Finance outsourcing in the high-tech and electronics industries

Transcription

1 Finance outsourcing in the high-tech and electronics industries The following summarises the findings of a survey looking into trends, risks and opportunities associated with finance outsourcing in the high-tech and electronics industries. The survey was conducted in March 2006 by the Economist Intelligence Unit and was sponsored by Accenture. In all, 229 executives around the world took part. Key Findings Finance is among the most outsourced functions. Almost half of survey participants currently outsource finance and accounting functions or plan to do so within three years. The only functions that are more often outsourced are IT, supply-chain management and manufacturing. And over the next three years, the only function that will be outsourced at a faster rate than finance will be supply-chain management. Finance being outsourced by small and large firms at differing rates. Smaller firms in the high-tech and electronic industries are twice as likely to be outsourcing finance functions currently, but large firms are more focused on finance for new outsourcing arrangements. Executives are satisfied with outsourcing arrangements. Industry executives are broadly satisfied with their companies outsourcing arrangements, and finance outsourcing in particular is seen as a success. The principle benefits of finance outsourcing are considered to be an ability to focus on core competencies and the opportunity to lower costs. Barriers to increased finance outsourcing exist. The perceived criticality of the finance and accounting function, cultural resistance, and concern about data security are among the obstacles to greater finance outsourcing. Some concerns, such as those surrounding data security, are allayed as companies gain experience in finance outsourcing. But others, such as quality and costs concerns, become more prominent with experience. Outsourcing of business processes is commonplace among electronics and high-tech companies, and outsourcing of the finance and accounting function currently practiced by just over a quarter of industry players is picking up momentum. Companies turn to finance outsourcing in order to focus on their core competencies and lower costs, often resolving compliance and business continuity issues along the way. Still, desire for direct control of the finance function and cultural resistance remain significant obstacles to more widespread finance outsourcing. Electronics and high-tech companies have generally embraced the practice of outsourcing business processes, with IT, manufacturing, supply chain and finance being most likely to go to an outside vendor (see Question 1, appendix). Outsourcing of IT services is most common 63% of high-tech and electronics firms currently outsource IT support or plan to within three 1

2 years. Almost half (46%) currently or plan to outsource finance and accounting functions. Only supply-chain management is being outsourced at a faster rate than finance (22% expect to start outsourcing this function within the next three years, versus 20% for finance). Relatively few respondents see room for growth in manufacturing outsourcing (only 10% expect to start outsourcing this function within the next three years). This picture varies according to company size (see tables, below). Small and mid-sized companies those with revenues of less than US$500m are more than twice as likely to outsource finance and accounting processes: 37% of these companies currently outsource finance, compared to only 16% of large companies. But for large companies, the finance function is the focus of new outsourcing arrangements: 21% plan to start outsourcing it in the next three years; no other function is expected to be outsourced at such a clip. For smaller firms, the focus on new outsourcing arrangements will be in supply-chain management, followed by IT services and finance. Currently outsource Smaller firms (under US$500m) Larger firms (over US$500m) Manufacturing 37% 3 Finance and accounting 37% 16% HR 26% 1 IT services 3 51% Customer service, sales and 7% marketing Procurement 5% R&D 14% 10% Supply chain and logistics 17% 36% Plan to start outsourcing within three years Smaller firms (under US$500m) Larger firms (over US$500m) Manufacturing 11% Finance and accounting 1 21% HR 16% 16% IT services 22% 15% Customer service, sales and 15% 13% marketing Procurement 14% 15% R&D 15% 6% Supply chain and logistics 2 15% Overall, executives are pleased with their companies outsourcing arrangements. Even for the least well-regarded arrangement R&D and product development those who say they are satisfied or very satisfied (3) with the experience far outnumber those who say they are dissatisfied or very dissatisfied (23%). (See Question 2, appendix.) The level of contentment with finance outsourcing is high. Among companies that have outsourced this function, over half (56%) say they are satisfied or very satisfied, and only 1 2

3 say they are dissatisfied or very dissatisfied. However, there is considerable difference between smaller and larger players, with 64% of small companies expressing satisfaction versus just 44% of large companies. In the experience of most industry executives, there are two principal reasons to consider outsourcing: the ability to sharpen focus on core competencies (noted as one of the top-three benefits by 72% of respondents) and the opportunity to lower costs (70%). (See Question 3, appendix.) Among larger firms, the opportunity to lower costs come ahead of the ability to focus on core competencies (71% and 6, respectively), while for smaller firms, core focus is ahead of lower costs (77% and 6, respectively). Throughout the survey, small companies consistently express greater concern about the potential costs of outsourcing. Small players are more likely to perceive continuity planning and transparency in the eyes of the market as being important benefits of outsourcing, while large firms are more likely to see improved service and an enhanced strategic role for finance executives as being benefits. Companies that already outsource the finance function cite the same factors as the aggregate group sharper focus on core competencies (80%) and lower costs (64%) as the primary benefits of outsourcing (see table, below). But compared to those who haven t outsourced finance, they give greater weight to avoiding compliance problems and ensuring business continuity. Companies that don t outsource finance are more likely to see outsourcing as a way to access best of breed talent and technology. Primary benefits of outsourcing (respondents selected up to three benefits) Firms that outsource finance function Firms that do not outsource finance function Better service 27% 24% Sharper focus on core 80% 6 competencies Lower costs 64% 72% Opportunity for finance 12% executives to play a more strategic role Opportunity to access best of 25% 35% breed talent and technology Fewer compliance problems 21% 11% Catalyst for wider 16% 1 organisational change Greater transparency and 5% openness in the eyes of the market Enhanced disaster recover 1 6% and continuity planning Other 0% 4% For companies that have kept finance and accounting in-house while outsourcing other functions, the most common reason is the perceived criticality of finance and accounting (cited 3

4 by 54% as a factor). (See Question 4, appendix.) This reasoning is more pronounced among larger than smaller industry players (63% and 44%, respectively). But for one-quarter of companies that do not currently outsource finance, the decision has not been a considered or deliberate one. Looking to the future, 5 of electronics and high-tech executives expect to see more finance outsourcing in their industry over the next three years (see Question 5, appendix). Companies that already outsource finance are particularly bullish on the practice, with 7 expecting it to become more widespread. Among those who expect greater finance outsourcing in their industry, the main drivers are seen to be cost pressures (cited by 4 as a top-three driver) and improved service quality among outsourcers (46%). (See Question 6, appendix.) Smaller companies cite successful experience outsourcing non-finance functions at a higher rate than do larger companies (31% versus 21%), while larger companies cite the improved pricing structures offered by outsourcing providers at a higher rate than do smaller companies (31% versus 1). Among companies that already outsource finance, a relatively high proportion (3) cite increasing regulatory compliance burdens as a driver. For companies that have outsourced finance, the objectives in doing so mirror the perceived benefits of outsourcing generally (see Question 7, appendix). Over half cite lower costs (5) and a sharpened focus on the core (57%). The avoidance of compliance problems is more commonly cited by finance outsourcers (27%), compared to the 13% who cited this as a benefit of outsourcing generally (Question 3). The biggest barriers executives see to more outsourcing of finance functions are organisations desire for direct control of the function (cited by 6 as a top-three barrier) and cultural resistance to change (42%). (See Question 8, appendix.) The need for direct control and compliance concerns are more pronounced among larger companies, while cultural resistance and vested internal interests are more characteristic of smaller companies (see table, below). Barriers to finance outsourcing (respondents selected up to three barriers) Smaller firms (under US$500m) Larger firms (over US$500m) Desire for greater direct 62% 73% control of finance function Highly specialised processes 26% 37% within the company that make outsourcing more difficult Cultural resistance to change 50% 36% Fear that outsourcing will lead 20% 30% to failures of compliance with regulatory requirements Vested interests within the 23% 15% company trying to protect jobs, budgets and power Political sensitivities 15% 21% surrounding outsourcing Initial research and set-up costs of outsourcing 15% 7% 4

5 arrangements Other 10% Weighing the risks of finance outsourcing (see Question 9, appendix), most industry executives focus on the threat of data security breaches (63% cite data security as a top-three risk), though this concern appears to abate as companies gain experience in finance outsourcing. Those with such experience are comparatively concerned about the cost and quality of the service (see table, below). Large companies are more concerned than smaller ones about the deterioration of internal finance capabilities. Among large firms, 41% cite the risk that standards of governance and compliance will deteriorate, and 4 are concerned about an erosion of in-house knowledge and expertise (compared to 2 and 35%, respectively, among smaller companies). For their part, smaller companies are more conscious of cost: 42% see escalating costs as a key risk, compared to 27% of large companies. Risks of finance outsourcing (respondents selected up to three risks) Firms that outsource finance function Firms that do not outsource finance function Risk that outsourcing provider 16% 16% goes bankrupt or changes ownership Risk of breaches of data 46% 67% security Risk that standards of 27% 36% governance and compliance deteriorate or simply not be met Risk that cost of outsourcing 41% 31% exceeds expectations Risk that management of 21% 21% outsourcing provider absorbs too much time Risk that quality of service is 5 36% inadequate Risk that in-house knowledge 43% 3 and expertise erodes beyond repair Risk that transition would 5% 12% disrupt current operations Other 4% 1% When it comes to selecting a finance outsourcing provider, functional expertise is, not surprisingly, the top consideration. It was chosen by 62% of all executives and 80% of executives with finance outsourcing experience as a top-three factor. Other factors vary 5

6 according to the size of the enterprise. Large firms are more likely to care about a provider s scale and global coverage (33%, versus 13% among smaller companies). Smaller companies are more likely to focus on cost (2, versus 1 among large companies) and gaining access to cutting-edge technology (25% versus 1). Companies that outsource finance are comparatively concerned with a provider s reputation for continuous improvement in delivery (43%, versus 23% among companies without finance outsourcing experience). 6

7 Appendix Question 1. Which of the following business processes does your organisation currently outsource and which does it plan to outsource within the next three years? IT services 45% 1 36% Manufacturing 3 10% 43% Supply chain and logistics 27% 22% 43% Finance and accounting 26% 20% 51% Human resources 22% 16% 5 R&D/product development 12% 11% 72% Customer service, sales and marketing 14% 74% Procurement 7% 15% 73% Currently outsource Plan to outsource w ithin 3 years No plans to outsource Don't know Question 2. How satisfied has your company been with its outsourcing experience? Rate each function on a scale of 1 to 5, where 1=Very satisfied and 5=Very dissatisfied. Finance and accounting 21% 35% 26% 15% IT services 20% 34% 33% 12% Supply chain and logistics 17% 33% 36% 13% Manufacturing 13% 45% 33% Human resources 4 31% R&D/product development 30% 37% 16% 7% Procurement 46% 34% Customer service, sales and marketing 43% 3 5% 5% Very satisfied Very dissatisfied 5 7

8 Question 3. In your experience, what are the primary benefits of outsourcing? (Select up to three.) Sharper focus on core competencies Low er costs 72% 70% Opportunity to access "best of breed" talent and technology Better service Catalyst for w ider organisational change 1 25% 32% Few er compliance problems Opportunity for finance executives to play a more strategic role Enhanced disaster recovery and continuity planning Greater transparency and openness in the eyes of the market Other, please specify 13% 11% 7% 3% Question 4. If you do not outsource finance and accounting functions but you do outsource in other areas of your business, please indicate why the finance function has not yet shifted to this model. (Select all that apply.) The finance functions are considered too critical to be outsourced 54% There are greater savings and productivity gains to be had in other parts of the business There has not been a conscious decision to leave finance functions out of the shift to outsourcing Our finance processes are more specialised than other processes and more difficult to outsource We have already invested heavily in improving the finance function 2 26% 23% 1 The quality of outsourcing providers is higher in other functional areas 13% Our experience of outsourcing other functions has not been satisfactory 5% Other, please specify 5% 8

9 Question 5. Do you expect finance outsourcing to become more prevalent in your industry over the next three years? No 42% Yes 5 Question 6. If so, what will be the primary drivers behind the increasing use of finance outsourcing in your industry? (Select up to three.) Pressure on costs Improved quality of service from outsourcing providers 46% 4 Increasing regulatory compliance burdens on in-house departments Improved technology and expertise of outsourcing providers Successful experience outsourcing finance functions Successful experience outsourcing nonfinance functions Improved pricing structures offered by outsourcing providers 34% 33% 2 26% 25% Other, please specify 4% 9

10 Question 7. If your organisation has outsourced finance and accounting, or plans to, what are the objectives behind the decision to outsource? (Select up to three.) Low er costs 5 Sharper focus on core competencies 57% Better service 32% Few er compliance problems 27% Opportunity to access "best of breed" talent and technology Opportunity for finance executives to play a more strategic role 1 24% Catalyst for w ider organisational change Greater transparency and openness in the eyes of the market Enhanced disaster recovery and continuity planning 6% 13% 10% Other, please specify 6% Question 8. In your own organisation, what are the barriers that stand -- or have stood -- in the way of a decision to outsource finance functions? (Select up to three.) Desire for greater direct control of finance functions 6 Cultural resistance to change 42% Highly specialised processes w ithin the company that make outsourcing more difficult Fear that outsourcing w ill lead to failures of compliance w ith regulatory requirements Vested interests w ithin the company trying to protect jobs, budgets and pow er 1 25% 32% Political sensitivities surrounding outsourcing 1 Initial research and set-up costs of outsourcing arrangements 10% Other, please specify 10

11 Question 9. In your view, what are the primary risks associated with finance outsourcing? (Select up to three.) Risk of breaches of data security 63% Risk that in-house know ledge and expertise erodes beyond repair 42% Risk that quality of service is inadequate 41% Risk that standards of governance and compliance w ill deteriorate or simply not be met Risk that cost of outsourcing exceeds expectations 36% 34% Risk that management of outsourcing provider absorbs too much time Risk that outsourcing provider goes bankrupt or changes ow nership Risk that transition w ould disrupt current operations 10% 16% 21% Other, please specify 1% Question 10. Which of the following are most important when selecting a finance outsourcing provider? (Select up to three.) 11

12 Finance and accounting expertise 62% Strong cultural fit 42% Track record of outsourcing in my industry 3 Willingness to share risks and rew ards of projects Reputation for continuous improvement in outsourcing delivery Cost 24% 2 2 Scale and global coverage 23% Cutting edge technology and infrastructure 22% Ability to offer shared utility services 11% Other, please specify 1% 12

13 Respondent Demographics Where is your company headquartered? Asia-Pacific (other) 17% Asia-Pacific (Japan) Asia-Pacific (China or Hong Kong) Asia-Pacific (Australia or New Zealand) Latin America 3% 3% 3% 2% North America 33% Middle East or Africa Eastern Europe 3% 3% Western Europe 34% Where are your company's finance and accounting operations currently located? Asia-Pacific (other) 2 Asia-Pacific (Japan) Asia-Pacific (China or Hong Kong) 12% Asia-Pacific (Australia or New Zealand) Latin America 7% North America 36% Middle East or Africa Eastern Europe Western Europe 45% Which of the following best describes your title? 13

14 Board member CEO/President/Managing Director CFO/Treasurer/Controller CIO/Technology Director Other C-level Executive SVP/VP/Director Head of Business Unit Head of Department Manager Other 5% 7% 5% 5% 7% 17% 20% 1 14

15 What is your industry? Aerospace and defence 5% Softw are 36% Semiconductors 7% Computers/office equipment 12% Communications equipment 23% Electronics 17% What are your organisation's global annual revenues in US dollars? $25bn or more 13% $10bn to $25bn $5bn to $10bn $1bn to $5bn $500m to $1bn 10% 10% 13% $500m or less 47% 15