Mid-market organizations are on the cusp of a financial services boom.
 
By Christian Baader and Gianni Giacomelli
 
The time has come for mid-market organizations to enjoy the sophistication and effectiveness of finance practices previously reserved to larger organizations. No longer will the only choice be to outsource simple tasks to service bureaus using simple tools.
 
After more than a decade in incubation, the Finance and Accounting Outsourcing (FAO) industry has experienced strong growth in recent years. Key factors driving CFOs toward FAO are the intense pressure to reduce transactional costs from within their own departments and reap the benefits of low-cost global talent, dovetailed with visibility into the plethora of profitable and operationally successful FAO engagements by peers and competitors. These lessons are ready for use in mid-market.
 
FAO until today was largely driven by process enablement in which buyers traditionally retained their respective technologies, and suppliers contributed selected transactional-oriented F&A processes. Research by Everest Research Institute finds that the majority of buyers do not invest a great deal of resources in transforming their existing finance and accounting systems or software when they enter into an outsourced F&A environment.
 
The onus has traditionally been on the suppliers to deliver any “tie and run” capabilities and associated “wrap-around” technologies that enable F&A processes to be quickly improved in an outsourced environment based on the buyer’s ERP systems. Buyer process improvement is delivered in the form of non-intrusive “add-ons” of client-specific wrappers, workflows, interfaces, and document digitalization. None of this fundamentally optimizes the F&A service delivery or unlocks the scale advantages of service providers across customers—a prerequisite for large-scale adoption of FAO by smaller-sized enterprises.
 
However, market observers such as Everest predict that the industry will move further, with suppliers designing broader offerings comprising process and technology capability. Those will be based on platforms reusable across customers in a virtual (i.e., same process blueprint, different technical installations) or real one-to-many mode. Some of these platforms are near ready to launch today. 
 
In contrast to the add-ons for invoice cleansing or document digitization used today for process-step optimization, such a platform might host, for instance, the complete payables subledger for a customer receiving an accounts payable service, which will be reconciled periodically with the general ledger technically retained at the customer. In this way, the platform enables a new end-to-end optimization of the complete process chain. 
 
For small enterprises or companies without specific F&A requirements, the provider’s one-to-many platform might well encompass the full F&A scope with the customer operating some processes himself while buying others in the form of FAO services. This would slim down the retained system to a browser-based user interface, thus avoiding the need to maintain a separate F&A system at the customer. Its integration with the providers platform unlocks even more economy of scale in delivery.
 
Technology is a key enabler for suppliers to leverage scale within and across customers as well as an agent for achieving process optimization and automation within F&A.
Technology investments (e.g., document digitalization) deliver optimum value in high-volume transaction environments that FAO providers often can generate.
 
In alignment with major industry observers, we foresee the bundling of F&A systems and processes becoming more prevalent in future outsourcing transactions due to a number of factors:
 
• By virtue of executing against many F&A shared services and larger-scale BPO projects, some suppliers have developed into best-practice business process experts for their offering domains, thus optimizing their core business. Suppliers who have learned the lessons are now getting ready to leverage these skills and accompanying assets on a broader scale to achieve sustained process improvements.
 
• Buyers are revisiting the rationale for retaining their F&A systems, due to rising confidence in supplier capabilities, availability of technology tools and Service-
Oriented Architectures, financial constraints to keep up with technology advancements, and especially willingness to use a standardized solution based on provider best-practice.
 
The financial constraints caused by today’s uncertain economic environment act as catalyzers of buyers’ increasing awareness of the commonalities of their F&A processes, and their appreciation of the extra sophistication suppliers can achieve in delivery by leveraging their economies of scale.
 
CFO’s of mid-market companies, under extra pressure to achieve “more with less,” will increasingly go after this additional savings potential. They will seek to leverage FAO providers to help them work through the impact of the weak economy, increasing costs, declining margins, and increasing interest rates. Watch this space. 
 
Christian Baader, christian.baader@sap.com, is vice president, BPO for SAP AG.
 
Gianni Giacomelli, gianni.giacomelli@sap.com, is head of strategy and marketing, BPO for SAP AG.