Sourcing F&A: Is It a Good Strategy for Us? And How Do We Do it Right?

Originally published on BPO Outcomes

by Tony Mataya

Of all the business processes to source, those in finance and accounting often raise the highest level of concern within organizations. Some firms refuse to consider F&A outsourcing (FAO) based on fears and doubts, and an overall risk-averse approach to outsourcing.

But how is the market for FAO doing? In a 2011 survey of buyers of outsourcing services by Hfs Research and the London School of Economics, demand for outsourcing core general and administrative services is reaching unprecedented levels.

In the survey, 31% of organizations are already doing FAO and 17% more groups plan to start within the next year. Meanwhile, the survey shows untapped demand, with half of those organizations still doing accounts payable and receivable, which are normally some of the first areas to outsource, in-house.

Increasingly, decision-makers are taking a second look and are seeking an approach to take advantage of the benefits of FAO while managing risks. In this article I will share some basic approaches and lessons learned from working with clients to source these services.

It is important to understand and clarify your objectives, systematically select the services to consider, and utilize some proven sourcing principles to get the most benefit and minimize risk while evaluating if FAO is right for you.

 First Step: Achieve Understanding

The first step in considering FAO is to understand where you are and what you are trying to accomplish. This seems intuitive, but it is often the most overlooked step, and this sets the foundation for the processes to follow. Typical objectives for organizations considering outsourcing services include:

Start with this list and review it in the context of your organization’s situation. Add any objectives not here and remove those that do not apply. Review them and validate with key stakeholders. Then, prioritize the list to understand the importance of each objective relative to the others. This provides the foundation to consider the type of services you need and keeps the team focused during the evaluation process.

There can be a tendency for the team to get lost in the details of services, vendors, scoring, and contracts and lose sight of the simple question: Why are we doing this again?

Document Your Objectives and Solutions

It is a good idea to keep the objectives posted and visible to the team during activities and communicate them to vendors to help align objectives with proposed solutions. An interesting approach is to ask the vendors to document how their proposed solution addresses each objective. It keeps them focused and helps with the evaluation. Once your objectives are clear, validated, and communicated, ask: What services should be considered for sourcing?

FAO services and processes normally include: accounts payable, accounts receivable, general accounting, treasury, tax, financial planning/analysis, performance management, management reporting, compliance, order-to-cash, procure-to-pay, and record-to-report. In the past, conventional wisdom was to include all services or make the scope as large as possible to get the interest and best pricing from potential vendors.

However, in the area of FAO, we have found that a more strategic analysis can improve the quality of the decision-making and reduce the overall time to complete the process. The first step in the process is to define “filters” that will be used to screen out the services that should not be considered. Here is a typical filter process your firm might go through with a client:

Assess the scope of services against the filters you have defined and determine the appropriate mix of services to consider for sourcing. It is important to understand that this does not mean they will be outsourced; it means they will beevaluated for outsourcing.

It is not easy to add a service late in the evaluation process, so include the services that make sense to balance cost, schedule, resources, and risk. It is also important to consider that each situation is different, and using the different filters can help guide the process. For example, one client had a department that did complex accounting in the oil and gas industry where there was no offering in the market. Not a good fit according to the market maturity filter.

However, all the other filters indicated it was a good candidate. It turned out that suppliers were very interested in offering this service, so it became a win-win situation to include the service. Once the scope of services is completed, data collection and financial base case should be completed to prepare for the remaining sourcing process and detailed evaluation. Once the organization is prepared to move forward, what are some lessons learned you should consider?

FAO Sourcing: The Basics

There is a lot of help and information for organizations considering sourcing FAO. Our firm helps clients navigate through this journey, but whether or not you use external help or do it yourself, we recommend you utilize some sourcing basics and lessons learned. Establish a good data collection process for the service areas. This can help with sourcing as well as with general management. You should have an idea of the volumes, cost drivers, service levels, resources, regulations, and processes associated with each service.

In addition, take time to document these aspects of your operations up front and it will pay long-term dividends in the quality of the services delivery, governance, and contract. Due to the sensitivity of some of these services and their touch points and regulatory oversight, it is critical to involve both internal and external auditors early to obtain their concurrence with the scope, process, and risk profile. The suppliers in the market are not as well defined by service as IT outsourcing, so it may be wise to utilize an initial process to select the subset of suppliers that are the best fit for the scope being considered. Have the potential vendors provide their views on key deal points that are essential to the solution. It is critical to maintain competition throughout the sourcing process – but having too many vendors involved can be costly.

This initial process should select a diverse mix of vendors, but no more than four to balance cost with quality. It is a good practice to include offshoring and/or nearshoring vendors as well as domestic vendors to get a full set of options for different price and risk levels. Another good practice is to utilize a common pricing template for the suppliers to respond to in order to facilitate the evaluation and minimize adjustments and normalization.

Utilize a base case to fully understand the costs associated with the services; this is usually different from the budget, so make sure the costs tie back to the services. The pricing in a sourcing transaction can help improve variability of costs, but make sure you do sensitivity analysis on the pricing for different levels of volumes to understand the impact of change in the different vendor proposals. Consider the costs of sourcing (including the ongoing governance) in the analysis of the transaction.

The contract is always an important aspect of sourcing, but with FAO, some key contractual considerations deserve special focus: confidentiality, intellectual property, liabilities and indemnities, step-in rights, audit rights, responsibilities for penalties and fees, regulatory change, Sarbanes-Oxley compliance, and termination assistance.

More and more organizations are using FAO as a strategy to accomplish business objectives. This includes an increase in small to medium-size firms considering FAO that may not have extensive sourcing experience. Sourcing vendors are starting to implement repeatable sales and delivery models to meet this need and reduce the cost of transactions.

In order to really do this right, first establish, validate, and communicate the objectives. Then, take the time to select the right services for evaluation. Finally, follow proven processes to minimize risk and improve the quality of the decision and ongoing governance of the transaction.