As recently as five years ago, managing most finance and accounting outsourcing (FAO) arrangements represented a fairly basic exercise.
A successful partnership seemed like a matter of understanding the rationale for the decision, selecting the best provider and managing the relationship via a service-level agreement (SLA), and some effective oversight, governance and troubleshooting capabilities – and not much beyond that. In fact, the process of managing FAO seemed quite similar to the process of managing information technology outsourcing (ITO) and human resources outsourcing (HRO) arrangements.
Times have changed.
“Once you get beyond, say, payables and receivables,” reports Stan Lepeak, KPMG’s director, global research, management consulting, “most FAO outsourcing becomes extremely complex due to reporting requirements.” What’s more, companies are using outsourcing partners to manage increasingly complex work.
As recently as five to 10 years ago, many outsourcing experts expected FAO to grow and expand in much the same way that ITO and, subsequently, HRO partnerships flourished by A) increasing in number, and B) greatly increasing in magnitude. Some pundits even envisioned a day when the finance and accounting function would be staffed by a few senior experts (in treasury, M&A and a few other strategic activities), while all of the more tactical processes would be farmed out to shops in Bangalore and Dalian.
FAO took a different evolutionary path thanks to business regulations with significant financial reporting components, like Sarbanes-Oxley and Dodd-Frank, as well as the impressive efficiency gains many finance functions achieved – through outsourcing, yes, but also via shared services, process improvements and new automation -- during the past 10 years. Leading finance and accounting functions cost as little as 1 percent of revenue today.
Although FAO, HRO and ITO outsourcing to low-cost countries continues, some experts expect it to taper off.
The Hackett Group research indicates that corporations in the U.S. and Europe will move an additional 750,000 jobs in IT, finance and other business services to India and other low-cost countries by 2016. However, this research also suggests that levels of additional offshoring in these areas will begin to decline by 2014.
“In the U.S. and Europe, offshoring of business services and the rapid transformation of shared services into global business services have had a significant negative impact on the jobs outlook for nearly a decade,” noted Michel Janssen, chief research officer with The Hackett Group. “[A]fter the offshoring spike driven by the Great Recession in 2009, the well is clearly beginning to dry up. A decade from now the landscape will have fundamentally changed, and the flow of business services jobs to India and other low-cost countries will have ceased.”
Given these and other dynamics that define 21st Century FAO, what should executives and managers investing in outsourcing partnerships do differently than they did five years ago?
Lepeak mentions several important considerations, including most of the following:
Understand Reporting Requirements: “If you want to do a finance and accounting outsourcing deal,” he asserts, “you need to understand what reporting requirements are involved.”
Rethink Traditional Locations: In the past, an FAO provider would extract the process from a client and execute the process using its own people, methodologies and options. Today, that’s no longer the case. In some cases, the FAO provider may provide the infrastructure; in other instances, the partner may provide the technology systems but rely on the client company’s staff to help execute the process or processes. Old notions of what kind of work goes where no longer apply. India handles tactical processes, but it can also handle complex FP&A work conducted by Ph.Ds. Specialized outsourcing firms now handle industry-specific needs as well as unique analytics needs.
Consider a ‘Hybrid” Approach: In some cases, FAO processes are conducted through a model that combines elements of both internal shared services and traditional outsourcing. “Sometimes a hybrid arrangement moves to a fully outsourced model,” Lepeak explains. “Sometimes it's a hybrid model that stays that way. … The main thing we’re seeing is that clients are creating some pretty complex global delivery environments.”
Get Extremely Good at Governance: The capabilities that constitute effective oversight and governance of FAO partnerships have intensified dramatically. Although the notion that a company could outsource a process and forget about it has always been a myth, this type of thinking has never posed a greater risk: Effective FAO absolutely requires a comprehensive governance approach. KPMG research indicates that a direct correlation between how highly companies rate their own outsourcing governance capabilities and their satisfaction with outsourcing.
Lepeak describes a new discipline, sourcing management, maturing around the management of outsourcing relationships. Supply chain optimization serves as a useful comparison; that practice was considered a rare art three or four decades ago, but it qualifies as a profession today. “Managing your ‘service chain’ has never been viewed or treated as a notable discipline,” Lepeak adds, “but it really needs to become that to support the complex activities companies now work on with outsourcing partners.”
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