. In many instances, particularly in complex industries like telecom or financial services, companies have serious issues surrounding legacy and/or highly customised IT infrastructures which are often plagued by poor integration across business units and geographies.

In some cases, bringing a third-party outsourcer into the equation can significantly complicate matters and all parties involved need to be definitive about whether to streamline these systems as part of the outsourcing engagement, or whether the customer should get its house in order prior to outsourcing.

F&A BPO BENEFITS

What we believe is clear in this maturing F&A BPO industry is that there are a significant number of ongoing business benefits companies can seek to achieve, while also enjoying the cost savings being offered by today's service providers.

While companies invested multiple millions of dollars on costly ERP deployments in the 1990s where the stakeholders largely footed the bill, impacting business change can generally be experienced with F&A BPO without this cost burden.

The role of the CFO and his executive team is rapidly changing to accommodate global sourcing, and only now are we at the beginning of a long period of change as we as an industry learn when and how to more effectively implement financial enhancement within a global sourcing model.