February 2007 F&A Global Sourcing: An Approach for SMEs The option of offshoring of some finance and accounting functions is becoming an attractive option for many small and medium enterprises. But how do you know what F&A functions are ripe for offshoring? And what is the "right" time to consider this move? This publication contains copyrighted material. Please do not re-use or reprint anything within this document without written consent from Tholons, Inc.
F&A Global Sourcing An Approach for SMEs Introduction Finance and Accounting Global Outsourcing has been one of the oldest process and currently the most popular in the outsourcing of business processes. F&A BPO has proved to be a logical move CFOs have used to attain significant cost savings and achieve excellence. Traditional accounts payable and accounts receivable processes have matured to high value services such as treasury activities and budgeting and forecasting. Continuous innovation on the supplier side has led to significant maturity, allowing for traction from the Small and Medium Enterprises (SMEs). However, the smaller firms today are yet to realize full benefits from this model. This paper aims at providing a high level approach for SMEs to begin outsourcing their F&A functions. Key Drivers for SMEs to Outsource Optimizing cost of operations Increased costs on Compliance and Control Access to Specialized F&A Expertise (Scalability) Improve process efficiency Competition Are We There Yet? Currently, small and medium firms find outsourcing many F&A functions to be an attractive option. However, it is important to not get carried away and make a move too soon. Firms must first define the strategies that align with their overall business objectives. The first step in doing so is to measure the organizational readiness for global outsourcing. 2007 Tholons 2 of 10
Outsourcing Readiness Index Favorable Opportunity Go Operating Environment Unfavorable No Go Work Harder Low Source: Tholons Degree of Outsourcing (Competition) The above model tries to identify and position an organization s readiness to offshore by measuring the readiness index of an organization using the two factors of Operating Environment and Degree of Outsourcing. The Operating Environment tries to capture the organization s readiness with respect to cultural differences, internal political issues, and senior management s acceptance to outsource, some factors that avert outsourcing. All this is driven by the fact that the competition is always picking up quickly. Here small firms should be cognizant to compare themselves with peers. What to Offshore? After having made the decision to outsource, targeting the scope of activities is fundamental. Performing a detailed analysis on the portfolio of current activities will help identify the order and speed at which they can be outsourced. In large organizations most F&A functions are typically decentralized. Smaller firms may be put in a complex position to decide what to outsource, as the amount of decentralization and the degree of standardization, both being low. In an SME structure, most resources may be multi tasking. Carving away only a certain piece to an outsourcing vendor may be a challenge. 2007 Tholons 3 of 10
Parameters for Analyzing A Portfolio Rewards Process Characteristics Risk Source: Tholons A scientific approach of mapping each of the F&A processes and sub- processes is required in order to name the processes and finalize the scope of activities to be considered for offshoring. A detailed due diligence for the F&A processes and sub-processes needs to be performed to study: Required domain expertise Level of customer interaction involved Size of team Decision making skills required Degree of financial impact of errors Dependency on other business lines like procurement, sales team etc Adherence to compliance Other factors Our past experience has shown that close to 95% of transactional processes including A/P, A/R, travel & expenses, payroll, etc. can be outsourced without much difficulty. On the other hand, only about 50 % of financial planning activities can be outsourced, as they require high involvement of senior executives and the risk management team because they comprise the core activities of F&A. 2007 Tholons 4 of 10
Processes Accounts Payable Accounts Receivable Collections and Call Center Reconciliations Travel and Expense Processing General Ledger Fixed Asset Maintenance Taxation Processing Budgeting and Forecasting Risk Management Treasury Management Degree of Global Outsourcing Medium Medium Low Source: Tholons Firms that may not have enough technical expertise in doing portfolio analysis, should seek the advice of experts. A misstep at this stage could falter the process and create a negative impact on management s ability to deliver. Decision on Captive versus Third Party Sourcing Financial and operational viability may be a major roadblock to SMEs in setting up a captive. Emphasizing the need for cost reduction and high savings, the SMEs may not find setting up a captive to be an attractive candidate, as it would involve high upfront investment. Familiarity in outsourcing, experience of transformation, and the ability to take large amounts of risk are other key drivers behind setting up captive centers. A high volume of transactions is another key to setting up captives to achieve economies of scale. Also, it remains a good bet for those organizations that have plans to set up IT operations. Outsourcing F&A functions to a third party sourcing company will help achieve operational excellence coupled with increased productivity of internal resources at a much lower cost. Outsourcers adopt best practices as opposed to the best knowledgeable way of doing business adopted by captives. Processes outsourced are typically low on risk in loss of intellectual property and data protection. Hence, the rewards outweigh the risks. What to Look For in a Service Provider? Innovation: Small firms may not have much transformation experience. With the help of process consulting, such firms can leverage on industry expertise and best practices. Process consulting should involve a detailed operational assessment of current processes, study the need for any 2007 Tholons 5 of 10
process improvements, provide a gap analysis, and develop solutions reflected in process standardization, automation (paperless environment) etc. Suppliers are required to comply with the latest regulations, such as SOX, SAS 70, Basel II, HIPPA, etc., and advise clients in developing risk management techniques and transition frameworks. Process consulting ultimately would provide for a transition and technology development roadmap. Innovation Innovation Cost Arbitrage Solution Cost Arbitrage Technology Leadership Operational Expertise Automation Source: Source: Tholons Tholons Technology Leadership: F&A involves using a great deal of technology. Right from ERPs being implemented, to scanning and workflow management, systems are being used to create successful onsite- offshore business models. Consolidation and integration of various systems and platforms remains key, primarily when complying with directives such as SOX, which requires segregation of duties within each the processes and creation of data repositories. However SMEs may not be able to access or afford such technology. The service provider, with inputs from their consulting team, can develop various planning and reporting tools which lead to automation. Operational Expertise: The service provider is the real expert performing the same activity from a distant location. The provider needs to demonstrate both expertise and experience in transforming processes and optimizing performance. They can gauge the impact of changes across an organization, enabling a firm to operate with more flexibility and gain global competitive advantage. The market for F&A outsourcing has matured and has seen increased traction towards service providers who can bundle these services. SMEs, today are in a position to take full advantage of emerging pricing models with an integrated approach provided by suppliers. Tier II suppliers have emerged to provide all these services by building proprietary technological solutions, at much lower costs. Costs incurred on technology up gradation, compliance and control, administrative overheads such as training etc. will decline resulting in additional savings above plain labor arbitrage. 2007 Tholons 6 of 10
Where to Go? Global centers have emerged to the forefront in providing specialized F&A offshore services to companies. Cities within countries such as, the UK and Central and Eastern Europe have demonstrated inherent capabilities in performing not just rule based processes such as A/P, A/R, General Ledger but also in high value services such as Treasury and Financial Management. FAO: Centers of Excellence City Mumbai Chennai Delhi (NCR) Manila Colombo Krakow Bratislava Prague Bucharest Budapest Sao Paolo Santiago Juarez Kingston Toronto San Antonio Shanghai Singapore City Manchester Country Philippines Sri Lanka Poland Slovakia Czech Republic Romania Hungary Brazil Chile Mexico Mexico Canada U.S.A China Singapore U.K 2007 Tholons 7 of 10
Tier II Suppliers in F&A Karvy Global Services Office Tiger Outsourcing Partners International Summersault Inc BPO International Source: Tholons Prime Outsourcing Center Sri Lanka Philippines Philippines Let s take a quick look at some of the offshore locations already established as F&A centers of excellence and understand what makes them attractive. F&A Capabilities by Cities Location City Characteristics Mumbai Financial hub of Large multi nations and service providers who have already set shop here. Morgan Stanley, Lehman Brothers, WINS, Principal, Citibank and JP Morgan have centers here. NCR Has the largest scale of skilled and component workspace among key offshore destinations. Genpact, EXL, Services, Fidelity Investments, Xansa and IBM are the service providers here. Chennai Historically been the financial and business hub of South F&A operations of Accenture and TCS carried out from here. Philippines Manila Accounting and Legal system influenced by the US, making it a preferred destination. Home to shared-service centers of companies like P&G, Chevron Texaco, Citibank and HP Sri Lanka Colombo Has the highest number of UK certified accountants outside of the UK Costs being one of the lowest in the region. HSBC, Office Tiger, Astron, WINS have F&A operations from Colombo Central and Eastern Europe 2007 Tholons 8 of 10
Krakow Having approximately 30,000 graduates in Krakow, of which about 21,000 are graduates in economics. Capgemini has its largest FAQ center in Krakow Bratislava, Prague, Budapest and Bucharest Manchester Multi Lingual European language capabilities Nearshore to Europe Accenture, Hewitt, IBM, Diageo and other shave their European services centers United Kingdom Large Talent pool (apart from London, which is highly expensive) Shared services hub for BT, 0 2, My Travel (provided by Xansa), Network Rail, Michelin, Marks & Spencer, TetraPak, Astra Zeneca and JT International Conclusion Employee compensation and compliance costs primarily drive the F&A operational costs. By outsourcing F&A, smaller firms are rest assured to get professional services, along with more freedom and flexibility to take part in strategic decision making. The positive track record of various suppliers in regards to delivering has helped F&A industry move from the operational excellence era to a highly innovative era. Smaller firms today should consider it the right time to plan outsourcing, as they perceive lesser risk in it and leverage on expert advice to mitigate risks, if any. Achieving their overall objective of cost reduction by reduced compliance costs, improved ROI from activities and increased productivity from internal employees, SMEs can anticipate significant savings and foresee a positive impact on the firm s budget. 2007 Tholons 9 of 10
About Tholons Tholons is a Services Globalization and Investment Advisory firm that combines "Best of Breed" consulting experience with deep execution expertise and investment insights to deliver truly effective services to its clients. Tholons offers a detailed understanding of business processes and combines it with practical hands-on expertise in executing the strategy. Tholons draws upon the considerable experience of a handpicked team, which has successfully formulated and executed globalization strategies to unlock value for Global Fortune 1000 companies. Service providers leverage Tholons expertise to optimize their global delivery model. Tholons advisors engage with government bodies to build compelling strategies for making countries attractive destination for outsourcing. THOLONS Global Offices Author: Avinash Vashistha Editor: Avinash Vashistha Chairman & CEO For more details about Tholons' Services Globalization and Investment Advisory capabilities, please visit our website at: www.tholons.com You may also contact: Jessica MacKenzie Director, Marketing and Public Relations jessica@tholons.com US: +1-646-290-9320 North America Office 3130 Fairview Park Drive, Suite 500 Falls Church, VA 22042, USA Phone: +1-646-290-9320 Fax: +1-646-349-3546 Europe Office 2 Crawford Farm, Ray Mill Road East Maidenhead, SL6 8SU Berkshire, UK Phone: +44-1628-566140 Asia Office 2/10, 2nd Floor, 80 Ft Road RMV Extension Stage II Bangalore 560 094, Phone: +91-80-23519760 Philippines Office 46th Floor, Yuchengco Tower RCBC Plaza, 6819 Ayala Makati City 1200, Philippines Phone: +632-894-9493 2007 Tholons 10 of 10