Finance, Outsourcing, F&A, FAO, Shared Services

Our past, present and future - Finance the smart way?

The pace and degree of change in the business landscape over the past few years has been nothing short of staggering. Guy Kirkwood explains how in a new world driven by increased competition, compliance issues and increasingly rapid and complex changes, maintaining the status quo is not an option if a business is to survive.

Business language is now peppered with concepts that were unheard of and unexplored only ten to 15 years ago – shared services, offshoring, business process outsourcing (BPO), re-engineering, business process redesign, six sigma and so on.

These things are neither fads nor gimmicks, but concrete ways companies can make themselves more efficient and cost effective in the race for market leadership. In fact, today's business leaders have realised that their people, processes and technology have to be transformed in order to deliver the service and value that customers and clients now demand.

WHAT TRENDS ARE WE SEEING TODAY?

Industry is moving towards globally integrated shared services with over 80% of large companies having adopted shared services. This integration is across functions, geographies and organisational units.

The provider market has significantly matured too, offering greater options: in the early 1990s the main focus was on internal transactional shared services and IT outsourcing.

This moved in the early noughties to a 'lift and shift' business process outsourcing / offshoring model and global multi-functional shared services. Now, we are seeing transformational outsourcing and knowledge services and this trend is likely to continue into the future.

This emerging market is mostly positive for buyers but not always so, for example: three to five years ago the BPO market was characterised by Andrew Kris, the chairman of the Shared Service and BPO Association (now SharedXpertise) as 'an immature market with immature suppliers selling to immature clients'. Most service providers were looking to acquire processing capability and there was little or no ongoing relationship management capability in clients.

Today, by contrast, there is increased service provider choice, service providers are trying to fill existing capacity and facilities and we see the development of sophisticated governance and relationship management organisations.

In a study conducted by EquaTerra in 2006, to assess the expanding scope of buyers, the firm found that: 35% of buyers were planning to expand into new process areas, 30% were planning to expand into new geographies or business units and 22% were planning to expand in the same process areas.

BPO VS INTERNAL SHARED SERVICES

The promise of outsourcing is enticing with guaranteed operational cost savings through economies of scale and scope and access to low-cost global labour. In most cases the savings are between 20% and 40% over a seven- to ten-year basis.

Service providers can be more successful than internal efforts, providing a better alignment between work complexity and nature and pay. There is also a lower cost structure – the benefits burden is 5% to 10% less and there is more standardisation and documented procedures allowing the ability to scale faster.

But is the promise fulfilled? In the same study, the advisors found that BPO satisfaction levels among buyers ran at 41%. This is to say 59% were only 'moderately' satisfied or not satisfied at all. Why should this be?

I think we can ignore the myths: we will give away all of our savings potential to the provider, internal process transformation is less risky than outsourcing, we will lose control and labour arbitrage is the only benefit to offshore-outsourcing. These have been proven to be false in almost every outsourced transaction.

TO OUTSOURCE OR NOT TO OUTSOURCE?

But there are some real reasons not to outsource. Firstly and most importantly, if executive sponsorship is not there, don't even try, the pain is just not worth it. Secondly, you should never outsource what you don't really, really understand. Added to these reasons, transition costs are often large, transformation and innovation don't just happen, market maturity for certain processes and geographies is still low. And always remember that there is no such thing as 'no noise' during transition.

For companies thinking about transforming their businesses either in one function, such as finance, or across many functions, a successful process will include the following characteristics: change and transition management, economic analysis, sourcing and contracting (if the decision is to outsource versus internal) solution evaluation and relationship management and governance.

GOVERNANCE

Governance, whether you decide that shared services or outsourcing is the preferred route, is second only to executive sponsorship when it comes to ensuring a successful transformation. Governance means getting the right internal team that shadows the external consultants, advisors or service provider team.

Governance should begin at the beginning, not as a bolt-on after-thought. In short, get the governance people and structure right and the investment in time, money and people will almost certainly not be wasted.

As many multi-national companies will tell you, the journey, as well as the benefits to the business, can be rewarding, adding shareholder value, decreasing complexity and increasing productivity. Now there is a story to tell the CEO.
 
Guy Kirkwood, Market Developer and Advisor,
First published 16 May 2007

Source: The Finance Director