Companies hoping to cut costs and make the most of their outsourcing engagements could be well-advised to work with an advisor.

by Bruce McCracken

For many organizations the decision to move towards FAO is the beginning of a journey into relatively unknown territory. Many financial executives may have never been involved in an outsourcing engagement. Advisors and consultants are increasingly being brought into the process. New research indicates that the results from bringing in an advisor are good overall, but many clients need to engage the advisory firm earlier in the project.

FAO Research noted in its investigations that clients are increasingly showing up to the table supported by third-party professionals acting on their behalf. In addition, a changing landscape presents them with more suppliers that have offerings from more locations.

The marketplace has gone beyond pilot projects or “toe dipping” with one process or business unit. Savings from “lift and shift” to reduce labor costs and “fix my mess for less” are decreasingly the only objectives. FAO is being recognized as an instrument to facilitate competitive advantage as a business strategy. Bigger deals involving longer contract lengths with more involved processes have resulted in much more complexity.

Ritesh Idnani, vice president and global sales and marketing head for Infosys BPO has seen that even though clients “are still looking for the low-hanging fruit to get started, they are also focused on the long-term roadmap to meet their end business objectives.”

Lisa Ross, vice president at Genpact, confirmed that FAO buyers frequently engage third-party sourcing advisors. “As the outsourcing of business functions becomes an increasingly viable and attractive operational alternative for companies around the world, many prospective buyers are involving third-party expert advisors to assist with their sourcing endeavors.”

“The prospective buyer faces a much more complex task in deciding what, where, and how to source, and with whom to work,” explained Ben Trowbridge, CEO for Alsbridge, Inc. “The growing complexity fuels the growth in demand for advisory services.”

“Outsourcing inherently is an initiative that has long-term impacts and needs to be managed well to sustain benefits,” noted Vinay Couto, partner for Booz & Company. “Having a trusted advisor with the requisite experience to guide them can make the difference between success and failure.”

The September 2008 Global Services - AMR Research report, The Definitive Survey of Sourcing Advisors, examined the effectiveness and impact of involving outsourcing advisors. The research involved 530 respondents worldwide being queried in July 2008. The breakdown of the survey population was customers comprising 23 percent, advisors/consultants 24 percent, with outsourcing providers representing 53 percent. The research report did not differentiate the processes being outsourced.

Results indicate that the majority of the 64 clients responding will use an advisor in the future with only 8 percent saying they would not. Of the 106 outsourcing suppliers responding, 87 percent felt that sourcing advisors had a positive influence on assisting with customer sourcing strategies. Yet, paradoxically, only three advisory firms out of 11 (plus one for “other”) were cited by more than 20 percent of their customers as providing “great” value for the money.

Mapping the Best Engagement
FAO clients are now realizing that the project management skills unique to outsourcing may not be among the core competencies of their financial executives. Businesses are increasingly turning to sourcing specialists to put a wealth of experience on their side of the negotiating table.

According to Ross, “Many prospective buyers seek to leverage the niche expertise of external advisors to help them manage the breadth and complexity of sourcing.” She suggested that advisors can help companies “determine if outsourcing within the finance domain would be a viable option, how they should decide what to outsource, how to select suppliers, how to negotiate terms and conditions, and even how to manage engagements post contract.”
Idnani believes that “sourcing advisors ensure that buyers are serious about taking a deal to closure, and the probability of a deal coming to fruition is high.”

Fersht said the increased use of advisors in FAO engagements is smart. “It is not that people don’t have the inclination. They don’t actually know how to evaluate what is core, non-core, and what should outsourced. Companies that have never outsourced FAO before don’t have that skill set,” he said.
“Companies are more inclined to use advisors for FAO because the finance function is more complex compared to the IT function,” Couto submitted.
“Financial executives don’t have time to get the transaction done. The department is simply too busy to peel somebody off to work on the transaction,” Trowbridge explained. “A fresh set of eyes is probably the first thing that they need.”

Idnani felt that more businesses today are using advisors, consultants, and/or attorneys for FAO contracts. “We are seeing many more deals. There are more and more moving parts and that just adds to the complexity. I would say also that large global operations and lack of process standardization are factors that lead to sourcing advisors being involved.”

“The process of procuring business services, especially those that are finance-related, is unlike procuring hardware, software, or consulting services,” Ross observed. “Prospective FAO buyers typically lack a solid understanding of the outsourcing process and the service provider landscape. They also may not have the project management skills, or time, needed to evaluate the sourcing option.”

“Without research and access to good information, they can’t determine what is possible or not possible,” Trowbridge noted. “A huge problem for the clients is that there are so many FAO providers in the market now. Everyone claims that they do FAO and it creates a lot of noise for the client.”
“While a lot of providers claim a global footprint and transformational capabilities, our experience shows that reality is often very different,” Couto cautioned. “You need an advisor who understands the capabilities of the service providers who can see through the fluff.”

Fersht advocated bringing in an expert, “Most firms doing FAO have never done it before. They need hand holding from an advisor throughout the entire process through to transaction and usually beyond. On the whole, in FAO you have to bring an advisor in if you have never done one before.”

The research showed diversity in the services the clients sought from advisors. “They are not saying, ‘Come in and spend a lot of time developing serious outsourcing strategy,”” Fersht elaborated. “There are a lot of companies concerned with governance that have outsourced wanting to renegotiate a contract as the SLA is completely outdated.” The types of services the clients of advisors sought are shown in Figure 1.

“The advisors that have very good relationships with the vendors are those whose methodologies are well understood. They tend to perform better with the buyers,” Fersht added. “They can bring a lot of providers to the table, have the cooperation, recognition, and people are used to working with them. A good advisor needs to be able to bring the right vendors to the table that will cooperate with their clients. It is all about the quality and experience of the advisors that get good results,” Customers in Figure 2 prioritize the importance of advisor skill sets and competencies.

An overwhelming majority of the 106 outsourcing providers responding, 87 percent, indicated that sourcing advisors had a positive influence on assisting with customer sourcing strategies as explained by Ross: “Today, there is much productive dialogue between sourcing consulting firms and FAO service providers.”

Gautam Thakkar, vice president, head of F&A for Infosys BPO, saw advantages to using an advisor. “If a client is immature in its outsourcing strategy, an advisor brings in an element of structure, scope and clarity. The level of preparedness is higher. You need somebody who has a level of perspective on what is out there, what is possible, what is not possible, the pitfalls and risks.”

The shortened time to benefit can be construed to be a factor in many clients wanting to use a sourcing advisor again in the future. Trowbridge submitted, “In our experience, customers using a consultant have reduced their time to benefit by about 40 percent.”

“Companies that decided to go alone ended up spending 12 to 18 months in finalizing the transaction, and in many cases did not realize the expected financial benefits,” Couto observed.

“Customers expect that when they use an external advisor, they should close in a shorter time frame,” Ross reasoned. “What some customers fail to recognize is that a delay in decision making actually delays benefits and payback.” Over half of the customers indicated that they would use a sourcing advisor in the future; very few said they would not, as demonstrated in Figure 3.

Almost 80 percent of clients desired that the transaction be completed in less than six months, and almost a third expected culmination in three months or less. “Speed is clearly of the essence in today’s times,” Ross said. And that factor is likely to become even more important as companies feel more of a pinch from the current economic downturn.

“An advisor brings a sense of realism to the table,” Thakkar stated. “Advisors usually shorten the transaction time 20 to 30 percent. In many ways they are helping to expedite the process.”

“In many instances we have seen companies eager to conclude a transaction cut corners and suffer the consequences later,” Couto pointed out.
“Sometimes the clients are sort of lying to themselves in how much time it is going to take,” Trowbridge explained.

“The advisor is commonly brought in under time constraints to get the deal pushed through quicker than is ideal,” Fersht observed. There is considerable pressure on the advisors due to the timelines cited by their customers in Figure 4.

Some clients will approach a consultant when they have no experience in that particular outsourcing endeavor or experience in choosing or working with a sourcing advisor. They also will approach an advisory firm belatedly when they are bogged down, compounding problems.

“In many cases, the customer has been dithering around with an outsourcing evaluation for months,” Fersht observed. “They bring in an advisor when they get into a panic mode as they realize they need help.”

Despite the fact that more than half of clients say they would use an advisor in the future, only two advisory firms out of 11 (plus one for “other”) were cited by a higher percentage of their customers as being “great” than “poor” in evaluating the value for the money spent.

Trowbridge was not surprised by the seemingly conflicting sentiments, attributing it to client’s changing needs and scope creep. “A client goes into a three-month process, and when they get into the transaction they suddenly want to do many other things. They wind up in the middle of a six-month process and the fees double. When they get to the end they like it, but they are angry at themselves because the fees are high.”

Couto pointed to statistics that say most clients do not achieve their original outsourcing expectations. “The money they spend on advisory fees is well worth the return they get from outsourcing and for the operational benefits from mitigating critical risks,” he noted.

Business has discovered that utilizing third-party specialists has increased leverage and produced business benefits in a reduced time frame. The results on the bottom line have produced a positive ROI for bringing the specialist on board. Organizations new to FAO can be increasingly expected to enlist advisors, consultants and attorneys. But a key takeaway is the need to bring them on board very early in the process.

Bruce McCracken writes for a variety of publications on business topics and can be reached at brucemccracken@verizon.net.