Seize the Day
10 October 2008 Cathy Tornbohm
The rapidly growing market for F&A business process outsourcing is experiencing trends familiar to those in other sectors, but most enterprises are missing the chance to learn from them. Cathy Tornbohm, research director at Gartner, tells CEO about the opportunities available.
Projections of growth for the F&A business process outsourcing (BPO) market show that industry analysts expect it to remain a hot sector in the years ahead. Gartner, for instance, expects demand for F&A BPO to show global growth of 14% CAGR from 2006 to 2011 as companies look to cut their transaction processing costs and access low-cost labour markets.
Demand for all types of F&A BPO is expanding, though accounts payable and accounts receivable are still the dominant areas and account for 70% of the global market in terms of staff numbers. Service providers nevertheless recognise the potential to build out their services, and many are actively improving their ability to hand over processes such as procurement, and payroll and benefits administration.
As the market grows it seems that companies are starting to look beyond mere cost cutting to unearth additional business benefits and greater efficiency in the finance function, but new buyers are failing to understand their responsibilities in outsourcing deals, and many still approach them with an attitude of short-termism.
"There is definitely a lot more interest in F&A BPO," says Cathy Tornbohm, research vice-president at Gartner. "Companies see positive experiences of other firms and realise their need to cut costs and get to grips with the back office, but every time it seems that the lessons we saw in IT outsourcing are not informing BPO activities. Mistakes are being repeated."
Tornbohm too often sees companies going straight to the RFP stage or starting with a small piece of the finance function instead of taking a holistic approach that considers the impact of BPO on the whole of the business. She also notes that this failure to widen the focus means that companies often fail to form a proper team of representatives from across the business to lead the BPO effort.
"Buyers have not had the training and lack the insight to know which approaches work. It requires common sense, but that is not enough – you need a clear methodology. Companies are not baselining costs, so they hit problems a year into their deal when companies have no comeback or dialogue with their service provider about whether costs have improved or whether books are closed faster," Tornbohm says.
For those companies that have a holistic view of the benefits of outsourcing, the advantages of baselining costs and enterprise-wide commitment in monitoring the performance of their BPO deals are in line with their strategic goals. Their experiences highlight the need for the less mature buyers of F&A BPO to be better informed and more strategic in their approach. Until that happens, many buyers will focus too much on cost reduction and too little on service improvement.
If the problems facing buyers of F&A BPO seem familiar it is because we have seen them before in other sectors of the outsourcing market. Companies would benefit from observing how outsourcing in a broader context has developed and what trends are emerging if they want to cut some corners on the way to unearthing value.
"People do not recognise that others have climbed this mountain before," notes Tornbohm. "They think it is sexy to be a pioneer and reinvent a few wheels. The only way to make them change is if senior management forces the people doing the work to get support from the whole business before they start. That doesn’t mean forcing them to get results quickly, but forcing them to develop a clear sourcing strategy. This will take more time, but will add valuable detail. "It needs to be done in such a way that the whole business can move as one and everyone knows why."
Where and how?
In forming a clear sourcing strategy there are many variables to consider and companies in sectors with strong experience of outsourcing have already faced many of the difficult decisions new buyers of F&A BPO must confront. A key consideration is where to locate a process – a decision that is influenced by whether companies are seeking short-term cost gains or long-term process improvement. To balance cost and control, for instance, companies have seen the sands shift in regard to offshoring in favour of a more sophisticated approach that blends elements of offshoring with other sourcing strategies.
Offshoring is certainly still popular, and more regions are emerging as outsourcing hot spots for the years ahead. Tornbohm notes there is an interest in stop-gaps, where companies move people to cheaper locations, and for English language services the number one location is still India, though there are lots of options elsewhere, particularly in North America and Europe. "Latin America is also up-and- coming, and we are seeing activity there such as the Capgemini deal with Unilever. Capgemini has also used China and won deals on the back of it," she says.
Capgemini took over Unilever's financial shared service centres in Santiago, Chile, and Sao Paulo, Brazil, which will be integrated into its Rightshore global delivery network in a deal that brings financial shared services for Latin American operations into the services relationship.
Countries in Asia continue to emerge, and the $250m BPO deal in which India's Infosys bought Philips' outsourcing offices in India, Poland and Thailand, opens up new locations to vie for outsourcing business with the Philippines and China.
There is also greater focus on Central and Eastern Europe, particularly as companies look to balance cost with skills and closer geographical proximity. "Often service providers have European hubs, like Dublin, though most are more expansive now," says Tornbohm.
"Prague and Krakow are popular, and Romania is emerging. In general, companies are looking further east. In the future, Ukraine and Russia will become more prominent." The trend for selling shared service centres to smaller BPO providers is also expected to continue, believes Tornbohm. "A shared service centre can be an internal captive, or a hybrid with BPO, or purely BPO. Companies have a good mix of these, but they need global counsel and a global remit, which means they need global process owners to link the shared service centre with the company’s business activities.
"A lot of companies, such as Philips and Unilever, sold their captive shared service centres after investing to build them up. Selling now means getting a better price from new players who are less experienced. If, however, the focus is on process improvement, then it may be wise to consider a worse short-term price and have better processes," she says.
At the top end of the outsourcing market the mega-deals suggest that closer relationships are developing between service providers and clients, as process improvement and mutual benefit dominate the agenda. In three of the four mega-deals in 2007, the vendor has a relationship with the client that exceeds the scope of the BPO deal.
The lessons from which F&A outsourcing buyers can learn is that establishing long-term relationships, defining ways to monitor and measure how well a BPO deal performs, and improving transparency can give buyers more flexibility, process improvement and a better chance to identify real value.
The move should be away from ad hoc sourcing to a more strategic approach. Described in many ways – rightshoring, multisourcing, blended sourcing – the challenge facing BPO buyers is to find the right balance between managing processes in-house and outsourcing, and then make the right decisions about onshoring, nearshoring or offshoring.
"Companies will continue to re-evaluate whether processes should be internal or external, Tornbohm says. "Regardless of the choice they make they will still have to decide where it should be done. Most F&A BPO deals are about labour cost arbitrage, when it should be about getting the paper out of the system."
Preparing the ground
Process inefficiencies can take many forms, but often the automation of paper-intensive processes can eliminate many problems. By way of example, Tornbohm points to the hotel industry, where information held electronically is often printed out and scanned into an ERP system, while paper copies often end up being destroyed. In this situation, better use of data through electronic information exchange between systems would greatly enhance efficiency.
Another common problem stems from the profusion of systems that impact on finance functions. Often when a company does an audit to identify these systems it uncovers more than it expects. "There are an awful lot of systems used in operations that companies don"t know about," notes Tornbohm. "One company discovered that it had over 150 systems across 42 countries, though it thought it only had one integrated ERP system."
Service providers may need access to a single, integrated ERP system and although F&A BPO usually focuses solely on the people and the processes, the competition among service providers sees them increasingly seek to include taking on the entire ERP system as part of the deal.
In terms of approaching any BPO deal, Tornbohm's advice differs from other analysts when it comes to how much work needs to be done to improve a process before it is handed over to a service provider. Although she confirms the need to identify all of the financial systems within a company and audit existing processes, she does not feel that they have to be fixed first.
While others warn that lifting and shifting a poor process to a service provider simply results in bad practice at a cheaper price, Tornbohm is less critical of this tactic. "It is not my opinion that you need to fix problems before you outsource. It makes more sense to outsource the process as it is. You don’t clean before the cleaner comes, though admittedly you might tidy up a bit. If you spend time with industry experts you will identify the steps you need to take, and you will probably realise that there is very little that needs to be bespoke for your company," she says.
With expert advice and a keen eye for the lessons of the past, companies should be able to unlock true value from F&A BPO.