The use of finance and accounting outsourcing (FAO) once again is increasing following a slowdown in 2011. That said, managing FAO relationships in 2012 and 2013 is dramatically different than managing similar arrangements in 2009, 2005 or 2002.
Earlier this year, Everest Group, a firm that closely tracks FAO activity, projected that total FAO spending, which was roughly $32 billion in 2011, would grow by 10 percent to 15 percent this year. (When related forms of outsourcing, such as “hybrid” outsourcing/captive shared services agreements, are factored into the projections, the total dollar amount of this activity soars well north of $100 billion.)
Everest also reports that a total of $7.3 billion in FAO contracts are up for renewal during the next three years. That’s big news for finance and accounting executives and managers, especially those who will consider entering into new agreements as the very nature of these arrangements transform.
“More recently,” reports David Borowski in a May Business Finance post, “the promise of outsourcing as an extension of the enterprise is beginning to become a reality for many mature buyers that embrace the nature of global business services.” (Borowski also posted a useful “2012 Outsourcing Checklist.”)
Until recently, however, stiff arms typically prevailed, preventing the ideal state of the extended enterprise from becoming a reality. Clients often failed to assign a sufficient number of resources to effectively manage this extended-enterprise relationship. For their part, many FAO vendors preferred to keep clients out of the kitchen, so to speak, relying instead on rigid service level agreements (SLAs) to “govern” the relationship.
Today, though, the enterprise appears to be genuinely extending, thanks to more innovative uses of outsourcing. Buyers have become much more educated about what makes FAO work (as well as what pitfalls to avoid), and providers appear much more willing to work closely with clients to develop effective and flexible relationships. SLAs remain necessarily crucial, but hands-on, human governance may be even more valuable.
This represents one of numerous changes prospective FAO buyers ought to consider if they have not selected and managed FAO providers in recent years.
Other “then & now” differences include:
Then: FAO’s value primarily hinged on the cost-savings labor arbitrage delivered.
Now: FAO’s value hinges on cost-savings, quality and compliance benefits, and strategic enablement.
Alexander Vocelka, a partner in IBM Global Business Services who oversees global shared services, describes an FAO “benefit triangle” that consists of three sources of value: cost-reduction, quality and compliance, and strategic gains. In terms of strategic benefits, consider a U.S.-based retailer that wants to enter an Asian market for the first time. “How can they do that while replicating their old finance functions there?” Vocelka asks, explaining that doing so is too expensive and time-consuming. Instead, the retailer builds an “operative platform” –a “globally integrated business services” (GIBS) platform, in IBM parlance – or hires an FAO partner to provide that finance platform so that they can enter Singapore. “And,” Vocelka adds, “they can use it a bit like an air craft carrier, as a strategic platform to grow in many, many countries.”
Then: Managing the FAO relationship represented a part-time job
Now: Service management is a quickly maturing into a genuine discipline and profession.
In the past, a finance executive or managers typically took on responsibility for managing an FAO partnership as if were an ongoing project; it was a part-time gig to be shoehorned into all of this individual’s other responsibilities. Today, that’s rarely the case, says Randle Havens, founder of FAO analysis firm aranddis. “There are often full-time gatekeepers for both parties,” Havens observes. “You’re even seeing specific job descriptions [for sourcing or service oversight] now. …More people on both sides of the outsourcing relationship recognize that they need a true partnership, and one that is carefully managed, in order to generate the innovation [from the relationship] that they want.”
Frank D’Andrea, for example, is “director, outsourcing services” for Ontario-based energy transmission and distribution company Hydro One, where he formerly served as the company’s director, corporate accounting and reporting.
Then: Managing outsourcing relationships was a stressful, rearview mirror exercise.
Now: Outsourcing relationships are less stressful thanks to real-time measures.
In the past, a client-side gatekeeper would leaf through a month’s worth of data to spot if and when a component of the SLA was violated the previous month. If an issue arose, it was often identified weeks after it occurred and would require tense exchanges, even several levels to get resolved. Not that all FAO arrangements operate flawlessly today, but the process of monitoring and measuring performance has grown much more objective and powerful thanks to new analytics and monitoring software.
“New tools are being applied … to ensure that the performance that has been agreed to in those service level agreements is adhered to, stringently,” reports Vocelka. “While that [monitoring] creates more work on both sides of the partnerships, it also relaxes the partnership because performance evaluation has become more objective.”
There are many more changes that unseasoned FAO buyers ought to bone up on before shopping for a service provider. Fortunately, there are plenty of outsourcing veterans to call upon for insights. The typical outsourcing relationship manager Vocelka talks to on the buyer side possesses “an average of eight to 10 years of shared services and BPO [business process outsourcing] experience,” he adds. “They know all the terms and conditions they need to consider. They know the service level agreement.”