The great recession has created a ‘new normal’ in cost monitoring.
 
By Sean Kracklauer and Michel Janssen
 
The global recession has uncovered a very sobering reality for Global 1000 companies: Few are agile enough to be able to reduce Selling, General & Administrative (SG&A) costs quickly enough to avoid becoming a drag on profits. Indeed, in Q1-2009 and Q2-2009, Global 1000 companies saw their revenues decline far faster than their SG&A costs (click here to see Figure 1). The difference between declines in revenue and declines in SG&A costs is called the agility gap.
 
Recent discussions with senior executives from The Hackett Group’s Global 1000 client base revealed three main insights about what has become the “new normal.” First, even after the economic recovery begins to take hold, companies will continue to seek back-office cost reductions in ways that don’t require major capital outlays. Second, companies are taking action now—they are neither waiting for the recovery to occur, nor are they pegging their plans to the expected extent of the recovery. Finally, back-office functions such as finance and accounting  (F&A) will be tasked with delivering improved levels of quality and service with much lower cost structures.
 
These revelations highlight what the current recession has already taught most F&A leaders: Cost cuts must be sustainable. Decision-making about sustainable cost cuts must address a variety of issues, including service placement (whether onshore or offshore), process sourcing (whether captive or outsourced), functional process design, and technology enablement. These areas form the components of F&A’s Service Delivery Model (SDM), one that, when optimized, delivers not only sustained costs but also world-class performance.
 
So, what is required of F&A leaders in an environment that demands sustainable cost reductions and a narrowing of the agility gap? From an expense basis, F&A organizations should be able to reduce their cost structure to match a 10-to-35 percent revenue reduction within a six- to 24-month time frame (depending on industry) while maintaining acceptable service and quality levels.
 
Fortunately, F&A organizations have a head start because most have already shifted routine activities to a Global Business Services (GBS) organization, the consequence of an evolution in shared services organizations (click here to see Figure 2). GBS organizations are already delivering on their promise of sustained cost reductions. In fact, 61 percent have saved their companies 20 percent or more on costs. However, the agility gap previously highlighted in Fig. 1 attests that much more can be done.
 
 
The Evolution From Shared Services to Global Business Services
Shared services handling back-office processes have assumed a new level of importance for F&A leaders. At leading-edge F&A organizations, shared services have undergone dramatic changes during the past three-to-five years. They are being retooled and rebranded to a more progressive concept, which Hackett calls Global Business Services.
The name says a great deal about what has changed: Deployment is now genuinely global, employing enterprise standards and expanded geographic scope, while taking advantage of labor arbitrage; business in the context of taking on a significantly broader range of activities, breaking through functional boundaries to become more integrated with the workings of the enterprise, instead of being pushed to the margins of the organization; and service orientation in terms of culture and performance attitude that were not always present in the early shared services movement.
 
Beyond cost reductions, other reasons for having a GBS/shared services organization are shown in Fig. 3. It is telling that, while both world-class and peer-group organizations share many goals—such as standardization of services, headcount reduction, improvements in service, and reduction in administration costs—the world-class group is more likely to have additional goals, such as reducing infrastructure costs, simplifying technology, and enabling flexible growth.
 
 
Successful F&A Service
Delivery Models Rely on Sound Decisions About Global Business Process Sourcing
The issue of global business process sourcing of F&A activities will only increase in importance over time. Process sourcing is one of seven elements in an effective Service Delivery Model (click here to see Figure 4). While only 10 percent of companies in Hackett’s finance database today carry out 50 percent or more of their finance transactions offshore, this is forecast to increase to 25 percent of companies within the next two years. Undoubtedly, part of this expansion will be driven by a growth in outsourcing. But the business case for moving ineffective processes to a third party becomes less attractive when those processes can be performed in-house at less cost and with heightened quality and effectiveness.
 
Increasingly, global process sourcing models will also include consolidation of selected analytical and value-added F&A activities into a Center of Excellence. This enables consolidation of expertise and standard approaches in dealing with cost analysis and value-based decision models. A Center of Excellence can either be complementary to, or part of, a GBS organization or outsourcing relationship.
 
As company leaders analyze how to create sustainable improvements to F&A activities, three main factors should be considered:
 
1. Develop a perspective on each and every aspect of the Service Delivery Model.
The main challenge for organizations is to think comprehensively about their Service Delivery Model. Too often, company leaders address only one or two of the seven components, expecting this to be sufficient, but they are mistaken.
For example, Hackett data shows that a strong focus on technology without equal attention to process and talent yields sub-par results. Similarly, focusing on the sourcing model without also addressing process or governance will blunt improvement efforts.
 
2. Build agility into the Service Delivery Model.
Companies often fail to build enough flexibility into their business scenario planning. While it is, of course, impossible to predict every eventuality, the Service Delivery Model should be created in a way that can handle a range of probabilities with appropriate strategies. This might include greater use of technology, a more variable workforce, and/or consolidation of multiple processing locations.
 
3. Treat your outsourcers as true business partners. 
Many companies still turn to outsourcers primarily to obtain quick savings through labor arbitrage. The strongest evidence supporting this is that pricing elements are still primarily labor-based units, such as FTEs. In the short term, this is an easy way to price deals, but it fails to build the right incentives into the relationship. Instead, agreements should be written in a way that rewards the outsourcing supplier for helping the client move toward and achieve world-class performance levels. 
 
Strategic Implications
At companies around the world, finance is being called on as never before to help resolve enterprise-wide performance problems and identify new opportunities for competitive differentiation—while optimizing cost structure.
 
Achieving this goal in F&A, as well as in other areas of finance, is based on realizing economies of scale, scope, and skills. This, in turn, depends on making good decisions about which processes are done where, how, and by whom.
 
Unfortunately, there is no one-size-fits-all sourcing model. Differences in industry structures, competitive conditions, enterprise cultures, and capabilities demand situation-specific service delivery architecture designs and implementation plans. 
 
Achieving world-class performance can take a long time. On average, it consumes approximately a decade. And, since performance levels overall will continue to rise, by the time F&A organizations achieve what is today world-class status, the bar will likely have been raised even higher.
 
Moreover, as external and internal conditions evolve over time, F&A leaders must continuously be on the lookout for strategies that will help them to meet new challenges. For most companies, this will mean creating an intelligent, hybrid sourcing strategy, one that involves both captives and outsourcing. Although that process will be operated independently, it will be managed with a single overarching goal of maximum effectiveness and efficiency.
 
 
Sean Kracklauer is the president of The Hackett Group Advisory Services and Research and practice leader of the firm's Finance Executive Advisory Program. Michael Janssen is the company's chief research officer.