An understanding of O2C and P2P unlocks new opportunities to create business impact.

by Katrina Menzigian, Saurabh Gupta, and Richa Bansal

Finance and Accounting Outsourcing (FAO) is well into the rapid-growth phase with established models and demonstrated supplier capabilities under its belt. To date, the value proposition has focused on providing direct-cost advantages by outsourcing transactional processes such as accounts receivable (AR) and accounts payable (AP).

However, buyers are now expressing a willingness to explore expansion of outsourcing scope to include end-to-end processes like Order-to-Cash (O2C) and Procure-to-Pay (P2P). Such processes impact metrics related to business outcomes like reduced DSOs, reduced working capital, better procurement compliance, efficient closing of account books, fixing of bad debts, and improved SOX compliance.

This article presents some of the findings of a recent Everest Research Institute study of outsourced O2C and P2P solutions, entitled, “Outsourcing O2C and P2P—Opportunity to Create Business Impact.” In this article, we will share viewpoints on the value proposition that’s driving interest in outsourced O2C and P2P offerings, and outline both benefits and challenges to embarking on this next step in the FAO market.

We also offer Everest’s assessment of implications for stakeholders and the future direction of these developments.

As early deals and early adopters assimilate the first phases of their FAO engagements involving piecemeal outsourcing of accounts receivable and/or accounts payable, their next steps of expanding scope and broader process integration are unfolding (See Exhibit 1,).

Certain key observations characterize the outsourced O2C/P2P market today.

These include:
• The O2C/P2P segments of the FAO market, while they are still in their infancy, clearly transition from customized point solutions to more leveraged and integrated solutions. The future direction of this space will reflect a focused and intentional move toward more pre-integrated solutions that tackle the full O2C/P2P lifecycle by design.

• By continuing to expand deal scope and focus, FAO buyers tacitly acknowledge the desire and need to drive even more value for their organizations through increased cost savings opportunities and by moving even closer to impacting business performance metrics.

• Suppliers of FAO solutions have identified O2C and P2P as a growing market focus and have actively built out their capabilities in this space. For many of the suppliers, the move involves centralizing, formalizing, and coordinating their existing assets in order to maximize the delivery efficiencies and cost benefits of leveraged solutions.

The Drivers for O2C and P2P
Cost savings for the sake of cost savings is often not adequate for moving organizations into action. For the O2C/P2P space, value levers beyond cost savings raise the overall attractiveness of such end-to-end solutions and have impact on both the operational and strategic levels. The value proposition of the traditional and more piecemeal approach to FAO is primarily cost-based while that of end-to-end process outsourcing is cost-plus. Besides the cost impact, the value proposition also includes:

• Expansion of the cost savings opportunity: Outsourcing end-to-end processes like O2C/P2P helps to expand this cost base to other parts of a client’s P&L statements like managing procurement spend, compliance, and working capital, which are a significant multiple of the operational cost base that the piecemeal approach could address.

• Ability to identify bottlenecks and drive efficiency across full process scope: By more closely linking each step of the process from order management through collections, buyers can achieve a clearer understanding of how the inputs and outputs of each sub-process impact the overall workflow of the end-to-end process. For example, an organization cannot solve purchase order compliance issues by just outsourcing AP. Outsourcing end-to-end helps tie up the disconnects between upstream and downstream processes.

• Increased process visibility throughout the process cycle: Through the application of technology and process analysis, integrated solutions offer the additional benefit of tracking, documenting, and analyzing content hand-offs with greater visibility. Furthermore, this increased level of visibility has a direct impact on the ability to apply reporting and analytics that provide richer views than previously possible.

• Streamlining of technology integration: Suppliers of outsourced O2C/P2P can support client objectives through their ability to deliver applications and tools that help the client achieve the desired levels of process throughput, accuracy, reliability, and visibility. From a technology perspective, suppliers have a key differentiator in their ability to incorporate process best practices into their technology strategies, thus further enhancing the value-add offered to clients.

• Stronger link to overall business performance outcomes: A key result of a shift in focus from isolated F&A sub-processes, such as AR or AP, to more of an integrated end-to-end view of O2C/P2P is the ability to more broadly impact corporate financial performance. In addressing inherent execution challenges, organizations can better improve such components as DSOs (days sales outstanding), positions on working capital, and spending leakage through noncompliance. Everest found that closer alignment between outsourcing activities and financial performance drives experienced FAO buyers to seek out integrated solutions in areas such as O2C and P2P.

• Suppliers can control costs, as well as deliver savings with a greater degree of certainty: Buyers find that by addressing their O2C/P2P requirements through an outsourcing model that is underpinned by a supplier-driven business model, they can better achieve sustainable and predictable cost controls, as well as realizing the savings they crave.

Identifying the Key Differences
Everest’s assessment of BPO solution components shows clear differences between traditional FAO contracts involving AP/AR and end-to-end processes like O2C/P2P. People, process, and technology are the key parameters of distinction, as follows:

• People skills: End-to-end processes require skills in addition to transactional capabilities. Such skills require different specialists for different roles, and there is a need to drive towards a CoE (Center of Excellence) model. The global sourcing model also changes from a predominantly offshore-centric model to a hybrid model, with most of the transactional work performed from remote locations and sensitive work involving customers delivered from onshore or nearshore locations.

• Process discipline: Managing the process across different stakeholders requires additional process capabilities, as there are more hand-off points to manage. Managing more hand-off points requires greater process discipline, as ownership structure and responsibility matrices become more complex.

Consequently, changes in delivery structure, retained organization structure, and governance structures are required.

• Technology: The technology agenda becomes more complex as it involves different client systems and impacts more than just the back-end systems. For example, an O2C solution technology integration requires extensive connection points spanning across operations, sales, marketing, and finance. Also, specialist add-on technology, like workflows, attains the utmost importance in an end-to-end solution.

The changing solution dynamics across the people, process, and technology dimensions impact contractual elements such as pricing structures and service levels. As an example, more than three-fourths of the traditional FAO contracts involve FTE-based pricing structures, while most of the O2C/P2P contracts utilize outcome-based pricing or a gain-sharing model. Pricing structures in end-to-end contracts typically include a base fee along with a reasonable component of business impact pricing or gain-sharing. The gain-sharing model provides the supplier’s skin-in-the-game to drive business outcomes for buyers.

Challenges in Outsourcing O2C/P2P
Despite a clear realization of the potential to gain incremental value from an integrated approach to O2C/P2P processes, key challenges impact adoption rates. These include:

• Interdepartmental conflicts regarding priorities: An organization’s ability to mobilize resources across separate but interrelated departments with distinct reporting structures is, perhaps, one of the more challenging dynamics. Finance and customer interaction organizations need to work collaboratively to successfully tackle a true O2C process. While often these organizations may share similar objectives, they do not always behave in ways that further a common agenda. Evidence of the real impact of this dynamic appears in how early O2C deals develop—many of which start and end with the finance department, with the longer-term hope being that they will expand further as the engagement matures. Examples include deals that focus on the bill-to-cash or invoice-to-pay segments of the continuum. (See Exhibit 2.)

• Big-bang not attractive, incremental expansion more prevalent: As mentioned earlier, buyers of O2C and P2P clearly stayed away from big-bang approaches and focused on incremental expansion based on value generation. This translates into deals with lower TCV’s (Total Contract Value), but higher growth potential. A key point here is that this trend typifies organizations of all sizes. Larger organizations are as likely as medium-sized organizations to test the waters with AR or AP before jumping in.

• Risk associated with decreased direct control of larger scope: Another key buyer concern involves perceived risks associated with relinquishing significant portions of key business processes. The nature of these concerns ranges from addressing complex technology integration issues to meeting regulatory requirements. In some cases, clients perceive risk not in terms of whether or not they achieve certain benefits but in terms of addressing existing problems. Will this solution provide the sought-after outcome?

• Technology integration logjams: While technology integration does offer clear benefits as outlined above, getting to that point can be a winding road. To address this challenge, FAO suppliers invested considerable time and resources in building tools and applications (like workflows, interfaces, application wrappers, dashboards), which work through many common technology logjams.

Net-net, there is risk involved in outsourcing end-to-end, but CFOs who focus on providing world-class productivity to their organizations increasingly gain comfort with outsourcing end-to-end.

Implications for Stakeholders
The O2C and P2P segments are quickly evolving, despite the nascent nature of both segments. Both buyers and suppliers have already laid much of the foundation for future expansion. Today, the market sees a growing number of new and renegotiated deals built upon AR and AP capabilities and results.

Implications for Buyers
• Increased O2C/P2P supplier options: Suppliers make significant investments across people, process, and technology to develop strong end-to-end O2C and P2P process capabilities.

• Business benefits beyond direct-cost savings: Outsourcing end-to-end processes will provide benefits beyond simple labor arbitrage and cost savings. It provides strategic and operational impact by achieving business outcomes like reduced DSOs, reduced working capital, better procurement compliance, efficient closing of account books, fixing of bad debts, and improved SOX compliance.

Potential buyers should consider several key questions in determining whether or not their organizations are ready to undertake this sort of initiative. These include:

• Is there proper alignment at the management level across the relevant departments or process areas?

• Does this team have a clear understanding of how the organization defines these process areas, and is there a unifying vision of the desired end-state?

• Did any existing FAO initiatives generate an adequate level of value? What sort of incremental value does the organization seek from an expanded end-to-end solution?

• What level of risk is the organization prepared to assume? Does the organization have the knowledge and functioning capability to manage and mitigate the risks?

Implications for suppliers
• Increasing buyer interest in outsourcing end-to-end services like O2C/P2P: The buyers of FAO services now send clear signals that they benefited from the cost savings and operational gains offered by FAO but want to build on those levers. FAO buyers have an increasing interest to expand the scope of the services outsourced to include end-to-end processes like O2C and P2P.

• Suppliers need to build additional capabilities across people, process, and technology: Suppliers need to develop a “continuum of innovation,” a roadmap for moving from one process and migrating to broader scope over time.

• The value proposition needs to be proved: There is a definite value proposition in end-to-end, but suppliers need to prove it through modular benefits. Suppliers need to use KPIs and metrics to show benefits of unifying processes across two departments and getting buy-in from different business leaders.

In conclusion, as client expectations expand beyond pure cost reduction toward closer alignment with broader business performance issues, value-drivers such as O2C and P2P will see increased demand. To truly achieve value from these end-to-end processes, however, FAO buyers and suppliers will each have to push their organizations to attain new levels of integration across multiple dimensions, including technology, functions, and processes.

Katrina Menzigian is VP, Research, at the Everest Group, kmenzigian@everestgrp.com. Saurabh Gupta is Research Director at the Everest Group (sgupta@ever estgrp.com), and Richa Bansal is Research Analyst (rbansal@everestgrp.com).