Building an Agile Finance Function: Alternative Approaches to Sourcing Financial Operations
FINANCIAL EXECUTIVES RESEARCH FOUNDATION, INC. W OU LD LIK E TO AC KN O W LED G E A ND THAN K THE GE NE R OSI TY A N D SU PP OR T O F
FOR THEI R SP O NS ORSHI P OF THIS EXE CU TIVE RE P OR T AND FO R U N DER W RI TIN G I TS PRI N TIN G
the source fo r financia l so lutions 200 Campus Drive P.O. Box 674 Florham Park, New Jersey 07932-0674 www.ferf.org
an affiliate of financial executives international
Building an A gile Finance Function: Alternative Approaches to Sourcing Financial Operations
William M. Sinnett Director of Research Financial Executives Research Foundation
Rhona L. Ferling Research Associate Financial Executives Research Foundation
the source fo r financia l so lutions 200 Campus Drive P.O. Box 674 Florham Park, New Jersey 07932-0674 www.ferf.org
an affiliate of financial executives international
Building an A gile Finance Function: Alternative Approaches to Sourcing Financial Operations TABLE OF CONTENTS Purpose and Executive Summary
1
Research Methodology
3
Exhibit 1: Companies Interviewed Exhibit 2: Annual Revenues of Companies Interviewed Exhibit 3: Number of Employees of Companies Interviewed
4 5 5
Shared Services Insights from the Companies
6 7
Co-Sourcing Insights from the Companies
11 12
Offshoring Insights from the Companies
14 15
Outsourcing Insights from the Companies
19 20
Appendix A: “2007 Technology Issues for Financial Executives”
21
Appendix B: Company Profiles
22
About the Authors and Financial Executives Research Foundation, Inc.
30
Building an A gile Finance Function Alternative Approaches to Sourcing Financial Operations Pur pos e The purpose of this study is to help financial executives understand the management issues and economics of alternative approaches to sourcing financial operations, including both costs and benefits. It is based on interviews with executives at 18 companies, 11 of which are in the Fortune 500, who provide insights based on their experiences with various sourcing alternatives. Four common approaches to sourcing are investigated, including shared services, co-sourcing, offshoring, and outsourcing. This research study was sponsored by The Siegfried Group, LLP.
Exe cutiv e S umm ar y Senior financial executives continue to seek ways to run their finance functions more effectively and efficiently. Many have investigated outsourcing and offshoring, but there is still uncertainty regarding the best sourcing approach for their own companies. At the request of FEI’s Committee on Finance and Information Technology (CFIT), Financial Executives Research Foundation (FERF) undertook a research study to investigate various alternative approaches to the sourcing of financial operations. FERF staff interviewed financial executives from 18 companies on their approach to the sourcing of financial operations. (See Exhibit 1.) These companies ranged in size from large to very large, as can be seen from a comparison of their annual revenues and number of employees. (See Exhibits 2 and 3.) Eleven of these 18 are Fortune 500 companies, two are privately held, and three are based in Europe. In light of the sensitive nature of sourcing, especially outsourcing and offshoring, the executives’ names and company affiliations will remain anonymous. All of the executives interviewed emphasized that the sourcing decision for financial operations must be made in the context of the business as a whole and the company’s overall strategy. As a result, change management is often a key issue. All interviewees also consistently highlighted the need to have a wellthought-out approach to sourcing, one that encompasses the varied aspects of integrating sourcing into both the business model and the corporate culture. For some companies, external sourcing of even a single function can meet with serious resistance. For others, the path to sourcing is relatively smooth, especially if it has started as a small pilot project and has grown organically. One or more of four general approaches to the sourcing of financial operations were used by the executives interviewed for this research study: • S h ar ed S er vice s: The finance team looks internally to a centralized or dedicated department (functional area) or to a specially assembled internal team for support in completing a function or project. • C o -So ur cin g: To extend its in-house capabilities, the finance team uses outside professionals on a periodic basis to assist internal teams with major projects. Also known as accounting resource services, this is an approach that enables the finance team to maintain primary control of the project, which minimizes project risk, accelerates delivery time and achieves cost efficiencies. • O ffs h orin g : Work is done in another country, in the offices of either the client company or the service provider. Work can be completed as part of a shared-services arrangement or as part of a co-sourcing arrangement. • O uts ou rcin g: The finance team looks to an outside provider to assume primary responsibility for performing or providing a specific function or deliverable.
Most of the companies interviewed used more than one sourcing alternative, showing that an agile finance function often requires a combination of approaches to financial operations. Of the 18 companies interviewed, only eight indicated that they used just one sourcing approach. Six used two sourcing approaches, and four used a combination of three sourcing approaches. The executives interviewed provided a number of insights on the implementation and use of these sourcing approaches, which are explored in greater depth in this report. The primary findings for each of the general approaches can be summarized as follows:
Sh ar ed se rvic es • The need to streamline financial operations often motivates the shift to shared services. • Implementation of enterprise resource planning (ERP) systems facilitates the transition to shared services. • Clear expectations and defined metrics are critical when implementing and leveraging a sharedservices model. Co -s ou rcin g • Co-sourcing provides access to talented professionals who execute special projects at the direction of the client. • Co-sourcing to backfill internal employees increases a company’s capacity and flexibility, while ensuring that important work is completed during times when internal resources are constrained. Offs h orin g • Offshoring provides the opportunity to reduce costs. • Offshoring may create change-management issues. • Offshore co-sourcing may be used to transition to shared services. Outs ou rcin g • Select only highly functioning processes to outsource.
To provide a broader context for this study, Appendix A includes a summary of responses to questions on outsourcing from the “2007 Annual Report: Technology Issues for Financial Executives”, a joint research effort of CFIT and FERF. A brief profile of each of the companies interviewed is provided in Appendix B.
2
Research Methodology FERF staff invited financial executives from large companies to participate in this research project. The executives were told that they would be interviewed on their company’s approach to the sourcing of financial operations. Possible approaches could include: • Shared services; • Co-sourcing; • Offshoring; and • Outsourcing. Senior financial executives from 18 companies agreed to be interviewed. The titles of the interviewees ranged from senior vice president and CFO to director of accounting. Because of the sensitive nature of sourcing, especially outsourcing and offshoring, the executives were assured that their names and company affiliations would remain anonymous. Exhibit 1 assigns a code letter to each company interviewed, and indicates its industry and the sourcing alternatives employed. The companies participating in the study ranged from large to very large. Exhibit 2 categorizes the size of the companies interviewed by annual revenues. Exhibit 3 categorizes the size of the companies interviewed by number of employees. Approaches to sourcing financial operations are defined as follows: • •
• •
S h ar ed S ervic es : The finance team looks internally to a centralized or dedicated department (functional area) or to a specially assembled internal team for support in completing a function or project. C o -So ur cin g: To extend its in-house capabilities, the finance team uses outside professionals on a periodic basis to assist internal teams with major projects. Also known as accounting resource services, this is an approach that enables the finance team to maintain primary control of the project, which minimizes project risk, accelerates delivery time and achieves cost efficiencies. O ffs h orin g : Work is done in another country, in the offices of either the client company or the service provider. Work can be completed as part of a shared-services arrangement or as part of a co-sourcing arrangement. O uts ou rcin g: The finance team looks to an outside provider to assume primary responsibility for performing or providing a specific function or deliverable.
Most of the companies interviewed used more than one sourcing option, showing that an agile finance function often requires a combination of approaches to financial operations. Of the 18 companies interviewed, only eight indicated that they used just one sourcing option. Six used two sourcing approaches, and four used a combination of three sourcing approaches.
3
Exhibit 1: Companies Intervie wed Com p an y
Ind ust ry
So urci ng Alter n ative s
A
Business Services
Shared Services
B
Metal Manufacturing
Shared Services, Offshoring
C
Distribution
Shared Services, Outsourcing
D
Biotechnology
Co-sourcing
E
Technology Manufacturing
Shared Services
F
Financial Services
Shared Services, Offshoring
G
Media
Shared Services, Outsourcing, Co-sourcing
H
Chemicals
Shared Services, Offshoring
I
Chemicals
Shared Services, Outsourcing, Co-sourcing
J
Diversified Manufacturer
Shared Services
K
Energy
Shared Services
L
Shipping
Shared Services, Outsourcing
M
Retail
Shared Services
N
Engineering Services
Shared Services
O
Telecommunications
Shared Services, Outsourcing
P
Media
Shared Services
Q
Business Services
Shared Services, Co-sourcing, Offshoring
R
Financial Services
Shared Services, Co-sourcing, Offshoring
4
Exhibit 2: Annual Revenues of Companies Interviewed
4 Less than $5 Billion
7
$5 to $9.9 Billion $10 to $25 Billion Over $25 Billion 4 3
Exhibit 3: Number of Employees for Companies Interviewed
4 7
Less than 10,000 10,000 to 24,900 25,000 to 50,000 Over 50,000
4 3
5
Shared Services Definition The finance team looks internally to a centralized or dedicated department (functional area) or to a specially assembled internal team for support in completing a function or project.
Overview Companies use shared services to standardize and centralize financial and other operations into one or more centers, which may be either domestic or offshore. The theory is that fewer operating locations will require fewer employees and fewer redundant systems, thus allowing the company to work more effectively. As companies standardize and centralize financial systems, they often migrate to just one, or at most a select few, enterprise resource planning (ERP) systems to facilitate the transition to shared services. EquaTerra research finds that organizations view internal shared services as a key means to enable finance and accounting (F&A) transformation. An EquaTerra study on F&A transformation revealed that more than 60 percent of organizations had already deployed F&A internal shared-services operations. 1 Fifty percent of those same respondents also planned to undertake business process outsourcing, a fact that underlines the importance of multiple service-delivery models under the shared-services umbrella. EquaTerra projects that organizations successfully deploying shared services can expect to reduce F&A costs by 20 to 40 percent three to five years into the effort. These savings, both hard and soft, can be derived from the following areas: • Headcount reduction • Lower operating costs (e.g., IT spending, real estate, audit fees) • Consolidated operations and economies of scale • Cost avoidance (i.e., decreasing future IT investments) • Improved efficiency of the F&A function There are a number of potential benefits resulting from the use of shared services. One major benefit is often a reduction in the costs of financial operations. A second benefit is a monthly accounting close that requires less time and effort. A third benefit is more control over financial operations, with less opportunity for error or fraud. Finally, the use of shared-services centers should enable the company to reduce the number of systems that must be documented, maintained, tested, and audited in compliance with Sarbanes-Oxley Section 404. The interviewed companies used shared-services centers primarily in North America, Latin America, Europe, and Asia. Asia is especially attractive for companies looking to lower costs.
1
“The Role of Shared Services In Enabling Finance & Accounting Transformation,” EquaTerra, May 2007.
6
Shared Services Insights from the Companies • S treamlining financial operations is a key motivator. Even companies on the leading edge of business practices, such as Company E, may find that they need to streamline. According to the senior vice president-finance, Company E’s decision to move toward shared services stemmed from a large growth spurt in the year 2000. At that time, the company decided to selectively centralize and standardize its U.S. processes. Then, in 2002, the company experienced a decline in growth. As a result, it began to investigate business-process outsourcing across human resources, finance, information technology, and procurement. Adding to the pressure to reduce costs, the company’s chief operating officer insisted on managing to world-class standards. The company began to contemplate how to transform finance into a world-class function. The company’s main goal was stronger best practices and internal controls in a more centralized environment. Another important goal was cost avoidance – that is, avoiding the need to invest in an IT upgrade, new facilities, etc. It wanted to maximize the investments it had already made in technology, personnel, and other areas. This was largely the reason that Company E eventually decided not to use an external provider and chose instead to move to a shared-services model. “We wanted to leverage our internal capabilities and use outsourcing to augment areas that were not strategic for us, and then carry out the process globally,” the company recounts. Company E chose a regional model that worked well from a change-management perspective. Now it is able to process any region’s transactions in any of its shared-services centers. In the reengineering effort, Company E focused on its transactional processes first, and these are still the farthest along. Functions now under the shared-services umbrella include order to cash, including credit analysis, collections, and billing; accounting; and general-ledger activities, including facilities closing, journal entries, and consolidations. IT service delivery is also located in the shared-services organization, including the global help desk. Company E has been tracking its shared-services costs and reports that shared services represents 12 percent of the total functional cost for finance, not including audit fees. Of that 12 percent, less than 10 percent of the shared-services budget goes to sourcing. Thus, sourcing represents about 0.5 percent of the total finance budget. Overall, Company E spends 10 percent on process improvement annually. Of course, some cost is involved whenever the company transitions work over to a new center. But once a shared-services center is complete, the company shifts to “steady state” mode, standardizing processes, centralizing work, and reducing costs. Now that the centers overall are better established, it is less costly to make changes in processes. Therefore, Company E does not foresee its costs growing a great deal in the long run, with the exception of organic growth or acquisitions.
7
Shared Services Insights from the Companies • I mplementation of ERP systems facilitates the transition to shared services. Despite large savings, Company E’s experiences demonstrate that staging a major shift to a sharedservices environment is no small task. However, several strategies and approaches can ease the transition. Many of the companies interviewed report that full-scale ERP (enterprise resource planning) implementations, the use of an enterprise-wide approach, and the development of a common chart of accounts greatly facilitated their move to shared services. For example, Company M has begun an initiative to develop a common chart of accounts so that it can centralize some of its key functions, beginning with fixed-asset accounting. This represents a shift from an earlier, more decentralized model. “Three years ago, as we entered new markets, we would install fully contained back-office functions that were completely self-sufficient,” the vice president of financial services says. “But this has proven too expensive and difficult. It’s hard to have control and to account for it under SOX. With shared services, internal audit only has to look at it once.” He adds, “Until recently, our broad strategy was coming from a high level in the organization and was well-established, but the tactical piece was one step at a time. But now, with the fixed-asset move under our belt, we know what can be done and how quickly.” The assistant controller of Company B said that a similar initiative to develop new processes and a new chart of accounts has meant tremendous strides in efficiency and the ability to close the books on time. Its financial processes and systems are now standardized worldwide, the result of a decision in 2000 to institute a global ERP system. Company K, too, found that its full-scale ERP implementation was a huge benefit during its transition. The assistant controller reports that the resulting uniformity and standardization has allowed the company to go in-house with shared services far more easily. Its approach is “an outgrowth of Y2K – to avoid problems by uniformity and standardization in the enterprise platform,” the company explains. Of course, the need for good data integrity goes hand in hand with any ERP initiative. Once a common chart of accounts has been established, many companies take firm measures to ensure data integrity and consistency going forward. For example, the assistant controller at Company K says it stringently maps its chart of accounts and maintains published corporate data standards. The company has a surveillance group of eight to 12 people, who go into the SAP system and do forensics. The forensic report looks for any change in the account mapping. In the complex and seismic shift to shared services, most companies begin by focusing on transactional processes such as accounts payable and receivable, order processing, travel and expense reporting, and so on. The transactional side of the business is usually the easiest to shift to a shared-services environment, because it is considered more discrete and less complex.
8
Shared Services Insights from the Companies • M etrics are critical. This need for clear expectations and defined metrics to assess whether those expectations are being met was a strong theme for many companies. Companies with well-established, thriving shared-services centers say that solid metrics are a vital aspect of the shift to shared services, in terms of good governance, assessing cost savings, monitoring efficiency, and other key concerns. Company K, for example, which has 15 major shared-services centers and nine hub centers, reports using extensive metrics, including monthly, quarterly, and annual measures. The company maintains a database with more than 200 line items, including the number of open balance-sheet items; the number of unreconciled accounts; safety statistics; personnel measures, such as headcount; number of defects; and downtime on the computer system. With two exceptions, all of its metrics have been stable or have improved over the past five years. In addition to tracking costs, Company E establishes service-level agreements with each partner; base operational metrics include quality, service, and cost. There are both input and output metrics, and in this respect the shared-services centers are treated just like factories. For instance, gross functional costs are tracked as a percentage of sales, and as compared to external benchmarks. Overall, notes the senior vice president-finance, Company E tracks more than 100 process-control metrics that include indicators like error and productivity rates. High-level metrics from a management perspective include the cost of payroll per employee and the cost of an invoice to be processed. In the compliance area, the main metrics are the annual audit and Section 404 testing. The company also does external benchmarking. Finally, within each region, a business unit may have performance-data needs specific to its circumstances and can request tracking for a particular metric. Metrics and change management are closely intertwined for many companies as they begin shifting to a shared-services environment or other sourcing alternative. Metrics can carry a great deal of weight, not merely in assessing the efficacy of the move, but in tackling the sensitive issue of change management in general, and more specifically in persuading business units to accept fundamental changes in the way they conduct business. This is certainly true for Company P, which is currently evaluating how best to move toward a shared-services environment in a corporate culture long characterized by decentralized and autonomous business units. Just as Company A views consistent metrics as a change-management tool, Company P envisions them as a catalyst for change. The vice president who was interviewed reports, “Right now, we don’t have a real emphasis on metrics yet, but we need to move towards that. For example, we’d like to do some external benchmarking to get some hard data. One of our major problems is that because we don’t have any metrics in place now, everyone thinks everything’s perfect. So if you put a new system in place and start to track things, the metrics will show that service and quality have declined. Then it looks as if the new system has failed. It’s a very awkward position – you almost need to put in the metrics first, as a wake-up call.” Company P has been considering instituting metrics for certain transactional items, like the number of checks cut and the number of invoices processed. However, the larger issue is the potential for service levels to drop. “We have some important change-management issues to address,” its vice president notes. “I’ve run an SAP implementation, so I know what it’s like to try to wrestle with some of these problems. We are going to need to mandate participation and address some personnel issues. There is an attitude of entitlement in many areas. The business units need to be told what’s expected of them.” Metrics have also been critical for Company F. According to the global head of financial accounting, “Our challenge is that we have not measured KPIs [key performance indicators] in the past, so we use current productivity measures to gauge improvement.” The company has now identified minimum target levels of operational performance. It has key performance indicators for each operational process, of which there
9
are over 100. Examples include quality of performance, error rates, the percentage of transactions that need to be rebooked, and meeting deadlines. Local management is responsible for meeting quality and productivity standards. Company M has a slightly different approach. “Our metrics are mostly around timeliness and accuracy, not so much cost. Our focus is on taking the burden off individual accounting functions. We try to keep our metrics down to five to seven key measurements,” the vice president of financial services explains. These are: th • Percentage of required account reconciliations finished by the 10 day of the business month; • Posting of manual journal entries within the closing period (by the fifth business day); • Percentage of P&Ls distributed by the 12th day of the fiscal period; • Percentage of missing bank deposits that the company’s German accounting group is notified of; • Percentage of capital project numbers set up and communicated within one day of the physical site information; • Percentage of assets placed in service in the correct period; • Percentage of invoices entered within five days of the receipt of information, as well as timeliness of payment. “We also try to make the SLAs (service-level agreements) two-way,” he adds. “In other words, did the customer provide the necessary data and information to allow the shared-services center to do its job?”
10
Co-Sourcing Definition Co -So ur cin g: To extend its in-house capabilities, the finance team uses outside professionals on a periodic basis to assist internal teams with major projects. Also known as accounting resource services, this is an approach that enables the finance team to maintain primary control of the project, which minimizes project risk, accelerates delivery time and achieves cost efficiencies.
Overview Co-sourcing is also known as accounting resource services (ARS). In March 2006, The Siegfried Group, LLP, issued a white paper that described ARS: “Unlike traditional consulting or other outsourcing options, the client maintains control of the project and provides direction to dedicated and focused professionals. Projects may include, but are not limited to: • carve-out financial statements • merger integration issues • problem accounting issues • internal-control documentation • Sarbanes-related evaluation and testing • financial analysis • internal and external reporting • internal and external auditing and forecasting • accounting position backfills. “Typically, the client is charged an hourly rate for highly qualified labor on non-annuity type projects. Depending upon the solution provider’s model, the professional providing the service could be a full-time or temporary employee or a contractor of the organization 2 that was engaged by the client.” Used on an as-needed basis primarily for special projects of limited duration, co-sourced professionals are released by the client when the project is completed, without any additional obligation or liability. Due to the fact that a co-sourced project is controlled and managed by the company, project risk is minimized, delivery time is accelerated, and the overall cost of the project is reduced. The onshore co-sourcing market is large and growing. The Siegfried Group estimates the ARS sector in 2005 was $5.12 billion. This represented a 14.2 percent increase over a similar 2004 estimate, and a compounded increase of 17.8 percent over the previous two years. Companies interviewed for this project use onshore co-sourced professionals for limited-term projects, such as Sarbanes-Oxley compliance initiatives and work related to the sale of a business. One of the companies interviewed added that it prefers this solution to using professionals from large accounting firms, who may have independence restrictions or be pulled back to perform audits for other companies.
2
“A White Paper on Accounting Resource Services (ARS), A Major Growth Sector Within the Accounting Industry,” The Siegfried Group, LLP, March 2006.
11
Co-Sourcing Insights from the Companies • U se co-sourcing for specia l projects. Like many companies, Company D uses co-sourcing for special projects. “Don’t hire people you will not need later on,” says the director of accounting. “We have had good success with our co-sourcing provider, which provides the arms and legs that we need for special projects.” Should the project scope or requirements change, external professionals can be substituted quickly. This arrangement allows the company maximum flexibility and provides it with a skilled, variable work force, but only when and if that work force is needed. Company R agrees. “From time to time, we have projects for which we need a lot of skilled people right away,” says the president and CEO of a U.S. division. “These could be special projects that have a fourto six-month life span, and it does not make sense to hire full-time people for these projects.” He is very satisfied with the people sent by his co-sourcing provider. “They are well-versed in sophisticated financial procedures, and they are quick learners.” The senior vice president and CFO of Company G used a co-sourcing provider when he worked at another company for Sarbanes-Oxley Section 404 documentation work, and also for the consolidation of acquisitions. Currently, his company uses a co-sourcing provider for financial reporting, financial planning and analysis, and acquisition due diligence. He said that the provider is a good fit for the company’s needs, because its people are highly skilled, flexible, and have broad knowledge. The provider focuses solely on accounting and finance co-sourcing. “When you work with a services firm, you want to be in the core of their business,” he points out. An outside auditing firm is used for internal-control systems. The company’s aim is to deploy co-sourcing strategically to make costs more variable, enable a focus on more strategic activities, and access external skills and talent. Overall, Company G has been very satisfied with its providers, a big change from 10 years ago, according to our interviewee, when “it was very difficult to find highly qualified people.” Likewise, Company I uses co-sourcing “to extend our internal capabilities on large, complex projects. We’re not looking for people to key-punch,” emphasizes its U.S. controller. She explains that “we used co-sourcing heavily when we did the carve-out and sale of one of our businesses, which was a three-year project overall.” She adds, “We can always go to these firms [co-sourcing providers] when we have a need. Therefore, there’s no point in hiring and then terminating more employees on a project basis.” The company prefers to contract people first rather than hire them from the outset, to ensure adequate coverage for a project and avoid permanent hires too early on. In other words, “If we think we may need eight people for a project, but aren’t sure, we sometimes contract four and hire four. Even if we end up hiring eight people later on, we err on the side of contracting at first so that we’re not overcommitted.” Company C uses co-sourcing with Web-based software providers that can add value to the company’s existing finance operations. “We will implement a [co-sourcing] solution if we determine that it improves our ability to efficiently complete all or a portion of the steps in the total process,” says the vice president of financial operations. “For example, in our payables processing, we co-source the OCR (optical character recognition) scanning of invoices that are not already sent electronically, in order to reduce internal data-entry costs.”
12
Co-Sourcing Insights from the Companies • U sing co-sourcing to backf ill in ternal employees adds both flexibilit y and capacity. Co-sourcing can also provide companies with much-needed flexibility and additional capacity during times of transition, ensuring the seamless completion of important financial work. The senior vice president and CFO of Company G uses co-sourcing to fill high-priority, time-constrained needs to either clean up a process or to execute a new demand (such as an acquisition) where there is a real need to “do it right the first time” and put the work behind you. “The incremental resources for this type of activity often do not justify new full-time headcount,” he explains. “People try to get it done with reallocated resources, and the work doesn’t get done either as well or as fast as desired, which can be quite costly if an important business initiative suffers.” The director of financial controls at Company Q views co-sourcing partly as “backfill for departing employees.” Also, it sometimes brings in external professionals to handle employees’ ongoing workload when the company needs to redeploy employees to take ownership of more strategic projects, such as mergers and acquisitions work. Conversely, this variable solution is occasionally used to tackle special projects in instances where the company cannot take an employee off his or her daily job. Professional fit, in terms of culture, personal attributes, and technical expertise, is critical when backfilling high-level internal positions. Decisions on co-sourcing are made at the vice president level, the director says. The company began using a new co-sourcing provider last year and has been very pleased with the results. “The key factor is the quality of people they send,” she explains. “We’ll go to whichever firm sends sharp, on-the-ball, professional people.” With its current provider, the quality of people for the price is far better than what the company has been able to find elsewhere. “Our provider is very accessible; there’s always someone in the field available. They seem to have a good model – a very high-quality employee, somebody you’d typically expect to find at a very large firm, combined with the more individualized service and lower costs of a smaller company,” she reports. Although co-sourcing has proven to be very successful for Company Q, it seems likely that as a sourcing alternative, it will eventually be absorbed into the company’s transition to shared services. This has to do with its particular corporate culture, rather than dissatisfaction with the performance of its providers. “In general, management dislikes the idea of bringing someone on, training them, and then having that expertise walk out the door – it doesn’t sit well,” our interviewee reports. Therefore, movement in the sourcing area will entail looking at other areas that the company can move into shared services, as part of an overall effort to centralize its European business as much as possible.
13
Offshoring Definition Offs h orin g : Work is done in another country, in the offices of either the client company or the service provider. Work can be completed as part of a shared-services arrangement or as part of a co-sourcing arrangement.
Overview The companies interviewed use offshore shared-services centers as a means of lowering costs. Or they may hire offshore co-sourcing providers while transitioning to an offshore shared-services center that they are planning to operate themselves. A company that is developing an offshore shared-services center in, say, India, will often use co-sourced Indian professionals to staff that center, until the company is ready to replace them with full-time company employees.
14
Offshoring Insights from the Companies • O ffshoring provides the opportunity to reduce costs. Companies are often looking for geographical and labor advantages in achieving their cost-savings goals, which is why many have shared-services centers offshore, often in India or China. Most of these centers focus on transactional processes. Examples include Company H’s shared-services center in China and Company L’s documentation function, which has been offshored to China. However, several companies had also implemented offshore shared-services centers by market region, including Europe, North America, and Latin America. Company O, which already had a major manufacturing facility in China, leveraged its well-established presence, infrastructure, and local contacts to open a shared-services center there. Today, 10 percent of the company’s finance function is in China. The center performs activities such as fixed-asset capitalization processing, inter-company activity processing, and travel and expense reporting. “Thus far, these sorts of transactional processing activities have been our main focus for shared services, so we tend to hire college graduates looking to cut their teeth with their first job. It’s not top-level work, but we feel there is room for growth in the type of job that is performed there; we’re looking to ratchet up the complexity of the activities,” explains the vice president for global financial shared services. “That said, we have kept the frontline customer support in the U.S. Someone who needs an immediate response by phone will be directed to a person here in the U.S. E-mail inquiries, on the other hand, are more likely to be directed to the shared-services organization in China,” he says. Similarly, for its offshore shared-services center, Company K hires people just out of school and also those who have two years’ experience with a multinational. At one time, the company had a fairly limited view of the development path of these offshore recruits. However, it has been impressed with their capabilities, which extend far beyond transaction work. The company believes these capabilities will open up career paths all over the world. “Our offshore recruits have outstanding skill sets. The level of their computer skills has exceeded my expectations,” says the assistant controller. “These employees are capable of fairly exotic analysis, and they are far more innovative and creative than the older workforce. They have youth and enthusiasm—they seek out change,” he observes. This has been an unexpected bonus for Company K, which initially found that the major obstacle in setting up its centers was the absence of a particular skill set in specific locales. Our interviewee counsels flexibility in strategy, both in the implementation of a labor migration strategy and in adjusting to local labor laws and conditions. Another key to its success has been its ability to gradually but steadily gain regional support from its business units, starting with its initial “proof of concept” in its Latin American market. Company K’s assistant controller also noted, “We have a number of companies to account for, as well as some complex financing activities. Our offshore shared-services centers were originally used for routine transactions. Now we are beginning to move accounting for all of this offshore.” This new shift, plus some other factors, is increasing the level and complexity of the shared-services centers’ activities. And like Company O, Company K also expects to assign more complex processes to its offshore shared-services centers as the skill set of their staffs continues to improve. Although many companies choose to largely or completely offshore their shared-services centers in pursuit of labor and real estate arbitrage, others find that a mix of domestic and offshore centers is the best fit for their business model and customer-service needs. Company A, a business-services company, is one of the latter. It incorporates both domestic and offshore shared-services centers in its vision of shared services. The company works from a build-prove-expand model, and closely examines which functions are best suited for specific locations. Currently, the company has two “smartshore” locations in El Paso, Tex., and Augusta, Ga. These shared-services centers focus on customer-facing, languagedependent functions. For example, the collections function remains onshore, because it is both client-
15
facing and language-specific, and also because there are sensitivities to moving it offshore. Planning and analysis also remain a domestic function. Company F also sought labor arbitrage and better access to talent. Currently, two-thirds of its headcount are in high-cost areas, while one-third is in the low-cost area. “Our goal is to get 45 percent of our headcount into a low-cost area and 20 percent into regional areas, with only 35 percent remaining in the high-cost area,” the global head of financial accounting reveals. Company F is now planning to move some operations to India to take advantage of lower costs. The company has decided that it has three options: outsource the operations to an Indian outsourcing firm; set up a shared-services captive in India; or co-source the Indian operations, using a combination of the first two options. The company plans to try option number three. It will provide the managers, and the Indian outsourcing firm will provide everything and everyone else. The Indian firm has better brand recognition in India, so it should be able to hire the best people. Company F reports that all of the firm’s employees have bachelor’s degrees in accounting, and 40 percent are CPAs under the Indian or English accounting systems. “They perform rules-based transactions, so we call this ‘accounting as a factory’,” our interviewee comments.
16
Offshoring Insights from the Companies • O ffshoring may create change-management issues. At Company B, a shift to an offshore co-sourcing arrangement in India for most transactional accounting and much of IT created a great deal of stress and anxiety during the transition. Company B had its first co-sourcing transaction with its Indian partner in mid-2005. According to the assistant controller, “We had a very thorough change-management process that took account of many issues – severance packages, retention bonuses, human resources issues and a detailed communication plan.” The company kept its employees apprised of the analysis and decisions as it moved closer to finalizing the co-sourcing arrangement. Some key employees left for other jobs, both inside and outside of the company, and there was concern that some key institutional knowledge might fall between the cracks. “We needed to make sure the knowledge was transferred over completely before we moved the U.S.based folks to other jobs,” the assistant controller says. Plus, the company had underestimated the attrition rate in India. Because business-process outsourcing is a top growth area there, people move around a great deal, jockeying for better positions. At one point, the attrition rate was around 80 to 90 percent, the company reports. “This was happening at the same time we were experiencing a great deal of turnover at home. And your internal customers are just as demanding, regardless of the circumstances.” In the end, detailed planning and a strong partner in India carried the day, and the arrangement has succeeded. Company B now has several co-sourcing providers based in India. “Although they are third-party providers, their team is connected into ours. We consider that we own the process and are leading the changes,” the company says. “They handle accounts payable, accounts receivable, general accounting, property and fixed-asset accounting.” The company describes its strategy as pyramid-shaped, noting that “our co-sourcing provider in India represents the base of the pyramid, the nuts-and-bolts transactional processing.” In the middle “are our core processes, those that are business-related that we want to have centralized in a lower-cost country but retain in-house.” And finally, at the top, is “our real expertise that will remain in the regions close to our business-unit customers, supporting the exceptions and unique items.”
17
Offshoring Insights from the Companies • O ffshore co-sourcing may be used to tr ansition to shared service s. Over time, Company F will need to decide whether to make its offshore co-sourcing arrangement into a foreign shared-services center. “We will have to ask ourselves, ‘Should these people be employees? Should we convert this operation into a captive?’ ” muses the global head of financial accounting. “But we are flexible, and we are not in a hurry to make a change.” By the time a decision needs to be made, the company plans to have built brand recognition in India, with the goal of attracting top-notch people on its own. It will also be able to offer a better career path, reduce turnover, and grow people into the organization who know the nuances of the business. In a similar move, Company H has teamed up with an offshore co-sourcing provider to create a center in Mumbai, which will eventually become its global shared-services center. Although it is a co-sourced operation, the Mumbai center will be managed, albeit somewhat differently, under the umbrella of the shared-services center. “Our provider is very experienced in setting up shared-services centers, particularly in dealing with local labor laws and hiring practices,” the global accounting director reports. “The center is headed up by one of our employees. Half of our ‘worker bees’ are internal people, and half are the provider’s employees, so we can hedge our bets in case the relationship doesn’t work out,” he says. The center will handle invoicing, accounts receivable, accounts payable, and payroll; some back-office customer-service functions that are not customer-facing; IT support (again, non-customer-facing); purchase-order creation; global sourcing; and supply-chain management. The Mumbai facility will gradually displace the company’s German center as its global shared-services center, although the company will probably retain certain areas of expertise in Germany, such as European Union statutory and tax expertise. The Mumbai center will represent about 15 percent of the total shared-services operations, with about 3 or 4 percent of the total shared-services budget. By comparison, Company H’s main shared-services center in the Midwest is about half of its total shared-services operations. Like many of the companies interviewed, Company H uses service-level agreements for its Mumbai operations. The metrics used include turnaround time/throughput, error rates, and cost and productivity-driven metrics.
18
Outsourcing Definition The finance team looks to an outside provider to assume primary responsibility for performing or providing a specific function or deliverable.
Overview Companies usually outsource work that is not considered a core business competency, and that can be done more efficiently and at less cost by an outside provider on an ongoing basis. Outsourcing services may be provided either domestically or offshore. Finance and accounting outsourcing (FAO) to an outsourcing provider can involve a single process, such as credit and collections or accounts payable, or three or four processes, often across multiple business units. EquaTerra conducted a market study on FAO in the first half of 2006. “Over 30 percent of the respondent organizations already had undertaken FAO, and another 10 percent were in the process of doing so. Equally important, of those buyers that had undertaken outsourcing, over one-third planned to expand 3 efforts going forward, and less than 5 percent planned to curtail or eliminate them.” Here are some of the key findings of this EquaTerra market study: • Multi-purpose deals have been smaller, and one- or two-process deals are still popular. • FAO more often is coupled with other alternative sourcing strategies, like shared services, as well as internal process-improvement efforts that are undertaken in advance of – or in lieu of – outsourcing. • India-based service providers are making solid FAO inroads, typically through point-solution deals, and nearly always in buyer accounts, where they already are performing ITO (information technology outsourcing) work. • Mid-market demand for FAO is strong, particularly in tax and accounts payable, and is attracting both Indian and tier-one multinational service providers’ attention. Since 2000, EquaTerra has seen approximately 100 FAO deals involving three or more functional areas, with a total contract value in excess of $10 million. Companies typically outsource routine transactions, such as payroll and accounts payable, and also higher-level work, such as taxes and external financial reporting, in foreign countries where the company does not have local expertise.
3
“How real is the Finance & Accounting outsourcing market?” EquaTerra, February 2007.
19
Outsourcing Insights from the Companies • S elect highly function ing processes to outsource. The consensus of our interviewees was that you need to get your own house in order before you can succeed at outsourcing. In other words, most companies said that they needed to be sure they had a good handle on their own processes before going to outsource providers. As the vice president of financial operations at Company C says, “Our key strategy is to obtain internal efficiencies – to get our arms around existing processes, make them as efficient as possible first, and then talk to outsourcing providers. We want to keep those profits for ourselves, not hand them over to an outsourcer.” But, he cautions, “This takes discipline: to ensure that you have adequate measurements in place to benchmark, and to know that you are getting more efficient every year. Our people are measured on efficiency and effectiveness. This has allowed us to grow the business without adding staff.” Echoing these sentiments, the senior vice president and controller at Company N observes that in his organization, “we always want to make sure that our processes are working properly before we outsource. You can’t outsource something that doesn’t work – you must make sure the interface is working. Otherwise you have quality issues. If you approach it in this way, you get greater efficiencies from your partner because of their scale or knowledge.” The vice president of financial services at Company M agrees. The company does outsource some of its functions, including travel and expense payments, as well as the printing and mailing of customer invoices. However, within its organization, there is a desire and a need to develop a strategy – “get it right and then outsource,” the company says. “We want to consolidate – get it all back in under our wing, stabilize things, and then outsource,” our interviewee explains. “Our business is growing so fast that we need to be careful what we do.” It is faced with a difficult dilemma, he says, because “our processes are too fragmented, but if we turn them over to a third party to fix, it will end up being too costly.” Yet in the right circumstances, outsourcing can prove very effective for some companies. Company L is one company that has successfully outsourced a number of its functions, including HR, documentation, cash management, and most of IT. “If it’s a process you can do worldwide, we outsource it,” says the CFO for the Americas of his company’s approach. With the documentation function, costs were a big factor, plus the need to find people willing to perform this kind of work. Cost savings were also a factor in offshoring financial and cash management – “the idea of getting a float on the dollars was appealing,” he notes. Plus, the company has found that closer tracking of metrics has improved its service levels – in cash management, for example, it tracks error rates and clearance time for checks. In the documentation area, it focuses on the error rate as well as the number of e-mails sent, “because previously we had a long turnaround time,” he notes. An improved control environment is an additional benefit. “There is lots of regulatory compliance, which is one reason to outsource it to one location. If you centralize it, it’s easier to address the regulatory issues.” Keenly aware of the change-management issues inherent in an outsourcing initiative, the company has proceeded with due caution and solid numbers on its side. Whenever it outsources anything, it always has a budget and a cost-benefit analysis. The payback has usually come within two years. This is a key point, because “some of the things we have done involve big changes to the organization, so you need not only a good plan, but good ROI,” advises our interviewee, adding, “You need to be able to convince other people and get buy-in. The financial side is one way of selling it.”
20
Appendix A “2007 Annual Report: Technology Issues for Financial Executives,” Financial Executives Research Foundation, June 2007 (Sel ect ed hig hlig hts ) FEI members were surveyed between January and March 2007 on a variety of technology issues that they face, including outsourcing. The results were distributed in the “2007 Annual Report: Technology Issues for Financial Executives” (Financial Executives Research Foundation, June 2007). Here are some of the questions regarding outsourcing: Ha s y ou r or ga niz atio n al re a dy out so ur ce d an y activitie s or pr oc ess es, o r d o es it pla n t o do so withi n th e ne xt y e ar ? Payroll was, by far, the most commonly outsourced activity, with 57 percent of the respondents indicating that their companies outsource payroll. Only about 5 percent of the respondents outsourced accounting, although another 5 percent planned to outsource it the following year. For ea ch ar e a th at is c ur re ntly o uts ou rc ed, h o w s ucc ess ful ha s th e arr a ng em ent b ee n ? As in the previous year, the report card on outsourcing produced very good grades. Eighty-five percent of respondents that have outsourced one or more areas consider their arrangements to be successful. Of all the outsourced areas, payroll got the highest marks, with 93 percent rating it successful. Ho w imp ort ant ar e th e follo win g crite ria to yo ur o rg a nizati on w h en it ev alu at es w h at activitie s to o uts ou rc e? “Not a core competence” and “cost is too high,” together representing over 70 percent of responses, are the main drivers of outsourcing as an activity. Companies outsource processes and activities that they cannot do well or are too costly in-house. Do y ou c urr e ntly us e – or pl an to use – a sh ar e d-s er vice s c e nte r f or tr an sa ctio nal acc o unti ng or ot he r s ervic es ? The most commonly implemented shared services continue to be “internal processes”, those that provide services to individuals or other functions within the organization. These processes include payroll, travel, and information technology, and they are also the most commonly outsourced activities. For ea ch ar e a c urr e ntly in a sh ar e d-s ervi c es arr a ng em en t, h o w s ucc es sful ha s t he op er atio n be e n? Shared services, the “in-sourcing” or centralization of common, repetitive processes, technology and personnel, appears to be overwhelmingly successful, with about 90 percent of respondents reporting either highly successful or moderately successful results. Similar to the previous year, the percentage of respondents reporting “highly successful” results remained at 50 percent.
21
Appendix B Company Profiles Com p an y A Company A, a business services company, has about 40,000 employees worldwide. Of these employees, about 1,200 are in accounting and finance. Company A has decentralized financial operations, with operations located around the world. It describes its financial operations model as “distributed.” However, although this model has worked well in the past, the company now plans to migrate to a shared-services model for three primary reasons: 1. The company wants to reduce the cost of its financial operations, or at least slow the rate of cost increases, which it expects to achieve through the use of shared services. 2. The company expects that the use of shared services will allow it to refocus its financial resources. If less time and effort is spent on business administration, more time and effort can be devoted to business analysis. 3. The company expects to achieve better overall control with shared services, which will reduce the number of systems that must be documented, maintained, tested, and audited in compliance with Sarbanes-Oxley Section 404. Company A expects to complete its transition to shared services within the next year. In the process, it will reduce the number of financial operations centers, as well as the number of employees, and thus cut costs. The company has a number of legacy systems that are over 20 years old. As it migrates to shared services, it will replace these legacy systems with one enterprise resource planning (ERP) system.
Com p an y B Company B, a metal manufacturing company, has about 124,000 employees worldwide. Of these employees, about 1,800 are in accounting and finance. The company has a very lean finance organization, with a distinct set of best practices. Most of the company’s transactional processing and expertise services in the non-core areas of the company are contained in its shared-services centers. The company’s financial processes and systems are standardized worldwide. In 2000, the company decided to implement a global ERP system and some complementary systems. It developed new processes, which included a new chart of accounts, and built a transactional foundation. This has enabled the company to make tremendous strides in efficiency and its ability to close the books on time. All of this was done before the Sarbanes-Oxley Act of 2002 was signed into law, so the company had a much easier time with compliance than it otherwise might have had. In mid-2005, the company had its first business-processing outsourcing (BPO) transaction with its Indian co-sourcing partner. It used a very thorough change-management process that encompassed many issues – severance packages, retention bonuses, human resources issues and a detailed communication plan. One key consideration was ensuring that institutional knowledge was transferred over completely to its partner before moving U.S.-based employees to other jobs. Company B describes its strategy as a pyramid. The Indian provider represents the base of the pyramid, the nuts-and-bolts transactional processing. In the middle are its core processes, those that are businessrelated, and that the company wants to centralize in a lower-cost country, but retain in-house. At the top is its real expertise, which will remain close to business-unit customers.
22
Com p an y C Company C is in the distribution business, with over 10,000 employees. Currently, the company operates globally, providing value-added services, supply-chain management and warehouse distribution. The company uses a shared-services model for its financial operations domestically, although it outsources payroll and cash application/bank processing transactions. Records management, including financial records, is also outsourced. Its key strategy is to obtain internal efficiencies. Due to internal priorities within finance- and accounting-related functions, outsourcing has been reviewed and is an option. However, it wants to “get its arms around” existing processes and make them as efficient as possible, before evaluating the costs and benefits of other sourcing alternatives. Given that approach, it is not surprising to find no full-scale outsourcing of financial operations at the company. Over the past several years, the company has focused on process improvements and restructuring, resulting in over 50-percent cost savings in financial shared services. However, the company acknowledges that in order to continue improving, it may need to consider outsourcing in the future, as well as in-sourcing its own operations globally. Company C approaches any kind of sourcing endeavor from the standpoint of efficiency and “what’s right for the business,” and the customer and supplier relationships are critical to the success of the business. Therefore, incremental cost savings may in fact be disruptive to the operation. This is important, because its model is less about direct distribution and more about customer relationships. Key customer relationships must remain under the company’s control, and they will not be outsourced, even if that means overstaffing
Com p an y D Company D is in the biotechnology industry. It has about 3,500 employees worldwide, of which 250 are in finance. About 200 of those finance employees are in the controller’s office. The company’s approach to sourcing is to hire the finance talent that it needs to grow its business, particularly for project management, and then to use co-sourcing for special projects and as a way of trying out employees before hiring them on permanently. The company has used the services of a co-sourcing provider since last summer, as a way of bringing more resources to the table without making a permanent commitment. In general, these employees have performed lower-level, transactional tasks, and the company has had good success with them thus far. It has also used other firms that have higher-level people with project management experience. Payroll, accounts payable, and international operations are all done in-house. The company doesn’t do any outsourcing, nor does it have a shared-services center. Currently, the company sees no reason to reevaluate that decision.
23
Com p an y E Company E is a global, diversified manufacturing and technology corporation. It has about 24,500 employees worldwide, including approximately 10,000 employees in the U.S. About 650 employees report to the CFO. Finance comprises five groups: control, treasury, technical accounting, tax, and shared services. The company has three regional shared-services centers, located in the U.S., China, and Eastern Europe, each of which supports its operating units. The shared-services centers handle: • payroll (U.S.); • credit management and cash applications; • purchase orders and customer service; and • general accounting. The U.S. shared-services center also has a consolidation and reporting group.
Com p an y F Company F is a financial-services company based in Europe. It has 3,000 full-time equivalents in the finance function, including 900 in financial accounting and 800 in product control; 900 employees report to the chief accounting officer. The company does not have shared-services centers per se, but that is how it describes its back-office function. In January 2006, it took certain functions shared by its divisions and consolidated them into the shared-services divisions. Strategically, the company’s approach has been to take back-office activities from its divisions and consolidate them into a centralized back office. The next step will be to look at consolidation. The company wants to get as much work as possible done offshore. It plans to centralize physically both the front and back office into lower-cost locations. The two primary sourcing objectives are better access to talent, at a lower cost and a lower attrition rate, and the ability to place employees in growth areas, especially Asia. Company F found that its competitors were using shared-services centers offshore for both front-office and back-office work, including high-end processes, rather than just lower-risk processes. It started with low-risk, simpler operations, and then moved on to higher-level processes. The company plans to use shared services not just for payroll and accounts payable, but also intercompany reconciliations for the financial-statement closing. Eventually, it will examine all processes that could be consolidated at offshore sites, where costs are lower.
Com p an y G Company G is a media company that provides programs in 170 countries. It has 4,500 employees, of which 650 are in finance. Company G has four operating divisions, each with its own CFO and its own controller. The U.S. division has a shared-services center that handles treasury and accounts payable. Outside of North America, it has accounting centers in four major regions: Asia, Latin America, Europe, and the United Kingdom. The company relies on co-sourcing for staff augmentation, because co-sourced employees have a high skill level and do not mind changing projects. It prefers this solution rather than using professionals from large accounting organizations, which have independence restrictions and may pull employees back to perform audits.
24
Com p an y H Company H, a global chemical company, has manufacturing operations in 40 countries, and does business in about 170. The company has a total of 43,000 employees, of which 1,600 are in finance. The company describes itself as being heavily centralized in the finance area, and all of its processes are standardized worldwide. Company H has a shared-services center in Europe. Some activities are being moved from this center to a co-sourcing center in India.
Com p an y I Company I, a chemical manufacturing company, has about 60,000 employees worldwide. The finance function has about 3,500 employees, and the company describes itself as a decentralized matrix, with both centralized and decentralized areas. The company has used a range of sourcing services for different needs. For example, it used co-sourcing heavily in the carve-out and sale of one of its businesses. A project staff, comprised of its co-sourcing provider and in-house staff, collaborated on this three-year project. It also used co-sourcing providers for early Sarbanes-Oxley compliance work. The company also uses professionals, such as CPAs, to extend its capabilities on large, complex projects. It generally doesn’t seek out temporary staffing for lower-level, transactional tasks. Outsourcing is limited to the accounts payable function of the parent company. Company I has a European shared-services center, which it implemented because of the cost incentives at the time. In general, finance has been driving the decisions about when and how to use the sharedservices center. However, the company says it is at a point where it can’t keep everything in one center, so it is reevaluating its options.
Com p an y J Company J, a diversified manufacturer, has 60,000 employees worldwide, of which 1,600 are in finance. Company J uses shared services for general ledger, payroll, accounts payable and receivable, and fixed assets. Different areas of the company worldwide are at different stages of implementation in terms of shared services. The company says it uses shared services because it can maintain control, and it thinks that shared services are just as cost-effective as other alternatives. It believes that companies cannot build institutional knowledge and organizational capability when relying on outsourcing.
25
Com p an y K Company K, an energy company, has 80,000 employees, with 5,000 finance employees. The company began doing pilot projects for a shared-services center in Latin America in the latter part of 2000. In 2002, it decided to go global with its shared-services philosophy. It began to develop a sharedservices environment in the lowest-risk areas first, and worked its way up to the more complex regions. Currently it has shared-services centers in Latin America, Asia, North America, and Europe. A full-scale ERP implementation greatly facilitated the company’s move toward in-house shared services. That approach was an outgrowth of Y2K—to avoid problems by having uniformity and standardization in the enterprise platform. The company does not do outsourcing or co-sourcing because it prefers not to rely heavily on outsiders. However, it does use consultants from time to time on a project basis. Company K now has 8,500 people worldwide in its shared-services centers. By 2008, it will have more than 10,000, because it will be using shared services for more sophisticated areas. It expects to have 1,600 to 1,800 employees there in finance alone.
Com p an y L Company L is in the liner shipping and container industry and is headquartered in Europe. It has over 3,500 employees worldwide, with about 650 in the Americas. Company L uses shared-services centers, and it has focused its outsourcing efforts on processes that are standardized and less reliant on people and communications. It believes that functions that are more people-oriented, or that require specific skills, are difficult to outsource. For example, although the company has outsourced payroll, timesheets, and many of its benefits, the more personal side of human resources, which requires communicating with employees and unions, cannot be outsourced. Company L has moved its documentation function to China, to be handled by the Asia CFO’s organization. Cost savings and process improvement were the main drivers in this decision. Other areas, such as its call center and special projects, are outsourced to consultants, because it does not have the internal expertise necessary. For most of the outsourcing, it used a project team from the outsourcing provider, in collaboration with internal staff. Given the emphasis on easily automated functions, the key to successful outsourcing is to look at the quality and consistency of processes and systems that the provider is offering, the company says. Also, companies need vendors with decision-making authority and an ability to solve technical problems.
26
Com p an y M Company M, a retailer, has 150,000 employees worldwide. About 700 of these employees are in the finance function. The company is slowly migrating toward shared services. However, it has examined outsourcing for its European operations, and has concluded that it doesn’t yet have enough critical mass to turn over a function to an outsourcer. The consensus is that the company needs to standardize and streamline its business processes, to develop a common chart of accounts, before it can move to outsourcing or shared services. There has been a cultural barrier against outsourcing certain functions, although that barrier is disappearing as the company grows and resources are increasingly squeezed. But the company says that any potential outsourcing provider would have to understand and operate within the company’s unique corporate culture.
Com p an y N Company N is in the engineering-services industry. It has about 10,000 employees worldwide. In its highly decentralized finance function, only about five people report directly to the CFO, but there are about 400 to 500 people in finance worldwide. Currently, the company outsources only payroll and some tax preparation. It does everything else inhouse, including paperless billing. It did consider outsourcing a few months ago for more transactional finance functions, but decided that there was no one company that it wanted to work with. With only 25 people in accounts payable and receivable, the current leadership is not interested in using an offshore provider. Management would rather have the expertise remain in the U.S. Nevertheless, the company does look at various ways to reduce costs. For example, it is considering moving some of the more routine finance functions to more cost-effective locations. And the company has used staff augmentation in the IT area, for special projects.
Com p an y O Company O, a telecommunications company, has about 60,000 employees worldwide. The company uses a shared-services center for its financial operations. Ten percent of its finance function is in China, where its shared-services center is located. The center performs activities such as accounts payable processing, fixed-asset capitalization processing, inter-company activity processing, and travel and expense reporting. Overall, Company O doesn’t do much outsourcing, but it does outsource certain human resources and IT support functions.
Com p an y P Company P is a media company with approximately 8,000 “overhead” employees (excluding production personnel). Of those employees, approximately 900 are in finance/accounting or related areas, and about half (approximately 450) of those are based in North America. The company has several areas that work as a type of shared service, including accounts payable, MIS, and human resources. It is contemplating the costs and benefits of doing more, and is discreetly exploring all kinds of alternative sourcing models (e.g., shared services, outsourcing, etc.) The company is looking for benefits such as lower total costs, improved efficiency, continuous improvement, better standardization, and improved service.
27
Com p an y Q Company Q is in the business services industry. It has 18,000 employees, of which about 70 percent are based in the U.S. The company has two shared-services centers, one in North America and one in the United Kingdom. It uses co-sourcing in both locations as short-term backfill for departing employees as well as for projects that require special expertise.
Com p an y R Company R is a financial-services company based in Europe. The company started its shared-services centers two years ago. These centers now employ people with comparable skills to those in North America or Europe at less cost. As the company shifts work to these shared-services centers, it uses co-sourcing services to help with the transition.
****************************************************************************
28
About the Authors William M. Sinnett is director of research at Financial Executives Research Foundation, Inc. He received a master’s of business administration from the University of Pittsburgh. Prior to joining FERF, he held positions in financial management with Mellon Bank and Carnegie-Mellon University. Bill can be reached at
[email protected] and (973) 765-1004. Rhona L. Ferling is currently a research associate at Financial Executives Research Foundation, Inc. She was formerly the publications manager at FERF and the senior editor at Financial Executive magazine. Rhona was also a senior developmental editor at Bloomberg Press.
About the Sponsor, The Siegfried Group, LLP Established in 1988, The Siegfried Group helps clients who experience periodic surges in critical accounting and finance work to strategically extend and enhance their internal workforce. The Siegfried Group is the nation's only CPA firm dedicated exclusively to providing Fortune 1000 companies and other major organizations with ready access to consultant-quality accounting and finance professionals. These full-time, career-focused Siegfried employees are highly motivated and committed to executing client initiatives. By allowing clients to maintain complete project control, Siegfried's accounting resource services model minimizes project risk, accelerates delivery time and results in cost efficiencies. The Siegfried Group's more than 500 full-time professionals operate out of 20 offices nationwide, with the ability to service clients throughout the U.S. and globally. For more information about The Siegfried Group, visit the company Web site at www.siegfriedgroup.com.
About CFIT FEI’s Committee on Finance and Information Technology (CFIT) is a national FEI technical committee that addresses the needs and interests of financial executives as strategic leaders, as they strive to realize measurable and sustainable performance improvements, while maintaining financial control. The committee’s priorities will be driven by the key trends in information technologies it identifies, and its top priorities for the coming year will be: • Corporate performance management (CPM), • Emerging technologies (including XBRL), • Governance (incIuding IT and system controls), and • Sourcing (including BPO). For more information about CFIT, visit its Web page on the FEI Web site: http://www.financialexecutives.org
About Financial Executives Research Foundation, Inc. Financial Executives Research Foundation, Inc. (FERF) is the non-profit 501(c)3 research affiliate of Financial Executives International (FEI). FERF researchers identify key financial issues and develop impartial, timely research reports for FEI members and nonmembers alike, in a variety of publication formats. The foundation relies primarily on voluntary tax-deductible contributions from corporations and individuals. The views set forth in this publication are those of the authors and do not necessarily represent those of the Financial Executives Research Foundation Board as a whole, individual trustees, employees, or the members of the Advisory Committee. Financial Executives Research Foundation shall be held harmless against any claims, demands, suits, damages, injuries, costs, or expenses of any kind or nature whatsoever, except such liabilities as may result solely from misconduct or improper performance by the foundation or any of its representatives. This and more than 80 other Research Foundation publications can be ordered by logging onto http://www.ferf.org
Financial Executives Research Foundation, Inc. 200 Campus Drive Florham Park, New Jersey 07932 Copyright © 2007 by Financial Executives Research Foundation, Inc. All rights reserved. No part of this publication may be reproduced in any form or by any means without written permission from the publisher. International Standard Book Number 1-933130-63-6 Printed in the United States of America First Printing Authorization to photocopy items for internal or personal use, or the internal or personal use of specific clients, is granted by Financial Executives Research Foundation, Inc., provided that an appropriate fee is paid to Copyright Clearance Center, 222 Rosewood Drive, Danvers, MA 01923. Fee inquiries can be directed to Copyright Clearance Center at 978-750-8400. For further information, please check Copyright Clearance Center online at: http://www.copyright.com
30
Financial Exec utives Res earc h Foundation, I nc. would like to a cknowledge the fo llowin g for their support and generosity:
Fiscal Year 2008 MAJOR GIFT DONOR: $50,000 Exxon Mobil Corporation Microsoft Corporation PLATINUM PRESIDENT’S CIRCLE: $15,000 + The Coca-Cola Company GOLD PRESIDENT’S CIRCLE: $10,000 - $14,999 Abbott Laboratories SILVER PRESIDENT’S CIRCLE: $5,000 - $9,999 American International Group, Inc. Cisco Systems Corning Incorporated Cummins, Inc. CVS Corporation Dow Chemical Company El Paso Corporation General Electric Company, Inc. Halliburton Company IBM Corporation Johnson & Johnson Siemens AG Sony Corporation of America Tenneco Time Warner, Inc. Verizon Foundation
business / research
