Beyond Labor Arbitrage: The New F&A BPO Frontier

May 17, 2007 | Phil Fersht

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. 

Posted in: Finance & Accounting BPO

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