Outsourcing Finance & Accounting to India for SMBs: 5 steps to making FAO work for you
To outsource or not?
Now it’s your turn to dwell on that classic question!
As the chief executive or CFO of a successful SMB, you have been following the news, and wondering if your organization is ready to outsource – and outsource which processes.
You have seen enough success stories; of companies transforming their complete Order-to-Cash or Procure-to-Pay cycles, reducing working capital, saving 30-40% on costs etc.; but seen a few disasters too, to have decided to go ahead – with caution.
Global FAO Scenario
As per Everest Group, of the total FAO contracts exceeding USD 4 Billion annually 55 percent of it is offshored to India, which accounts for more than 60 percent of all FAO FTEs. With the largest pool of skilled resources, and process maturity accruing from the established IT industry, India is by far the most preferred destination for FAO – and the fastest growing.
The growth is driven by companies looking at outsourcing for a combination of reasons:
– Cost savings
– Fixed to variable cost structure
– On-demand scalability
– Better Governance and Decision Support
– On-demand access to varied skills
– Access to innovative technologies
– On-demand adaptability
– Standardization & Best-practices adoption
– Freeing-up internal bandwidth for more strategic activities
An SMB running F&A processes inhouse would find it hard-pressed to match, on a sustained basis, the efficiencies and best-practices of a competitor with an FAO partner. But SMBs mostly have kept away in the initial outsourcing wave, which was led by the Billion $ club and the concept of Shared Services.
This is about to change quickly, with the advent of new-generation FAO service providers. The Everest Group estimates the opportunity for FAO to be in the USD 150-200 Billion range, with hardly 5% being addressed currently.
This will be realized when service providers start working with the SMBs, with appropriately lightweight and agile business frameworks. BPaaS (Business process as a service), with its irresistible plug-and-play like proposition, is poised to act as the catalyst that will make it easy for SMBs to realize the opportunities from FAO – without the heavy investments that was part of the first generation outsourcing.
FAO: Technology and Processes
Apart from BPaaS, Workflow Engines, Document Management Systems, OCR (optical character recognition), BPM (business process management) and Analytics Tools (with attendant Data Warehousing) – connected to the ERP – define the mainstay of the technology landscape in FAO.
Around 50% of new FAO contracts in 2010 had a technology augmentation component, which works to fill the gaps in the existing ERP/Non-ERP systems of the client, and adding new capabilities.
Even if we are ready with FAO 2.0, focusing on business transformation and end-to-end processes, currently the bulk of outsourcing consists of transactional processes: Accounts Receivables, Accounts Payables and General Ledger – followed by Fixed Assets, Payroll and Tax.
If your organization is planning to test the waters, F&A outsourcing benefits can start with a simple document scanner and an FTP server also, or with just a remote login access to your accounting system. In other words, one doesn’t need a Bugatti Veyron if the requirement is intra-city commuting – in fact, it would be a pain to run and manage.
Apart from services, the FAO service providers mostly offer IT capabilities too, which allows you to think bigger and address processes in an end-to-end manner. For example, Procure to Pay (P2P) cycle. Here, you can have vendor management system, online reverse-bidding and e-procurement, EDI-based ordering, supplier contract management etc.
But getting down to brass tacks, as someone evaluating outsourcing F&A for the first time, how should you go about ensuring that you get what is right for your organization?
Step 1: Self Assessment & Outsourcing Strategy
Your outsourcing strategy and approach would depend on a multitude of factors like: Current comfort level with outsourcing, existing investment on IT Systems, language of business communication, compliance requirements, future growth projections, size, and complexity of F&A operations.
The current status of internal processes is also a factor, but the service provider can be given the mandate of ‘Fix and Ship’ or ‘Ship and Fix’, instead of just transitioning the process. Of course, if the processes are already well-defined, it makes the transition smoother and quicker.
Most service providers also provide consulting help to assess the readiness of your processes and other factors, and recommend the best-fit outsourcing roadmap. So, it might be a good idea to get the service providers involved at an early stage, unless these capabilities exist in-house.
A good idea would be to go for a Pilot project as part of the outsourcing approach. This allows faster and focused organizational learning while minimizing the risks. Further, a Pilot is possible with very low tech requirements.
An important criterion at this point itself is the buy-in from the relevant members of your organization. The Sponsor or Champion of the outsourcing program has to be someone senior, preferably with executive powers.
The outcome of this step should allow you to build the business case for outsourcing, and come up with an RFP (request for proposal) if required.
Step 2: Prepare a Comprehensive Agreement/Contract
This is not so much for legal purposes, as for understanding how the outsourcing arrangement will work, and having it laid down in black and white.
A good contract will detail out the outsourcing process, responsibilities, project plan and timelines, reporting and escalations, risk management, change management, performance metrics, service levels (SLA), governance mechanism, termination terms, renewal terms, YoY performance metrics improvement targets etc.
This step will also ensure that all possible risks are identified and a mitigation strategy is in place before beginning.
Depending on your comfort level and understanding with the FAO partner that you have chosen, the contract may be prepared before the Pilot, or after. If your organization is not experienced with outsourcing, then the learning from the Pilot can be useful when evaluating or adapting the contract.
A mature FAO partner would probably have the contract framework ready. In fact, the Proposal itself would include most of the details.
The outcome of this step is that you have a ‘hit-the-floor’ documented plan – before the rubber meets the tarmac.
Step 3: Run a Pilot
A Pilot is like dating before deciding to get married.
It will help you in two major ways – building trust and comfort levels with your FAO partner while assessing their capabilities, and secondly, it’ll progress your organization on the learning curve to more complex outsourcing arrangements.
Even if the Pilot is being run prior to the final agreement, depending on the scale of the Pilot, it’s a good idea to have some sort of project management plan and metrics in place. Everything relevant that can be measured should be measured for the “Before” and “After” analysis.
And for best results, it’s required for both sides to work together towards the common goal. It’s quite easy to get into sparring mode when things don’t go as planned (and it’s almost certain), but with a more cooperative working relationship with your FAO partner, the relationship will give much better returns.
It’s crucial that the team from your side is clearly identified and given express responsibilities. Strong project management skills go a long way in avoiding or minimizing wastage of time and effort. Outsourcing partners too prefer working with client teams who understand and follow project management principles.
The Pilot is not complete without the analysis phase. The observations and learning should be documented. Problems encountered should go through an RCA (root cause analysis) process.
If it seems like a lot of work at the beginning, don’t worry, it’ll save you many times that time and money later on.
The target outcome of this step is a confident team, ready and eager to take on bigger challenges.
Step 4: Process Transitioning
Once the learning from the Pilot has been imbibed, and the contract has been finalized, it’s time to start transitioning the process (es).
The main components of the process transition would be:
1. Process Mapping & Design: “As Is” and “To Be”
The processes can be also shipped on an As Is basis, and then re-engineered/fixed once it is stabilized on the provider’s side. But if process documentation does not exist, it is strongly recommended that it is done at the beginning of the transitioning.
2. Systems & Technology aspects
Depending on how the outsourcing is being done, there may be quite a bit of IT work involved, or none. For example, if you’re planning to move to the Service Providers platform, then migration of data etc. could be an involved task, and would need to be analyzed and planned.
Similar attention has to be paid in cases where the outsourcing arrangement includes technology augmentation (add-ons).
But, if you’re planning on retaining your own systems, then all that may be required is to setup a simple document imaging and transfer system (FTP server can do the basic job), with VPN/remote access given to the SP, and a process tracking and reporting system.
3. Knowledge Transfer (KT)
This is a standard activity, which ensures that Tacit knowledge of the client-specific aspects of the process are not missed out by the SP. Best to follow a structured and recorded/documented approach to KT.
4. Transition Plan
Once the process details and the inputs from KT sessions are captured, the detailed transition plan should lay down the sequence, the timelines, the acceptance criteria, the training plan, the IT/Systems deployment and migration plan etc.
5. Acceptance Testing
For safer transitioning, you might want to run the outsourced process in redundant mode – both at your end and at the Service Providers end for some period. Once the acceptance criteria have been fulfilled, then the client-side process is switched off.
6. Overall Project Management
The whole transition process should follow a robust project management framework which will look at resource requirements, resource allocation, planning, tracking, reporting, escalations etc.
To manage the IT interventions, you may need to have a separate workstream if these are a bit complex.
Simple, smaller processes may dispense with a lot of the rigorous project management activities, especially when working with a matured team.
Step 5: Governance & Improvement
This phase kicks in once the new process passes the acceptance criteria, and is stable.
The service levels need to be monitored, as also the target performance metrics. Most Service Providers would provide you with a Dashboard to make the monitoring easier.
The performance incentives payout or penalties should depend on the performance metrics and Service Level Agreement (SLA) adherence, and this requires the metrics to be unambiguous and clearly measurable.
Governing a stable, unchanged process is simpler. The complexity comes in when process re-engineering, or change due to statutory requirements etc. is needed. Then, you need to have a change management process to ensure that the change is smooth and effective.
Another aspect to be considered is if you wish to change your Service Provider at any point of time. Apart from the commercial terms, included in the initial contract, you need to make sure that there are no hidden ‘Lock-In’ factors. Best to ask that up-front in the RFP stage, or put it down explicitly in the contract.
Apart from other common project risks, a tricky issue when outsourcing is what happens to your existing personnel. There is a risk that once the intent to outsource has been announced, your best resources might leave immediately – taking most of the critical and tacit knowledge with them.
Some companies offer a stay-on bonus to such resources, others may also employ Knowledge Management systems to capture the tacit knowledge.
An important aspect that you need to consider when setting up the outsourcing arrangement is the control and responsibilities demarcation between you and the Service Provider. At one extreme is a situation where only the trained manpower is provided by the Service Provider , but managing them and the process is done by the client. On the other end is where the complete responsibility rests with the Service Provider, and the client manages via Service Level Agreement(SLA) and metrics.
The potential benefit from outsourcing, especially when working with a mature SP, is generally more in the second scenario. But, it is something that needs careful consideration.
Whichever might be your final approach to outsourcing your F&A processes, following these simple steps should go a long way in ensuring that you are firmly in the driver’s seat and on a successful journey.
Please contact us if you like to know further.