Taking a walk on the Wacki side...

If there’s one person who’s been a consistent figure closely tied to the development of Finance and Accounting sourcing over the last decade, it’s Paul Nowacki (or to those of us know him, simply “Wacki”), who today leads F&A transformation for leading sourcing strategy and implementation consultancy, Everest Group.

Paul’s advised on several of the largest engagements in the business (in fact, I do think he’s worked on the largest) and taught me a lot about the space when I worked with him at Everest a few years’ back. Never afraid to speak his mind, Paul is always a popular figure at industry events to talk about what our industry needs to do to get to that next level of performance. He’s truly a “been there done that guy” who’s seen it all… Anyhow, I managed to drag Paul away from his favorite past-time of tracking global financial indices and stock markets (no joke, he does that for fun) to talk to us for a while about finance transformation and global sourcing:

Phil Fersht (PF): Paul, firstly, what are the main issues you’re hearing from your clients these days? What are the main contrasts between now and before the economic crash last year?

Paul Nowacki (PN): The trend toward smaller deals is accelerating. Cost pressures on the buyer community are so great that companies are evaluating small deals that they did not bother to consider in better times. This in turn is putting new pressure on the supplier community, that is, to find ways to provide cost reduction to buyers and make a profit on ever smaller deals. We are really seeing the envelope pushed on the question of how small is too small. There is also increased focus and pressure on the first year impact of deals. In better times, the focus was on the life of the deal economics, now first year impact is equally important.

PF: How are they approaching F&A transformation? Are they increasing focus on BPO and away from captives?

PN: There is significant growth in captives, for engineering, supply chain, R&D, and a number of other functions, but not for commodity F&A transaction processing. Companies recognize that the suppliers have mature offshore F&A capabilities, so when it comes to the make or buy decision, they are buying. When it comes to transformation, it is being baked into the outsourcing agreement. The old idea of transform it and then outsource it is dying.

PF: We’re hearing a lot more about outcome-based pricing in maturing areas of sourcing, such as IT infrastructure and applications. How is this impacting F&A engagements today, and do you view this as becoming increasingly important?

PN: First of all, the term ‘outcome-based’ is an often misused and misunderstood term. Most people who apply that term are using it broadly to represent both transaction-based pricing and business outcome-based pricing. Gainsharing payments for collections work is an example of business outcome-based pricing. Transaction-based pricing, such as the number of invoices processed, is really output pricing rather than outcome pricing, and it is becoming more important to both buyers and providers. However, both buyers and provides are finding that it is not a simple task to properly calibrate the appropriate unit price for various volumes of activity. What is emerging is a hybrid situation: contracts that call for an initial period of FTE pricing followed by implementation of transaction based pricing which allows both sides to take their time to correctly calibrate the unit pricing.

PF: Do you see genuine opportunities for hybrid BPO-IT offerings in F&A, for example, SAP R/3 financials being delivered in a Platform-BPO engagement model? Or is it simply too challenging / expensive to reconfigure most companies’ general ledger data repositories to move them onto these utility models?

PN: If you have not made a large investment in systems, have been growing from a small company to a mid-size company, are starting to outgrow your systems, and are facing a make or buy decision for new core F&A systems, the platform option is a viable alternative. However, the large established firms have ERP systems that have been heavily invested in for many years and are integrated with every other system in the company. These systems also have interfaces with customers, suppliers, and financial institutions. Given the current state of the art for platform BPO for F&A and the associated switching costs, the vast majority of large established companies will not be platform adopters in the immediate future.

PF: We’ve also seen advisors try and step up and deliver governance services, but many have found this challenging (clients don’t exactly ring up and ask to “buy some governance”). What – in your experience – is working, and what isn’t, in F&A BPO environments?

PN: It is challenging for a couple of reasons. First of all, the true core function of governing (cost stewardship, the alignment of business strategy with service delivery, relationship management, etc.) should never be outsourced, so when we talk about governance services we are talking about the administrative and tactical aspects of governance and the tools that support those tasks. Secondly, the service providers are getting ever more sophisticated in the tools that they provide clients with respect to SLA and metrics dashboards, so the opportunity to add value to buyers with these tools is diminishing over time.

PF: And finally, you’ve been close to many of the largest F&A BPO engagements for many years now. What are the three key developments you expect to see in the next couple of years, based on your vast experience of this industry?

PN: One: platform BPO for F&A will grow in the small and mid-market segments. Two: we will see some supplier rationalization. Currently we are seeing some supplier consolidation due to M&A activity, but new FAO suppliers are being created as fast as or faster than suppliers are being acquired; not all of these new suppliers will be viable long term. Three: we will see a maturing in FAO pricing with fewer input based deals, more transaction based pricing, and a better understanding and standardization of transaction based pricing.

PF: Paul – thanks for sharing your views with us today.

Paul Nowacki (pictured here with wife Kathleen) is Associate Principal for sourcing strategy and implementation consultancy, Everest Group with multiple leadership responsibilities including leadership in finance and accounting consulting advisory services. Prior to Everest, he was a senior operations executive for DuPont. He has over 25 years of professional experience spanning industry, consulting, and Wall Street. Paul has an MBA from the Lerner Business School, University of Delaware. 

Comments

[Paul Nowacki]

Sanjeev - regarding "how small is too small" and "are the large players adressing small deals", the answer is constantly changing. Large players have been able to address smaller deals over time, but the definition of small is relative. For the smallest deals, the largest players will pass and these very small deals are then adressed by mid-market players. Also, size is not the only issue, a small deal consisting of a centralized group with minimal knowlege transfer costs will make more sense to both buyer and supplier than a larger deal that is highly decentralized and fragmented and has high knowledge transfer and high severence costs.

[Brad Smith]

Interesting stuff. Any predictions on which captives will get acquired next?

[Sanjeev Prasad]

A very informative intervies - thanks Phil and Paul. The "how small is too small" question is interesting. Do either of you see the large service providers playing in the smaller deals, or mainly those providers serving that middle-market segment taking on more and more small-scale contracts?

Sanjeev

[Paul Nowacki]

Julie - I am happy to discuss this in detail if you wish to set up a call with me, just email your contact info to me at pnowacki@everestgrp.com

But in a nutshell it is: price, delivery center footprint, technology and tools, ease/flexibility of working with, acceptance of risk, breadth of service offerings, performance history with other clients, financial health/stability.

[Julie Donohue]

Paul / Phil

What an excellent discussion - really informative!

One question I have is how service providers are differentiating themselves with F&A BPO. Sees like everyone's saying the same story these days - what do you see making the difference?

Julie