The answer lies within benchmarking data. In a first of many columns, The Hackett Group discusses what it means to be “world class.”

by Michel Janssen, Richard Roth

As some FAO Today readers may have noticed, I recently joined The Hackett Group, and my first three months have been interesting because while I have found there to be significant differences in sourcing philosophies, the underlying objective of helping clients achieve their goals is the same.

I thought a good subject for my first column would be defining world-class performance. For those of you unfamiliar with The Hackett Group, we are a global strategic advisory firm that provides advisory, benchmarking, and transformation services across all of the SG&A functions.

One of the great challenges for any organization contemplating a long-term FAO relationship is forming a clear vision of what it wants to achieve beyond the initial 12 to 18 months. Sure, everybody wants cost savings from labor arbitrage, but such gains are largely short-term, adrenaline fixes. If you’re looking for a successful, long-term outsourcing marriage, you have to ensure finance’s ability to deliver sustainable world-class performance for the duration of the relationship.

DEFINING WORLD CLASS
So how do you know if you have a world-class FAO deal? One simplistic answer is to find buyers with comparable service levels and declare those with the lowest prices as the best in class. If you look closely at most existing FAO deals, you will find that almost all are based on either FTEs utilized or very transactional pricing units with corresponding SLAs. Almost by definition, none of those types of metrics will find their way to the senior executive suite as defining an organization’s performance against broader business goals. This doesn’t have to be the case.

Hackett has performed more than 3,500 benchmarks with organizations since 1992. Expertise gained through those benchmarks has led to very specific conclusions on how to view overall success for finance and accounting.

To identify the world-class finance and accounting organization, Hackett analyzes performance metrics using the Hackett Value Grid, which is designed to highlight how well the finance and accounting function is performing, using a balance between efficiency and effectiveness. Performance metrics associated with efficiency are scored on the horizontal axis, while metrics associated with effectiveness are scored on the vertical axis. “World-class overall” organizations (i.e., top quartile performers) deliberately balance the two major contributors to value (performing as cost-efficiently as possible and being focused on the highest-impact-value-contribution to the business). Conversely, world-class organizations with an exclusive focus on either efficiency or effectiveness deliberately create and follow a strategy for operating their functions in a way that is most suitable for their business operations and strategy.

BECOMING WORLD CLASS IN YOUR FAO DEAL
So how do you apply these learnings to your FAO relationship? Look at the way you measure success. While measuring the transactional portions of the FAO deal is an imperative, it is equally important to measure items that make finance and accounting successful on both an overall efficiency and effectiveness basis (Fig. 1). You want your provider looking to make your F&A professionals more efficient, maximize the ROI on technology, improve controls, upgrade analytical capabilities for the business, etc.

Why don’t organizations include these metrics in their relationships? Often, it is because many take a very tactical approach to outsourcing by focusing on labor arbitrage opportunity. Another reason is that your FAO supplier may not want to sign up for these types of metrics because it must sign up for objectives they don’t directly control. But that is exactly the point. You want your supplier to work closely with you to achieve your organization goals.

Enforce the same disciplines on your FAO provider that you would impose on yourself. It is not unreasonable to ask your potential suppliers to put 8 to 15 percent of their fees at risk to improve overall organizational goals. This may require putting a world-class performance program in place so that all parties are aligned and working toward the same objectives.

Can it be done? Absolutely. Will it be done? That remains to be seen. Such a commitment separates the high-value FAO suppliers from those focusing on commodity transactions. At the end of the day, you get what you asked for, and without full participation from your supplier, the chances of sustaining a long-lasting marriage and achieving world-class results are greatly diminished.