As companies seek to strengthen their bottom line and weather out the current storm, outsourcing and the use of shared services continues to grow. In a world fixated with cutbacks, recession and circling vultures, business process outsourcing and the use of shared services remain growth markets. Indeed, even as the burgeoning credit crunch starts to bite at our heels, one of the fastest growing areas within all this is the outsourcing of finance and administration (F&A).
Logically, smart organisations are using such measures as a way to rein in costs, promote business agility and make use of external expert knowledge. And buoyed by other factors including the current credit squeeze and changes in the regulatory process following the collapse of Northern Rock, more and more companies, which traditionally may have overlooked outsourcing as strategic option, are turning to the model.
As Nigel Roxburgh, research director at the National Outsourcing Association (NOA), suggests, "There is a big argument for outsourcing growth in a recession as organisations use it to curtail spending and tap into external expertise."
"So this is a buoyant time for many specialist outsourcers as more companies outsource functions to strengthen their bottom line," explains Mark Scrivens, director, European Insurance Practice at Perot Systems.
"When company top-lines and bottom-lines are under pressure and while earnings expectations continue to be demanding, the first place companies focus is on controllable expenses," adds Satyen Patel, executive vice chairman of Cambridge Solutions. He believes these areas come under increasing scrutiny especially when it can be established internally that such functions are neither critical to keep in-house nor a company's core competency.
While there was a steady decline in the average value of Business Process Outsourcing (BPO) contracts during 2005-2006, last year saw an increase in the average value of the top BPO contracts, according to Roxburgh. In fact, the NOA puts the average contract value of the top 20 deals as having increased by 58% to $525m in 2007, with the average contract value in the top 50 up by 47% to around $300m.
Having said this, he believes companies are once again looking at cost within the outsourcing contracts. "The focus shifted in the time of economic boom to outsourcing for strategic benefit and whilst companies are of course still doing this, their primary focus has been put back to outsourcing for cost," he says.
"Given cost pressures, marketplace benchmarks and improving BPO and knowledge process outsourcing (KPO) capabilities, more companies are looking to transform their finance function by leveraging a shared services, outsourced, or hybrid model," says Robin Shahani, managing director, Business and Financial Processes, EMEA and APAC, EquaTerra.
"While discretionary spending on innovative IT projects may be adversely affected, businesses often see shared services and F&A outsourcing as a way to drive savings in non-discretionary spending," adds Alistair Maughan, a partner at Morrison and Foerster. Maughan believes we're seeing more and more finance and outsourcing projects covering multiple processes now that financial directors and chief financial officers are on top of regulatory issues such as Sarbanes-Oxley and seeking new ways to drive savings.
Shahani feels that whereas historically, when looking at F&A, corporations focused on rules-based, transactional activities, such as accounts payable, we are increasingly seeing higher value areas, such as Financial Planning and Analysis, Treasury and Tax being placed in-scope.
"This is most striking when an outsourced model is being pursued," he says. "While service provider capabilities are expanding rapidly, complex organisations might find that they are trying to buy capability at the leading edge or perhaps just ahead of the market's ability to deliver to expectations. Nevertheless this trend is likely to continue."
"There is definite evidence that F&A outsourcing is moving up the value chain," confirms Roxburgh.
It is also widely accepted that there have been two distinct types of activity in the market so far. The predominant of these, says John Willmott, CEO of NelsonHall, remains 'lift & shift', whereby existing operations are relocated to a service provider's existing centres such as India . In these cases, the transition typically consists of approximately three to four month knowledge transfer exercises in each country from which accounting operations are to be transferred.
"The supplier continues to interface with client accounting systems though vendors are increasingly active in supplementing core systems with specialist technology of their own and there has recently been increased emphasis on technologies such as e-invoicing by a number of suppliers," he adds.
The second model, according to Willmott, is the transfer of existing corporate finance & accounting shared services centres to the supplier. He believes a principal driver for this remains that while organisations can frequently obtain senior executive consideration and capital for the initial establishment of shared service centres, it can be more difficult to get attention and funding to maintain new tools, technologies and momentum.
In addition, a high proportion of shared service centres are no longer in the optimum locations as the focus of major corporations shifts to targeting the domestic economies of emerging markets like China, India, and Brazil. "Accordingly outsourcing is being used as a vehicle to refresh tools and technologies and change the location of major accounting hubs," he adds. "In addition, some organisations find it increasingly difficult to motivate personnel in corporate accounting shared services centres faced with a need to focus on continuing staff reduction to maintain cost reduction."
At the same time he thinks suppliers faced with changes in currency rates - eroding the traditional margins in labour arbitrage for more transactional services such as accounts payable - are moving more strongly into areas regarded as higher value-adds, such as record-to-report, whilst intensifying efforts to automate data capture to reduce the need for labour arbitrage and error correction services.
Contracts are morphing too, with most topping out at five years and many organisations seeking bundled solutions from the same supplier. Shahani feels they are maturing, adding, "There is an aggressive shift toward transaction-based pricing and gain share mechanisms today."
The message, however, is to keep it simple, paying close attention to solutions, due diligence, governance and the negotiations process. Complex pricing models are difficult to establish and even more challenging when it comes to implementation and management. "An appropriately designed, skilled team of managers, supported by a suite of cutting-edge tools, is critical," says Shahani.
"The difficulty here remains that organisations have rarely adopted a rigorous approach to metrics prior to outsourcing, so that the precise targets can be difficult to establish at the start of the contract and both sides are reluctant to take on the resulting financial risk," adds Willmott.
Maughan still thinks the biggest problem is in companies not actually knowing what they're outsourcing, or outsourcing confused or conflicting processes. "That's fine if the outsource service provider's task is specifically both to deliver a steady-state on-going service and to transform the services to eliminate issues," he says. "But too often businesses just outsource a problem and the service provider isn't getting paid to fix the problem or improve the situation, so the issue perpetuates."
Scrivens believes a change of culture is needed and that pricing must be far more transparent to protect both the customer and outsourcer. Clear definitions of what a customer wants must also be on the agenda, with dialogue coming from both sides. Buyers also need to study the deal they are signing up to, looking at the economic viability of the arrangement to ensure that an outsourcer is also able to win out of the arrangement.
"We've moved on from the days when defined contractual agreements were set in stone for the lifetime of a contract," adds Scrivens. "We are now seeing a lot more outcome-based pricing decisions being taken by the outsourcing company from the outset." In reality, he says, both the vendor and the customer need to have a symbiotic relationship where joint problem solving and working in collaboration is the norm. "Although it sounds a bit clichéd the relationship needs to be like a marriage where both parties are working together with a two-way dialogue," he adds.
"The whole point of entering into a partnership with an outsourcer is to make your business more streamlined so that it is agile enough to react to changes in the market or the business environment," he says. "Going forward the industry should be aiming to develop shorter contracts that are more manageable and won't stifle the way that the business is delivered. Good governance is key in these situations. It is important in all walks of life that you do business with somebody that you trust."