Most FDs have a suitably high regard for the work which they and consultancy near you. But FDs are not so keen. their departments do and the value it has for their organisations as a whole. Peripheral is not an adjective which would spring to their minds or from their lips when describing their output. But there is a sizeable body of opinion that says the finance function, along with other non-core activities, should be outsourced or managed away from the centre of the organisation. Not many years ago, this would have been as heretical as outsourcing your own central nervous system.
The reason for this trend is simple. Studies show that both FDs and their teams expect to change the way that they manage their time over the next few years. So if more time is spent in financial strategy and value-added activities then less time must be spent on the transaction work in the accounting factory.
The surge of interest in the endless possibilities for outsourcing, which started with IT, has now become one of the key management mantras of the late 1990s. Outsourcing has rapidly become an accepted way for organisations to focus on core competencies, obtain the benefit of more specialist skills, keep abreast of market developments and reduce costs.
The Board for Chartered Accountants in Business has identified nine key finance function activities which could be outsourced. These are purchase ledger, sales ledger, management accounting, audit, financial accounting and reporting, treasury, tax management, personnel support and IT management.
In some ways, outsourcing is such old hat as to be barely worthy of mention.
For instance, many companies of all sizes have for decades handed over the function of calculating the wages to banks and their pay-roll subsidiaries.
What is new is the idea of just how far you can go and with whom. The added dimension to the familiar concept of outsourcing is the shared service centre (SSC). In effect, this is internal outsourcing by large multinational organisations where work such as transaction processing, general accounting, treasury management and other financial activities are taken away from divisions or countries. General Electric and Whirlpool are among the big organisations that have set up pan-European SSCs. The organisations keep control, ensure common standards and at the same time can strive to find a route to ‘world class performance’ which will help in maintaining a competitive edge.
The regular flow of announcements of outsourcing deals suggests that the question has moved on from “Should the FD consider outsourcing?”to “What parts of my finance function should be outsourced and how quickly should I do it?” But perhaps care needs to be exercised. Like all these business fashions there is a not-so-hidden motive behind the outsourcing trend. Consultancies and those providing outsourcing services clearly want it to become accepted as a “Good Thing”.
A growing body of evidence reinforces the common-sense approach that outsourcing must not be entered into lightly. A recent survey by KPMG Management Consultants demonstrated that outsourcing was far from a panacea.
Inflexible and ambiguous contracts were cited as the main sources of major dissatisfaction, particularly with regard to the level of control that could be exercised by the client.
Outsourcing is clearly one of the major revenue opportunities identified by the consultants for the next decade or so. Factors in favour of outsourcing are strong resources not available internally, better value at lower cost and using the time and skills of financial professionals for other purposes.
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The reasons that stop companies outsourcing are equally convincing. The major factor which deters the outsourcing of more functions is the loss of control over information and its processing. According to the BCAB research there was “concern expressed of who completes the first analysis of the information”. FDs naturally wedded to the idea that they and their staff are good at producing accurate, timely information are worried about the idea of a third party getting it wrong. This fear is probably more acute in smaller companies where the supplier may not have acquired sufficient business knowledge due to the relatively small size of the contract and the fact that personnel are not usually transferred.
The undermining of the management function and an expected increase in operating costs are other factors against the outsourcing route. FDs who expect outsourcing to save money may be disappointed. Research suggests that, while there are often improvements in costs for reasonably simple functions such as processing, overall cost savings were not always as large as had been anticipated.
We will continue to be told that outsourcing is growing strongly, especially in areas where it is not feasible within individual businesses to hire in specialist knowledge. However, FDs may not be rushing down this route with quite as much eagerness as it once appeared they would do.
See feature, page 51.