FAO thrives despite the downturn, but business cases are shifting. 

By Tom Klein & Paul Allan 

 
Finance & Accounting Outsourcing (FAO) is a maturing market, driven by the need to improve finance and accounting performance, flexibility, controls, and cost. 

 
While economic and competitive pressures remain intense, few companies are actually aggressively pursuing major finance and accounting (F&A) transformation initiatives. Instead, most companies are engaged in incremental, low-cost transformation programs that are targeted at fixing operational, systemic, and tactical problems. These organizations plan to establish F&A operational platforms for future, strategic, “big T” initiatives, when they are better positioned to successfully implement this level of change. 

 
The demand for FAO remains high, despite the current economic climate. We see six emerging trends driving CFOs to deploy FAO initiatives to improve their organization’s F&A processes. This also includes CFOs who already use FAO service providers, operate off-shore captive centers, or run internal shared service centers.  

 
1. Shift in Business Case Drivers. For years the analysis has been all about “location, location, location”—where can the work be performed to optimize wage arbitrage savings, service quality, and productivity? Although this line of inquiry is still used to justify FAO (especially for companies that haven’t adopted an outsourced model), other business cases have become prevalent for adopting FAO strategies. Business cases that are a number of elements: controls and compliance; adaptability for scalability after a merger or acquisition; and enterprise-wide process standardization. In addition, increasing pressure on CFOs—from various camps, including auditors, regulators, and tax authorities—in today’s business environment is shifting focus beyond cost-savings to the value that FAO can provide. That value includes both tighter controls and the use of common F&A operational platforms that can easily adapt to application to unique business changes. 

 
 
2. Change Management Expertise. Effectively communicating to stakeholders and staff that their jobs are going away is as critical as managing global process standardization with disparate systems across a federated organization structure. The complexity of this type of organizational and process change management—combined with internal culture alignments and outsourced governance—forces many companies to ask whether they are ready for, and capable of, such a change. The dilemma is that change management is often not a top priority during the evaluation and deal structuring process, (notwithstanding urgings from the FAO partner). But shortly after the transition is underway, change management becomes the single largest critical success factor in any F&A program. CEOs and CFOs are looking to the FAO partner to provide this expertise and take more responsibility for their change management program.  

 
3. Incrementalism Versus Big-Bang. According to several research organizations and sourcing advisors, the trend is toward smaller FAO projects. More companies are looking to outsource smaller portions of their F&A work in their initial FAO contract. The reasons for this vary from mitigating risk and focusing resources on more complex work to managing the change appropriately, “testing” the provider, the frequent lack of any broad internal consensus, and the “show-me before we do more” attitude. Many companies that have done the “big bang” approach debate whether or not it is better to make the change as quickly as possible in order to optimize the savings and shorten the transition period. Incrementalism is not without its own drawbacks, such as a lower business case, unresolved process issues, and the stress of continual transition and change. But nearly all companies see FAO as a strategic initiative and plan to outsource a much larger and broader scope of programs over time, while requiring their FAO partners to provide the capabilities and scale to support them.  
   
4. Rise of Analytical Services. Some analysts see analytical services superseding the FAO market in three to five years. Companies are flush with data, short on analytical talent, and ripe with business challenges requiring decision-making information. Analytical services go beyond “judgmental” F&A process work to focus on decision-support and solving business problems using financial domain expertise, analytical tools, data simulations, and modeling. Leading organizations are looking at F&A enterprise-wide and the entire life-cycle of financial management from sourcing (paying vendors) to customers (sales and collections). In this view, analytical services (e.g., revenue leakage, pricing elasticity, cash flow modeling, and market-mix/churn simulation) can be used to generate benefits beyond labor arbitrage and process standardization to improved cash flow, spending, sales, and market share. Analytical services are rapidly being seen as an extension of FAO and generating benefits outside the walls of the CFO’s organization.  

 
5. Outcome-Based Pricing. While the majority of work priced in contracts is full-time equivalent (FTE) or transaction-based, clients are looking for their FAO partner to take greater accountability for improved business results, such as days payable outstanding, days sales outstanding, and closing days. This holds especially true for companies that are looking to their FAO partner to assume responsibility for end-to-end process, supporting systems, and/or need more performance accountability than standard service levels provide. Depending on the FAO scope, another variation is gain-sharing, in which multiple companies invest to provide a capability or solve a problem and then split the benefits based on some predetermined formula. FAO agreements with these types of structures need a level of transparency, integration with the client, and partnership governance model to work effectively. It is becoming prevalent that more existing FAO relationships will evolve to incorporate outcome-based pricing, and captive-shared services centers will be pressured to contract internally at these leveraged market levels.  

 
6. Transformational Asset Financing. Cash is king. As a result, many companies that are concerned with upfront transition costs, the impact on payback periods, and earnings per share are looking for creative financial structures to meet their unique needs. This can range from buying client assets, to deferring certain charges, to structuring deals for tax purposes, to structuring the payments like a simple installment loan. These types of financing structures can be found in mid-market clients as well as global Fortune 500 companies. In order to successfully transform financing structures and to structure them correctly and competitively, FAO providers need to have a strong balance sheet and deep financing experience. With the current economic uncertainty and intense scrutiny of investment programs, more organizations will be looking for creative ways to structure their FAO deals and want the one-stop shop approach with their FAO partner. 

 
FAO continues to be a key strategy that CFOs use to drive change and improve their F&A operations. As FAO continues to mature, its next generation will demand more capabilities, flexibility, and bottom line accountability from FAO providers. It will also require a more strategic partnership mindset on the part of CFOs. 

 
Paul Allan is sales director for Business Process Outsourcing, HP Enterprise Services. Tom Klein is sales manager for Business Process Outsourcing, HP Enterprise Services.