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Accenture

Organizations that adopt a more liberal view of outsourcing can gain tremendousvalue and intangible benefits that extend across the enterprise.

As organizations increasingly turn their attention to growth-oriented agendas, a number are considering outsourcing as a way to help them transform their operations and to bring scalable expertise.

However, it is not the same approach to outsourcing that organizations have used traditionally to shed noncore activities and reduce operating costs. Instead, some organizations have used a new approach that provides many advantages over standard transaction-based outsourcing. These organizations have completed ambitious transformational programs in which they outsourced their finance and accounting function, in some cases as part of an even larger multiprocess and IT outsourcing arrangement. In the process, they have realized a number of very significant businesswide benefits which, while difficult to quantify precisely on their own, have liberated these organizations to focus on their most critical and strategic priorities.

It’s a fact that outsourcing has helped many organizations cut costs, especially in finance and accounting. Accounts payable remains one of the most widely outsourced functions and cost cutting is still the most commonly cited reason for organizations to outsource finance and accounting activities.

However, while finance and accounting outsourcing has been successful in reducing operating costs, organizations have only just scratched the surface of the benefits that can be realized. A new transformational approach to outsourcing demonstrates how a deeper and more substantive organization-provider relationship can lead to high performance and generate a wide range of intangible benefits – well above and beyond simple cost cutting.

Intangible Benefits

One such intangible benefit is a greater ability to execute more effectively the organization’s growth strategy – whether it’s based on organic expansion, a new business or product launch, or a merger or acquisition.

Finance and accounting is at the heart of any business, and growth initiatives must be tightly linked to this function in order to succeed. By outsourcing finance and accounting to a qualified third party, organizations quickly gain access to a solid systems platform and process model that more easily accommodates both new acquisitions and ventures into new channels or markets. For example, a U.K.-based logistics company was able to successfully incorporate the finance functions of numerous acquisitions into a shared services center that was created as part of its finance and accounting outsourcing program.

Another benefit is the ability to gain more comprehensive, standardized, actionable management information for running the business. In today’s environment, corporate transparency and governance is critical. Finance and accounting outsourcing has not only enabled organizations to feel confident in their financial data – thus helping managers make better decisions – it has also served as the basis for organizations to accurately gauge their overall business performance and the performance of their workforce. Employees are also better able to see the connection between their role and how the organization performs, which can be a powerful motivator. Further, with dependable performance data, organizations can more effectively pinpoint and correct problem areas before they reach crisis level.

Additional intangible benefits include better relationships both with vendors and customers and improved compliance with relevant governmental regulations and tax strategies. Organizations that have outsourced their finance and accounting functions have found that the enhanced capabilities they acquire enable them to forge tighter electronic links with their customers and suppliers – resulting in much less manual intervention, greater accuracy in transactions and fewer handoffs of work. On the compliance side, an outsourced finance and accounting environment can provide the process rigor and discipline required by such regulations as Sarbanes-Oxley, thus freeing up senior executives and finance and accounting personnel to dedicate their energies to more strategic pursuits.

There are also direct financial benefits of these operational improvements, including having more working capital and improved cash flow due to a stronger capacity for collecting payments from customers; reducing spending on compliance-related initiatives; and the ability to fully capitalize on potential tax benefits. For example, a large telecommunications organization, after outsourcing its finance and accounting, was able to collect $40 million in outstanding sales within the first year, reduce its days sales outstanding by nearly 50 percent and cut past due accounts almost in half.

An often-overlooked yet significant benefit of finance and accounting outsourcing is the creation of a culture that values innovation and is aligned with the organization’s overall business strategy and mission. An outsourcing arrangement that is focused on business outcomes, rather than just lowering operating costs, can dramatically change the way an organization goes about its business. In some cases this results from the implementation of a simple tool, such as an employee portal that enables people in distant locations to interact with one another inexpensively and in real time, thus creating a team dynamic and corporate culture that did not exist before. In other cases, exposure to the outsourcing provider’s best-practice finance and accounting processes inspires employees to think creatively about how to leverage the new capabilities to improve other areas of the business. In still other cases, organizational change stems from an explicit agreement in the contract for the outsourcing partner to share the risk and reward of achieving the planned business case. Outsourcing partners with a “consulting legacy” are well-placed to bring broad-based innovation capabilities and, when innovation is linked to the long-term finance and accounting service arrangement, high-value, risk-sharing change programs can be developed.

Consistent with these experiences are the results of a recent Accenture survey[1] that gathered insights from organizations that have outsourced. Many of these organizations realized increased access to functional expertise, including:

• Access to the latest technology (named by 62 percent as a benefit of their outsourcing arrangement);
• Better performance measurement and management (51 percent);
• Improved quality management and control (48 percent);
• Improved analytics for decision making (44 percent);
• Culture of continual improvement/innovation (42 percent);
• Better change management (39 percent);
• Improved market information used to spot market trends (37 percent); and
• More strategic view of the business, including ROI (34 percent).

Key Factors to Generating Intangible Value

How have organizations been able to achieve far more than cost savings through their outsourcing relationships? They have taken a number of critical steps that have enabled them to generate significant intangible value.

Embracing a New Perspective on Outsourcing
One of the most basic but critically important steps is for executives to move past the traditional view of outsourcing as an arrangement in which an organization “gets rid of” unwanted activities. Instead, they must recognize outsourcing to be a collaborative relationship in which the organization actually gains significant capabilities, expertise and assets that would be difficult (if not impossible) to build on their own cost-effectively and with an acceptable level of risk. Such a shift in mind-set is, in fact, occurring among many executives whose organizations have been involved in outsourcing relationships. In the Accenture survey mentioned earlier, 92 percent of executives whose organizations are currently in an outsourcing relationship said they gained process expertise and capabilities in the outsourced finance function — as opposed to simply reducing costs.

Using Outsourcing as a Vehicle to Adopt Best Practices
Few organizations are expert in operating back-office finance functions, nor should they be. However, a finance and accounting outsourcing provider’s core business is providing finance and accounting services; therefore, it must provide best-practice finance operations if it is to gain and retain clients.

Integrating Process Outsourcing With Enabling Technology
In many ways, operational excellence begins with information technology. Multiple software applications and mixed technology platforms often impede business performance, making it difficult for organizations to perform basic activities, such as reconciling financial figures among different business units or hampering more ambitious efforts, such as integrating a newly acquired business entity.

By standardizing all of their finance and accounting activities onto a common, integrated, enterprise resource planning system, organizations remove a major obstacle to improving business performance. They can also integrate acquisitions smoothly into an outsourced shared services center with no interruption of service.

Another potential payoff is being able to adopt a common financial language and reporting structure across business units.

At the previously mentioned U.K. logistics company, the implementation of a new, integrated finance system and processes enabled the organization to streamline and coordinate financial information flows. This, in turn, made it easier to track customer profitability and credit issues and to gain a better understanding of its cost base.

By embedding change programs into their outsourcing arrangements and creating the right outsourcing relationship, organizations can share the risk of delivery while contracting for “business outcomes.”

Using Appropriate Metrics

Traditional outsourcing arrangements that are purely focused on cost reduction tend to fall far short of what they could ultimately generate. To achieve higher-value benefits from outsourcing, it’s critical for the organization and outsourcing provider to agree on appropriate and relevant metrics that are outcome-based. For instance, a global travel company used its outsourcing relationship to create a new organizational culture that was more consistent with its business goals. One of the keys to doing so was the creation of innovative metrics that rewarded its outsourcing provider on “cultural fit.” In addition, the company hoped to infuse greater innovation into its own organization and developed a metric to gauge the outsourcing provider’s performance in bringing new ideas to the business. In fact, innovation was and still is such a priority that it is one of four metrics on which its outsourcer’s compensation depends.

Ensuring Strong Governance

The right governance structure is essential throughout the life cycle of an outsourcing arrangement to ensure that the desired goals are achieved. Good governance entails involving the right people, at the right level of seniority, at the right time. For example, while the CFO and other senior executives are critical participants at the beginning of the arrangement, their involvement may decrease over the long term. Importantly, the organizational structures and events related to governance are not intended to replace the operational management structures that help ensure the smooth day-to-day functioning of the outsourced processes. Rather, the governance structure is there to manage the interface between the organization and service provider to keep the focus on the overall business objectives of the arrangement.

Conclusion

In many organizations, the back office – especially finance and accounting – is viewed as an impediment to growth and change. Some of the technology, resource and expertise constraints with which many finance and accounting functions are saddled do limit an organization’s ability to effectively execute bold new strategies to help it become and remain a market leader. The challenge is to transform the finance and accounting function from a constraint into a platform for growth and innovation and a driver for continually improving business performance.

Today’s dynamic business environment absolutely requires creative thinking and flexibility, especially in finance and accounting. That’s why the traditional approach to outsourcing – unloading noncore accounting processes to a third-party provider who can do them cheaper – sells an organization short. Yes, a cost-focused outsourcing arrangement may result in lower-cost finance and accounting operations. But because it is predicated on predictability and repeatability, such an arrangement does not generally include innovation, growth and alignment with the strategic direction of the organization.

Organizations that are open to new models for outsourcing can be rewarded handsomely. For example, when the previously discussed travel company entered into an outsourcing arrangement, it was incurring significant losses. Sixteen months later, it had turned around and was generating a considerable profit that has continued to grow year after year. While some of that change is attributable to cost-saving initiatives, much of it can be traced back to the fact that the organization is doing business in a completely different way. These results were only achievable because of the foresight of the company’s management team.

Sometimes, being smarter often starts with thinking bigger.

Endnote

1. “Driving High Performance Through Outsourcing: Achieving Process Excellence,” Accenture, 2005.