Throughout the world, the use of finance and accounting outsourcing (FAO) by small, medium, and large enterprises is rising.

The number of “multiscope” FAO contracts (those that include two or more core finance and accounting processes and a total contract value north of $1 million) increased by nearly 60 percent from 2005 to 2007, according to AMR Research. The research firm also reports that multiscope FAO partnerships are extending beyond transactional accounting processes, such as accounts payable, and starting to include financial reporting and financial planning/business intelligence processes with greater frequency.

Most CFOs and finance executives can count on having to weigh the pros and cons of outsourcing; many will play key roles in managing outsourcing relationships with external providers. The Management Accounting Guideline (published jointly by the Society of Management Accountants of Canada, the American Institute of Certified Public Accountants, and The Chartered Institute of Management Accountants), from which this article is adapted, provides guidance on managing FAO opportunities, challenges, and risks.

This guidance — which targets CFOs, finance and accounting managers, and others responsible for selecting, implementing, and managing FAO relationships — centers on what might be done at each of the following three stages of the FAO life cycle to create and manage a successful FAO initiative.

I. Making the Outsourcing Decision

Before outsourcing a process or a set of processes, finance executives should conduct four different — but frequently overlapping — evaluations to ensure a sound outsourcing decision (whether positive or negative) that aligns with corporate strategy, objectives, capabilities, and plans:

Identifying the company-specific strategic drivers for the outsourcing decision is essential to keep everyone on the same page throughout the process.

A thorough evaluation of the full range of options includes consideration of shared services arrangements, as well as all potential “sourcing” and “shoring” possibilities.

Assessing the internal capabilities of each sourcing option must include an honest evaluation of systems and controls as well as the skills necessary to transfer and effectively manage the outsourced process or processes. And,

Determining the scope and logic is an essential element of building and finalizing the business case for an FAO decision.

II. Selecting the Outsourcing Provider

The success of the process of selecting an outsourcing provider depends largely on the rigor and comprehensiveness of the outsourcing decision-making process that led to the search.

An effective decision-making process will highlight important issues that need to be examined in the selection process. For example, if an assessment of internal capabilities reveals that a company does not possess sufficient expertise and resources to manage the transition of multiple processes to an external provider, the search should extend to prospective outsourcing partners who possess that capability.

Many other considerations need to be addressed during the selection process if it is to result in a successful choice and a beneficial relationship. Those considerations and needs must be prioritized and communicated, usually through a request for proposals (RFP), in a way that enables the individual or team responsible for selection to understand and compare the merits of proposals by potential outsourcing providers with the greatest possible consistency.

The need to prioritize selection criteria and to conduct thorough due diligence exists even when a company seeks to outsource a single finance and accounting process, as U.S.-based Susquehanna Trust & Investment Co. demonstrated. The firm, a financial holding company’s subsidiary that provides tax-processing services to financial institutions and financial services companies, sought to outsource tax services. They did this primarily to address difficulties in recruiting qualified staff to handle the highly specialized back-office tax work the company conducts. The company’s senior vice president of risk, compliance, and tax led the selection process, which identified the following four key criteria on which she and her staff focused while comparing and analyzing prospective outsourcing partners:

Size of the outsourcing firm. The vice president believed that her company would enhance its chances of receiving excellent service by “making sure that we weren’t the biggest fish in the pond or the littlest fish in the pond” compared to the rest of the provider’s customers.

Reliability and flexibility. The vice president wanted to make sure that the outsourcing provider could continue to deliver service if Susquehanna encountered any major systems issues, entered into any mergers or acquisitions, or converted to a new accounting system. Similarly, if significant external changes occurred, such as a major tax law being passed in the last quarter of the year, Susquehanna wanted assurances that the provider’s finances were sufficient to accommodate any programming or staffing changes that might become necessary.

Potential for change in ownership. Susquehanna did not want an outsourcing partner that might undergo a change in management, which the vice president feared might negatively affect service levels. (This concern explains why most outsourcing contracts allow for termination of the relationship upon a change in control at either the buyer or the provider.)

Quality of work output. This factor, of course, represents a priority in every selection process, and quality is typically evaluated by speaking with current customers. The outsourcing provider that Susquehanna ultimately selected was a firm that the company had worked with in the past — a positive experience that figured into the final decision.

The vice president compares the selection process to the due diligence that the company conducts before selecting a consulting firm or an enterprise software vendor. “I made a list of all the things that I had forgotten to ask in similar situations before,” she notes. “And then it was a matter of sorting out the information so that we were comparing apples to apples.”

The same objective should guide the selection of outsourcing providers, even for arrangements that are much more expensive and involve multiple finance and accounting processes. Once the documentation from the decision-making stage has been completed and reviewed, the selection process should begin with the following steps:

Creating a project team responsible for guiding the selection process and for making the final selection decision (or recommendation, if the decision requires approval from a higher-ranking executive or the board of directors);

Developing an understanding of the current outsourcing provider marketplace to allow the buyer to more effectively target potential providers most likely to meet their needs;

Considering whether to hire an outsourcing advisor (i.e., consultants and/or lawyers with extensive knowledge of and experience with outsourcing agreements and relationships) to assist with the selection an outsourcing provider and the subsequent negotiation process;

Developing and distributing RFPs and, in some cases (often when multiple processes are involved), requests for information (RFIs);

Establishing a process to review RFPs and/or RFIs (including a standard approach to responding to questions from prospective vendors during the selection phase) and conducting that review; and

Conducting additional due diligence that may include site visits to a prospective outsourcing provider’s location, presentations by outsourcing providers, and calls to outsourcing providers’ current customers or references.

III. Managing the Outsourcing Relationship

According to The Wall Street Journal, as many as one-third of selection teams decided to keep their processes in-house even after investing significant time and money in evaluating potential providers. They did this because the teams decided that their companies were not prepared for the magnitude of change required by a transition to an outsourcing relationship.

Underestimating the amount of resources, energy, and time that change management activities require represents one of the most commonly reported pitfalls of outsourcing relationships. The primary reason that outsourcing providers can execute F&A processes — particularly transactional activities — more efficiently than the outsourcing buyer is because the provider executes the process differently. This difference requires employees with the company investing in the outsourcing services to interact with the outsourced processes (and the outsourcing provider’s workforce) in different ways. In other words, it requires employees to change.

How well an outsourcing arrangement successfully deals with that need to change depends on the parameters governing the outsourcing relationship. Those parameters, including change-management considerations, are established during the contract negotiations and continue until the agreement ends at a predetermined date (or earlier if one of the parties exercises the early termination clause).

The sections that follow discuss useful steps in contract negotiations, which take into consideration the following:

Negotiating the contract and Service Level Agreement (SLA) is the culmination of the vendor selection process and the beginning of the ongoing management of the outsourcing relationship.

• The transfer of process and knowledge to the outsourcing provider is a major change initiative that requires significant project management expertise to clarify roles and responsibilities and to establish key milestones and deadlines.

Active involvement and monitoring of both qualitative and quantitative characteristics are key to the successful management of outsourcing performance. And,

• Long lead times and the potential impact on the organization of “repatriating” or moving previously outsourced processes to a new provider requires anticipating and articulating provisions for renewal, renegotiation, or termination in the outsourcing contract.

How an outsourcing buyer evaluates potential providers, cements the union, and then manages the relationship moving forward is frequently compared to a marriage. The parallel is useful to keep in mind; the success of an outsourcing relationship, like the success of a marriage, hinges on the quality and flow of communication between two distinct entities, as well as both parties’ ability to work together to resolve problems and improve the relationship over time.

More Guidance

FAO arrangements offer companies opportunities to significantly reduce costs, access better skills and technologies, and achieve other benefits. These include sharpening the organization’s focus on core competencies and/or moving finance and accounting professionals away from transactional duties and toward more strategic responsibilities. To achieve those opportunities, companies pursuing FAO arrangements must avoid problems that damage relationships with providers and lower the returns on their FAO investments.

FAO should be of significant interest to finance and accounting professionals due to the discipline’s growing use, its risks and benefits, and its growing importance to a finance and accounting department.

The full Management Accounting Guideline details steps throughout the FAO life cycle to help finance and accounting executives and others get from the initial outsourcing decision to its effective conclusion. The publication is available by clicking on the “MAGs and MAPs” link on CMA Canada’s Web site, www.cma-canada.org.