Understanding Finance Outsourcing


Outsourcing the finance function
by Alexa Michael

The use of finance and accounting outsourcing (FAO) by organisations of all sizes is increasing across the world. Companies use FAO to gain at least one of the following benefits: reduced costs; superior expertise; fewer labour shortages; access to better technology; improved processes and productivity; and the chance to move existing staff to work of higher value.There are three stages in the FAO process: making the decision; selecting the provider; and managing the relationship. Managing the relationship begins during the selection process when you make a request for proposal and start communicating with the provider. This tends to be the most problematic aspect of outsourcing.

Making the decision
At this stage the organisation should conduct four separate, but overlapping evaluations. First, you need to identify the strategic drivers. Why are you considering outsourcing, and do those reasons support your strategic objectives, directions and plans?

Second, you must evaluate the full range of options. Should you leave the processes in their current state, improve existing internal processes (for example, by adopting a different model such as shared services), or opt for FAO? You must consider carefully the advantages and disadvantages of each.

Third, you should assess your company’s internal capabilities in terms of essential employees and business expertise. Will the organisation be able to manage the transition to the outsourcing provider? Do you have the expertise and staff to monitor and manage the contract from start to finish (or renewal)?

Lastly you need to agree the scope and logic of any outsourcing arrangement. This involves finalising the FAO business case and choosing which processes to outsource.

Selecting the provider
If an organisation decides to outsource, it must seek providers to match its needs. Selectors must understand and compare the merits of each provider’s proposal and ensure that they are comparing like with like. You should consider the size of the provider and be aware of any likely changes in ownership, since management upheavals might affect service levels. You should also be sure that the partner has a high output standard.

Managing the relationship
One common mistake is to underestimate the amount of time, energy and resources necessary to make outsourcing relationships successful. The purpose of outsourcing finance and accountancy related processes, particularly transactional activities, is to perform them more efficiently. By definition, the outsourcing provider will do things differently. This means that your company’s staff need to interact with the outsourced processes (and the provider’s staff) in different ways. They must be able to change.

At the outset you should negotiate a contract and service-level agreement (SLA) with the outsourcing provider that should describe the services to be provided. This part of the contract will also state which processes need to change to meet the provider’s standards and which will remain unchanged. When it comes to SLAs, it is important to include qualitative and quantitative measures to monitor and manage the relationship – particularly regarding vendor performance.

Pricing is a key element of any FAO agreement and must be considered as part of the SLA. A detailed pricing model should be drawn up at this stage. As FAO has matured, pricing systems have changed to ensure that they encourage the right relationship between buyer and provider. There has been a shift away from traditional pricing models such as cost-plus, fixed price and fee for service, and a move to more variable pricing mechanisms and “shared-risk-reward” pricing arrangements so that both parties can potentially profit. For example, for debt collection processes a provider can recover debts that are too small for large companies to collect efficiently on their own. A share of the extra revenue recovered can go to the provider.

The SLA should also stipulate how changes relating to the execution of processes during the outsourcing agreement will affect pricing. A change in delivery may affect the scope of the contract – eg., new processes may be added or existing ones deleted from a multi-process arrangement if the buyer decides to take them back in-house.

Similarly, a change in the volume of work to be transacted would affect the price, as could ownership changes to either the buyer or the outsourcing company. External changes, such as new regulations that affect how a process is performed, will also have cost implications. The SLA will need to include the potential for change which may occur during the FAO agreement.

Another key part of managing the relationship involves transferring your processes and knowledge to the provider. This depends on effective project management to clarify roles and responsibilities and to establish a project method. The project team should:

  • Establish a project plan, milestones and roles for individuals and teams.
  • Create a communication plan to reach everybody involved in the outsourcing process, including employees whose roles will be changed or eliminated.
  • Transfer employees to the outsourcer or terminate their employment and redeploy staff to alternative roles.
  • Address potential negative reactions from employees who lose their jobs.
  • Identify and provide training and communications to end users.

The FAO relationship can be more effective if the following management and monitoring steps are taken:

  • Select people with the necessary authority on both sides to manage the relationship for the duration of the contract.
  • Track qualitative and quantitative measures as stated in the SLA to monitor the outsourcer’s performance.
  • Set up formal processes for meetings with the provider.
  • Establish formal troubleshooting processes so that problems are tackled as they occur.
  • Visit the FAO provider’s workplace at least once every other year during the contract.
  • Agree a process for changing the contract. This should include adding or deleting processes from the original contract, amending performance objectives and adjusting prices.
  • Use qualitative and quantitative performance monitoring as the basis of any decision to renew, renegotiate or terminate the contract.

Source: http://www.jobstreet.com.my/learning/ot61.htm

Alexa Michael is an information specialist at CIMA. This article is contributed by CIMA (The Chartered Institute of Management Accountants) and it first appeared in Financial Management, CIMA’s monthly magazine for its members.

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