In a meeting with a Fortune 500 insurance CFO last month, the conversation went something like this:
“We know we need to lower costs to remain competitive, especially in light of the Affordable Care Act and low sustained interest rates. I believe outsourcing my Finance and Accounting processes and other portions of our back office is wise because I know a third-party provider can do it better, cheaper and faster. The problems I have are my Business Unit CFO’s are not aligned; regulatory compliance is a daily struggle; the processes are decentralized and disharmonized; and even though we are on a single instance of our ERP, we are still performing a lot of manual work. My service and quality levels aren’t being consistently measured and reported, let alone compared to industry benchmarks. I am thinking I should fix my F&A operations before going to an outsourcer, otherwise I’ll be paying to outsource an inefficient process. What do you think?
This CFO’s concerns are typical. No large corporate F&A process is perfect, and every situation is unique. ‘”Best Practices” are guidelines that can certainly be used to chart a roadmap, but someone else’s solution is never going to be yours. Let us assume you are in the same or similar situation of uneven alignment, high costs, inconsistent execution, and increasing regulatory demands. What are the consequences of choosing one path over the other?
1. Fix, then Shift
In our experience, this approach achieves the least desirable outcomes because the “shift” rarely happens after the “fix” due to the time, resources and energy it requires to generate change.
F&A reengineering is a lengthy and expensive process when considering the work steps involved:
i. Senior leadership alignment – 2 to 3 months, or longer if there are multiple business units who are used to operating independently
ii. Obtain funding and form the project team – 1 to 2 months
iii. High-level design – 2 months
iv. Detailed design – 3 months
v. Execution – 6 to 8 months, or longer if the processes must be centralized and standardized)
vi. Total time – 14 to 18 months, and that is for one process, not an entire F&A operation.
By the time the project is completed, other priorities may have surfaced or leadership changes could have occurred. This “shift” may be off the radar screen, and any potential additional savings will be lost to inertia.
b. Money and Distraction
F&A reengineering requires dedication and resources. For a company to own and drive the transformation on their own, they must do so with a staff that has to execute the reengineering while maintaining their “day jobs.” This leads most companies to backfill staff, which rarely works because of training and expertise issues, or hire consultants, which can easily cost $1 to $2 million in fees. In addition, the organizational distraction is high. Even when consultants are hired, the process owners are still required to be engaged at least 25% of the time. Bandwidth of the internal team is further constrained when factoring in the leadership and steering committee meetings, status updates and problem/ resolution meetings required.
Assuming the one- to two-year reengineering project meets initial objectives — processes are harmonized and functions are operating at a high level of service and efficiency with transactional functions migrated into a domestic shared services center—many organizations lose steam and question the need for further transformation. Executives look around the room and ask themselves why make the shift to a third-party now? Many are skeptical when the business case of an additional 30% savings is presented. They can question whether a third party can perform at their levels and wonder whether their environment is too unique to risk partnering with another firm.
If this happens, the organization will achieve some but not all of their goals, including perhaps a more centralized and standardized process with moderate cost savings (typically 12 to 15%). The organization foregoes the larger 50% savings associated with a third-party provider, as well as fail to tap any of the partner’s superior technology, process expertise, functional or industry best practice, and global service delivery. The company’s F&A organization settles into a “good enough” state and attention shifts to other priorities.
2. Lift and Shift
Although delivering greater immediate financial benefits (often as much as 40% due to labor arbitrage within six months assuming a stable transition), this approach carries the stigma of “your mess for less” if the approach omits process improvements. The stereotype is not always the reality, since a certain level of base re-engineering occurs during the lift process. The first step includes due diligence and scoping that results in a deep understanding of the existing environment. The next step is designing processes in such a way that they somewhat mimic the current processes (e.g., accessing the same disparate systems, badging over the same workflow, programming in policies, etc.) while facilitating a certain level of standardization, thereby incorporating some process improvements and identifying others for subsequent analysis and implementation.
Despite the perception of “your mess for less”, the real problem with “lift and shift” is the obstacles it places for post-transition improvements:
a. Organizational Attention
Once processes has been transferred and performance stabilizes, the finance organization typically turns its attention to other pressing priorities, which reduces the urgency for further process improvements.
b. Cooperation with the Provider
The nature of “your mess for less” infers that a problem-infested process is now being performed by a third party. As a result, the relationship often suffers.. Fair or not, the problems that were there before can now be considered “the provider’s fault.” Focus moves to governance and patching the process rather than improving it. A comprehensive transformation program becomes secondary to ongoing F&A execution, reducing the urgency for long-term improvements.
c. Client Resources
Once the work has transitioned, the retained organization is a fraction of its former size. Working with the provider to implement long-term process changes becomes much more difficult because the client lacks the staff, and often the expertise, to go through design and implementation. Once again, patching the process becomes the order of the day.
Hence, the “lift and shift” approach, although obtaining decent run-rate savings, fails to solve issues of quality and execution while also creating governance issues and limiting the ability to drive further transformation.
Given the challenges of typical approaches, corporate F&A organizations are increasingly partnering with a provider on a third alternative:
3. Improve while you Move
Many CFOs now leveraging service provider capabilities have discovered this third alternative optimizes cost savings and achieves world-class F&A performance. How is this done?
a. Selecting the Proper Provider
Some F&A Providers are better than others at future-state Service Delivery Model (SDM) design and implementation. In order for the “improve while you move” option to be effective, the service provider must bring these four things to the table:
i. Enabling Technology
The provider should have proprietary enabling technology, or strong partnerships with leading technology providers. For example, these could include Coupa for S2P, BlackLine for accounting, SunGard and many others. Also, BPaaS solutions are key to leveraging the benefits of the cloud and are a packaged solution. Finally, Robotics Process Automation (robotics) can greatly reduce the need for on-the-ground personnel to perform routinized processes in any location.
ii. Best Practices Repository
The provider should have depth, scale, and a robust repository of F&A best practices to craft a leading edge SDM. The provider must be able to leverage its broad and deep experience to your benefit.
iii. Improvement Capability
Six Sigma and Kaizan are not new; however many providers still lack those capabilities. Select one that can seamlessly integrate these capabilities into the SDM planning, design and ongoing operation management.
iv. Embedded Analytics
The provider needs deep expertise in analytics, a competency to which many aspire but few achieve. Ask the question: “Do you provide analytics as a separate line of business to your clients?” If they do, chances are they are good at it since theyhave a business providing it. Analytics is important to future-state SDM by enabling the CFO to look forward, not just in the rear-view mirror. During future-state SDM design, the analytics capabilities will augment Six Sigma and best practices capabilities to ensure the best possible outcome.
b. Design First then Move
After a provider is selected, the client’s finance organization and the provider’s migration team should collaborate closely to design the future-state SDM to achieve both reduced costs and world-class performance following the completed transition.
c. Wise Contracting
Since we are moving while improving, the future state base case will be dramatically different than the current base case. This will need to be carefully modeled such that the staffing glide-path throughout the life of the contract is well-forecasted with a high degree of reliability. Shared incentives to achieve these improved results are an important consideration.