Finance to Go

The steady growth of the outsourcing industry is forcing CFOs to look afresh at the entire finance value chain.

Call it a sign of the times. In late 2003, GlaxoSmithKline (GSK), the £20 billion ($35 billion) U.K.-based pharmaceuticals company, began a project to uproot its U.K. financial shared services centre and move it to India. In August this year, it agreed to hand over the running of the offshore operations — including processes such as accounts payable, inter-company and financial reporting, payroll, and travel expenses — to Genpact, GE’s business process outsourcing (BPO) unit. “The decision was taken after a full review. We decided that these services could be provided at a lower cost, while maintaining our current service standards,” says David Mawdsley, a GSK spokesman.

What was a trickle of outsourcing deals last year (see “Outward bound,” CFO Europe, October 2004) is becoming a stream. Last month, for example, another heavyweight — Anglo-Dutch consumer goods firm Unilever — said it was looking at outsourcing a cluster of finance, HR and IT processes, identifying IBM and Accenture as potential service providers. According to Gartner, the technology research firm, European companies have so far signed around 70 finance and accounting (F&A) deals of various sizes and durations, with a typical value of between €40 million and €100 million ($34 million and $85 million). And they’re set to increase: Gartner predicts that by the end of 2006, 12 new major deals will be signed in the region.

The reason for the growth is compliance, says Cathy Tornbohm, London-based research director at Gartner. As firms look to “achieve global compliance with their own methodologies and to have that documented better, services such as the management of the general ledger and inter-company reporting will increasingly be outsourced,” she claims. And as providers demonstrate longer track records in managing third parties’ affairs, “comfort levels will rise” among clients, adds Bob Cecil, global F&A practice leader at EquaTerra, an outsourcing advisory firm in Houston.

Over to You

For many finance chiefs, however, the idea of relinquishing control of even low-level finance processes is one they struggle with — mostly because of the difficulty of achieving suitable management oversight and control from a distance. Add to that the fear of valuable data falling into competitors’ hands, the erosion of in-house knowledge, and the possible degradation of service levels during the handover, and the whole proposition can seem too risky to consider. In fact, in a September survey of 500 finance executives at mid-sized to large firms, industrial property insurer FM Global found that a high proportion of respondents — 84 percent in the United Kingdom, 59 percent in Germany, 48 percent in France — view their concerns about the risks associated with outsourcing as “moderate” to “high.”

Attitudes like these are understandable, notes Phil Searle, CFO of Cendant TDS International Markets, the $2 billion U.K.-based division of Cendant, a $20 billion U.S. hospitality services group. While processes like accounts payable (A/P) and receivables management may be “non-core, they are what I call ‘mission-critical,’ ” he says. “If these things fail, it doesn’t matter how non-core they are; they can destroy your business.”

There are practical difficulties, too, admits Anoop Sagoo, vice president of Accenture Finance Solutions in Europe. Cutting loose even repetitive, transactional finance processes such as accounts receivable (A/R) is rarely as simple as uncoupling, say, payroll or other non-finance processes. “Finance in most organizations remains a spider’s web of connections between different departments, which always makes it complicated,” he says.

That’s why plenty of CFOs will continue to resist the outsourcing tide. But at the very least, the fact that the option is open to them is making many finance chiefs look afresh at the total finance value chain. In doing so, they’re delving into metrics such as cost per vendor invoice, general accounting costs as a percentage of revenue, payment cycle times for travel and entertainment in days, and A/P error rates as a percentage of claims. Says Rick Roth, Atlanta-based chief research officer at Hackett, the business advisory group: “World-class companies are looking broadly, asking, is this process of competitive advantage to me, and what’s the best way to do it? Should it be done within a business unit, in corporate headquarters, in shared service centers (SSCs) onshore or offshore, or should we outsource it altogether?”

Location, Location, Location

Hackett calls this model “selective sourcing”; others call it “smart sourcing.” For his part, Searle of Cendant TDS prefers the term “multi-dimensional sourcing,” in which cost — the traditional driver of outsourcing and offshoring — is only one input. “You look at the whole range of F&A services, along processes and across your global footprint, and map them to your existing and desired cost structure, your service delivery requirements, your available and planned systems, processes and infrastructure, your in-house and desired skill levels, and your company risk profile,” he says.

That’s exactly what Searle did while corporate controller between 1998 and 2003 at 3Com, a $700 million Massachusetts-based network equipment maker. Shared services at 3Com had been used in the United States since the mid-1990s, while the worldwide billing, credit, and collection functions were in a global centre in Singapore and three regional centers in Santa Clara, California; Buenos Aires, and Hemel Hempstead, in the United Kingdom.

After spending a few years rolling out various performance improvement initiatives — including document imaging technology, electronic funds transmission, and online expense reporting — Searle turned his attention to location, and the optimal distribution of finance services. Having looked at possible outsourcing alternatives, Searle and his team decided to ship out a number of global functions to the centre in Singapore — among them fixed asset accounting, vendor master maintenance, and English-speaking expenses processing and reimbursement. Meanwhile, despite the higher labor costs in the United States, an assessment of “risk and complexity” led Searle to retain certain activities in North America, such as worldwide commission processing and payment, inter-company accounting and sales data management. Finally, the team decided to leave several processes in the old regional hubs — such as general ledger, revenue accounting, local payroll and VAT compliance — largely because of language and time zone considerations.

A similar evaluation is now happening at Cendant TDS, where Searle is examining its SSCs in Slough (U.K.), Hong Kong, Sydney, Delhi, and Gurgaon. (The last, in India, inherited after the acquisition earlier this year of Ebookers, a U.K. online travel agency.) He’s also pushing the “multi-dimensional sourcing” message as part of his advisory board membership of the Brussels-based Shared Services and BPO Association. “Looking up and down the finance value chain to understand what needs to go where: these are questions every CFO should be asking himself,” he says.

Indian Express

Kevin Radley would go along with that. As chief operating officer and finance director of the U.K. arm of LogicaCMG, a £1.6 billion IT services and wireless telecoms provider, he’s spent much of the past 18 months masterminding the transfer of many of the firm’s U.K. finance activities to its fast-growing facility in Bangalore, where around 1,500 staff handle IT services and product development as well as run a technical support desk for customers.

The move, effective from March this year, was a result of the gradual stitching together of two finance teams following the merger of Britain’s Logica and Anglo-Dutch CMG in 2002. “There was a need to upgrade our processes to reflect larger volumes, and we needed to create a platform that could be used by the entire group,” Radley explains. Adds group CFO Seamus Keating: “It’s no longer sufficient to just have your productive, billable capacity in lower cost locations. The more of your support costs that you can do in lower-cost parts of the world, the more competitive you’re going to be.”

Today, the U.K. finance function — handling around 60,000 supplier invoices, 36,000 customer invoices, and 500,000 ledger entries a year — is split between the firm’s headquarters in London, Bangalore, and Bridgend, South Wales. “Whether they’re onsite, offsite, near-shore, or offshore, they’re all part of the same structure, following the same standards and business systems,” says Radley.

Poles Apart

One firm that has opted for the straight outsourcing route, meanwhile, is Danfoss, a €2 billion Danish manufacturer of heating and refrigeration systems. In July, the firm began to migrate transactional processes related to A/R, A/P, general ledger, and cash management and banking from 37 sites in 26 locations in Europe to a Capgemini-owned BPO centre in Krakow, Poland.

CFO Ole Steen Andersen says it took a year of internal debates about the merits of both in-house and outsourcing models to settle on the €20m, seven-year deal. As he explains, the original plan was to centralize the “less strategic parts of the finance function” within the firm’s captive operation (covering IT, logistics, admin, and HR), and to find somewhere in Europe to house this new finance arm. “But when it came to making a decision on location, we got more and more into thinking about outsourcing, relying on someone else’s experience,” he says. “Aside from the reductions in operating costs, we saw we could achieve greater visibility, consolidation and accountability, and move from a country-based organization to one that is process led.”

Outsourcing was something Danfoss had considered before. What held the firm back, says Andersen, was a misperception that they were activities only Danfoss could do: “It takes a little bit of time to get around that, to say, ‘OK, maybe it’s not really true.’ ” And now that Denmark’s largest industrial group has led the way, he expects others to follow: “Every company should at least think about it.”

Whatever model a firm selects, it should be reviewed regularly, says Cecil of EquaTerra, “to see if the blend you’ve selected is still the right fit.” That applies, of course, if the company has outsourced a chunk of finance processes: “After the initial flurry of post-contract excitement, there’s a clear danger that BPO arrangements slide into maintenance mode,” warns Simon Lindley, a London-based consultant at Orbys Consulting, an outsourcing advisory firm. But it applies just as much to SSCs. Says Tornbohm of Gartner: “SSCs don’t necessarily have service level agreements, and if they haven’t been performing to a level you’d like, you can’t penalize them, because you’d be penalizing yourself.”

One thing is certain: there’s no going back to the way things were. “Ten years ago, back-office accounting was pretty basic: finance sat next to everybody else, did debits and credits and reported up,” says Searle of Cendant TDS. “Today there are so many options available.”

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