Shared services, OUTSOURCING, TECHNOLOGY as options to F&A transformation by Luca Segantini, The Shared Services and Business Process Outsourcing Association (SBPOA)

by Luca Segantini


Business transformation is one of the buzzwords in today’s corporations, and is intended as the road to improve process efficiency, achieve better service quality and reduce costs – not always prioritised in this order. The main tools to transform finance & accounting (F&A) processes are shared services, outsourcing, and a smart use of available technology, or a mix of all three.

SHARED SERVICES

Finance shared services are one of the cornerstones of today's strategies for the redesign of finance organisations. 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%. An efficient F&A shared services centre (FSSC) can achieve the following:

• optimisation of FSSC operations (policies, procedures, systems and tools) in the area of finance and 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 and distribution);
• integration with external parties (vendors, customers, banks) and systems; and
• monitoring and management of internal FSSC activities (service level agreements, pricing/ charging, key performance indicators).

The majority of organisations surveyed by the SBPOA in 2004 (see Exhibit 1) 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, LAN/desktop 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 centralisation 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:

• price;
• quality; and
• timeliness.

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 utilising 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 (see Exhibit 2).

F&A OUTSOURCING

When corporations have managed to succeed in establishing a competitive finance shared services centre, 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 (see Exhibit 3).

Most commonly outsourced F&A processes	Exhibit 3
What percentage of companies outsource each function or plan to do so in the next two years?
Payroll, billing or A/P	63%
IT/systems support	56%
Tax services	56%
Benefits and claims administration	52%
Legal services related to finance	43%
Advisory compliance services	37%
Accounting services (non basic)	29%
Risk management	26%
Internal audit	26%
Human resource/hiring	24%
Asset management	19%
Source: PwC survey, 2005

The global market for outsourced finance and accounting functions will expand at a 9.6% compounded annual growth rate and top US$47.6bn 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% per year; of tax management, 9.3%; and general accounting, 8.3%.
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 five questions before starting to explore how to transform F&A processes.

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 (US$38.4bn) 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 realised that they could not 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.

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.

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.

How should the finance organisation 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.

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 organisations 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 organisations may not be capitalising 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 organisation 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.

F&A outsourcing
Businesses continue to turn key finance processes over to third-party providers, yet fewer than half of organisations 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 US and Europe (see Exhibit 4).

Forty-seven percent of respondents reported that their company has saved either a moderate amount (44%) or a great deal (3%) by outsourcing finance. Nine percent reported that they are breaking even, and 4% 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 return on investment (ROI) on finance outsourcing deals remains murky. Only 33% of respondents from organisations based in the US 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.

CONCLUSIONS

You don’t need a crystal ball. 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 organisations which are implementing them. But this may be missing the point altogether. Many F&A shared services and outsourcing activities actually underperform. So what can we do to make sure that the future remains bright? Here are three ideas:

• 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 organisation or outsourced.
• 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?
• Focus on people not the technology. Assist the breaking down of cultural, organisation and political barriers that inevitably stand in the way of running shared services as a business.

	ABOUT THE SHARED SERVICES AND BUSINESS PROCESS OUTSOURCING ASSOCIATION – SBPOA Who we are The SBPOA is the leading, independent, global body for shared services and business process outsourcing (BPO), interacting with more than 250,000 professionals each year, including services providers and practitioners around the world. As a membership organisation, we provide online and offline networking, best practices and independent commentary on the evolution of shared services and BPO. We do this in the following ways: Membership for everyone with a professional interest in shared services and BPO Networking for executives and senior management engaged in shared services and BPO activities to share knowledge and experience Directories of members and service providers Publishing of the premier online resource for the global shared services and BPO community Bulletins on shared services and BPO, the leading independent newsletter Content-driven, interactive events, from road shows to networking conference and webinars Education and training through the SBPOA University Independent research on hot issues, trends, customer satisfaction surveys for shared services and BPO operators, and market feasibility studies HRO Europe the only pan-European magazine covering the information gap between HR business leaders and HR outsourcing providers Representing the shared services and BPO community at international and national levels

Luca Segantini is Managing Director of The Shared
Services and Business Process Outsourcing Association
(SBPOA) in Brussels. For further information, please
telephone +32 (2) 777 9688 o
e-mail: luca@sharedxpertise.org

Reprinted with permission from SBPOA