Outsourcing and the CFO

Transcription

1 Outsourcing and the CFO The Balanced Delivery Model for Finance and Accounting The role of the Chief Financial Officer (CFO) has evolved dramatically, moving far beyond the responsibilities the title suggests. Increasingly, CFOs are being called on to handle assignments that traditionally were within the purview of the Chief Operating Officer, or even the Chief Executive Officer. But at the same time, CFOs are expected to deliver continuous improvements in their own areas Finance and Accounting. Like many general and administrative functions, Finance and Accounting (F&A) is under pressure. Many CFOs are discovering that they have exhausted supply-side opportunities for improving F&A functions typically by having eliminated, consolidated, and standardized as many processes and operations as possible. Yet CFOs continue to face business-unit (demand-side) expectations for lower costs and higher performance levels. CFOs are expected to set an example in their own operations before demanding similar performance improvements from the remainder of the company. Exhibit 1 illustrates these dual pressures. Increasingly, Business Process Outsourcing (BPO) has become a tool that can help CFOs manage this challenge. Once a niche market, in recent years BPO of F&A functions has become mainstream as the offshore market has grown, matured, and proved its economic benefits. The increasing prevalence of F&A BPO is driven by a heightened appreciation of its potential to capture value across a range of fronts from the obvious and tangible (e.g., reductions in operating costs) to the longer term and strategic Exhibit 1 Pressures Facing the F&A Organization

2 2 (e.g., access to truly world-class capabilities). A growing number of companies are expanding the scope of their outsourcing to include portions of their F&A operations, and the number and types of BPO offerings also continue to increase. The maturation of BPO and the service provider marketplace, although increasing the range of F&A service delivery options for CFOs, raises important questions to which answers are not always obvious. Beyond the primary question Should F&A processes be outsourced? the CFO needs to determine what can or should be outsourced, how and where the outsourcing should be performed, and whether outsourcing should involve only specific processes or large portions of the F&A function. Occasionally, CFOs may need to relinquish some control while still ensuring process integrity, which is challenging. Although helpful, it is not possible to simply follow the lessons and framework from information technology outsourcing (ITO); the process and functional requirements and the state of the market are too different. Balanced Delivery Model We believe a well-structured model for BPO F&A is emerging. This model can help a CFO navigate the choices and inherent uniqueness and complexity of the F&A function while exploiting the significant advances in the BPO arena. We call this approach the F&A Balanced Delivery Model a decision framework designed to help CFOs assess their organizations capabilities and opportunities within the context of outsourcing and offshoring. The first step in choosing an appropriate set of delivery-model options is to appreciate the evolutionary position of the firm s F&A organization. At most companies, F&A has migrated over time from being a set of siloed operations that are hard-wired to their individual business units to an integrated design that often incorporates elements of a shared-services model. Recently, F&A has moved toward more processbased structures. The sourcing models that have been employed for business processes in the F&A organization are inextricably tied, as they should be, to the organization s position along this evolutionary continuum. Exhibit 2 illustrates this evolution and the range of options typically employed. The F&A Balanced Delivery Model then addresses three issues: sourcing approach (what to outsource), delivery model (how and where services will be performed), and governance model for outsourced operations. Issue 1 Sourcing Approach: Insource or Outsource? The primary drivers of the insource/outsource decision Exhibit 2 F&A Delivery Model Evolution

3 3 encompass a set of questions about the business criticality specific to each F&A process for example, the extent to which a process involves significant controls or the magnitude of risk exposure should the process fail. These drivers are particularly critical for Finance because Finance is the infrastructure on which the company s financial operations are based. Exhibit 3 illustrates the sourcing framework for F&A processes. Processes that usually score high on these criteria (e.g., treasury operations, tax, corporate controller, and financial planning and analysis) are typically retained within the organization. In addition, the framework helps decisionmakers to be explicit about process areas in which outsourcing can provide significant benefits because of access to greater scale (e.g., Accounts Payable) or more specialized skills (e.g., Fixed Asset Accounting). Issue 2 Which Delivery Model? The state of the market for most companies today is a mixed model based on a combination of four major insource-outsource pure-tone models. Selecting the proper combination of these pure-tone delivery models for F&A processes is important because not only can it have significant risk implications, but failing to take advantage of alternative locations for service delivery may also result in significant foregone cost savings. Onshore and Nearshore Outsource. Until recently, the traditional approach has been to outsource onshore; however, internal consolidation and process improvements have lessened the economic improvements from moving to these models. Increasingly, companies are instead considering a nearshore option under which a BPO provider delivers services from an adjacent country to take advantage of labor rate differences while minimizing physical distance from core operations (e.g., Canada, in the case of the United States). Business criticality is often a key consideration for selecting these processes and keeping them near the business. However, the emerging scale and cost advantages of offshoring and the increasing maturity of the offshore supply base are starting to drive companies to look first to offshore outsourcing rather than onshore or nearshore BPO. Offshore Outsource. Once an option reserved for information technology application development and call centers, offshore BPO continues to gain momentum and has become an increasingly credible delivery model for F&A business processes. BPO in F&A has evolved to the point where the central question is often not should I move processes offshore? but which processes should I move Exhibit 3 Sourcing Framework for F&A Processes

4 4 Exhibit 4 Delivery Models for the F&A Value Chain offshore? When assessing whether activities are appropriate for offshoring, companies should ask whether they are routine, non-business-critical processes in which geographic location and proximity are unimportant, and same-day requirements and regulatory constraints do not play a major role. Offshore Captive. The offshore captive model, in which a company establishes its own internal offshore operation, has emerged as a new alternative in recent years. This model is a viable option for only select companies that have large internal scale, extensive in-house expertise, and a commitment to make the significant capital investment required and to assume the risks involved. For these companies, the captive model might include business-critical processes and others requiring industry or company-specific knowledge. Retain In-House. A core set of strategic and planning F&A processes will typically need to remain on-site. Companies should consider which processes must be preserved within their own walls, typically at the corporate location, for reasons of risk, compliance, strategic advantage, and company-specific knowledge. Exhibit 4 illustrates how these four pure-tone models typically play out against the full range of key F&A processes. It is important to reiterate that companies typically implement two or more of these approaches to create a mixed model. Issue 3 Designing the Governance Model For companies outsourcing F&A operations, the selection of the delivery model is only part of the process. Increasingly, companies are realizing that outsourcers can deliver significant cost reductions and provide access to world-class capabilities, commitments to long-term and continuous performance improvement, and risk-sharing in other words, move beyond a traditional vendor relationship to one more like a partnership. This concept is particularly relevant to F&A, given the dramatic bottom-line impact that can result from an increase in process effectiveness. For example, a recent BPO deal involving a global energy company confirmed that improvements in receivables and collection-cycle times were four times as large as the savings from salary and process costs. We refer to the underlying relationship with F&A suppliers, and the motivations that drive it, as the governance model. Typically, discrete processes are handed off to one of multiple vendors, with the primary objectives of increasing productivity and sustaining the targeted improvements. The governance structure is

5 5 an explicitly defined, internally retained organization designed to administer the outsourcing arrangement and act as an intermediary with the remainder of the business. The key point is that companies cannot shut their eyes after the processes are outsourced. Occasionally, the complexity introduced by having multiple sources across a single process can require even more structured governance and coordination. Simply put, careful design of the retained organization is a prerequisite to the deal s success. Getting the Balance Right The global sourcing of F&A business processes is here to stay. The economic case for BPO is compelling, and the demand and need for these alternative models is growing. The quality and variety of available services will continue to improve as technology develops and experience broadens. Innovation is leading to improved offerings and more sophisticated business models, and much value can be extracted. Increasingly, it will be the CFO s job to lead multifunctional outsourcing efforts, especially in BPO. As the F&A BPO market continues to evolve, it will be difficult for potential buyers to navigate. Constraints surrounding the F&A function (e.g., regulatory and financial risk) will make it critical that sourcing decisions be made only after thoughtful deliberation. We believe that F&A functions cannot unlock all possible sources of benefit without considering a global sourcing strategy, but they must do so on their own terms and with a strong economic focus. What Booz Allen Brings Booz Allen Hamilton has been at the forefront of management consulting for businesses and governments for 90 years. Booz Allen, a global strategy and technology consulting firm, works with clients to deliver results that endure. With more than 16,000 employees on six continents, the firm generates annual sales of $2.7 billion. Booz Allen provides services in strategy, organization, operations, systems, and technology to the world s leading corporations, government and other public agencies, emerging growth companies, and institutions. To learn more about the firm, visit the Booz Allen Web site at To learn more about the best ideas in business, visit the Web site for strategy+business, a quarterly journal sponsored by Booz Allen. Contact Information CHICAGO Eduardo Alvarez Vice President alvarez_eduardo@bah.com Frank Galioto Principal galioto_frank@bah.com Vinay Couto Vice President couto_vinay@bah.com McLEAN Ashok Divakaran Principal divakaran_ashok@bah.com

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