Outsourcing and the question of what you should keep within the perimeter fence is one of those questions that companies of all sizes are constantly asking themselves. Mark Dye, FSNs contributing editor, reports.
When we think of outsourcing, it is typically call centres in places such as Bangalore that spring to mind for most people. However, as a process it encompasses far more than this and companies have been using it as an integral part of business strategy across a number of areas for many years. Taking the management of certain procedures such as payroll, your supply chain, and IT out of house can certainly streamline operations and more importantly boost those all important margins. But for many, the question with all this is what to begin with and when?
According to Robin Shahani, managing director, Business & Financial Processes Practice EMEA & APAC, Equaterra, there is no real 'right time' to outsource as each enterprise has its own unique requirements. "By and large however, we find that we have our first conversations with decision makers when they are at a point when either cost or service quality become an issue or when there is a gap in their existing contract that allows them the opportunity to explore other, potentially better, agreements with other service providers," he explains.
Shahani says companies should develop an overall sourcing strategy, which may include outsourcing, shared services, internal transformation, or some combination of all three, depending on maturity, as well as regulatory and other business requirements. Once that is complete, he believes it is possible to size the opportunity for improving or outsourcing various processes, whether from operational cost reduction or enhanced ability to generate revenues or drive cost savings. "Executive sponsorship and organisation will play a central role in this triage process," he adds.
One thing that is important for firms to remember is the need to challenge assumptions within businesses in order to be able to properly identify the optimal scope for outsourcing activities.
"Typically," says Shahani, "good candidates for outsourcing include functions, activities, or business processes that are not truly core to the business, but which still represent a sufficiently significant expense or influence on the bottom-line to focus on for cost reduction and or service improvement."
Indeed, these days much of IT has been outsourced by even the most conservative organisations. However, obvious non-IT areas that are ripe for outsourcing include accounts payable, indirect procurement, comprehensive human resources services including payroll, learning, recruitment and the like. "Increasingly, however, our clients are looking at higher value functions, such as tax, treasury, and financial planning and analysis," adds Shahani.
As Clive Longbottom, service director for Business Processes Facilitation, Quocrica, testifies, "Finance and outsourcing is a complicated issue and comes down to the type of business and the attitude towards perceived risk." At a basic level he says processes like payroll should rarely be kept in house as aspects of this change far too often to make it worthwhile. Here, external expertise will enable enterprises to manage and deal with any changes and keep a business in line with its legal requirements.
High levels of complaints from customers or investors, customer attrition rates, investor concerns and worrying market conditions are prime times to outsource, according to Peter Romaine, Director and General Manager, Xerox Global Services, Xerox UK. "The balance sheet shows increased costs and lower profits, internal problems are highlighted in a business process review, or competitors are taking your core business away as they are able to offer cheaper rates as their processing capability is automated or off –shored and outsourced," he says. "By outsourcing to a credible business process management company you are able to ensure faster, more accurate processing while driving cost out of your business, and remaining compliant."
Another time to consider outsourcing is when you begin to do inter-business electronic financial transactions like contract negotiations between international companies, financial searches as to the viability of other companies, funds transfers and so forth.
Again, as Longbottom points out, with so many rules to abide by it's all too easy to get it wrong and the cost of remedying this could come at a big price. "Far better to use externals to ensure that they carry the responsibility for getting things done according to legal and internal governance requirements," he says.
Typical finance & accounting outsourcing programmes follow the path of transaction execution, management enablement, strategy support and go through multiple waves of outsourcing, says Ashutosh Sharma, senior solution architect, Patni Computer Systems. "Wave one takes up standard transactions for Accounts Payable, Accounts Receivable and General Ledger," he says. "More importantly, the first wave also establishes infrastructure and enablers to support the outsourcing roadmap."
A second wave focuses on higher end activities in areas that enable the middle management to make faster and more accurate decisions. This, according to Sharma, consolidates the capability to service end-to-end processes and a function like Record to Report (R2R). Here, activities outsourced include Financial Accounting, Management Reporting, Revenue Accounting, Cash Forecasting, Statutory Reporting, Tax Compliance, and Budgeting and Forecasting.
He says a third wave then focuses on strategy support and activities such as collaboratively looking at industry trends, patterns of invoicing or revenue recognition, as well as providing support for policy design plus strategy and policy implementation.
As to the question of when companies should be outsourcing, Sharma believes that the finance outsourcing industry is at a mature stage and can cater for a variety of organisations. However, he feels that certain parameters like process maturity, deployment of industry standard systems, regulatory compliance, automation, and enthusiasm can help decide the ease of this.
"Outsourcing can be an excellent catalyst for change," adds Shahani. "Some say that it is better to streamline operations internally, then consider outsourcing, but in my experience, with the appropriate executive sponsorship and organisational will, transformational outsourcing is a highly powerful change tool."
Further benefits include sharing investment risk in a future state platform, ability to shed staff and hard assets, and ability to be more flexible in one's operations by structuring such arrangements with third-parties.
Shahani says many outsourcing deals include at least an element of operational cost reduction. However, it is in transformational outsourcing, where a business invests to gain significantly greater savings from optimised processes and technology, where the greatest value lies.
"The most advanced procurement business process outsourcing arrangements, for instance, require an investment to be made in additional tools and staffing, as the solutions seek to accelerate savings generation from 'waves' of strategic sourcing that leverage relevant, senior resources only as needed, then focus on achieving compliance with preferred agreements via technology and process management," says Shahani.
"You may not immediately associate outsourcing as an activity to embark upon when the market is rightsizing," adds Robert May, managing director of Ramsac, "but now is precisely the time to be thinking about how to surround yourself with the best expertise available to you. "I started Ramsac eighteen years ago in the middle of a recession, so know from experience the importance of having the right skills, in the right place, at the right time."
He adds, "Undoubtedly the strength and success of a business in any economic climate is derived from the quality of its people and outsourcing is a viable way to deliver the strength in-depth needed, whilst maintaining sensible, right-sized budgets."