High level overview of F&A Outsourcing

The purpose of this white paper is to disseminate information in this field to the stakeholders in this line
of activity. What is indisputable is that any business that has grown to more than about $25 million in
sales has begun to encounter growth-related challenges in back-office processes that may be suitable
for handing over to an outsourcing partner. Many of the companies catalyzing changes are outsourcing
to shed processes and operations that no longer give them a competitive distinction. There are two
stake holders in this activity and they are the Corporate customer and the Service provider ( SP )
Vendor and there needs to be a partnership between these two. This paper would discuss at a high
level the cradle to constantly improving matured services life cycle process of F&A outsourcing. In the
current competitive environ of BPO, only the players who have the ability to have an integrated
solutions in place as well as to innovate on the requirements can survive.
The paper is segregated into four areas from the
1) Business drivers for an organization to outsource
2) challenges involved in outsourcing
3) actual implementation and transition and
4) constant improvement.
1. Business drivers for an organization to outsource
In todays economic challenges in running a business profitably, more and more CFOs are realizing
that they need to outsource their mundane everyday activities that do not add strategic value to
the organizations growth and bottom line. For an organization to prosper and become a leader,
there needs to be a few ingredients built into the system as far as F&A is concerned. Instead of the
CFOs time spent on controlling the Non Core activities like payables, receivables he/she can spend
quality time on how to further the interests of the organization like decisions in early to market
product development, innovative pricing etc. The company that outsources need to have their
priorities right from identifying the core from the non core activities and analyzing the cost benefit
analysis of outsourcing each activity. What is Core and Non core activity need to be identified by the
individual company as the priorities might change from company to company even within the same
industry. The segregation of the activities between core and non core activities as well as whether
they can be outsourced can be done keeping in mind the following characteristics ( Complexity,
cash flow released by outsourcing, volume, sensitivity, skillsets availability as well as whether that
activity is delinkable ). The business drivers of an organization to outsource is listed below.
a.
b.
c.
d.
e.
f.
g.
h.

Cost Advantage
Get access to world class capabilities and best business practices
Increase cash flow
Economies of scale
Catalyst to business process reengineering
Improved data quality for optimal decision making
Skilled accounting workforce
Level playing ground for competing with others players in the market

Cost advantage The cost advantage of outsourcing is always talked about only from the angle of
cost arbitrage. There is definitely a big advantage in this by way of lower labor costs as well as per seat
costs in terms of overheads. But the biggest cost advantage accruing is not in terms of this cost
arbitrage but in productivity, turn around time and quality. These advantages accrue due to the
processes built by the service provider in terms of standardization, quality initiatives and constant
lowering of the costs. The transactions are driven by Metrics particularly for productivity, quality and
turn around time. Automation of transactions need also be explored to see how to leverage the
lowering of dependence on labor. The activities need to be broken down into their task level details
and productivity need to be measured at that level to quantum increase the same. The labor arbitrage

would slowly and steadily become smaller and so it is imperative that the vendors start looking at
increasing their value adds in all three areas of productivity, quality and turn around time by using
their resources, processes and technology more intelligently. This would require a complete rethink on
how the BPO is looked at at present.
Access to world class capabilities The capabilities built by the Service provider is in having a
LEAN accounting machine which works on the basis of standardized processes and Metrics driven
approach. The support by the service provider is SLA driven and works to the advantage of both the
customer and himself. The SP has the domain knowledge and builds competencies in specific areas to
service the customer in a better way in terms of quality and On time Data. The best business practices
are not in terms of the regular business but in terms of the changed circumstances of an outsourced
environ. One example can be use of technology in enabling business to d things faster like using
Vendor portals where the vendor can login with his password and check for him selves his transactions
and come back with clarifications only where necessary.
Increase cash flow The cash flow for an organization is blocked for every resource employed in
terms of labor and labor related costs, office space, overheads like lighting, electricity etc. These costs
are freed by outsourcing. This cash flow available can then be used for furthering the business
interests. The other costs involved with a resource like training costs, incentives etc are again freed by
outsourcing the positions.
Economies of Scale It is very easy and economically less costly for an service provider to ramp up
in times of need and scale down when necessary whereas the customer would have to think of
forecasted business when scaling up and once scaled up, it is difficult to scale down and thereby
encountering heavy expenses. The ramp up of the service provider for the business does not
proportionately increase the costs and there is a direct correlation to the increase of the bottom line for
the customers business.

Catalyst to the business process re-engineering Costs associated with the BPO analysis phase
can be mitigated through a variety of tactics. For example, the exercise of mapping organizational
processes in the interest of determining their suitability for BPO also reveals opportunities for
reengineering. Processes that have gone unexamined for a period of time almost assuredly have
become bloated and inefficient in a number of ways, some subtle and some not so subtle.The process
maps developed during the analysis phase should be used to catalyze reengineering efforts directed at
those inefficient or unproductive processes that are not outsourced. It is natural for a company to
introduce processes for situations that become unwieldy or complex over a period of time. This
happens unless there is a strict watch on the introduction of the processes as well as stepping back and
having a 360 degree look at how the process needs to be integrated into the existing processes. The
outsourcing initiative helps in achieving both these objectives. Re-engineer existing business
processes and making sure that processes that are brought in after this have a synergistic effect on the
business activities.
Improved data quality for optimal decision making By outsourcing to a good service provider
with the proper Service Level Agreements as checks, the data that is entered in the system would help
the business to take optimal decisions. The metrics that should be brought in place by the service
provider would take care of this quality requirements.
Skilled accounting workforce There is ample skilled work force in the developing countries and
India is no exception. The service provider would have ample skilled work force in all areas of its
operations as well as training programs to see that there is a constant up gradation of the skill sets to
match that of the requirements.
Level playing ground for competing with other players in the market - Most of the S mall and
Medium segment organizations would need to be innovative in cutting down their costs and increasing
revenue and this initiative of outsourcing would help them in cutting down their costs as well as give
them the advantage of quality data to increase their business by way of business intelligence gathered.

Challenges in outsourcing The main challenges in outsourcing are

a. The first challenge is in making sure that the morale of the existing employees is kept
high and the outsourcing roadmap is made very transparent to everyone concerned.
Also, this helps in the employees to be redeployed in other Core areas appreciate the
initiative and help it to be a success. This also helps in attrition control of the important
employees.
b. The second challenge is in top management support. Unless the top management of the
organizations is committed to this initiative, it would be very difficult to make this
successful . The effort to make this a success have to come from both sides.
c. Expectation setting and expectation management needs to be tuned to a skill set and
consistent regular communications need to be kept up till the relationship stabilizes.
d. The third challenge would be in the operations area. Unless the service provider acts like
an extension of the organization supporting the business operations in terms of its goals
and objectives.
e. With SOX compliance in the picture, the transaction processing needs to be aligned in
line with SAS70 compliance requirements.
f. Security of the data is paramount importance and this would need special attention.
g. Business continuity planning in place to take care of unforeseen events
Actual Implementation & Transition The implementation starts with an understanding of the
existing processes and selecting the processes that can be outsourced to get the best benefit of this
initiative. Once the processes are selected, the future processes to be, taking into consideration the
changed circumstances of BPO in the picture and its mapping is done with the customers agreement.
The transition of this knowledge is done by the transition manager from the service provider side and
the internal controls as well as the operations are tested to check that it is working and is in place.
Base lining of the existing performance level is important as that would help in fixing the metrics and
the achievement of the targets. The process would include an overlap period with the inhouse staff of
the customer to understand all the issues involved in the processes before it is finally transitioned to
offshore. Once the transition happens, the transactions are done in a pilot phase where the customer
gives tacit support to the offshore staff. Organization hierarchy involving the staff of the vendor is put
in place and roles and responsibilities frozen. The SLA drawn up in this phase helps in understanding
the expectations and it is this that drives the BPO initiative right through its lifetime. Metrics is agreed
to by both the customer and vendor and would be part of the SLA. Reviews at frequent intervals to iron
out the challenges in the project helps in streamlining the initiative. Communication, communications
and again communication is the only answer to making BPO a success.
Improvement strategies The ideal way to go for improvement in processes or new technology
adoption would be after utilizing the same processes of the customers for some time for stabilizing the
changeover and after a quiet period start on the improvement activities in terms of technology and
processes . Constant improvement is the only strategy to keep the cost under check and for the
customer to enjoy the benefits arising out of this initiative. The improvement strategy approach should
not be done in an overboard manner as the main benefit out of outsourcing comes out of
standardization and repetition of the work. The improvement can be out of technology innovations,
process improvements or out of the box thinking in the approach to doing the routing things. There are
two components of financial perspective. One is functional efficiency and the other is functional
effectiveness. An efficiency gain is a) Reduced inputs for the same output b) Reduced process for the
same output c) Additional outputs or improved quality for the same inputs and d) improved ratios of
cost / Output.
Using Balanced Score card approach is very useful not only to get loyal customers but also for
improvement opportunities.

One more approach is to bench mark yourself against the Industry

Benchmarking:
Ask yourself these questions:
"How are we doing?"
"Are we tracking the right measures?"
"How do we compare with others?"
"Are we making progress fast enough?"
"Are we using the best practices?"

Identifying and segregating of all activities by breaking them down to the tasks and sub tasks level
between wasteful activities and needed activities is an on going process . This weeding of wasteful
tasks need to be done at periodical intervals as there is a propensity of these activities getting
attached to the processes over a period of time.

Understanding & Eliminating Waste

All processes always
consist of two types of
activities Work and
Waste.
Work = Value Added
Activity
Activity that
meets
customer
requirements
Something
customers are
willing to pay
for
Waste = Non-Value
Added Activity
Activity that
adds no value
to the customer
Simply raises
costs in our
business!
So lets look at every
type of waste in more
detail

Observe that 2 Things are ALWAYS Happening. . .

Things that should be done

WORK

Things that should not be done

WASTE

Before

After

Time
Value Added Work
Non Value Added Work

It Either Adds Value or Does Not

Finance Example:

Reduce the number of

purchase orders that must
be matched by using blanket
purchase
orders and automate threeway matching.

Improving the business processes on a consistent basis would have a large impact on the bottomline.
One dollar saved is one dollar earned should be the motto of every organization and outsourcing is the
first step in this direction.
Calculating your total cost of ownership (TCO) enables you to establish a baseline for comparing
before and after results, which can be based on the total cost of running the business in its current
state how much does it cost your organization to conduct business transactions using existing
processes? By improving the efficiency of executing business processes, your organization can
effectively reduce its TCO for running the business.
The primary characteristics of operational efficiency are cycle time and required resources, both of
which can be used as units of measure. Cycle time is the total time required for executing your
business processes from end to end and at a task level, and required resources are the total number of
people and/or systems it takes to execute such business processes. Plainly stated, the more time and
resources that are required to ensure that processes are fully executed, the more money it costs to
organization all of which has a downstream impact on the customer in one way or another, whether

from a servicing perspective or in the form of a financial penalty. Furthermore, reducing human
involvement in the process has several advantages. For starters, it greatly reduces the amount of time
required to perform any given task within the process. Secondly, humans are prone to committing
errors. Such errors cost the organization additional time and cost to correct. Much of this overhead can
be avoided if human involvement was kept to a minimum.
Improvements in organizations operational efficiency translate directly into cost reduction, which in
turn means hard-dollar cost savings to the organization. These tangible benefits directly influence the
bottom line.

Operating processes must be designed to meet customer requirements and drive business
performance.

Processes are measurable and must be continually improved.

Managers and process owners are personally accountable for process performance.

Decision-making should be based on facts, not assumptions.

Process control systems describe process priorities and performance and should be understood
and used by all associates.

Best practices should be identified and replicated wherever possible.

Each associate should seek continuous improvement in everything they do.

Summarization - To summarize, this article touches upon at a high level, a few main areas of
outsourcing to give an appreciation of the concept to the audience. BPO is based on the fundamental
proposition that organizations should focus on what they do best and outsource everything else. While
these areas are representative of the F&A sphere there are quite a few other areas that would need
mention like easier assimilation of acquired companies into the standardized accounting engine and
thereby getting synergy in terms of vital data for making optimum decisions. Once the traditional BPO
is stabilized for some time, it would be deal to go in for transformational outsourcing.
Transformation outsourcing - Transformation outsourcing is defined as a long-term relationship through
which an outsourcing vendor assists the buyer in stimulating continuous business change while also
achieving operational effectiveness.
BPO

BTO

Operational focus

Business focus

Focus on cost cutting

Focus on value creation

Impose tight controls

Manage uncertainty

Fixed-bid fees

Performance-based fees

Offload non core functions

Create business change