Former CFO, FAO metrics guru, and FAO provider Chris Gattenio of IBM has been an advisor for more than 1,000 CFOs. This month, she examines how outsourcing can deliver value beyond cost efficiency and serve as a strategic enabler of change.

by Chris Gattenio

Q. How do successful companies use F&A outsourcing as a facilitator of strategic initiatives?

A: With the global FAO market in a state of rapid growth, many leading-edge companies have already discovered that while outsourcing delivers extensive savings, process efficiency, and labor arbitrage, the value in choosing a flexible, strategically aligned partner can be the biggest differentiator in a competitive market.

A strong outsourcing partner will leverage its expertise to adapt to a client’s changing environment, linking its own objectives to the evolving strategic initiatives of the client organization throughout the life of a contract. The following is an example of how careful alignment of objectives can ensure a company’s success—in this case, in an invoice-to-cash outsourcing environment.

INDUSTRY DOWNTURN
In early 2001, one of IBM’s high-tech clients was at the top of its industry. A world leader in its field, the company was reaping the benefits of the extraordinary global sales growth, thanks to expanded internet technology and service offerings. By the middle of that year, a massive, industry-wide downturn had slowed spending and halted the rapid acceleration of the technology sector.    

The company’s management team, faced with the daunting task of maintaining revenue growth in the midst of a recession, responded quickly and decisively with both strategic and organizational changes, realigning the company’s operations around its core technologies and centralizing many of its efforts. A shift in focus emerged from increasing scalability to support growing demands, to one of reducing costs and maximizing working capital without negatively affecting customers.

The company’s rapid growth and record sales had disguised underlying issues in its invoice-to-cash processes, an area that overnight had become increasingly important and had a potentially drastic impact on the company’s bottom line. Before the market’s downturn, the company had sought to optimize  its invoice-to-cash processes to fulfill scalability requirements it needed due to accelerated sales growth. The company signed IBM to manage its multi-billion-dollar European customer base.  

In the midst of the critical transition phase of the project, new and more extreme market conditions required a sharp turnaround in focus, resulting in a complete redesign of the company’s solution.

While sales growth was strong, underlying problems in the client’s processes were hidden beneath the positive metrics used to track performance, specifically percentage of current account receviables. As the client sought to maximize its working capital and reduce costs through a “back to basics” strategic focus, IBM switched gears to support the business imperative.

IBM began transitioning key components of the process, implementing its proprietary technology suite and high-caliber people, freeing up the client’s management resources and allowing the invoice-to-cash processes to become self-sufficient. With the tactical direction of the company changing, issues that required immediate attention included:

• Dispute Resolution. Due to inaccurate order entry, an increased number of defects were manifesting themselves within the receivables portfolio, disrupting cash collection, increasing days sales outstanding (DSO), aggravating cash application, and increasing transaction processing costs.
• Cash Application. Due to fragmented and inconsistent processes, resulting in poor document management and limited visibility, the client’s AR had peaked at more than $140 million in unapplied cash.
• Cash Collection. Inefficient dispute resolution and disconnected cash application processes resulted in AR balances that were inconsistent with customer perception, inhibiting effective collection of outstanding balances.

Leveraging IBM’s dispute management tools, the client connected all stakeholders to the credit management function, enabling seamless communication throughout the organization. Electronic handoffs facilitated effective responses, allowing for measurability and a granularity of visibility into the portfolio. In addition, the application of workflow techniques combined with analytical reporting tools enabled the direction of resources to key components of the output measurement that would have the biggest impact overall.

A dedicated cash application team was established in one location where copies of all remittances were directed. Access to apply cash to the client’s ERP system was only provided to this group, and clear lines of responsibility were established. Clear measures were put in place and closely monitored to ensure accountability throughout the organization.

With the processes in place, IBM introduced a more systematic, disciplined approach around cash collection, dispute resolution, and cash applications—implementing processes and technology that increased visibility into the AR portfolio, enabling more accurate forecasting and driving stronger levels of customer service.

In addition to these results, IBM’s results-driven solution has also significantly reduced the administrative burden on the client’s management teams and increased its visibility into the invoice-to-cash process, freeing the company to focus on core competencies, customer satisfaction, and working capital.

Data published with permission from IBM.