Reducing the Risk of Outsourcing : A CFO Perspective
Outsourcing is the new mantra in the present age when companies believe strongly in focusing on their core competencies. Gone are the days when large corporations would try to ‘do it all’ in having the whole gamut of functions and sub functions in-house. For instance, an auto maker would have large payroll functions or contract labor operations that were necessary but were quite far removed from the core competency and expertise areas of the company. It is this realization that has spawned the hugely profitable business of outsourcing, which is based on the principle of win-win where both the client and the customer stand to gain.
Outsourcing contracts can be worth millions of dollars on an annual basis. While the promise of cost advantage exists, there are also quite a few risks that can give any Chief Financial Officer [ CFO ] sleepless nights. Many of these outsourced contracts could go across the world to low cost countries like India, Vietnam or the Philippines, which means the risk of operations could come into play. There are various ways in which such risk could be minimized from a CFO’s perspective. For one, the contract that is signed should be precise, detailed and crystal clear, with very little scope for ambiguity and misinterpretation. Deliverables as well as performance standards should be clearly mentioned so that there are no disputes later. It goes without saying that a thorough scrutiny of the credentials of the company in terms of track record, financials, list of clients and recommendations, as well as statutory compliance should be checked. After all, you cannot outsource work to a company that uses child labor or pays lower than the minimum wage to its employees!
In addition to the aforesaid things, it is necessary to clearly spell out the governance structure and the channels of communication, evaluation as well as feedback. One has to ensure that proper flow of information occurs so that quality and cost mishaps can be avoided. When you are paying top dollars for outsourcing work, you need to have adequate quality and monitoring capability on time so that cost and time overruns or risk of unacceptable quality are effectively avoided. It may be necessary for top management to get involved in the quality evaluation as well as price and standards negotiation process where respective functional heads and experts deal with the head honchos of the company that is bidding for the contract.
In some cases, it may even make sense for your top officials to visit the company at its operations on-site to check out in person before any contract is signed. Sitting in New York, it may not really be possible for you to know what’s happening in Bangalore, which makes it worthwhile to perhaps make a trip to India before signing on the dotted line.
“ Tried and true tips on avoiding risks and improving bottom-line performance. “
Every important business decision has potential risk. Consider the case of a European rollout of a single shared-service center for finance and accounting covering up to 20 different countries. Rather than doing it yourself, think about choosing an outsource provider to carry out this task—a provider that already has similar experiences and an established European shared-service center in place. Properly executed, this outsourcing relationship can significantly reduce overall corporate risk, and increase control through greater transparency and more disciplined business processes.
Accenture’s extensive research into high-performance businesses found that they demonstrate “mastery of finance” in a distinctive manner to drive differentiation and superior results. Our research showed that they build their finance organizations by focusing on key capabilities, two of which are business-performance management and enterprise risk management.
In its broadest form, business-performance management is the ability to integrate strategy, process, and execution in a way that supports the CFO’s business objectives. Risk management means proactively identifying and managing financial and insurable risks, as well as non-financial risks.
Accenture has outlined how the CFO can approach making the right outsourcing decisions to develop these key capabilities. This approach can be applied even if the function is already performing well as outsourcing typically makes additional improvements possible because each party focuses on what it does best. The client defines the results they require to be successful; the outsourcer creates a “services” environment to deliver those results.
Make sure there is a real deal to be done. A clear vision of the strategic outcome is essential. There is a risk of confusion and misunderstanding if time is not taken to clarify objectives and results. The CFO and the board member sponsors involved should be consistent in supporting the vision and keeping key stakeholders in the picture.
Put in place a governance structure for managing both strategic and operational risks. The right governance structure is essential in managing relationships with a service provider at the strategic, tactical, and operational levels. Governance ispivotal in the overall approach to making crucial decisions, as well as resolving issues and disputes between parties.
Be proactive in managing your outsourcing arrangements. The internal outsourcing relationship manager is a very important position and must be recognized and promoted as such. Teamwork should be emphasized, as well as a positive relationship between your provider(s) and your staff. Both teams should rapidly create a process to perpetuate the knowledge and intent of the outsourcing agreement, and where significant business transformation is required, it is critical that executive support and direction is provided.
Be comprehensive in the written contract. The success of an outsourcing arrangement cannot depend solely on the contract. However, a robust contract is essential. The contract is written to define commitments, performance responsibilities, and risk sharing betweenthe parties, and it will underpin and provide the framework for mitigating commercial risks.
Consider the special risks associated with global sourcing. Globally, sourcing business services and benefiting from cost arbitrage is a topic generating considerable interest in the CFO community,especially while the number of attractive locations in the global sourcing marketplace continues to expand.
Consider outsourcing to mitigate risk. A growing number of organizations are realizing the advantages and business benefits of outsourcing and recognizing that this approach can help mitigate risks. Remember that risk exists with whatever decision you choose—the art is to manage and mitigate it. If you choose your partner wisely, have a sound business case, and the sustained commitment of your CEO. Then there is plenty of evidence in the market that the outsourcing arrangement will prove successful and help your company on its journey toward becoming a high-performance business.
The Role of CFO Has Changed
For most Chief Financial Officers, times have never been more challenging. Not that long ago, closing the month on time and completing the annual audit and the report to shareholders were the measures of success for many CFO’s. As the business environment has evolved, the expectations of the CFO have changed too. Finance chiefs are now being expected to ensure compliance with burgeoning laws and regulations, achieve cost reductions in the corporation’s institutional budget, improve every department’s business processes and participate in key technology decisions. Most important, the CEO and the Board of Directors are looking to you to be a strategic partner in managing the company and providing leadership in focusing the business on its core mission.
Meeting your basic fiduciary responsibilities is no longer enough. That means many of your traditional responsibilities are no longer your top priorities. The expectation that you’ll use the company’s resources wisely has taken on new meaning. You’re being asked to think outside the box, to come up with new ways
to use the company’s limited resources to meet ever-increasing demands. Competition is becoming more aggressive and the revenue opportunities are becoming scarcer. To compound this problem, the expectations of the other stakeholders in your business world have changed too. Shareholders are expecting more information and accountability. Regulators are tightening reporting requirements.
Meeting the New Expectations
No CFO can meet all of these expectations at once. Somehow the CFO must find ways of focusing on those responsibilities that are most critical. What alternatives do you have to meet your new responsibilities and the expectations of stakeholders?
Among the choices are:
• Reduce expenses in non-core areas;
• Offload responsibilities to other members of the management team;
• Squeeze more performance and service from existing vendors and service providers;
• Redefine your mission to include only those functions that really matter;
• Find ways of outsourcing important functions that are critical, but not core to the corporate mission (for
example accounting, payroll, benefits, etc.); and
• Find a service provider that can deliver a number ofthese functions more efficiently while supporting the
mission of the company — for example, outsourcing some IT or human resources functions.
Sorting through these alternatives and reaching the best formula for balancing traditional roles and new responsibilities is a critical strategic choice for the Chief Financial Officer. The logical conclusion many CFO’s are reaching is to embrace their new priorities and delegate critical tasks that aren’t part of their strategic mission and don’t support the company’s core business goals. At the same time, driven by the same forces, corporations as a whole have begun to look for solutions that can demonstrate current-year cost savings, produce real improvements in key business processes, and focus limited resources on the core business. And, as always, management must choose the solution from one of the three known alternatives – build, buy or outsource. Many CFO’s have concluded that newly created outsourcing options available in
the market can be a key element in the formula for success.
Outsourcing Becomes Strategic
Outsourcing, or subcontracting responsibility for completing certain business functions, has been a fact of corporate life for a number of years. Traditionally, corporations have outsourced individual business functions, such as computer hardware infrastructure or payroll processing. Outsourcing decisions were made on the basis of whether the outsourcing vendor could provide the service more cost effectively than could be done with internal resources. With the changing business climate and the demonstrated success of outsourcing, companies have begun to ask for, and service providers have begun to offer, more comprehensive outsourcing solutions.
Typically these solutions extend the focused outsourcing of a single task to encompass the entire business process of which that task is a part. This newer approach has become known as business process outsourcing (BPO). Outsourcing entire processes can be very appealing to corporations because it enables them to expand the scope of the outsourced services dramatically, while containing them within a scope that can be readily monitored and managed. This means the performance of the outsourcing provider can be more directly judged and the return to the corporation can be more clearly determined. The vast majority of BPO initiatives have been successful enough that corporations have chosen to continue and expand their use of business process outsourcing. In fact, the creation and management of BPO relationships is becoming a recognized business discipline. While outsourcing information technology processes typically has been the first place companies implement BPO, savvy CFO’s have come to understand that even greater benefits can be realized in other parts of the corporation. The Outsourcing Institute reported in May 2003 that human resources processes are receiving more attention than any other area as a candidate for BPO.
What is HR Outsourcing?
Non-core internal business processes are prime candidates for outsourcing, among them the repetitive transactions related to providing human resources administration and services. For many years companies have been outsourcing payroll services, tax preparation and similar focused tactical functions. Some companies even progressed to the point that they outsourced a number of functions. In fact, it’s not uncommon to find that as many as six or seven individual HR functions such as COBRA administration, benefits management and payroll have been outsourced to multiple providers. This is especially true in middle market companies.
“Many CFO’s have concluded that newly created outsourcing options available in the market can be a key element in the formula for success.”
Human Resources Business Process Outsourcing (HR BPO) is a logical extension of the trend toward outsourcing and the inclination of companies to delegate individual functions. In HR BPO, the company outsources complete responsibility for an integrated set of functions such as Benefits Administration, Payroll Management and general Human Resources Administration to a third party. It’s generally accepted that Human Resource departments provide 22 standard services to the corporation, some of them strategic (they contribute to the central mission of the company), and some of them tactical (they don’t contribute to the central mission, but they’re necessary to carry on business day-to-day).
Of these 22 functions, eleven are tactical, back office functions, are transaction intensive and can consume as much as 80 percent of the time and energy of an HR department. Among these eleven are: compensation, benefits, payroll, time and expense reimbursement, employee data and records management, HRIT/HRIS, employee and manager self-service, workforce analytics, expatriate administration, domestic relocation and policy and legal compliance.
Comprehensive HR BPO generally encompasses most, if not all, of these eleven functions. Some, such as expatriate administration, are less critical to midsized companies. When properly implemented, HR BPO can help an organization deliver industry leading HR practices through the innovative use of technology, enabling its own internal HR department to focus on the truly strategic human issues that can have a significant impact on organizational goals. For mid-market companies, outsourcing the tactical functions, so the organization can focus on strategic issues, can have a dramatic impact on performance.
Benefits to the CFO of Implementing HR BPO
Although the benefits of outsourcing human resources processes vary from company to company, most firms that have implemented comprehensive HR BPO programs have seen significant financial savings (30 to 50% of the operating budget) and a variety of less tangible, but equally important benefits.
Among the key benefits of HR BPO for the CFO are:
• Converting a growing capital investment to a predictable variable expense based on the number of active
employees;
• Reducing HR staff headcount and dramatically improving the ratio of HR personnel to the overall
employee base;
• Reducing the total amount spent on internally provided and currently outsourced services;
• Eliminating inefficiencies resulting from nonintegrated and redundant processes;
• Streamlining and simplifying relationships with several HR service vendors to a single strategic partner;
• Gaining access to HR best practices and subject matterexperts at a fraction of the cost to bring them in-
house;
• Reducing the risk and legal exposure of noncompliance with the myriad national, state and local regulations and laws now in force; and
• Refocusing HR personnel on strategic activities such as compensation planning, human capital
development and recruiting and succession planning, where they can truly add value to the core business.
Until recently, human resources business process outsourcing was an alternative only for the largest companies. Conventional wisdom was that the economies of scale required to gain true benefit could only be achieved in companies with more than 10,000 employees. With the cadre of HR BPO providers expanding, some firms have already targeted their services to mid-market companies. If you’re a mid-sized firm (500 to 10,000 employees), the key to success is finding an outsourcing partner that offers the unique scope and quality of services your organization requires and has achieved the economies of scale through working with multiple clients.
HR BPO Makes Sense
As you work to refocus your role as CFO, offloading non-core functions such as back office human resources activities can be one of your key initiatives in shifting your focus to strategic activities that support the core mission of your company. Outsourcing human resources functions not only reduces operating expenses and improves internal performance, but frees your HR, IT and finance staff to become as strategic as you need to be. By selecting the right HR BPO partner and carefully deploying the solution, mid-sized companies can achieve the same benefits as their larger competitors.
**************************** SHIVASHANKAR V. JIRLI.