Consider This Scenario: Your finance organization has streamlined its processes, standardized as many systems as possible, and begun the consolidation of groups within the organization to drive greater efficiencies.
Unexpectedly, one division decides that it wants to maintain its own collections process, while another doesn't want to let go of its legacy system. Meanwhile, the finance team has received multiple reminders from the CEO indicating that costs as a percentage of revenue continue to be higher than those of your company's largest competitor.
It's becoming clear that there are only two approaches that can bring about the broad structural change necessary: shared services and outsourcing. But which approach works better, and what should drive that decision?
Both options appear to have been successfully pursued by dozens of companies, but the magnitude of the investment and the knowledge that success can be derailed by any number of factors — from the upfront strategy through the execution — give many of your colleagues pause.
The good news is that the companies that have gone before have learned lessons that other organizations, whether new to outsourcing and shared services or looking to expand their programs, can apply. The following four steps can help finance executives to ask the right questions and find the necessary answers.
When companies are considering whether to outsource or implement shared services, they often offer a rationale along the lines of “Because it's cheaper to do it from India” or “Because the competition is doing it.” But they need to fully understand why the approach makes sense for them and articulate the company's specific objectives. How important are cost savings, and how quickly do they need to hit the bottom line? How much weight does the company give to process and technology improvements, improvements in service quality, and the ability to managing demand more effectively?
The degree of emphasis a company places on each of these will help to determine a trajectory, or at least narrow down the list of options. For example, if quick savings are critical, setting up internal shared services will likely not be the best strategy, as the payback period for shared services typically exceeds that for outsourcing by a considerable margin.
On the other hand, if process standardization and stabilization are key, a shared services approach might be more appropriate as it provides greater control and a bigger buffer to absorb the various components of the transformation — albeit at a higher cost and over a longer time period.
Getting grounded in exactly what is needed and at what time provides the crucial context to make the decisions on the best delivery model.
A number of internal factors can have a powerful impact on the selection of the future finance delivery model. Key among these is the organization's inherent complexity. Shared services and outsourcing efforts typically trigger a number of complicated questions, particularly around standardization versus customization. The majority of the benefits rest on standardization and consolidation — yet the business typically doesn't want to let go of its own resources or its own way of doing work, thus undermining the business case.
In a few cases, such customized processes are legitimate — for instance, where process differences are driven by local regulations. In most cases, however, they are driven by reluctance to let go of familiar ways of working, and these should not be supported. Senior management must clearly and preemptively articulate the organization's decisions about how to treat issues like dedicated staff and systems.
It is equally important to take a hard look at the finance organization's capabilities and environment. How standardized and efficient are processes and systems? How reliable are internal service-management capabilities, such as service-level agreements and management reporting? How much change can realistically be absorbed in the time frame that has been set for the transformation? What internal capabilities and experience exist to conduct the transition and, subsequently, manage a shared services or outsourced model? Is there sufficient scale to justify the investment costs of a shared service?
Being honest about current performance and about what finance can realistically do can help to identify a pragmatic set of options for outsourcing, improving processes in-house, or shared services.
This chart [1] depicts a typical path followed by many companies as they optimize their finance function.
Finally, the organizational culture can have significant implications for the end-game solution. We've seen situations in which enthused project sponsors tried to drive an outsourcing recommendation that, while presenting a better business case than an internal shared service, would not fly given their company's cultural preference to keep all jobs in-house. It's important to recognize these factors and their implications sooner rather than later, as it can save months of effort that might otherwise be wasted.
After evaluating the company's appetite for outsourcing and shared services and its ability to implement them, consider the implementation options across two dimensions: the sourcing model (insourced vs. outsourced) and the geographical location (onshore/nearshore/offshore).
Sometimes it's best to start simple. General Electric Co. kept its process internal, or captive, but offshore, because it had an existing operation in India that it could leverage and scale enough to make economically viable. Some companies with little experience in outsourcing and shared services choose to ramp up by launching a pilot program in specific process areas.
More recently, companies have been choosing to outsource because they have existing information technology or business process outsourcing (BPO) contracts to build on. This background has allowed them to build up their expertise in managing vendors and scale up to manage broader, more complex, outsourcing arrangements.
Companies with more evolved outsourcing experience sometimes choose a best-of-breed model, which involves distributing the work across several vendors and trading off the simplicity of managing one or two vendors for multiple vendors, in order to offer more tailored capabilities and advantaged pricing.
A company's business needs should also drive the options that it considers. For example, a North American company looking solely to outsource back-office operations should consider offshore outsourcing, since the work does not need to be done in the same geography or time zone. But a multinational looking to migrate both back-office and frontline processes, such as collections, may need to consider performing the work out of several hubs — some offshore and some nearshore — to accommodate multiple language and time-zone requirements.
This chart [2] illustrates a framework for determining a set of potential delivery models based on process scope and geographical and time-zone requirements.
In the final analysis, lower costs are the primary drivers of shared services and outsourcing efforts. If the business case is off and can't deliver that result, companies are guaranteed to face disappointment down the road. It is therefore essential that the final decision rest on an airtight set of numbers.
In the case of outsourcing, are the expected benefits based on realistic vendor pricing? In establishing shared services, are the expected benefits based on realistic internal operating costs that reflect the company's level of scale and accurate local wage rates? Does the business case take into account all infrastructure costs, including personnel transition costs, which typically represent a large portion of start-up costs? Conversely, does the business case consider tax breaks in the chosen geography that might provide incentives? To what extent is systems integration necessary and what will it cost? How will the work's transition, and thus the savings, be sequenced, and is there a way to make the effort self-funding?
These are all key elements that can make or break the economics — and success — of the effort.
These questions may appear simple. The answers, however, are often complex.
Fortunately, companies can address this complexity by breaking it down into a set of clear, tangible issues. As is the case with so many large, complex transformations, the key lies in structuring the process correctly, allocating the right resources, relentlessly asking the important questions — and being honest with the answers.
Now hear Ashok Divakaran of Booz & Company discuss [3] the types of questions that will need to be answered before determining whether a shared services or outsourcing model is correct for your company.
Links:
[1] http://businessfinancemag.com/files/misc_file/Evolutionary-Ladder.gif
[2] http://businessfinancemag.com/files/misc_file/How-to-Determine-Potential-Delivery-Models.gif
[3] http://businessfinancemag.com/video/exploring-shared-services-models-0530