The finance and accounting outsourcing (FAO) market is growing by leaps and bounds, zooming 22 percent last year according to the Everest Research Institute's 2008 annual report. The growth was propelled in part by greater penetration of the midmarket and the growing maturity of suppliers' offerings. And FAO service providers may get a further boost this year as companies dig around for G&A savings to counteract the bottom-line impact of a cooling economy (see recommendations from The Hackett Group, reported here)
When companies first dip their toes into FAO they usually start with their accounts receivable, and then their payable processes, says Lisa Ross, CEO and founder of FAO Research Inc. From there they might move to general ledger and financial reporting activities, and eventually to investor reporting and the more complex financial analytics and decision-support tasks that Ross sees as characteristic of what she calls FAO 2.0. Companies that have graduated to this next-generation level of outsourcing are motivated not just by cost-cutting but by process improvement, domain expertise, and flexibility.
D3Publisher of America Inc. is a case in point. While the Los Angeles-based video game distributor chose the classic low-hanging fruit -- A/P processes -- for its 2006 outsourcing initiative, flexibility was the key strategic goal. The service provider was Vengroff, Williams & Associates (VWA).
"In our first year of business we only shipped six months of the financial year and we did about $7.5 million in business," recalls Kim Motika, vice president of worldwide sales and operations for D3Publisher. "The second year of business, which was a full year of business, we did $45 million. As you can see from that growth alone, ramping up an internal staff and training that internal staff was probably unreasonable given the benefits that a provider like VWA can give us."
The video game business is highly seasonal, and 50 percent of DP3's sales fall in the year-end holiday season. "To have a team to support that kind of revenue all year round is really not very cost effective," says Motika. The service provider can scale resources to meet demand. "If we're slow one month they pull people off our team and put them on another team. If we're really busy one month or one quarter they pull people off of other teams to help meet the volume."
There's general agreement among experts that cost savings are still the primary driver of FAO initiatives, but whether the benefits can be achieved quickly enough to make FAO a viable response to the slowdown is debatable. Jason Balogh, Principal, CFO Advisory Practice, with Archstone Consulting, is skeptical. "You're not seeing too many people looking at BPO [business process outsourcing] as the easiest lever to pull to respond to the recessionary period," he says. Outsourcing is a long-term endeavor, and it's a lot easier to get into it than to get out of it.
Conventional wisdom holds that companies should get their own house in order before attempting to transfer a process to a provider; they should be wary of "lift-and-shift" arrangements that simply hand off a process as-is, problems and all, to the third party. But companies may have good reasons for ignoring that advice, says Balogh. "The idea of taking four or five years and fixing everything ourselves and then evolving to a BPO model is fast losing ground to the lift-and shift-model," he reports. "A number of finance executives are becoming much more acknowledging of the fact that when we say internally that something is going to take one year it takes two; when we say something is going to get 30 million in savings it only gets 10."
What's more, providers are getting pretty good at taking on their customers' messy processes, Balogh adds. "It used to be 'lift and shift' meant 'your problems for less,' but now what you're seeing is organizations going into these types of deals with a bit more of a long-term horizon and saying 'Here's the situation, here are the problems, and here's how you can help fix them."
The following tips may be useful for CFOs contemplating an FAO initiative:
Leverage scale. "It takes a tremendous amount of due diligence to decide to outsource in general; if you put all of that time and energy into making the go decision to outsource, you might as well go with more than just one or two functions," says Ross. "You certainly can get cost savings by outsourcing a piece of this, a piece of that, but you can get fuller benefits by outsourcing a larger suite of services."
Assess your current state. It's worth the time investment to examine your existing processes in some detail, notes Balogh. "You need to have a thoughtful examination of what truly gets done today." From that vantage point you can ask questions like "What should our scope be?"
Don't limit yourself to preconceived notions about FAO. The industry is changing fast and the breadth of providers' offerings may surprise you. "Go out and see what providers are doing for other organizations, and get your group comfortable with the capability," Balogh says.
Expect resistance. An FAO project is by nature a sensitive operation, and it can be "a very successful effort or a very painful one, depending on whether you've addressed the change management aspects appropriately," says Balogh. The push-back may be subtle and indirect; for example, "people may provide misinformation, possibly to render a business case less appealing. There's a lot of different ways that the resistance can embody itself, and you need to be prepared for it."