Maximizing Value From FAO

1.
Maximizing Value
from F&A
Outsourcing
Lokesh Agarwal – lokesh_agarwal@yahoo.com
9/19/2010

2.
Finance and Accounting Transformation
Globally, the Finance and Accounting (F&A) function is undergoing a transformation.
Traditionally, the F&A function was seen as the corporate scorekeeper and played a limited role
in decision support and strategy formulation. In most organizations, it had been a decentralized
function. Besides, automation was limited to few processes like payroll, inventory accounting,
GL processing. This resulted in delayed, incomplete and inconsistent financial information. The
COF (Cost of F&A function as revenue percentage) was high as well.
Today, the F&A function partners closely with the business in devising business strategies and
mitigating business and financial risks. F&A processes are becoming automated and integrated
with other processes like HRMS (HR Management Systems), procurement, CRM, etc. This has
helped in the reduction of close cycle time and financial information is more accurate and
reliable now. F&A operations are being increasingly centralized, technology adoption is at a
faster pace, and the COF has also come down.
The F&A function will transform to emerge as a forward‐looking business partner and will
strengthen its role in managing risk and opportunity. The function will focus more on strategy,
decision, control and financial analytics. F&A operations will become flexible, scalable and the
COF will continue to come down.
Outsourcing and technology deployment in the F&A function will be the key elements in this
transition, and organizations will adopt these at an accelerated pace.
Evolution of F&A Function
Future of F&A
• Forward looking Business Partner
• Transaction processing fully automated and
data capture at source
• On demand provision of information
• Heavy investment and usage of technology
• Lower Cost of F&A Function
• Main focus on strategy, decision, control and
financial analytics
• F&A operations flexible & scalable
• Partner with FAO vendors in process outsourcing,
and optimize technology investments
As Is F&A
Value Addition
• Business Partner in decision support
• Transaction processing more automated
• Timely and accurate financial information
• Decentralized operations, process standardization
• Increase investment in technology like ERP
• Low Cost of F&A Function
• More focus on strategy, decision and control
• Open on FAO and considering it seriously
Traditional F&A
• Main focus on transaction processing
• Financial information delayed and inconsistent
• Decentralized operations
• Islands of automation
• High Cost of F&A Function
• Limited role in strategy and decision support
• Skeptical on FAO model
F&A evolution
Changing Landscape for F&A Outsourcing (FAO)

3. F&A was always a potential candidate for outsourcing but was a late starter and customers
experimented with outsourcing of discrete processes rather than end–to–end processes. Data
security, lack of technology platforms, decentralized operations and quality assurance were the
key concerns of organizations when they decided to move their F&A function to a third party
service provider.
The maturity of the outsourcing industry and F&A transformation has addressed the traditional
concerns with outsourcing. The compliance requirements for Sarbanes Oxley (SOX), availability
of new technology and pressures on CFOs to reduce the COF have brought a big change in how
companies decide on outsourcing their F&A function.
Organizations have invested significantly in new technologies to automate their F&A processes
and to adhere to new compliance norms like SOX, Basel II, etc. While these changes have made
the processes automated, standardized and portable, these have also resulted in significant
financial investments and increased the COF. As a result, there is a business need to adopt FAO
for reducing costs.
As many companies have observed, the potential benefits of FAO go far beyond cost drivers. It
adds more value by building operational flexibility, efficiency, quality, and transforming the
finance function from a fixed cost model to a variable cost model. F&A processes have today
emerged as front‐runners among the outsourcing candidates and FAO is ready to witness
significant growth in the coming years from all industries. This trend is validated in recent
industry reports. Customers will outsource not only the operational finance activities but also
the activities that are higher in the F&A value chain like research and reconciliation, reporting &
financial analysis and compliance support.
Maximizing Value
Customers would have to devise a long term strategy and address a few issues to be able to
transform the F&A function to an ‘on demand’ score keeper with decision support built in – i.e.,
shorter turnaround times, efficient and accurate information availability and meaningful analysis
of the numbers.
Key points that customers need to address:
 Captive offshore location v/s outsourcing to a 3rd party service provider
 Convergence of consulting with outsourcing
 Technology roadmap
 Outsource end‐to‐end processes or discrete processes
 Address pain areas in onshore processes
Captive Offshore Location v/s Outsourcing to a 3rd Party Service Provider
Customers need to evaluate both these options at an early stage of their finance transformation
strategies. Those who look at offshoring as a means to shave off some costs and hope to
improve on savings with passing time would achieve their goals if they work on maximizing
productivity and minimizing risks. There is no merit in keeping support as a captive unit where
scale is not there. The process of offshore outsourcing may be more evolutionary for first time
outsourcers and a determined pursuit to engage more wide and deep would be a sure way to
reap consistent benefits.

4.
Convergence of Consulting With Outsourcing
In most cases, customers require consulting support for F&A process improvements to leverage
FAO. Also, customers should look at prioritizing processes to be outsourced based on
parameters of risk and simplicity of the processes. To get the maximum benefits, the process
transition roadmap should be ready before initiating process outsourcing. In many cases there is
a need to make significant changes in the F&A organization to enable outsourcing. It also
requires that processes being retained are reengineered to enable their seamless integration
with the outsourced processes.
Technology Roadmap
A key issue in a technology enabled function like F&A is assessing the extent of integration the
technology systems and applications have with current processes and its impact on processes to
be outsourced. This would cover deployment of single v/s multiple ERP systems, strategy for
automating, planning and reporting, instance consolidation at global level, deployment of bolt
on applications, ownership of finance systems, application support – in‐house v/s outsource.
Outsource End‐to‐End Processes or Discrete Processes
F&A processes are inherently interlinked and require domain knowledge. This makes for a
strong case for outsourcing a set of sequentially dependent processes and the several linked sub
processes (e.g., procure to pay). The benefits from FAO will be manifold when outsourcing is
done for end‐to‐end processes since the communication time and costs between various
process owners would be reduced and relatively streamlined. Customers should also plan for
evaluating outsourcing of processes that are closely integrated with F&A processes. These
would include payroll processing, procurement, etc.
Address Pain Areas in Onshore Processes
Customers should identify the pain points in the current processes and plan to fix these as part
of the FAO strategy. These could include poor quality, control, compliance, customer
satisfaction, service levels, revenue leakage, excess payouts, etc.
Parameters for Evaluating FAO
Today, the concerns for FAO are radically different from the traditional ones. The scales are
larger, the diversity in business is more and the F&A function is directly impacted by the
business strategies of the organization in terms of organic and inorganic growth.
The key parameters that should be considered in evaluating FAO options include:
 Domain expertise of FAO service provider
 Scope for process improvements
 Support in compliance and controls
 Technology integration and consolidation
 Capability of FAO service providers to bundle technology solutions
 Pricing models

5. Domain Expertise Of FAO Service Provider
A service provider’s understanding and expertise of F&A should be an important decision
enabler for outsourcing. This would include expertise on the entire F&A value chain covering ‐
transaction processing, reporting and analysis, compliance support and financial analytics.
The service provider should have understanding and experience with industry best practices for
F&A operations e.g., FTE deployment, transaction processing time and key measures for
productivity, quality and efficiency. They should be well versed with the applicable generally
accepted accounting principles and compliance legislations like SOX, Basel II, etc. One should
also expect FAO service providers to be able to facilitate decision support by undertaking
activities like report generation, data analysis and forecasting on the basis of past trends and
business objectives.
Scope for Process Improvements
CFOs are under constant pressure to reduce the COF and make F&A processes more efficient.
FAO mandates organizations to change their processes and provide them with an opportunity to
optimize them. Improvements can be introduced not only in the processes that are being
outsourced but also in those processes that will be retained. Hence, FAO transactions should
look at F&A operations holistically and should go beyond outsourcing.
Support in Compliance and Controls
With introduction of legislations like SOX, Basel II, etc., there is an increased focus on
compliance and controls. Organizations are required to spend significant time and resources in
revamping the compliance framework for the first time review and ensuring its sustenance for
future reviews. Building these norms into the FAO transactions will be critical. Checks and
balances will have to be incorporated in the processes operating at offshore locations and will
be needed for both online exception monitoring and periodic reviews that would ensure
adherence to these compliance norms.
Technology Integration and Consolidation
Most of the organizations have achieved more automation of finance processes by
implementation of ERP and other finance systems. However, in many cases, organizations still
have multiple finance systems for transaction processing and reporting, especially where growth
has been inorganic in the past years. Also, there is limited integration between the finance
systems and other systems like HRMS, CRM, SCM, etc.
Today FAO strategy is integrated with the technology strategy and CIOs are playing an important
role in transformation of the finance systems. There is a thrust to consolidate finance systems to
a single instance and integrate F&A processes with other functions. This will help the customers
to move up rapidly in the FAO value chain. Also, the gaps in finance technology that are barriers
to FAO are identifiable and customers are adopting various measures to address these
comprehensively.
Pure‐play FAO specialist service providers may tie up with technology service providers in
offering these solutions rather than developing these competencies in house.
Capability Of FAO Service Providers to Bundle Technology Solutions
Finance technology system transformation will play a key role in increasing the size and depth of

6. the FAO market. Presently, there are gaps in finance systems deployed by the customers and
this can act as a key barrier to FAO. Customers can seek support from FAO service providers in
deploying technology bolt‐on solutions that can be integrated with existing processes and
systems and can address the gaps comprehensively.
In the medium term, FAO service providers will offer technology solutions that will facilitate
integration and automation of manual processes. These would include bolt‐on solutions around
workflow based expense approval, document imaging, archival and retrieval, reconciliations,
portals for data entry in self‐service mode, financial consolidation, etc. Customers or the service
providers can own these systems. In addition, service providers can also bundle application
management services as part of their FAO offerings. These solutions will need to adhere to
various control norms and should have maker and checker features along with segregation of
duties in the process flows. FAO service providers offering these services will have an edge over
their competitors.
Outsourcers will score well if they choose to outsource their processes along with deployment
of new technology platforms at the same time. It will result in significant savings on transition
and training efforts and reduce time to implement outsourcing solutions.
Pricing Models
As FAO moves up the value chain and technology offerings are bundled with FAO, pricing
becomes complex. As a result multiple pricing options have emerged. Initially, the pricing was
FTE based, as there was lack of clarity in terms of service levels, volumes and productivity
parameters. Customers may consider paying upfront for technology solutions deployed by the
FAO service providers. As FAO matures and complex processes are outsourced, pricing will
change from FTE based to transaction based. There may also be flexible pricing options for
technology deployment. This would include cost of technology bundled in the FAO rates, license
cost on named user basis/ concurrent user basis, finance charges for funding technology costs,
technology support cost, etc.
And Finally...
FAO can bring significant benefits to an organization and its market is ready for an exponential
growth in the coming years. To leverage outsourcing as a strategic tool for the F&A function, the
strategy for outsourcing has to ensure that compliance, technology, analytics, innovation and
efficiencies are built into the outsourcing investments. Only then will it lead to significant
savings and a positive impact on functioning of the CFO’s office.