By Luca Segantini
Originally published on Finance Director Europe, 2005
Transforming finance in global corporations is usually accomplished by a mixture of three options: setting up an internal shared services center, outsourcing parts of the finance processes and functions, and an efficient use of technology.
Finance shared services are one of the cornerstones of today’s strategies for the redesign of finance organizations. The concept of shared services has already showed its potential when sharing IT, payroll or purchasing services. Early adopters report benefits of up to 30 percent. An efficient F&A shared services center (FSSC) can achieve the following:
- Optimization of FSSC operations (policies, procedures, systems & tools) in the area of finance & control – purchase-to-pay, order-to-cash, accounting-to-reporting, capital expenditure, travel and expenses, reporting, planning and budgeting;
- Integration with other business functions and systems (procurement, materials management, production, sales & distribution);
- Integration with external parties (vendors, customers, banks) and systems;
- Monitoring and management of internal FSSC activities (service level agreements, pricingcharging, key performance indicators).
The majority of organizations surveyed by the SBPOA in 2004 indicated core financial processes (e.g., accounts payable, accounts receivable, fixed assets, payroll, general accounting) as those most commonly included within their initial scope. These financial processes were followed by human resources activities such as benefits administration, and information technology-related functions, including application development and maintenance, LANdesktop maintenance, and help desk. Less commonly included (less than 20%) as part of their initial implementation scope, were those business functions that are more complex and business specific, such as marketing and communications, regulatory or statutory, and legal. These areas are less transaction driven, focus on the external market, or are of a compliance nature; therefore, by themselves, they do not offer the economies of scale generally required to justify the business decision for moving to shared services at the outset.
It must be said that shared services are much more than simple centralization exercises, and that monitoring their success is somewhat complicated: our opinion at the Shared Services and Business Process Outsourcing Association (SBPOA), supported by a survey conducted in 2004 in association with Accenture’s Finance Performance Management group, is to consider a SSC successful if it delivers services that are competitive with third party alternatives in terms of:
The internal customer, defined as the user of financial services provided by the SSC, is the final judge of the SSC’s success, and by all means a choice between utilizing the SSC services or hiring a third party provider should be allowed. The most important factor for succeeding with F&A shared services is having top management on your side.
When corporations have managed to succeed in establishing a competitive finance shared services center, they start looking for ways to improve quality and reduce costs even further. At that stage, outsourcing some finance processes looks like a rational choice.
The global market for outsourced finance and accounting functions will expand at a 9.6 percent compounded annual growth rate and top $47.6 billion in 2008, according to a 2004 report from technology consultancy IDC.
IDC doesn’t expect that finance and accounting will become fully outsourced in the foreseeable future. Over the next five years, however, it foresees that outsourcing of transaction management will grow at 9.8 percent per year; of tax management, 9.3 percent; and general accounting, 8.3 percent.
Accounts payable remains the most widely outsourced function in this area, noted IDC, and cost-cutting is still the most widely cited reason that companies outsource finance and accounting functions. But the need to solve strategic business issues, added the consultancy, is becoming an ever-larger driver of outsourcing spending worldwide.
Another study, commissioned by Accenture and conducted in 2005 by the Economist, dispels some commonly held beliefs among finance directors that outsourcing of finance functions decreases control over governance and compliance.
The study of more than 200 finance officers and directors found that in just over half of those surveyed concerns over companies’ ability to maintain governance and compliance had prevented them from outsourcing finance functions. But of those companies that had made the leap of faith, 43% reported that outsourcing had improved governance and compliance, with an additional 44% stating that it had not had an adverse impact on existing processes.
But how can outsourcing a finance function to a third party enhance governance and compliance? By way of explanation, 73% of those companies that had outsourced said it helped define business processes more clearly, leading to greater clarity and accuracy of financial figures. Additionally, more than 50% of companies said outsourcing providers were better placed to deal with changes to accounting and tax codes and provided greater transparency of information and business processes.
An F&A transformation checklist
At the moment, more than 50% of global corporations do not use outsourcing to transform their finance function. Moreover, not all finance functions lend themselves to outsourcing, so ask yourself the following 5 questions before starting to explore how to transform F&A processes.
1) What is off-limits because it is core to the business?
This is a complex question.
Some companies see almost nothing as off-limits. Bayer AG, the German drug giant, has even outsourced about 30% of an area that could make or break the company: its long-term research-and-development efforts. Throughout the pharmaceutical industry, some 20% of drug development is now outsourced, and research firm Frost & Sullivan predicts that by 2004 nearly 42% of all pharmaceutical drug development expenditures ($38.4 billion) will be spent on outsourcing to alliance partners. Still, companies can make mistakes if they evaluate corporate capabilities individually and don’t consider how much one process or department affects another. As Wall Street firms evaluated IT outsourcing, they saw that they would get clear efficiencies, but they also realized that they couldn’t view those efficiencies in isolation, and that the people who design their complex financial instruments would lose some agility. Because these firms depend so much on their ability to quickly design and bring financial products to market, they correctly decided to pass up the efficiencies that would have come from outsourcing. As far as F&A processes are concerned, there is consensus that budgeting and forecasting should be maintained in-house alongside treasury and cash management. Regulatory measures such as Sarbanes-Oxley, placing additional pressure to implement financial controls, make most companies even less likely to outsource vital finance functions.
2) Is cost reduction the primary factor?
Of course lowering costs and maximising efficiencies are paramount, but finance executives are increasingly reporting that the ability to focus on their core business, the augmented business productivity on the part of the CFO and the finance team, and access to best of breed talent and technology are important parameters and should influence any transformation decision.
3) Is finance taking full advantage of developments in technology to improve its service to the business community?
There are a number of tools that could dramatically affect the efficiency of F&A processes, such as invoice management, order-to-cash, role-based self-service portals and more. By incorporating leading technologies, increased speed, flexibility and cost reduction across the connected organisation can be achieved.
4) How should the finance organization be supporting a commitment to business analytics?
As a finance executive engaged in F&A transformation, you should be on the frontlines every day, to explain the business model, the strategy you are following, to show the value-based management and the evaluating of scenarios.
5) How can finance leaders contribute to F&A transformation?
The more important issue to consider is that leadership is not about what you personally accomplish; it’s about what the team accomplishes. That’s the collective dimension. It’s about bringing together talented people and building them into a team that’s more than the sum of its parts. That’s partly about talent. But large organizations have a range of levels of talent, so leadership is also about bringing out the best in everyone. No matter the level, everyone is encouraged to believe they can make a difference and given opportunities to contribute meaningfully.
Is F&A transformation effective?
F&A Shared services
For all the interest in shared services, there is still little available benchmark information that can be used to tell what we all are doing and, more specifically, how well we are doing it. This baseline information is an invaluable tool, necessary to compare practices from year to year, to understand what those who have been successful have done to ensure their success, and to help those just starting out on their shared services journey to know what practices to avoid and which ones to pursue rigorously. The SBPOA shared services survey conducted in 2004 discovered that shared services is not quite living up to initial expectations and that some organizations may not be capitalizing on key leading practices that should yield significant additional benefit. We believe these “surprises” are most important to our insight regarding the state of shared services. Perhaps the most valuable finding was the response to the last question of the survey: “Would you implement a shared services model for your organization if you had to do it all over again?”. An astounding 98% of the respondents said “yes”. That finding alone confirmed our greatest belief about shared services – that it is a topic well worth our continued interest and study.
Businesses continue to turn key finance processes over to third-party providers, yet fewer than half of organizations that have outsourced all or part of their finance function consider the strategy cost-effective, according to a PricewaterhouseCoopers survey of CFOs and managing directors of multinational companies headquartered in the United States and Europe.
Forty-seven percent of respondents reported that their company has saved either a moderate amount (44 percent) or a great deal (3 percent) by outsourcing finance. Nine percent reported that they are breaking even, and 4 percent said that they are actually losing money but achieving other benefits. Still, nearly one-third of respondents said they see limited or very little benefit from outsourcing.
And for many companies, estimating ROI on finance outsourcing deals remains murky. Only 33 percent of respondents from organizations based in the United States said their company correctly estimates its ROI from outsourcing most of the time. Fifty-three percent said it does so either some of the time or rarely.
You don’t need a crystal ball. Finance and accounting (F&A) transformation initiatives are set to generate substantial future revenue streams for consulting and technology firms, on top of securing significant cost savings and quality improvements for organizations which are implementing them.
But this may be missing the point altogether. Many F&A shared services and outsourcing activities actually under perform. So what can we do to make sure that the future remains bright? Here are three ideas:
1. Be rigorous in defining and talking about shared services – always stress it is not simply about consolidation, it must be run as a business whether it is internal to the organization or outsourced.
2. Encourage clients to step out of the old corporate function mode and ask – if this was a stand alone business rather than a transformation project, what would you do differently – why don’t you do it?
3. Focus on people not the technology. Assist the breaking down of cultural, organization and political barriers that inevitably stand in the way of running shared services as a business.