I have been amazed by the strength of the business cases for the F&A outsourcing deals I’ve led over the last few years. A number of things have happened to make them look so good.
First, the suppliers have really got their acts into gear. They provide clear, all inclusive pricing that makes a comparison very clear.
The market is not fully comfortable with transaction based pricing, but that is as much the issue of the Buyers as the Supplier. At an FTE/employee basis, the comparison is a lot easier for everyone, given the level of data required to price at a transaction level.
Second, what has happened on the Buyer side of things is that Shared Service Centers have experienced wage creep over the years, sometimes adding 1-2 layers of operation. Most Shared Service Centers have countered this in part by improved productivity, but this has not matched the similar gains made by the outsourcers.
Combined, these facts make the business case strong for most F&A outsourcing projects.
Key Fact 1. The average, fully laden cost of an outsourced finance team member is $34,000/£22,000 per year. This is the fully loaded cost, of staff who are fully trained, including all overheads and leadership costs.
From any Shared Service Centre I’ve seen in the US, UK and Europe, those are pretty much entry level salaries, regardless of all the additional employment taxes, operating costs, and management costs attached to every position.
These numbers translate into a very strong business case, and it is the main reason why CFOs push for a deeper investigation.
2. Amounts At Risk
Is your Shared Services Operation willing to risk its own money to underwrite delivery levels? Away from financially-based business cases, this is the most under-valued differentiator between an internal delivery model and an outsourced delivery model.
I have not yet seen an internal delivery model that creates any alternative to this. Yes, I’ve seen bonuses unpaid due to performance issues, but nothing that repays the business for failings that have impacted their own performance.
The chasm between the Internal and External model is only going to widen further as the Outsource Suppliers choose to adopt targets for business-critical areas such as Days Sales Outstanding. Failure there has a lot greater impact than in something like Customer Support, but it is an area that the Suppliers are stepping up to the mark on.
Key Fact 2. On a monthly basis, will the Shared Service team offer, from their own funds, rebates to the business of up to 15% of the cost of the services they deliver? While the exact amount at risk will vary between suppliers, they will offer significant discounts where service levels are not met. It is essential to note that a well constructed contract will lead to constantly improving service levels, so the bar will be raised quarterly, if not monthly.
3. The Cost Of Transformation
For many years, the outsourcers played a cost-only card. Regardless of whether the delivery was onshore or offshore, it was relatively easy to offer lower costs than most internal organizations. Come 2012 (and probably since 2010) the value proposition has moved on significantly.
Now the Suppliers come with a toolset – technology, people, and methodology – that drives “Big T” Transformation and “Little t” transformation. “Little t” brings the day-to-day change; “Big T” brings the headline-grabbing changes. Often this gives access to changes that were unlikely to be funded in any other way.
As an example, the biggest area of opportunity is in leveraging the Supplier’s investment in technology. One client had recently expected to invest a minimum of $500,000 to implement a automated reconciliation tool. Getting approval for that spend had taken almost 12 months, and was high on the list of programs that was likely to be cut from the Investment Plan. So delivering it at all was highly unlikely.
The deal that they were able to strike with the Supplier delivered their operational tools and also embedded it in the pricing, removing the road-bump that was preventing access to the improved, automated process.
To be honest, some of the home-built technology are not the prettiest of things, but they come at a price and an operational improvement that will make you focus on the value they drive, not how they look. Other suppliers, however, have bought third party technology companies that come with world class technologies that will be as good as or better than the ERP competitors.
Key Fact 3. You can work to build an outsourcing deal and delivery model that cuts the invest