1. Employee Costs
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 investment that you have to make to address key, process-improving projects.
Key Fact 3a. Please note – I always emphasise to clients that they still need to invest in their service going forward. It is a myth that all investment goes away, but you can certainly be creative in how to get the best service quality and a pricing structure that helps the Buyer and Supplier.
4. “Flash To Bang”
When referring to Flash to Bang” I mean the time between taking the decision to move to a new delivery model and reaching optimum delivery and efficiency levels in the chosen model.
One of the “Lost Costs” that we dwell on in projects is the time difference between a “build yourself” option and a “buy it in” option. Like most things that we choose to do ourselves, timescales are more fluid than those that are commercially underwritten. Having an outside party responsible for delivery does not guarantee success and we can all share horror stories about projects that have gone wrong. However, the penalties attached to failure are a lot more transparent when external parties are involved.
Where the greatest impact is felt is in the time it takes to reach optimum delivery/efficiency levels. As an example look at a greenfield environment, where nothing has been centralized. Given a standing start, an internal Shared Services Center will take around 6 months longer just to be established. At that stage the Outsourced model will have been operating at full efficiency levels for 6 months. There is a clear opportunity cost within that.
Key Fact 4. Commercially contracted projects are 75% more likely to deliver on time, and nearly 100% of them are promised to be delivered sooner than any internal, equivalent project. The financial impact of this is hard to generalize about, but having a project completed sooner, leads to benefits earlier.
5. Staff Skills – what percentage of your staff are Six Sigma Trained?
The growth of Six Sigma training within the workplace has been impressive over the last 10 years. For many organizations there will be some staff with these skills, though further investment is always dependent upon the budget being available. The question – and the opportunity – is what percentage of your staff have this kind of training. More prescient, it is also worth asking how frequently their skills are drawn on.
One of the revelations of site visits to the Outsourcers is the sheer passion that the delivery teams bring to every client. The prospective clients who take floor walks of existing operations always comment on the drive, engagement, and hard, proven business improvement case studies that are discussed on the tours.
Really what the outsourcers are doing is encouraging their staff to cut their customers’ costs. While that will lead to short term revenue losses to the Outsourcer, they bank on the fact that it will lead to even more work in the future. From most deals I’ve seen this is exactly what has resulted.
Key Fact 5. For most specialists in Finance Outsourcing, almost 100% of their delivery staff will have some kind of Six Sigma or Lean training. More importantly, they will be incentivized and rewarded to identify and implement projects on a daily basis. For even the basic online Six Sigma training, $2000 per person is a starting point – that is investment that you no longer have t make. Outsourcing gives you access to a skills base that has made that investment already.
6. The Price of Flexibility
Often the feeling of Outsourcing is that it is “More For Less”. Taking almost a Supply Chain approach to meeting your future delivery needs means you have to ask the following questions:
How much will it cost to reduce delivery capacity?
What fixed costs will you be left with, even after reducing headcount?
What will the cost be of increasing capacity, whether to deal with an acquisition or just increased volumes?
How quickly can you get the headcount sign off to increase volumes?
What are the onboarding costs (e.g. recruitment, training etc) of adding new staff?
What is the time between recognising the need for increased volumes and having the resources in place to deliver them?
In the modern employment world, temporary resources can give much upside flexibility. Employed for longer, they can also provide the downside flexibility. Until then, they come at a premium that will blow the $34,000/£22,000 fully loaded cost comparison out of the water.
From a 2012-2017 planning perspective I always challenge clients to map out the widest possible range of events that could impact their business. We then carry out an exercise to ensure that their delivery operations – whether insourced or outsourced – are able to address those scenarios at a cost and speed that is proximate to the event.
This is all based on a lot of tough learnings from the last four years. One client, who I recently advised on renegotiating their arrangement, had only factored in upward growth in their contracted volumes. The concept of their business shrinking had seemed alien when negotiating their first arrangement in 2007. Their new contract takes as its starting point the need for a delivery model that adapts operationally and commercially to all future volume scenarios.
Within the certainty of zero or low economic growth, it is the strategic attraction of outsourcing that should provide confidence. Suppliers should be able to react to upturns in your volumes within a matter of weeks. Most events causing this can be foreseen and planned via the normal Service Management procedures.
Planned reductions in volumes can occur on a timeline determined by the client. Unplanned reductions may take 8 or more weeks to filter through to the monthly invoice. Suppliers take differing views on how they recoup their investment in deals, so scenario planning should be taken early on with the down-selected Suppliers.
Key Fact 6. Suppliers offer a significantly more flexible delivery model than any internal function can offer. They have the ability to bring on resources faster, at a lower cost, and reaching a faster level of efficiency than an internal delivery model. With proper account planning they also offer a model that more easily “breathes in, breathes out” to match actual business volumes.
Key Fact 6a. I always warn clients that they are investing in their Supplier, so losing key resources when volumes shrink is a risk. However, the knowledge in an outsourced environment will be more heavily documented and captured in an educational process that can deal with both natural and forced attrition.
7. When Did You Set Up Your Shared Services Operation?
The most common determinant affecting the strength of the Outsourcing business case is the age of the operation. It is worth looking at the business case for any Shared Service Center set up before 2009. The older it is, my experience is that the better the business case is.
A number of the points raised above drive this. Typically, the last serious comparison between outsourcing and insourcing, whether a Benchmark study or a full blown assessment, will have been done several years ago. Since then, limited spending on benchmarking and consulting has reduced the focus on the external world and increased it on the internal operations.
It is worth dusting off those old Shared Service Center business plans. When organizations set up Shared Service Centers in the 1990s and through to the late 2000s, most paid lip service to Outsourcing. It was usually mentioned as a likely future option, but that they would be able to deliver most of the savings internally, by themselves, via Shared Services.
Fast forward to 2012 and I can honestly say that every client I’ve had in the last 2 years has been shocked at the strength of their business case for Finance Outsourcing, even after years of operating a SSC environment.
In the “new normal” world of zero or low economic growth, and with little investment available for back office services, Finance Departments are now taking a fresh and more sophisticated look at what Outsourcing can deliver.
Key Fact 7. If your internal operations are more than 3 years old then there is an 80% chance (based on my experience on over $5bn worth of deals) of there being a strong business case for outsourcing. The costs of investigating it are now lower than ever, and the results give you a clear confidence.