Procurement Outsourcing And FAO - The Benefits For 2008

As FAO Research evaluates the market opportunities for 2008, it becomes clear why a company would couple finance and accounting outsourcing (FAO) with the external sourcing of procurement: both business processes directly impact a company’s bottom line.

Both procedures operate in high-volume processing environments, where the management of one department often affects the other, and both procedures can be plagued by cost overruns, ineffective processes and inefficient analytical capabilities; yet both are struggling to improve operations with lower expenses. Changes to one process via outsourcing could possibly affect the other and positively improve a company’s overall financial performance.

OUTSOURCED TOGETHER

Companies that consider outsourcing finance functions typically go through a standard process of assessing their current position (including costs and process improvements), forecasting a more desirable 'post-outsourced' situation, choosing a supplier and negotiating long-term arrangements.

They also develop processes for transition, governance, communication and relationship management (to ensure that expectations are understood and met). More importantly, they construe measures of performance to monitor the achievement of quantitative metrics over time.

The period of finance sourcing can take between four and 18 months to finalise. For multinational corporations, we see the timeline toward the higher end.

With all this time, effort and resources, it may make sense for companies to include procurement outsourcing as part of their company-wide operational due diligence, especially as much of the procurement process is already tied into many finance functions. There are several global outsourcing providers that offer full-scale procurement services in addition to FAO.

There are also niche outsourcers that can manage the entire procurement process, including consulting services around the supply chain. Furthermore, many companies have taken this dual-plunge already, including Dun & Bradstreet, Kodak and a host of others.

RISK AVERSE

FAO Research believes that multi-tower contracts (those involving two or more business processes outsourced at the same time, such as FAO and procurement outsourcing) will be less common in 2008 than previous years.

We see some companies becoming more risk averse than in the past due to the challenging economic climate, so with such contracts being more time consuming to source and difficult to manage, we expect stand alone engagements. We have seen that a methodical approach to better outsourcing assures that processes are transitioned in line with expectations, cost and savings targets are aptly monitored and achieved and human resources are prepared – on both the supplier and client sides – to facilitate successful engagements.

THE RATIONALE FOR CONVERGING MARKETS

However, despite the challenges inherent in multi-tower deals, the value-add of FAO coupled with procurement outsourcing cannot be ignored. As the FAO market continues to mature, the case for outsourcing business processes in tandem becomes increasingly compelling. The procure-to-pay (P2P) cycle is linked closely to the finance function via the purchasing/requisition process.

For example, as a company engages in FAO via accounts payable the natural evolution of these services should move to include additional transactional components, like those in P2P. Outsourcing this procurement function in addition to FAO would enable greater control of the purchasing environment and a fuller view of operational spend and its overall financial impact.

FAO FORECAST

FAO Research expects to see a greater number of companies and governments worldwide embrace the outsourcing approach, especially as they face increased economic pressures in 2008.

The outsourcing mantra of 'better/cheaper/faster' applies as much to finance processes as it does to procurement. A company’s choice to combine the benefits of FAO with procurement outsourcing would refine process efficiency and other cost-cutting measures that would drive down expenses and positively affect customer satisfaction in a more streamlined and fiscally responsible organisation.

Moreover, business processes such as financial reporting, regulatory compliance, risk mitigation and spend management could run parallel company wide. As outsourcing buyers become more adept, they may also assess bundling supplier sourcing and management components into the FAO/procurement outsourcing equation.

FAO Research predicts that as organisations consider outsourcing procurement-related functions in conjunction with FAO, they are likely to engage in the transactional components first. Similarly, those entering into procurement arrangements will often include multiple levels of FAO activity in their contracts. Over time, we expect a fuller convergence of these business process areas within new outsourcing engagements and also other types of outsourcing contract renewals with procurement and related FAO function additions.

FAO Research strongly believes that the procurement outsourcing option offers tremendous potential for FAO service providers to educate prospective customers about how their process improvements could help manage spending. We expect suppliers to seek sole source engagements, with activity driven primarily by global companies already offering all types of outsourcing services.

We also see niche procurement outsourcers giving the traditional suppliers a good run for their money by competing for major engagements. We also expect more of a movement by FAO suppliers to team with procurement industry specialists and provide complementary offerings. Traditional outsourcing competitors may be forced to ‘team’ with each another at customers’ requests, creating unusual bedfellows.

Overall, FAO Research expects prospective outsourcing buyers to choose service provider partners that not only best match their current requirements but also help them advance with greater efficiency, cost effectiveness and enhanced performance.