Little-understood scope and technology choices can be key to mitigating the risk of offshore FAO.

by Gianni Giacomelli, Christian Baader

Imagine for a moment you are Julius Caesar, setting out to conquer endless strips of gorgeous lands. Your army is mainly composed of non-Romans, because Rome has conquered so many, and the ones who go to battle are no longer the expensive children of Rome’s urban elite. Your soldiers are neither better nor more numerous than the ones you face in battle, and for the most part, they engage in combat in remote areas where you cannot control them directly—a virtual offshore army. And while your odds at best are 50/50, you keep on winning.

Why? Because you divide your enemy and conquer it by employing the right techniques to ensure that the aggregate of the individuals you have is more powerful than any of them taken individually. In FAO terms, you choose the right scope and design a technology-enabled process to ensure you reap strong economies of scale.

While today the FAO battle mainly relies on transferring processes to cheaper resources, in the long run this will not be sufficient. Resources will cost more, you cannot outsource extremely complex tasks, providers area not necessarily loyal to you, and your competitors will turn to the same vendors as you do for their services.

To minimize the risk of losing the battle, choose the scope that maximizes the structural advantage of offshoring, and design an appropriate process that’s underpinned by appropriate technology effectively deployed.

The Nature of the Game
Think about how general and administrative (G&A) costs can be reduced. If a customer wants to reduce its cost structure by 20 percent, still giving the provider some margin to make a good living and reflect governance costs, it must have substantial productivity and cost-per-head gains on labor (see Figure 1). This means that labor, facilities, utilities, and so forth need to be compressed by at least 30 percent and that IT can be reduced, too. (The main way to drive cost down is to implement and run that technology cheaply by consolidating infrastructure and replicating deployment.)

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The offshore FAO industry has relied so far mostly on labor cost reduction. Today we see providers deploying additional technology via “non-intrusive” bolt-on tools that achieve incremental benefits like some front-end standardization via interaction center overlays, or workflow tools and specific add-on process automation support as in the case of imaging technology for digitalization of paper-based content. But the process impact of bolt-on tools has its limits, since beyond optimizing on the fringes, their non-intrusive nature keeps the process essentially unchanged and customer-specific. The goal remains the optimization of the full end-to-end process.

Roman legions used refined combat techniques that exploited the power of teams of people; a similar concept applies to F&A processes. A company will have a certain number of employees in each country, and the bigger the organization, the fewer F&A staff will be needed per thousand employees to execute its tasks. When the company combines its different organizations based in different countries without reengineering or deploying technology to put them on a common platform, this may result in silos. In the end, the company discovers it has the average number of F&A staff needed per thousand employees—the same average it had before. Nothing has been achieved.

The opposite happens with full centralization and standardization. Local requirements will limit the standardization and related economies of scale achievable. But those should be treated as exceptions, not the rule.

The BPO industry has matured significantly in the past five years in this respect, and it is useful to transfer the lessons learned to the broader shared-services topic. Large G&A outsourcing and offshore deals sometimes brought far too much scope to inexperienced internal or external delivery teams. This approach has proven to be unsustainable in cases where the cheaper labor alone is not sufficient. BPO providers, therefore, turned toward getting matters in order and leveraging their scale advantage, essentially via reengineering, but often were not able to overcome resistance.

The Moment of Truth
But if scale is king, harmonization (that is, reengineering) is a prerequisite. The ability to use offshore resources is not an excuse to avoid
substantial homework. With some processes there is just not enough to be gained, and the amount of pain generated by enforcing the necessary change (offshoring and harmonization) is too big. Clients are advised to pick their battles carefully when it comes to scope; i.e., which processes to outsource, which to keep in-house, which to standardize and
automate, and which to leave alone. Picking processes means figuring out which ones:
• Matter in terms of cost;
• Show strong economies of scale and can be optimized well in general, or are people-intensive;
• Will allow the chosen internal or BPO service provider to bring them to a scale and performance higher than the client’s; and
• Will not create uproar in the client organization when they
are changed.

There is empirical evidence that many G&A processes have a clear and steep economy-of-scale behavior, but in the end whether specific companies can leverage this to their benefit depends on who the client and the provider are (often country by country) and what the provider is able to do. How much better can the provider be on accounts payable for the U.K.? How much better can the provider be globally compared to the client? And how much pain will stakeholders feel if the relocation rules are changed to harmonize them with the provider’s best-practice delivery?

It is important to do this assessment and then summarize it, including savings, qualitative improvement, and disruption. What is the gain that is attained for each one of those subprocesses either by harmonizing in-house or by BPO?

Figure 2 illustrates a possible simplified outcome. The white bubbles depict what clients can achieve in-house (internal shared services), and the black ones show what they can get with BPO. The vertical axis shows the gain to be achieved by standardizing and by increasing the amount of offshoring you apply: What is the potential cost reduction? Are there other improvements?

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The horizontal axis maps the pain associated with the change: how much disruption will happen when this is done?

For process 1, the internal shared services deliver insufficient gains to justify the change, while BPO delivers a good trade-off with only marginal additional effort and pain. Payroll might sometimes fall in this category. For process 2, internal shared services deliver decent gains already and have substantially less painful impact than BPO would have. In this case, internal shared services look like a better option than BPO. Processes incorporating a high degree of customer-specific judgment might feature here. In process 3, both options are viable; BPO has more gain but also inflicts more pain on the organization. Depending on the client and its appetite for risk and change management, procurement vendor management can fall into this category. In process 4, process harmonization and standardization are simply too painful. The achievable gains do not justify the pain, and thus the process should probably remain customer-specific—which means that either you save enough by offshoring and improving the process as a stand-alone, or you should not expect the provider to save you money. Policy-setting and strategy are likely to fall here, as well as the work of many subject matter experts in corporate finance, for example.

When this analysis is done, it’s necessary to check whether the portfolio makes sense as a whole, because sometimes processes should be bundled to make synergies happen. Many find it advisable to bundle, for instance, payroll zero-to-gross and gross-to-net processes, HR data administration, and related employee self-services. There are some processes that should not be split up too finely because in the end they might not work out anymore—the integration and synchronization of these process bits is too painful.

With these facts in hand, it is important to ask what the implications are for technology across this delivery, especially in an offshore environment where the control will be at arm’s length. Process redesign and technology redesign must work together. The most successful CIOs are not pure technologists, and the most successful CEOs and CFOs understand how technology can help them deliver their strategy. Why should these cross-silo competencies disappear one or more levels down the organization? At the same time, BPO providers and software vendor should cooperate more intensely than used to be the case in the past, to ensure that they are not at fault when it comes to enabling BPO economics with the right technology, appropriately deployed.

As shown in Figure 3, the main lever to reduce total cost is the labor part of the cost structure. That is where appropriate attention to software choice and deployment is critical. First, software and its deployment affect processes—and therefore their scale, optimization, and use of labor arbitrage in offshore locations. Software acts as the foundation for cross-system integration and ensures that providers can scale across customer units and countries. It is also the basis for process optimization. Technology that offers an integrated best-in-class design (for example, tiered service delivery) can help customers address problems. It can also, for example, enable self-services. Processes can be controlled through technology, giving customers better governance and compliance—especially in offshore environments. Global reach of your solution (so that you build only one blueprint) and ability to seamlessly integrate between what is left in house and what is offshored (so that you do not inadvertently create more cost and risk at “the border crossings”) will complete your list of basic requirements.

Figure 4 helps clarify how process and technology must be designed jointly for optimal service sharing and in particular in the situation of offshore locations. In a tiered service delivery, many transactions such as shared services that call real-time data from applications and databases, can be accommodated by Tier 0. Tier 1 encapsulates a complex center of clerks and operators that rely heavily on scripts and automated tools to respond to queries. Tiers 2 and 3 include more specialized staff requiring access to policy repositories but also reporting on other functions, so technology cuts across all of them (F&A and HR, but also production, scheduling, and so forth).

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While technology is largely about automating and consolidating processes, it is also about giving information support for judgment-intensive components of the processes. One key here is the integration of the various functional silos; it is essential that providers deploy the technology usefully to ensure integration. By integrating the various components that sit underneath each one of these tiers, a provider can ensure that process optimization actually works.

Watch the Fundamentals
The Roman Empire was based on a very simple concept: Do not ram into people who are bigger than you are, and use your economies of scale by engineering processes that leverage people as a group, not as individuals. F&A offshoring can learn from this to minimize risks that are generated by economic imbalances.

Rome was not built in a day, or just on good strategy. There is a lot of gory detail to be absorbed, including governance and compliance. However, people often can’t see the forest for the trees, ignoring the big picture—and this is why executives must keep eyes wide open.