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Finance and Accounting Outsourcing (FAO) dramatically changes the ratio of workers to middle managers. This change creates a promising reengineering opportunity for the outsourcing buyer. This article discusses how the reengineering opportunities, which occur in FAO more than any other BPO initiative, develop and how buyers can take advantage of them to create even more outsourcing value.

If you look at the data (see Exhibit 1 below), the finance and accounting (F&A) processes that companies outsource most often are accounts payable, accounts receivable, and general accounting. Buyers outsource these processes because the primary driver of FAO is cost reduction through labor arbitrage; these processes are the most labor-intensive since they are transaction-based processes.

Exhibit 1

When approaching the outsourcing of business processes, most companies today realize that they need to not only focus on the transaction but also on the design and implementation of the governance structure and processes. By addressing governance in addition to the transaction itself, a company has covered all of the bases...right? Wrong! There are three areas organizations need to address:

1. in-scope functions
2. governance function
3. retained organization

The middle-management layer of the F&A function handles many responsibilities; one of those is the management of the transaction-processing tasks and workforce. When you disaggregate the core transaction F&A processes, you remove a large number of workers relative to the total size of the F&A function. This frees up a portion of the F&A middle-management's capacity.

What Happens to F&A Middle Management Post Outsourcing?

There are four possibilities for the F&A middle managers after the outsourcing of multiple F&A processes:

1. Governance: New positions are required to manage the various necessary governance functions such as relationship management, performance management, demand management, contract management, budgeting and chargeback, etc.
2. Retained Processes: As of yet, no large company has outsourced 100 percent of its F&A functions. Therefore, managers are required to continue to manage the processes that are out of scope for the outsourcing.
3. Underinvested Activities: Within every company there is high-value strategic work that has been underinvested. This is the classic case of the urgent taking precedence over the important. The transaction-processing work is always urgent and always gets staffed. The less urgent but more important financial support such as strategic planning, M&A strategy, long-range forecasting, and business analysis are often understaffed. I see many companies wisely using some of the savings produced from the FAO transaction to fund previously understaffed higher value-adding activities.
4. Redundancy: Some positions become redundant and are eliminated through a reduction-in-force (RIF) process that produces additional direct-cost savings directly associated with the outsourcing.

How Do We Figure All This Out?

Determining how many and which people to move to governance, retained processes, under-invested activities, and redundancy can be done accurately and efficiently if you go about it the right way. Performing the assessment and implementation of the changes to the retained organization cannot be done as an afterthought; it requires a well-run reengineering project.

The reengineering effort needs to be run like any other major change program; that is, you need to identify objectives, savings targets, a project team, progress measurement mechanisms, communications, change management, and a steering body.

A reengineering project has a life cycle similar to many other change programs; that is, there is an assessment phase, a design phase, and an implementation phase. The design of the new reengineered retained organization is done best when thinking is from right to left; that is, don't start thinking about what you have and work from that starting point. This approach produces incremental change that will be suboptimal.

Instead, work right to left. Start by designing the 'to be' state that is best aligned with your corporate structure, your marketplace, and your business strategy.

What Implications Does This Have for Buyers?

FAO dramatically changes the ratio of workers to middle managers. Therefore, in FAO, more than any other BPO initiative, the buyer of outsourcing has a reengineering opportunity. The direct savings associated with the labor arbitrage on the transactional work can be achieved without the reengineering of the retained organization, and this is the approach that some buyers of FAO follow. However, the savings and impact to the buyer are far greater when buyers take a thoughtful approach to reengineering the retained organization.

Lessons from the Outsourcing Journal:

• In Finance and Accounting Outsourcing, companies most often outsource the transactional processing work such as accounts payable, accounts receivable, and general accounting.
• Given the magnitude of the change of the ratio of accounting workers to middle managers, there is a retained organization reengineering opportunity.
• In the past, the thinking was that a buyer had two things to get right, the outsourcing transaction and the outsourcing governance. However, there is a third: reengineering the retained organization.
• The reengineering should not be seen as a daunting task or an afterthought; it needs to be run and managed like any other major change program.

Publish Date: October 2006

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Copyright © 2006 - Everest Partners, L.P.

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