Diligently determining which model is best for you can help you better meet outsourcing and control goals.

by Bob Cecil

As companies increasingly consider outsourcing their F&A processes, few would consider ceding ownership for process strategy and policy setting to a service provider. On the flip side, few would argue against the service provider assuming responsibility for administrative process delivery. But what about the middle of the spectrum, shown in Figure 1? Who should own process development and management and systems development and maintenance?

This middle ground is the area where companies choose different solutions, and the service provider marketplace is segmented.
Clients often seek help as they evaluate this complex middle ground. Frequently, the outcome is a comprehensive joint-ownership structure segmented into four types of outsourcing models, as described in Figure 2.

• Lift and Shift. Under the lift-and-shift model, the buyer acquires people and infrastructure that support transaction processing. Benefits primarily accrue through labor arbitrage and organizational de-layering. The buyer is typically left with control, accountability, and innovation responsibilities and often receives 15- to 25-percent savings.

Middle-ground discussions are relatively straightforward because the lines of ownership are typically clear. This model is attractive for companies that have already undertaken process and system transformation, don’t foresee significant additional process transformation opportunities, and are highly concerned about losing employee competencies in F&A transactional process innovation and management.

However, before choosing this model, a bit of introspection is advised. First, has your company truly been successful in your transformation initiatives, or are you choosing the model because it’s more comfortable? Are you delaying the inevitable and creating unnecessary organizational pain and potentially thousands of patches? Do you really need to retain competencies in transaction process management and development, or is this just a legacy holdover?

• Continuous Improvement. Operating under a similar philosophy is the continuous improvement model, in which the buyer acquires capability in addition to capacity. Companies are seeking access to Six Sigma and ongoing process improvement without a meaningful capital investment. The buyer typically retains accountability for major process and technology improvement with steady-state process improvement responsibilities transferred to the provider. Savings under this model often range from 20 to 30 percent.

Middle-ground discussions become increasingly challenging as process improvement objectives and price guarantees are embedded in a relationship with the buyer retaining control of most aspects. Specific negotiations reside around topics such as timing of training, improved performance around month- and year-end close, invoice exception resolution, and aged payables and receivables.

This model is attractive to buyers desiring regular, ongoing, “locked-in” productivity savings not necessarily delivered by the lift-and-shift model. Companies also adopt this model if they feel they have the capabilities and willingness to internally manage “step-change” improvements using software providers and other partners, yet want someone else to handle the daily improvement agenda.

• Enhancement. In the enhancement model, buyers access an enabling solution in addition to capability and capacity. The provider offers a layer of technology such as self-service applications and workflow among other supporting technologies. A significant change is that productivity improvement accountability resides mostly with the provider, with typical savings of 30 to 40 percent.

The increased complexity in the middle ground is often offset by the increased value the provider delivers through its supporting applications and resulting process improvements. As many systems may need to exchange information regularly, increased clarity around specific ownership of the technology interfaces is critical. End-user acceptance of these applications and the underlying process changes required will often drive the savings and require negotiation.

• Transformation. The transformation model represents a significant shift of responsibility to the provider as it assumes the people, facilities, supporting and underlying applications, and systems infrastructure. Through this model, the provider assumes responsibility for control and productivity improvements. The net result is savings in the 40- to 50-percent range, yet these types of transactions are always the most complex to negotiate.

Due to the significant transfer of ownership, buyers can expect to spend much time mired in the middle ground to allow a line of sight into how transformation objectives may be realized. The savings opportunities are compelling, but don’t expect to walk away from the process once outsourced. There will be significant change to manage internally, and the question of innovation is often overlooked at the contract signing. Buyers must be prepared to challenge the provider, perhaps building innovation clauses into the contract and performing regular innovation reviews against others in the industry. Work through your company objectives, savings targets, ownership requirements, etc., and utilize this framework to understand the value and the middle-ground ownership complexity of each model.