Beyond Labor Arbitrage: The New F&A BPO Frontier

The value proposition of F&A BPO now encompasses many added business benefits beyond a simple arbitrage of labor to help decrease transactional processing costs.  Companies are focused on both incremental improvement and transformational innovation, and F&A BPO is a lever that can help drive both without the need for significant investments in people and technology. These benefits can be summarized as follows:

·          Access to scarce talent.  Many companies today are struggling to find the finance and accounting talent they need. The U.S.-based talent pool has been shrinking considerably, and many companies are finding that F&A BPO service providers can usually offer skills, like payroll and accounts payable, significantly over-and-above basic transactional tasks – and at significantly lower cost. 

·          Ability to focus retained finance function on mission-critical activities.  The retained finance function can focus its time and resources toward driving ongoing quality into its financial processes and staff development and determine ongoing transfer of experience and skills from their service provider.  Moreover, the finance function’s retained management can focus time and energy on SLA-setting and rolling out governance programs, while working closely with their supplier.  These collaborations are often decade-long “marriages” and require increased energy and focus to achieve effective results with compromise required on both sides on many occasions. 

·          Continual cost reduction and performance enhancement, taking advantage of process methodologies and standards, namely Six Sigma and LEAN.    Companies can often achieve cost reduction initially through labor arbitrage, and then subsequently through increased economies of scale from service providers and increased performance levels from services providers as they continue to mature and further their offshore investment (e.g., China and the
Philippines).  Contracts are frequently structured to demand annual performance improvement and reduced baseline costs, while expecting the service provider to drive process improvement and innovation.. Additionally, today’s companies are quickly realizing that F&A BPO is an opportunity to make rapid, impactful changes to their business and take advantage of the standards service providers are developing.  Many service providers are going to market with differentiated value propositions that are geared to moving companies onto their existing delivery models, with a heavy skew toward offshore delivery.  They have quickly realized that they need to demonstrate industry-specific F&A process excellence to win credibility.  Effective companies are quickly seeing BPO as an opportunity to make substantial structural changes that would be very difficult to achieve if they were not moving into an outsourced end-state. 

·          Ability to increase working capital and directly impact the bottom line.  Experienced suppliers can devote increased resources and generally have more efficient processes for managing cash flow from end-to-end solutions, such as Order-to-Cash and Procure-to-Pay.  Improving the effectiveness and velocity of the cash-flow can help improve management decision-making, not to mention the positive impact on working capital. 

·          Availability of new F&A technologies and bundled solutions.  It’s our experience that many of the leading F&A BPO service providers are continually developing solutions that can work in tandem with the company’s technology, or even replace it in certain cases.  Service providers are focused on F&A BPO solutions that can be standardized on incumbent ERPs, namely SAP and Oracle, with bolt-on tools and application solutions in discrete areas where value can be reaped. Additionally, solution areas like Order-to-Cash have moved beyond the performance of simple account collections using a billing application. They are frequently now bundled process solutions that often cross organizational boundaries, (e.g., dispute management, cash-flow analytics, and reporting capabilities).  The benefits of bundled process outsourcing can include improved opportunities for process redesign and associated cost reduction, synergies from staff working together in the same environment, the ability to create a more leveraged management team, and potentially fewer contact points with external and internal customers. 

·          Potential to integrate multiple disparate financial platforms, applications and middleware into one common global standard.  The cost savings enjoyed through labor arbitrage can offset significant enhancements to financial systems as part of the F&A BPO initiative to achieve a single, unified global chart of accounts.  We have seen many companies in the past delay F&A BPO initiatives to resolve inherent issues with their accounting systems, but there is a clear move within many of today’s initiatives to combine systems integration with the F&A BPO transformation, especially where the same service provider can be deployed to improve the F&A systems as part of the BPO initiative.  BPO provides the opportunity for companies to make rapid changes to their business, especially where there are multiple silos of financial data strewn across geographies and business entities.  Companies have a singular opportunity to address these issues as part of the BPO transition process. 

·          Transferal of risk to the supplier.  Managing offshore resources in today’s business environment can be very difficult.  In particular, offshore captive organizations that are not a Tier 1 global brand in lower-cost geographies (e.g. India) will find it increasingly difficult – and expensive – to hire, train, and retain quality staff resources – not to mention accounting for the geopolitical risks associated with owning offshore assets and employing offshore labor.  Many companies are quickly realizing they are far better off having experienced service providers take on these associated risks, as they have invested heavily in their staff development and governance programs. This can also save companies hefty management costs in running a captive operation. 

·          Preparation for a business slowdown. The desirable time to consider creating more effective and efficient F&A processes is when business is good and there is sufficient time to plan and manage the outsourcing transition. When done properly, engaging an outsourcing service provider takes time and is more effective when not executed hastily. Additionally, service providers are more willing to collaborate and share the benefits when you (and other companies) are not feeling immediate cost-reduction pressures.

·          Preparation for M&A activity. Outsourcing F&A forces the company to move to standard processes across business units.  This can help facilitate future M&A activity by decreasing the effort associated with the integration and by improving the likelihood and accelerating the timeline of realized synergies.  It also allows the company to focus on the core business during integration, leveraging the service provider’s skills and platform for integration of F&A. 

Comments

[Phil Fersht]

Payal,

1) Get an alliances pro to push your services onto the sourcing advisors and consultants. They are always being pulled into discussions with their clients - and these are often SMBs, or larger firms lookingfor smaller deals.

2) Look to partner with other firms who focus on SMBs (accouting software providers / resellers; IT services firms). I see you have made a good start already here...

3) Sponsor some of the accounting forums and events where SMB firms will be represented.

4) Upgrade your website and put some compeling thought-leadership on it that is authored by your firm (i.e. a white paper / case studies etc)

Easier said that done. Good luck!

PF

[Payal Jaggi]

We started our company FAOnDemand in JAN 07. We are doing pretty well as a startup but find it tough to market our services. Any suggestions?
We outsource F&A services to India.

[Phil Fersht]

Hi Gaurav - great to "hear" from you.

Completely agree with yout point about having a third party accouting services firm adding credibility, especially when there are specific SLAs that are set and a consistent track record of being met. Moreover, am speaking with more and more companies who simply can't get quality staff to do basic accouting jobs. More and more CFOs actually want to offload AP to a third party if they can do it better (and cheaper). I believe AP is fast becoming similar to payroll, where it makes more sense to use an ADP/Ceridian than try to do it yourself. And to add to your point, am also seeing procurement activities more frequently included in the FAO discussion. The key component moving forwards is how the suppliers integrate offshore resources into smaller deals - I have some really interesting new data to show offshoring kicking in a much smaller deals levels than anyone anticipated (more to follow shortly).

Cheers,
PF

[Gaurav Malhotra]

Phil,

Great article. I really like and agree your point around the availability of bundled solutions within F&A process. I am certainly seeing the bundling trend continue within and beyond F&A to adjacent processes like Source-to-Procure being bundled with AP and F&A to effectively manage spend and ensure relaized savings to the P&L.
I was also thinking that the trend towards public companies going private via the private equity route interplays well with F&A outsourcing. Certainly easier for the Client to focus on growing the core business when going private, while leaving the hassles of accounting and compliance to a third-party. I would think that having a third party F&A outsourcer manage acounting would give the compay's financials more credibility, when going public again in the future (upon which many of these private equity buy-outs are predicated)? thoughts?

Gaurav Malhotra
Ariba Inc.

[David Sheinfeld]

Phil
Your comments are right on point. What the providers fail to realize is that margins from labor arbitrage will continue to be compressed and unless the providers can offer more services and applications to meet the needs of the clients their will have a difficult time keeping up with the competition and overall profitability.

[Phil Fersht]

Peter! Thanks for your comment. Wait for my next post very shortly for some data noone has yet seen,

Phil

[Lisa Ross (FAO Research)]

100% on target as always. What more can be said?! :) Great resource for the industry given your unique perspective and experience.

[Peter Allen]

Phil;

We need more healthy sharing of facts. Nice commentary!

Peter

[Rob Smith]

Great post Phil - about time someone started an outsourcing blog,

Rob

[Harry Feinburg]

Phil, you are thought leading again with this blog, and I have booked marked it!!

[David Jensen]

Phil, great points - especially your next-to-last one about the benefit of globalizing now, before the inevitable downturns occur.

[Vince Sparrow]

I’ll look forward to future postings as well. Great start Phil.
Vince

[Naomi Bloom]

You’re off and running. Naomi