Perspective Eduardo Alvarez Vinay Couto Ashok Divakaran Outsourcing and the CFO The Balanced Delivery Model for Finance and Accounting
Booz & Company is a leading global management consulting firm, helping the world s top businesses, governments, and organizations. Our founder, Edwin Booz, defined the profession when he established the first management consulting firm in 1914. Today, with more than 3,300 people in 58 offices around the world, we bring foresight and knowledge, deep functional expertise, and a practical approach to building capabilities and delivering real impact. We work closely with our clients to create and deliver essential advantage. For our management magazine strategy+business, visit www.strategy-business.com. Visit www.booz.com to learn more about Booz & Company. COTACT IFORMATIO Chicago Eduardo Alvarez Partner 312-578-4774 eduardo.alvarez@booz.com Vinay Couto Partner 312-578-4617 vinay.couto@booz.com Chicago Ashok Divakaran Principal 312-578-4751 ashok.divakaran@booz.com Originally published as: Outsourcing and the CFO: The Balanced Delivery Model for Finance and Accounting, by Eduardo Alvarez, Vinay Couto, and Ashok Divakaran, Booz Allen Hamilton, 2007.
1 Outsourcing and the CFO The Balanced Delivery Model for Finance and Accounting The role of the Chief Financial Officer has evolved dramatically, moving far beyond the responsibilities the job title itself suggests. Increasingly, CFOs are being called upon to handle assignments that traditionally were within the purview of the Chief Operating Officer, and, in some instances, even the Chief Executive Officer. But at the same time, CFOs are expected to deliver continuous improvements in their own organization. Outsourcing offers a compelling approach to drive significant cost and effectiveness benefits; this article examines some of the key considerations for organizations contemplating outsourcing. Like many general and administrative functions, Finance and Accounting (F&A) is under pressure. On the one hand, many CFOs are discovering that they have exhausted the supply-side opportunities to improve F&A functions typically, by having eliminated, consolidated, and standardized as many processes and operations as they reasonably can. On the other hand, CFOs continue to face business-unit (demandside) expectations for both lower costs and higher performance levels. CFOs are expected to set an example in their own operations before demanding similar performance improvements from the rest of the company. Exhibit 1 illustrates these dual pressures. Business Process Outsourcing (BPO) is a tool that can increasingly help CFOs manage this challenge. Once a niche market, business process outsourcing of F&A Exhibit 1 Pressures Facing the F&A Organization Supply-Side Pressures High fixed cost infrastructure and uncompetitive labor rates Declining capital access to fund process improvement and innovation Inability to capture scale through further consideration Employee morale and attrition levels F&A Performance Improvement Levers Demand-Side Pressures Predictable, ever-decreasing unit costs More business-specific solutions and increased capabilities without sacrificing scale Greater shared accountability for managing total supply chain cost Greater scalability and variability in cost structure Reengineering Levers (e.g., automate, redesign, consolidate) Sourcing Levers Source: Booz Allen Hamilton
2 functions has become mainstream in recent years as the offshore market has grown, matured, and proven its economic benefits. The growing 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, such as reductions in operating costs, to the longer-term and strategic, such as access to truly world-class capabilities. More and more companies are expanding the scope of their outsourcing activities to include portions of their F&A operations, and the number and types of BPO offerings continues to grow. The maturation of BPO and the service provider marketplace increases the range of F&A service delivery options for CFOs, but it also raises a number of important questions whose answers aren t always obvious. Beyond answering the primary question Should F&A processes be outsourced? the CFO needs to decide not only what can or should be outsourced, but also how and where the outsourcing should be done, and whether it should involve only specific processes or large portions of the F&A function. In some cases, CFOs may need to relinquish some control while still ensuring process integrity, which is challenging. Knowing the lessons learned from information technology outsourcing (ITO) may be helpful, but, in the end, the process and functional requirements, as well as Exhibit 2 F&A Delivery Model Evolution the state of the market, are so different that merely recreating the ITO framework is not possible. The Balanced Delivery Model We believe a well-structured model for F&A BPO 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 the appropriate set of delivery-model options for a particular company is an appreciation of the evolutionary position of the firm s F&A organization. At most companies, F&A has migrated over time from a set of siloed operations, hard-wired to their individual business units, to a more integrated model that in many cases incorporates elements of a shared-services model. More recently, F&A has also moved toward more process-based 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 position of the organization along this evolutionary continuum. Exhibit 2 illustrates this evolution and the range of options typically employed. F&A Delivery Model Evolution Functional Model Traditional Shared-Services Model Process-Centric Model Sourcing Model Onshore outsourcing (activities, piecemeal) In-house Onshore outsourcing (entire functions) Offshore outsourcing (selective) Retain in-house Onshore outsourcing (processes) Offshore outsourcing (processes) Captive offshoring (processes) Joint venture models Retain in-house Requires demand and process management governance in place Opens new models Owned by company More variable Multi-vendor Bundled value proposition: Innovation and performance management built into the end-to-end process Implications Easy to source More difficult to manage as scope grows arrow value definition Service improvemennt is in parts, not end-to-end Lower costs, helps capture scale within region or enterprise Access lower factor costs More dependable service Helps access and sustain functional talent Source: Booz Allen Hamilton
3 The Balanced Delivery Model then addresses three issues: the sourcing approach (what to outsource), the delivery model (how and where services will be performed), and the governance model for outsourced operations. Issue 1: Sourcing Approach Insource or Outsource? The primary drivers of the insource/outsource decision are a set of key 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 provides the infrastructure on which the company s financial operations rest. Exhibit 3 illustrates the sourcing framework for F&A processes. Processes that tend to score high on these criteria such as treasury operations, tax, corporate controller, and financial planning and analysis are typically retained in the organization. In addition, the framework helps decision makers be explicit about process areas where outsourcing can provide significant benefits, because of either access to greater scale (e.g., Accounts Payable) or scarce, unique skills (e.g., Fixed Asset Accounting, some treasury work). Issue 2: Which Delivery Model? The state of the market for most companies today is a mixed model, basically a combination of four major insource-outsource pure-tone models. Selecting the right combination of these pure-tone delivery models for the F&A processes is important not only because it can have significant risk implications, but also because failing to take advantage of alternative locations for service delivery can significantly reduce the potential cost savings. Offshore Outsource. 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 often is not Should I move processes offshore? but Which processes can I not move offshore? The offshore market has now matured to the point that it represents a safe choice for the majority of F&A process areas. Vendor capabilities have advanced considerably in recent years; in fact, the line between the originally Western hemisphere centric players that were once the market mainstay and their offshore rivals has blurred, with both groups having built a global portfolio of delivery centers to drive down cost, better serve their global clients, and hedge their own operational risk. Exhibit 3 Sourcing Framework for F&A Processes Increasing Outsourceability Is it linked to strategic planning or critical to competitive advantage? Does it create significant business risk? Does it require a large number of controls? Can fail-safe mechanisms be built? Can these controls be preserved by an external provider? P E R F O R M I - H O U S E Corporate Controller Business Finance Treasury Operations Financial Planning and Analysis Accounts Payable Payroll Is the impact on end-customers critical? OUTSOURCIG (for Scale and Expertise) Travel and Accounts Bank F&A IT Expense Receivable Reconciliation Support General Accounting Fixed Asset Accounting Strategic/Key Account Collections Source: Booz Allen Hamilton
4 Exhibit 4 Delivery Models for the F&A Value Chain Key F&A Processes Accounts Payable Payroll Travel and Expense Accounts Receivable General Accounting Fixed Asset Accounting F&A IT Support oncritical Account Collections Critical (Strategic) Account Collections Financial Planning and Analysis Corporate Controller Treasury Operations External Audit Tax Offshore Outsource F&A Models Onshore/earshore Outsource Offshore Captive Retain In-House State of the Market Additional Possible Delivery Model Source: Booz Allen Hamilton For these reasons, we recommend that companies consider offshoring or, more accurately, global sourcing as the first port of call when looking to optimize their Finance function. When determining which activities are appropriate for offshoring, companies should focus on transactional processes where geographical location and proximity are relatively unimportant, and where same-day requirements and regulatory constraints do not play a major role. Companies should also bundle multiple processes wherever possible in order to obtain advantaged vendor pricing. Onshore and earshore Outsource. The traditional approach until recently has been to outsource onshore, but internal consolidation and process improvements have made the economic benefits from this model marginal. Companies are instead considering a nearshore option under which a BPO provider delivers services from an adjacent country in order to take advantage of lower labor rates while minimizing physical distance from core operations (Canada, for example, in the case of the United States). Business criticality is often the key consideration for selecting these processes and for keeping them in close proximity to the business. However, the considerable cost advantages and market maturity of offshoring are starting to lead companies to look first to offshore rather than to onshore or nearshore BPO. Offshore Captive. The captive model, in which a company establishes its own internal offshore operation, has been in existence for years. However, with the compelling value proposition offered by third-party offshoring, we believe it to be a viable option for only selected companies with large internal scale, extensive in-house expertise, and a commitment to make the significant capital investment required and to assume the risks involved. Alternatively, the company must either own an existing offshore operation that can be leveraged to create a captive or be able extend an existing captive into new process areas. Increasingly, companies are finding that these factors are economically prohibitive and that captives make sense only for processes that involve proprietary knowledge, such as engineering or R&D. 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 typi-
5 cally implement two or three 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 story. Increasingly, companies are realizing that outsourcers not only can deliver significant cost reductions, but can also 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 something 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 for 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 an explicitly defined, internally retained organization designed to administer the outsourcing arrangement and act as the intermediary with the rest of the business. The key point is that companies cannot shut their eyes after the processes are outsourced. In some cases, the complexity introduced by having multiple sources across a single process can require even more structured governance and coordination than when the process was in-house. 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 both the demand and the need for these alternative models is growing. The quality and variety of services available will continue to improve as technology develops and experience grows; 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, specially in BPO. As the F&A BPO market continues to evolve, it will be difficult for potential buyers to navigate. In addition, the constraints that surround the F&A function, such as 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.
BOOZ & COMPA WORLDWIDE OFFICES Asia Europe Middle East South America Beijing Hong Kong Mumbai Seoul Shanghai Taipei Tokyo Australia, ew Zealand, and Southeast Asia Adelaide Auckland Bangkok Brisbane Canberra Jakarta Kuala Lumpur Melbourne Sydney Amsterdam Berlin Copenhagen Dublin Düsseldorf Frankfurt Helsinki London Madrid Milan Moscow Munich Oslo Paris Rome Stockholm Stuttgart Vienna Warsaw Zurich Abu Dhabi Beirut Cairo Dubai Riyadh orth America Atlanta Chicago Cleveland Dallas Detroit Florham Park Houston Los Angeles McLean Mexico City ew ork City Parsippany San Francisco Buenos Aires Rio de Janeiro Santiago São Paulo The most recent list of our office addresses and telephone numbers can be found on our Web site, www.booz.com. 07/08 Printed in USA 2007 Booz & Company Inc.