Capturing Value from F&A Outsourcing

Globalisation and tough market conditions caused by slow economic growth in Europe have forced many firms to consider IT outsourcing. Now the efficiency spotlight has switched to other business functions that often suffer from suboptimal and inflexible processes, such as F&A.

There are examples of F&A outsourcing deals of every type in Europe, but most deals begin with accounts payable or related processes in the procure-to-pay cycle. Larger firms use the momentum towards shared services as the first step in F&A process improvement.

Procure-to-pay, general accounting, fixed asset accounting, and higher-value F&A elements collectively represent the process stack where the outsourcing value proposition centres on transaction processing.

MULTIPLE F&A OPTIONS

Choice extends from implementing finance transformation or outsourcing finance applications as part of the ERP stack to engaging services under an end-to-end F&A BPO deal, or consolidating finance into a shared service centre.

Each option aims to reduce costs and drive service excellence to varying degrees. It helps that F&A functions up to now have been under-unionised – removing an obstacle that bedevils IT outsourcing uptake in Europe's larger economies.

Although service providers position offerings in the context of end-to-end F&A processing, most tend to be organised around a particular subprocess – such as procure-to-pay, comprising accounts payable, or order-to-cash, comprising accounts receivable.

Accenture's suite of F&A BPO services for example, features core services around procure-to-pay and order-to-cash, supplemented by tiered, metrics-focused, value-added services that target the whole finance chain.

ATTACKING THE FAULTIEST PROCESSES

At the heart of a transactional F&A engagement lies the transition of paper documents such as invoices, into electronic images, which are then processed, corrected, matched, reconciled and approved for payment.

Applying workflow technology and relocating these activities into a shared services centre, internal offshore services centre, or to a third-party service provider, drastically reduces overall function costs for many firms. Forrester's surveyed group of finance and IT executives report, on average, a 30% reduction in cost from F&A outsourcing.

Many F&A service providers have gained business from US firms cracking the whip over European subsidiaries in an effort to drive down operating costs. But the rising level of interest in BPO, blended delivery models and, in particular, shared services suggests that there is a change in mindset among the CFOs of locally based firms in Europe.

Core finance ERP application refresh / upgrade cycles are also ticking down, forcing firms to re-examine the effectiveness and efficiency of the technology platforms underlying their business processes.

SHARED SERVICES DOMINATE

Shared services provide the lever for firms to implement F&A transformation. Ongoing transition towards shared service configurations continues as work begins on centralising IT and data centre operations initially, and then aspects of HR and F&A, into a shared service centre configuration.

Furthermore, firms that have implemented first-generation shared service centres report difficulties in creating a service culture to effectively serve business requirements.

Motivation levels drop within the centre, while the investment needed to capture the next wave of technological innovation disappears.

PROCURE-TO-PAY

Accounts payable within the procure-to-pay cycle is usually the first piece of the F&A function handed off to a service provider, often under trial. Although elements of accounts receivable are suitable for outsourcing, customers are wary of handing over such customer-facing aspects of finance operations, particularly to offshore centres or third-party service providers without significant levels of trust. Service take-up is aggressive on the accounts payable side and light on the accounts receivable side.

Vendors expect this area of work to open up the path towards business decision-makers (CFOs rather than CIOs), delivering new revenue streams and mining 'wallet share' with existing customers. Moreover, the competitive nature of Europe's IT outsourcing market and, in particular, the recent lack of megadeals in the market means that service providers are now seeking new ways to create traction with their customers.

However, there is a sense of déjà vu around F&A outsourcing as the vendor messaging builds and the market fails to deliver. Vendors have been predicting a 40% compound annual growth rate for F&A outsourcing spending since Andersen's groundbreaking deal with BP 15 years ago.

THE INDIA FACTOR

Despite the slow take-up, F&A transformation approaches have gained traction with European firms. New energy came to the market with the entry of Indian service providers that leverage labour arbitrage, scale and new technology through an integrated global delivery model.

Infosys, Tata, Wipro and Genpact (a former back-office operation of GE) now sell F&A services as well as infrastructure services to European firms. Each continues to ramp up for multi-country BPO engagements by pushing headcount into Europe and recognising the importance of local language skills to their proposition – see Wipro's inaugural service centre in Romania, for example.

Not to be outdone, the global integrators (Accenture, EDS, IBM, Capgemini and their ilk) are reworking business models to capture the labour arbitrage open to the Indian players while leveraging a front-end selling machine focused on F&A transformation.

A SLOW TWO-STEP MIGRATION

F&A outsourcing has yet to gain real momentum as a broad-based market trend. Moreover, most firms prefer to centralise F&A people, processes and technologies into one location under a shared services configuration, rather than outsource to third-party service providers.

Firms will migrate to F&A BPO through two separate routes. Firstly, early adopters aim to capture value from procure-to-pay; secondly, large firms transition shared services towards F&A BPO providers.

CAPTURING VALUE FROM F&A BPO

European firms take a cautious approach to F&A BPO. This means that end-to-end adoption will play out as a long-term trend rather than an immediate opportunity, despite the enthusiastic vendor messaging bubbling through the market. Forrester recommends four steps that will help user firms succeed with F&A BPO:

• Establish a solid F&A cost and service baseline
• Determine F&A comparables
• Derail political issues
• Drive cultural change to underpin F&A shared service configuration

Running an F&A shared services operation demands a performance-driven culture that often proves alien to enterprise DNA – and is difficult to realise outside formalised third-party contracts. The pains arising from these challenges will drive future F&A BPO adoption. However, firms capture value by improving their cost structures and tightening up processes for improved cash flow – the life blood of any business.