Only 6.1% of CFOs of large firms are fully content with their financial chain. Still, financial chain outsourcing is quite rare. Tim Weitzel and Jochen Franke present empirical findings of a large survey with Germany’s top 1,000 firms on what CFOs think about their financial processes and financial chain outsourcing. Also, a CFO's personal experience with outsourcing turns out to be a firm internal cultural challenge for outsourcing.
THE FINANCIAL CHAIN
'Classical' Supply Chain Management (SCM) describes the successful philosophy of an integrated planning, execution and fulfilment of physical goods and services production, enabling real time production and avoiding cost and error intense media discontinuities.
While traditional SCM is mainly focused at orchestrating physical and information logistics associated with the primary flow of goods, there is a substantial optimization potential associated with the often neglected financial processes. Accordingly, the financial flows encapsulated in the financial chain have rarely been addressed in the literature as an autonomous source of competitive advantage.
To systematically identify efficiency potentials in financial processes, we have developed and empirically evaluated a generic (sell side) financial chain (Figure 1) at the Institute of Information Systems of Goethe University as part of a research project of the E-Finance Lab.
The financial chain starts with the business partner qualification by checking identity, credit worthiness and solvency. Then, the financing modus (e.g. supplier credit, leasing) for the deal is determined, followed by pricing (price negotiation and determination), sales offer and risk assurance (currency risk, transportation risks, credit default risk).
After this financial trade enablement phase and the actual fulfillment, the processes of the financial settlement phase include invoice generation, invoice delivery and possibly dispute management The financial chain cycle terminates with the customer paying the bill.
Based on this chain, in 2003 a questionnaire was sent to the 1,000 largest firms in Germany (according to revenue; excluding banks and insurers). 103 completed questionnaires were returned (10.3%).
DISSATISFACTION AND OPTIMISTIC SELF EVALUATION
Despite the fact that the financial chain consumes 22% of the annual IT budget, only 6.1% of all responding CFOs are fully content with their financial chain. Two out of three are either dissatisfied or indifferent. Also, one out of two CFOs has already identified areas to improve upon. Still, quite surprisingly two out of three consider the efficiency of their financial chain management to be good or very good compared to industry competitors. And despite the common dissatisfaction with the financial chain, only 3.2% consider their own financial chain management to be inefficient compared to industry peers.
OUTSOURCING TO THE RESCUE?
The financial chain is usually a secondary process to support a firm's core business. Therefore, it is rarely designed and optimized to provide a competitive advantage on its own. Secondary processes only account for 23% of all business process reengineering projects (Kallio et al. 1999). But outsourcing (parts of) the financial chain to a specialized provider might offer the chance to employ excellent services even for secondary processes. This approach is called Business Process Outsourcing (BPO).
Do CFOs deem BPO a viable option at all? 51.5% of the CFOs consider outsourcing of parts of the financial chain possible. 32.3% answer that selective sourcing is not an option. Interestingly, those firms that have already identified areas of improvement in their financial chain are more likely to consider selective sourcing an interesting option (significant to 0.01, Pearson correlation coefficient 0.292). Less than half of all firms (49.4%) have already evaluated possible outsourcing benefits in the financial chain.
THE STATUS QUO OF FINANCIAL CHAIN OUTSOURCING
Concerning the status quo of financial chain outsourcing we found BPO rates between 11% (qualify) and 27% (invoice), depending on the sub process. Operational cost savings associated with the outsourcing of processes of the financial chain are 10.3%.
WHO ARE ADEQUATE OUTSOURCING PARTNERS?
When outsourcing the financial chain, there are many alternatives regarding the scope (partial sourcing vs. entire sourcing vs. founding a service company) and providers (banks, IT service providers etc.). An interesting question is if certain industries particularly qualify as competent sourcing partner. For financial chain outsourcing, interesting partners are especially banks, other financial service providers, IT service providers, consulting firms and even other firms from the same industry.
For most processes of the financial chain, CFOs prefer keeping the processes in-house. For the qualification process 'other financial service providers' are seen as most competent, while for 'finance' (54 respondents) and 'assure' (33 respondents) banks are deemed the best partner. Besides keeping it in-house, IT service providers are considered to be the most competent providers of the invoice and dispute process. Not surprisingly, for payment banks are attractive again.
A CULTURAL OBSTACLE TO OUTSOURCING
Our empirical study shows that outsourcing of the financial chain is still quite rare. Yet, those firms that could gather experience with it mostly report successes and could realize substantial operational cost savings. A key finding though is that many CFOs tend to systematically overestimate the quality of their internal financial processes and especially their competencies compared to external experts. More precisely, we found a significant impact of a manager’s experience on his attitude towards outsourcing. Despite the dissatisfaction with their financial chain, 68.4% of the CFOs without outsourcing experience consider their own internal process competence superior to that of the specialized provider, compared to only 28.5% of the CFOs with outsourcing experience.
This is a serious internal cultural barrier to financial chain outsourcing. Our message thus is to decide on outsourcing after calculating a detailed business case.
Beimborn, D., Franke, J., Weitzel, T.: The Role of Experience for Outsourcing Evaluation, WIRTSCHAFTSINFORMATIK, 47, 6, (2005), 431-440.
Kallio, J., Saarinen, T., Salo, S., Tinnilä, M. and Vepsäläinen, A.P.J.: Drivers and tracers of business process change, Journal of Strategic Information Systems, 8, (1999), 125-142.
ABOUT THE AUTHORS
Tim Weitzel is Professor of Information Systems at Bamberg University. Prior to that, he was Asst. Professor at the Institute of Information Systems at Goethe University in Frankfurt, Germany, where he worked as project leader for E-HR, outsourcing and IT management projects.
Tim has been head of a variety of research and consulting projects on standardization, E-Business and E-Recruiting. He is the author of over 100 articles and four books. His research on standards, outsourcing, IT management and alignment, E-Finance and E-HR has been published in MIS Quarterly, Wirtschaftsinformatik, ZfB, Electronic Markets, JEIM, ICIS, JITSR and others.
Jochen Franke is Research Assistant at the Institute of Information Systems at Goethe University in Frankfurt, Germany where he works in the E-Finance Lab. His research interests include IT management, alignment, E-Finance, and flexibility.
Jochen’s research has been published in national and international journals (Journal of Information Systems and e-Business Management, Wirtschaftsinformatik) and conference proceedings (ICIS, ECIS, AMCIS, HICSS, WI). He is author of six books covering financial process management and programming topics.