Transactional processes were fine to outsource, but will F&A leaders risk the general ledger in their FAO strategy? Early indications say yes.

by Andy Teng

As the CFO of an international corporation with subsidiaries in a number of locations, you’ve grown comfortable with the idea of outsourcing highly transactional processes such as payroll, accounts payable, or accounts receivable. Your comfort level may even extend to fixed assets or other general accounting functions. But when it comes to the general ledger, that’s where you draw the line, right?

If you answered yes, don’t worry—you’re not alone. The FAO movement has deep roots in outsourcing transactional processing, so it’s no surprise that when it comes to outsourcing general ledger work, some accounting and finance leaders balk. After all, the GL is the complete financial picture of an organization, and entrusting its administration to a third-party service provider is akin to asking the CFO or controller to give up an organ. A vendor that messes up a few payables might not harm the bottom line too much, but problems in maintaining the GL can resonate throughout the entire organizations and affect financial statements. That might be why many finance leaders have not embraced the outsourcing of GL work. Until now.

As FAO’s value proposition continues to evolve, more practitioners realize that GL services can be outsourced as easily as the other pillars of FAO—AP and AR. In fact, some providers observe that existing buyers—as well as new ones drawn to the marketplace—are increasingly weighing the idea of including GL in their full-service outsourcing deals. As finance leaders everywhere grow comfortable with outsourcing pieces of their domain—garnering significant cost savings, as well as access to the best practices and technological tools of vendors—they are willing to incorporate higher-value processes in their outsourcing strategy.

Moreover, the benefits of redirecting skilled accountants from performing GL work to more strategic functions such as business analytics are becoming abundantly clear to today’s buyers. This fact, coupled with an increasingly sophisticated market, speaks volumes about the direction FAO practices are headed.

“I think what it’s telling us is you have a combination of a maturing marketplace and buyers growing more comfortable with outsourcing. Suppliers now have capabilities that are competent for handling judgment-intensive activities,” said Katrina Menzigian, vice president of research at Everest Research Institute , a Dallas-based sourcing advisory firm. “If you were to look at how these processes are stacked together, it’s a natural flow in and out of the GL from AP and AR.”

Menzigian pointed out that today’s FAO market is quickly moving up the value chain, and buyers only stand to benefit from more sophisticated offerings. Outsourcing GL work is just one example of the ability of providers—whether onshore or offshore—to move from strictly transactional to higher-skill services. Because of the high visibility of GL processing, providers must be able to deliver at a consistently high level to be successful, she added. It’s also necessary to instill confidence in the buyer that FAO, as a whole, is a viable practice.

In a report released earlier this year, Everest noted that while 85 percent of the FAO workforce is still distributed across labor-intensive activities such as AP, AR, payroll, and others, a growing number of suppliers are adding accountants and other highly skilled workers to address growing customer demand for processing core F&A functions such as management reporting and analysis. Menzigian added that providers are willing to “move as far up the chain” as customers ask them. And during this dynamic period of growth, that often means incorporating GL services.

Having the confidence to outsource the GL process is paramount to companies broadening their FAO engagement. And there is a good reason to expand these relationships—additional cost saving from the labor arbitrage. It’s the main driver behind all of today’s FAO deals, and the more a CFO can save without exposing his organization to undue risk, the greater the engagement.

For a Fortune 500 company such as International Paper , an outsourced GL process can now be a part of the comprehensive outsourcing plan. Like so many buyers, it was drawn to the cost savings. Jim Martin, who recently retired as director of financial shared services at the paper giant before joining its long-time FAO provider Capgemini , said his former employer began its FAO journey by outsourcing AP services. After successfully moving the processes offshore to Capgemini’s Krakow, Poland, facility, International Paper decided to move cash applications for AP offsite followed by general ledger work in 2003. Today, general ledger work for the company’s subsidiaries is performed externally, but the corporate GL remains the purview of in-house staff.

As a member of the team that oversaw the transition of AP services to the provider, he said a smooth implementation helped International Paper finance executives consider outsourcing other parts of their financial services. It seemed to them that moving GL to the provider was a natural step forward in the company’s outsourcing strategy, he said. And while it took extensive training of the providers’ staff to understand the company’s various ledgers at its divisions, International Paper was nevertheless able to shift much of that work. Martin said he believes more F&A processes can be shifted, as well.

“As we moved through the AP process, that gave us time to think that we could look at other processes,” he said.

“You keep looking at fine tuning and seeing where that scope creep leads you, whether it’s management reporting, forecasting, or analysis.”

Martin likened his FAO implementation at International Paper to its earlier move to a shared-services model. But instead of going it alone, this exercise was supported by a global service provider. To ensure a smooth transition, he said, the company insisted on a highly controlled implementation following a large-scale installation of an SAP ERP system. Martin noted that it was the IT initiative that instilled confidence in International Paper’s leaders that they were ready for outsourcing.

GL in More RFPs
Indeed, the success of International Paper and other organizations that have moved GL work offshore has encouraged other companies to do the same. Just ask Eric Selvadurai, the CEO of WNS Enterprise Services , which provides FAO services through facilities in India and elsewhere around the world. He estimated that about 52 percent of WNS clients are outsourcing GL work, and most of the recent requests for proposals (RFPs) include GL services.

He noted that inclusion of GL as part of a buyer’s outsourcing strategy has grown more common during the past 24 to 30 months. This market shift, he said, reflects a maturing of the providers, as well as the buyers, in the market.

“Obviously, the clients are very mature now. They’re not just buying labor arbitrage; that’s a given. They want to know what happens beyond labor arbitrage,” he pointed out. “We are telling our customers we would like to manage the outcome and not the output.”

As part of that value proposition, companies realize that accountants who used to work on the general ledger can be deployed to more valuable roles post-outsourcing. By moving employees to analytical work that can affect business outcomes, FAO buyers not only reduce costs, but also improve operational efficiencies, Selvadurai said.

“They are looking for transformation and reengineering. That’s something they want to work jointly with us on,” he said, pointing out that one client who moved 300 accountants offshore went as far as to employ WNS to perform consolidation work for its smaller subsidiaries. For business units with more than $100 million and for the group as a whole, the client continues to perform this internally.

Selvadurai said it’s likely that some GL work will always remain in-house, no matter how comfortable the client becomes with outsourcing. “Group consolidation sits under the CFO tower, and I haven’t seen any movement away from there,” he said.

The Compliance Factor
Another reason why some companies are growing more interested in outsourcing GL is the impact on compliance. Claude Hartridge, the director of BPO business development for Capgemini Americas, pointed out that, as organizations outsource different components, including the general ledger as part of the engagement can help buyers better comply with Sarbanes-Oxley and other regulatory controls. And this is especially helpful for multinationals that have to abide by the regulations of not just one jurisdiction, but also many others. Hartridge noted that Capgemini has 115 employees dedicated to this task. Integrating these outsourced services is somewhat like moving them to a shared-services center.

But Hartridge, who was involved in the first F&A BPO deal ever (undertaken by BP in the early 1990s), said there is still resistance to outsourcing GL work to
outside vendors because of the fear of losing control.

“If organizations are looking at outsourcing two or three processes, what do these feed? They feed into the GL. When you look at the nature of those sub-processes, their linkage to the GL is so strong,” he said. “The only reason not to include GL into the suite is the fear that the CFO is losing control of the accounting environment.”

Whether most finance leaders will overcome their concerns when it comes to outsourcing the general ledger remains to be seen. However, considering that an increasing number of FAO deals include GL in scope, it appears that many have already gotten over their phobia.