Way forward for financial accounting outsourcing industry
Thursday, 11 September 2014 01:43
The Business Processing Management (BPM) sphere is recognised as a star performer for many countries, but it is imperative that it ventures into new areas if it is to maintain its growth momentum.
In an attempt to highlight areas of potential, Ernst and Young (EY), the Association of Chartered Certified Accountants (ACCA) and the Sri Lanka Association for Software and Service Companies (SLASSCOM) jointly organised a top briefing where expert insights on accounting outsourcing and shared services were provided.
Indentifying Financial Accounting Outsourcing (FAO) as the new avenue of growth, the forum aimed at showcasing how this emerging service will help boost the BPM Sector.
While it is not always about saving costs, but about transforming companies by adding value to activities, SLASSCOM Executive Director Imran Furkan cautioned that if an organisation only focuses on the former it will become irrelevant sooner rather than later since the first time the client gets an opportunity the service will be recalled.
Outlook for FAO industry
In terms of the global market at the moment the BPM industry is about a $1 trillion and out of that FAO is about $ 25 billion, accounting for 3%.
With the pioneers of BPM is the IT industry where they were providing services to other industries the FAO is really a late comer to this although it is a crucial part of an organisation. And often it is the last to be outsourced.
Looking at the FAO industry forecast from 2012 to 2017, it is observed that Source to Pay Outsourcing will grow the fastest, at an annual compound rate of about 14%. This process is closely followed by Record to Report Outsourcing that is growing by 13.5%, Multi process F&A and BPO, growing by 12.6%, Procure to Report Outsourcing 10.9% and Order to Cash which shows an annual growth of 5.1%.
Although the latter (Order to Cash) is the biggest segment, it is expected to grow at a slower rate compared to the rest.
Looking at industries that have taken up FAO, it is the traditional industries such as banking, finance and insurance which have been greatly involved in this arena. With the energy sector now coming in it is indentified that the next opportune area for FAO to flourish is the public sector.
According to Furkan, there are enormous pressures on governments in terms of reducing costs and one good way of doing this is to outsource the accounting systems. The public sector offers huge opportunity for the outsourcing industry, particularly for the FAO industry and there are only a handful of countries that have gone forward and tapped that market.
“I say there are huge opportunities since there are very few functions that have actually been outsource in the FAO space. We as an industry have failed to show value beyond cost. Organisations are reluctant to outsource critical functions and are afraid to let go. The opportunities are in the high end processing, one where there will be lots of value in terms of the bottom line of the outsourcing provider,” he noted.
“Once a mission critical component has been outsourced and the vendor is very comfortable, they will not pull back. It is not like a call center that is peripheral to their organisation,” added Furkan.
Key market issues impacting F&A BPM
Noting that 2015 will see a maturing of organisational approaches to outsourcing and shared services, gone are the excuses and now is the time for execution after the “uncertain years” Furkan asserted. Two-thirds of organisations care about improving their sourcing capabilities beyond merely meeting green-lights metrics. There is a need for change management and to shift the corporate mindset to cost to value dominate enterprise sourcing agenda.
With three-quarters of large-scale enterprises focusing on hybrid shared services and outsourcing frameworks, outsourcing buyers are getting what they paid for, which is cost-reduction and efficient delivery. However, they are not getting what they now want, which is innovation, analytical capability and skilled talent that help define business outcomes.
With 2015 expected to be a critical year for the future of South Asian-based BPM delivery, it is observed that cost differentials are closing, especially in Europe for mid-level skills.
There is a desire to standardise fuelling market for platform-based solutions that can industrialise processes and providers with strong tech-enablement capabilities stand to gain.
As talent issues are expected to come to the forefront there is a need for the workforce to be analytical and innovative and enterprises to gear up for achieving tactical measures. However, it is noted that 50% of providers fail to have formal training for their own staff in strategic skills.
Future of F&A outsourcing market: Vertical focus
Furkan noted that with there being a greater trend towards the ultimate catering of industry-specific focused FAO services, clients have referenced vertical or industry focused scope of services importance.
This is resulting in a few providers holding strong positions within verticals. The trend is expected to continue in the future, where service providers will become F&A experts within given industries.
Notable industries where clients prefer providers with specific vertical capability are Pharma, CPG and Insurance.
However, noted is a blur between procurement and F&A with companies looking to reduce overhead and find synergies between the lines of corporate groups. According to Furkan, it will be imperative for service providers to keep abreast of the changing landscape and address finance and procurement needs together.
Going beyond labor arbitrage, compared to previous years, clients are noted to be much more focused on innovation and process improvement. As the F&A BPO market nears maturity, those providers that are able to provide clear and measurable innovative improvements will continue to dominate market share as buyers move towards a clear innovative motivation versus cost.
The need for more interaction between a provider’s client bases is abundantly clear. It was shared that clients have called for more cross collaboration, to better understand how other companies are leveraging their F&A BPO and where best practices can be identified. It is expected for providers to start providing forms of regional or vertical focus groups in their F&A BPO client pool.
Vibes of FAO and shared services
The findings of a recent report compiled by the ACCA under the title “Finance Transformation: Expert Insights on Shared Services and Outsourcing” suggest that although significant benefits from shared services and outsourcing for the finance function have been realised, there are greater opportunities to drive business performance in the future.
While finance transformation is about rethinking and putting in place an entirely new approach that helps in leveraging expertise and best practice to reconfigure the finance function, it has only one key objective.
The key objective is to significantly improve business performance, operational effectiveness and efficiency through SSC & FAO to restructure the finance function with multi-year finance transformation projects, along with putting in place structural changes in cost and improve performance and bring in change management initiatives that involves new processes, systems and IT.
Highlighting the vibes of FAO and shared services discussed by the top global experts, EY Senior Director Accounting Compliance and Reporting/ SLASSCOM Council Member Praveen Ruberu presented nine strategies that should be adopted to move forward in this area.
1. No turning back from shared services and outsourcing
If the expert respondents are representative, there is no turning back from the adoption of shared services and outsourcing as a meaningful finance transformation tool. The benefits are transparency, lower cost, greater efficiency, standardisation, improved governance and more. The current issue is that these are taken for granted by the industry.
2. Different approaches to finance transformation are evident
The scope of finance transformation varies according to the business priority. It can be varied simply from focusing on improving finance processes to a business solution that unlocks the value across the organisation. The application of these delivery models are, however, still a work in progress, and different approaches to finance transformation are evident.
Ruberu pointed out that some leaders use shared services and outsourcing as a ‘functional fix’ to improve finance operations and processes, while others see finance transformation as a means to transform the business, rather than stop at a better finance function. “Regardless of the endpoint, finance leaders stand firm in their belief that transformation is a journey, not only in terms of value creation but also in the evolution of the finance model,” he noted.
3. Correlations between finance transformation ambition and sourcing strategy
It is established that there is a strong relationship between the finance model and the business transformation ambition. Where a ‘functional fix’ is sought, the sourcing model of choice is outsourcing. Conversely, those finance leaders seeking to drive business performance grapple with a greater degree of model complexity. They see beyond the finance function and focus on the “connectedness” of the finance function to the rest of the business, transforming and aligning end-to-end processes, regardless of where they are housed whether it be within the business, the retained finance function, shared services or outsourced environment. Ruberu pointed this requires significant influencing capability, internally and externally. “They understand that they must focus on the business need, evaluating the best means to integrate finance into the business in order to be effective. The solutions are not cut-and-dried.”
4. Cost remains the starting point
The starting point for finance transformation is typically a drive for reducing the cost of the finance function, freeing up valuable finance function resources to support the business in ‘higher value’ areas.
Although it is acknowledged that their first objective is always finance function cost and efficiency, some finance leaders recognise that their peers within the business to whom they are providing a finance service are not concerned about a better finance function per se, but rather the “more” – how do I get more cash, more information, more service, more business intelligence to drive business performance? To finance leaders, delivering “more” does not end with the outsource, explained Ruberu while sharing insights of the report.
5. Leaders differentiate between provider capability
Finance leaders suggest that not all finance and accounting outsourcing providers are created equal with some providers being very good “operators” and others being more strategic in their approach.
As a result, today’s finance leaders are now becoming more attuned to provider skills, placing greater demands to improve their capability. “Finance leaders are consciously mapping solutions and considering the providers ability to create value, flexibility, and their service approach against their transformation requirements, as opposed to simply the finance model, whereas providers question the ambition of finance leaders to drive the level of change required.” He added that both parties agree that there is also a question of getting the right balance in the relationship. Providers still need to be able to tell the client things they may not want to hear; “tough love” is cited as a key buying value in provider selection.
6. Finance transformation success rests on change management
Change management is viewed as the single largest barrier to finance transformation success, while most finance leaders stressed the need for good communication, several focused on the essence of change – the organisation’s ability to absorb new ways of working.
Notably, the so-called ‘softer stuff’ continues to be the number one impediment to achieving transformation success. Finance leaders and outsource providers alike name change management as the biggest barrier, and in particular cite the organisation’s inability to assimilate new ways of working as a key challenge. For their part, providers remain confused as to why clients still do not deliver change management effectively.
7. The ‘retained’ finance function capability is the prime driver of value
The capability of the retained finance team is also a significant barrier to transformation success. The roles and skills of the retained finance team have typically not been well articulated, impacting the ability of the finance function to support the business more effectively.
Concerns about the capability of the retained team are equally evident. From the client side the challenge for finance leaders is no longer a question of “am I doing the right thing by adopting a remote model?” It is now a question of “how does the retained team add value and how can we implement a complete end-to-end vision for finance that best supports the business?” The experts see ongoing concerns about the ability of the retained finance team to work within a different finance function model, both from the standpoint of engagement and capability. In particular, the roles and skills of the retained finance team have typically not been well-articulated, affecting the ability of the finance function to support the business most effectively.
8. Client-provider relationship continues to be misaligned
Finance leaders are vocal about the natural misalignment between themselves and the provider, believing that service delivery is often suboptimal, different incentivisation approaches, varying transformation expectations and goals, and different economic interest in transition speed. Finance leaders express concern that some providers promote a “one size fits all” approach to the finance model, whereas providers question the ambition of finance leaders to drive the level of change required.
9. Service and service delivery
Whilst cost benefits have been realised through finance transformation activity, there is a sense that “service” benefits are more elusive; a good service to clients from providers goes beyond simply meeting service level agreements (SLAs).
There is a growing realisation from finance leaders of clients that effective sourcing is synonymous with service, and that while cost benefits are achievable, service benefits are rather more elusive. Increasingly, finance leaders differentiate between the quality of service delivery they receive and the achievement of service level agreements. Providers often recognise that green indicators on service level agreements do not necessarily mean the client is happy.
Pix by Upul Abayasekara