Outsourcing The Finance And Accounting Functions
MANAGEMENTS T R AT E G YMEASUREMENTM A N AG E M E N T AC C O U N T I N G G U I D E L I N EOutsourcingthe Financeand AccountingFunctionsByEric KrellPublished by The Society of Management Accountants of Canada, the AmericanInstitute of Certified Public Accountants and The Chartered Institute ofManagement Accountants.
N OT I C E TO R E A D E R SThe material contained in the Management Accounting Guideline Outsourcing the Finance and Accounting Functions is designedto provide illustrative information with respect to the subject matter covered. It does not establish standards or preferredpractices.This material has not been considered or acted upon by any senior or technical committees or the board of directorsof either the AICPA, CIMA or The Society of Management Accountants of Canada and does not represent an official opinion orposition of either the AICPA, CIMA or The Society of Management Accountants of Canada.Copyright 2007 by The Society of Management Accountants of Canada (CMA Canada), the American Institute of CertifiedPublic Accountants, Inc. (AICPA) and The Chartered Institute of Management Accountants (CIMA). All Rights Reserved.No part of this publication may be reproduced, stored in a retrieval system or transmitted, in any form or by any means, withoutthe prior written consent of the publisher or a licence from The Canadian Copyright Licensing Agency (Access Copyright).For an Access Copyright Licence, visit www.accesscopyright.ca or call toll free to 1-800-893-5777.ISBN: 1-55302-204-1
S T R AT E G YOUTSOURCING THE FINANCEA N D AC C O U N T I N G F U N C T I O N SINTRODUCTIONThe use of finance and accountingoutsourcing (FAO) continues to risethroughout the world.The FAO market,as measured by the number of contractssigned for large FAO agreements (thosethat include five or more processesand/or have a contract value of at least 50 million) has increased steadily since2000, and by more than 45 percent since2005 (Fersht). A March 2007 IDC(Interactive Data Corporation) reportforecasts that the global FAO market willexceed 47.6 billion in 2008. Althoughthe United States will remain the largestsegment of the FAO market, the fastestgrowing region includes Europe, theMiddle East, and Africa (EMEA) (Bingham).CONTENTSIn the past 18 months, several largeoutsourcing agreements covering multiplefinance and accounting processes werefinalized. Earlier this year, the world’s toppersonal paper products manufacturer,Texas-based Kimberly-Clark Corporation,entered into a five-year contract withFAO provider Genpact. Genpact willoperate Kimberly-Clark’s global accountspayable, travel and entertainment expensemanagement, pricing administration,accounting-to-reporting, and supply-chainaccounting processes. Late last year,Aktiebolaget SKF hired outsourcingprovider Capgemini to manage multiplefinance and accounting processes forseveral of the Swedish ball bearingsEXECUTIVE SUMMARYPageINTRODUCTION1. MAKING THE DECISIONIdentify Strategic DriversEvaluate the Full Range of OptionsAssess Internal CapabilitiesDetermine Scope and Logic2. SELECTING THE PROVIDERCreate the Project TeamLink Buyer’s Needsto Provider MarketplaceConsider Outside HelpDevelop the Request for Proposal (RFP)Establish an RFP Evaluation ProcessConduct Due Diligence3. MANAGING THE RELATIONSHIPNegotiate Contract and ServiceLevel Agreement (SLA)Transfer Process and KnowledgeMonitor and Manage PerformanceRenew, ED 232426Throughout the world, the use of finance andaccounting outsourcing (FAO) by small, mediumand large enterprises is rising.The number of largeFAO contracts (those that cover five or moreprocesses and/or have a contract value of at least 50 million) increased by 45 percent from 2005to 2007. Most CFOs and other finance andaccounting managers can count on having toweigh the pros and cons of outsourcing; manywill play key roles in managing outsourcingrelationships with external providers.Thismanagement accounting guideline (MAG) providesguidance on managing FAO opportunities,challenges, and risks.This guidance – which targetsCFOs, finance and accounting managers, andothers responsible for selecting, implementing andmanaging FAO relationships – centers on whatmight be done at each stage of the FAO lifecycleto create and manage a successful FAO initiative.3
MANAGEMENTS T R AT E G YMEASUREMENTmaker’s European operations. A few monthsearlier, the British Broadcasting Corporation(BBC) signed a 10-year, 160 million deal withoutsourcing provider Xansa, which will managemuch of the BBC’s purchasing and sales transactionprocessing, financial management and projectaccounting, payroll processing, and other financeand accounting processes.The BBC reportedthat the arrangement will help it save more than 375 million over the course of the relationship(FAO Today News).The use of modern multi-process FAO beganwith a 1990 meeting in a London hotel betweena BP CFO and a partner at the consulting firmnow known as Accenture.The two men discussedthe severe challenges the oil company confronted:plummeting oil prices, new, highly agile competition,and a burdensome cost structure.The discussionproduced an innovative idea: rather than simplyproviding advice on how to make the CFO’sfunction more efficient, Accenture would takeover the CFO’s entire accounting function, withthe exception of control and financial policy.Thefollowing year, more than 300 BP employees fromnumerous locations transferred to Accenture’soutsourcing center in Aberdeen, Scotland.Therethey performed forecasting, payment processing,joint venture accounting, and other processes thatAccenture designed and managed.BP reduced the costs of the outsourced processesby an estimated 50% over the term of the agreement, which has been renewed several times andcontinues today, a time when the oil giant spendsan estimated 1 billion annually in outsourcedservices of all types with various vendors.Between BP’s pioneering FAO venture in 1991and 2002, the worldwide growth of multi-processFAO progressed at a slow pace. During thatperiod, the vast majority of companies pursuingFAO focused on single-process arrangements.Since 2003, however, the use of multi-processFAO has surged, growing by roughly 30 percent(from year to year) during each of the past fouryears, according to The Everest Group andDeloitte Consulting.Despite the growth of all forms of outsourcingrelationships – those involving finance andaccounting and, even more so, those involvinghuman resources (HR) and informationtechnology (IT) processes – dissatisfaction hasremained surprisingly high among buyers,according to numerous surveys of businessexecutives involved in outsourcing relationships.4Fifty-four percent of a group of 228 global CFOs(two-thirds of these CFOs work for companieswith more than 1 billion in annual revenue)indicated that outsourcing does not deliver thebenefits promised by the media and outsourcingvendors. However, 73 percent of those samerespondents asserted that they would beinterested in outsourcing from a few processes upto every process “that’s not core,” (CFO ResearchServices, 2006).Together, those seemingly contradictory attitudes– a strong willingness to outsource and skepticismabout outsourcing’s benefits – suggest that:a) Outsourcing promises valuable opportunitiesbut poses formidable challenges and risks; andb) A significant number of outsourcingagreements have been mismanaged; andc) The outsourcing market is still relativelyimmature.The outsourcing market is however maturing,thanks to the discipline’s growth, the growingexperience of outsourcing buyers, and the currenteffort to develop professional standards similar tothose that apply to accountants and lawyers (TheWall Street Journal).These standards, if and whenfinalized, may facilitate more effective and valuableoutsourcing relationships.To date, research onthe effectiveness and perception of the value ofoutsourcing relationships strongly suggests thatmismanagement of the outsourcing relationshipby both providers and users of the servicesrepresents a primary source of dissatisfaction.This mismanagement can occur from the initialdecision to outsource all the way to the end ofthe relationship.For example, when 120 finance and accountingexecutives whose North American companies hadentered into large FAO agreements were asked toidentify the most challenging aspects of FAO, thethird most frequently cited response (among 14)was “not sure/don’t know” (EquaTerra, 2005).Finance and accounting professionals familiar withthe old saw “you can’t manage what you can’tmeasure” would agree that a company also cannotmanage what it does not understand. A morerecent and highly detailed 30-page study on theevolution of outsourcing concludes that threespecific areas of the discipline are in greatest needof improvement:1. monitoring and managing the benefits ;2. selecting the outsourcing provider; and
OUTSOURCING THE FINANCEAND ACCOUNTING FUNCTIONS3. involving the “right people” and culturallyaligning the outsourcing buyer and provider(KPMG, 2007).Improving each of those areas, as well as effectivelymanaging the overall outsourcing relationshipfrom inception through conclusion, can beachieved by understanding and addressing thechallenges and risks that cause mismanagement.The purpose of this guideline is to provide aframework for guidance on managing FAO’sopportunities, challenges and risks, that is, whatmight be done at each stage of the FAO lifecycleto enhance the probability of a successful FAOinitiative.This guidance qualifies as “good practices”,because “best practices” have not yet emerged asmodern FAO continues to mature. In fact, giventhe unique circumstances of each organization, aclear set of “best practices” may never emerge.These good practices can support the development of solutions or responses to such uniquecircumstances.The target audience of this guideline is buyers ofFAO services and those charged with implementingand managing FAO relationships. CFOs and otherfinance and accounting managers dominate thatpopulation:Executives Primarily Making FAO RecommendationsTitlePercentageFinance Executives and Senior Management56 %CEO13 %Board of Directors7%Business Unit Executives7%COO4%Other Staff Function Executives4%Shared Services Leader4%Others5%(EquaTerra)This guideline can be applied to the outsourcingof a single finance and accounting process as wellas to multi-process outsourcing.Although certain forms of FAO have existed formany years, this MAG deals with modern FAO,which typically involves multiple finance andaccounting processes and longer term relationships(in the range of five-year to ten-year contractualcommitments).These FAO relationships sharemany characteristics with the large informationtechnology outsourcing (ITO) and humanresources outsourcing (HRO) agreements thathave grown increasingly common during thepast 10 to 20 years.To date, the worldwide use and volume of FAOtrails behind ITO and HRO. Much of the guidancein this MAG is both based on and can be appliedto ITO and HRO relationships. As a NorthAmerican finance executive at a global softwarecompany told a business publication last year,“Finance executives can walk over to the ITfunction and ask,‘How did this work for you?’”FAO covers a wide collection of processes,ranging from highly transactional activities such asaccounts payable, accounts receivable and payroll,to processes that require greater and morecomplex degrees of knowledge and analysis(e.g., treasury, tax strategy, or financial planningand analysis). Although the same processes canhelp manage the challenges, risks and opportunitiesof both sorts of finance and accounting activities,the risks associated with knowledge- and analysisbased FAO are greater, and therefore requiregreater management discipline.How well an outsourcing arrangement is managedmatters more than where the outsourcingservices are provided.That point has at timesbeen obfuscated by politically charged discussionsand articles that examine the pros and (morefrequently) the cons of off-shoring.“Off-shoring”can be performed by an external outsourcingvendor or within a company that establishes“captive” shared-services operations in othercountries.The geographic location of an FAOprovider does matter, and its potential implicationsshould be addressed during the selection of aprovider; however, the location of the outsourcingservices matters less than how well the FAObuyer manages and monitors the relationship.Thisguideline focuses squarely on the latter challenge.To that end, this guideline identifies processes formanaging the challenges, risks and opportunitiesassociated with FAO within each of the followingsteps and sub-steps of the FAO lifecycle.As shown in the following graphic, the steps donot necessarily start and stop in a cut-and-dryfashion. For example, managing the relationshipwith outsourcing providers technically beginsduring the provider selection process, when arequest for proposal (RFP) initiates communications with the eventual provider. Similarly, acompany that decides to outsource a collectionof finance and accounting processes, and thenconducts its selection processes, may ultimatelydecide against outsourcing the processes becauseof what it learns about the provider marketplace.5
MANAGEMENTS T R AT E G YMEASUREMENTTHE FAO LIFECYCLEKey Steps in the ProcessMAKINGTHEDECISIONSELECTINGTHEPROVIDER IdentifyStrategic Drivers Create theProject Team Evaluate the FullRange of Options Assess InternalCapabilities Link Buyer’sNeeds toProviderMarketplace Determine Scopeand Logic ConsiderOutside Help Develop theRequest forProposal (RFP) Establish an RFPEvaluation ProcessMANAGINGTHERELATIONSHIP NegotiateContract andService LevelAgreement (SLA) Transfer Processand Knowledge Monitor andManagePerformance Renew,Renegotiate,Terminate Conduct DueDiligenceKey TermsOutsourcing: The transfer of responsibility for conducting internal processes to an external services provider.That externalprovider may or may not be located in a different country than its customer’s headquarters.Finance and Accounting Outsourcing (FAO): The outsourcing of one or more finance and accounting activitiesor processes.Human Resources Outsourcing (HRO): The outsourcing of one or more human resources activities or processes.Business Process Outsourcing (BPO): The outsourcing of business processes; the term is frequently used to describeboth HR and F&A outsourcing, and to differentiate those activities from information technology outsourcing.Information Technology Outsourcing (ITO): The outsourcing of one or more information technology activities orprocesses.Shared Services: The centralization within a company of responsibility for conducting internal transactions, processes and,in some cases, corporate functions. Shared services are also referred to as in-sourcing or captive off-shoring (when theshared services center is located in a different country).Off-Shoring: This term, often misused, refers to geography only; it refers to the movement of processes – those conductedby an outsourcing provider or those conducted internally through a shared services arrangement – to a country different fromthe company’s home base.Two derivations of the phrase, near-shoring (moving processes to an adjacent or nearly adjacentcountry) and same-shoring (moving processes to a central location within the same country) also refer exclusively togeographic location.Two other more recently coined terms, right-shoring and best-shoring, refer to quality of location –choosing the optimal location for outsourced and/or shared services processes with respect to a company’s unique needs.Multisourcing: A term used to describe a company’s overall in-sourcing and outsourcing strategy.The phrase is defined as“the disciplined provisioning and blending of business and IT services from the optimal set of internal and external providers inthe pursuit of business goals” in the book “Multisourcing” (Cohen and Young, 2006).The appearance and use of the term, alongwith more references to outsourcing and in-sourcing as “sourcing” (Sourcing Interests Group) signify the maturating of theoutsourcing discipline.6
OUTSOURCING THE FINANCEAND ACCOUNTING FUNCTIONS1. MAKING THE DECISIONBefore outsourcing a process or a set ofprocesses, finance and accounting leaders shouldconduct four different, but frequently overlapping,evaluations to ensure a sound outsourcingdecision (whether positive or negative) that alignswith corporate strategy, objectives, capabilities,and plans.Those four evaluations include: Identify Strategic Drivers – Identifying thecompany-specific strategic drivers for theoutsourcing decision is essential to keepeveryone on the same page throughout theprocess; Evaluate the Full Range of Options –A thorough evaluation of the full range ofoptions includes consideration of sharedservice arrangements, as well as all potential“sourcing” and “shoring” possibilities; Assess Internal Capabilities – Assessingthe internal capabilities of each sourcing optionmust include an honest evaluation of systemsand controls as well as the skills necessary totransfer and effectively manage the outsourcedprocess or processes; and Determine Scope and Logic –Determining the scope and logic is an essentialelement of building and finalizing the businesscase for an FAO decision.Before examining those evaluations in greaterdetail, it is useful to review why companiesoutsource finance and accounting processes.Organizations use outsourcing, including FAO, toachieve one or more of the following benefits:1.2.3.4.5.6.Reduce costs;Gain access to better talent;Address staffing issues and labor shortages;Gain access to better technology;Improve processes and productivity;Reduce risks associated with ineffective inhouse processes; and7. Re-assign employees to higher-value activities.Research on outsourcing benefits suggests thatcost reduction remains FAO’s primary motivation.By far the most important criteria for selecting afinance and accounting outsourcing provideramong North American companies are price andthe deal’s overall economic proposition; theFAO provider’s “transformational capability”represented only the 12th (out of 18) mostimportant provider-selection criteria (CFOResearch Services).The most frequentlyoutsourced finance and accounting processes are(in priority) accounts payable (A/P), accountsreceivable (A/R) and payroll.Turning over thoseprocesses to an outside vendor rarely deliverstransformational benefits; rather, the primaryobjective is cost reduction. This may reflectthe number of years that FAO outsourcing hasbeen occurring; other criteria may evolve as theprocess matures, as has happened to some degreewith IT outsourcing.The benefits associated with finance andaccounting outsourcing are similar to thoseassociated with both HR and IT outsourcing:“Take all of the work within a financedepartment involved in maintaining its company’sbooks: reviewing and verifying receivables andpayables, making deposits, reconciling bankstatements, entering updates into the company’sfinancial system, and producing timely reports formanagement (the internal customer of theprocess). Outsourcing this type of work within afinance department has produced real benefits formany companies.They gain significant savings byleveraging the scale and scope of the provider’soperation.They gain access to a more flexibleworkforce, one that can be ramped up for quickquarterly and year-end processing and thenregulated back down for the rest of the year.Thecompany can tap specialized financial skills it onlyneeds occasionally. All of the work of recruiting andstaffing personnel and dealing with day-to-dayoperational issues are assumed by the serviceprovider. As a result, internal skills can be freed,making more time available for financial planning,what-if analysis, and forecasting,
accounting managers can count on having to weigh the pros and cons of outsourcing;many will play key roles in managing outsourcing relationships with external providers.This management accounting guideline (MAG) provides guidance on managing FAO opportunities, challenges,and risks.This guidance – which
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2016 Outsourcing accelerates forward 04 Responses to this year's survey reflect the growth of outsourcing across mature functions, including IT, human resources, and finance, during the two years since our last survey. Findings also indicate outsourcing's accelerated growth into additional functions, like real estate,
FINANCIAL ACCOUNTING : MEANING, NATURE AND ROLE OF ACCOUNTING STRUCTURE 1.0 Objective 1.1 Introduction 1.2 Origin and Growth of Accounting 1.3 Meaning of Accounting 1.4 Distinction between Book-Keeping and Accounting 1.5 Distinction between Accounting and Accountancy 1.6 Nature of Accounting 1.7 Objectives of Accounting 1.8 Users of Accounting Information 1.9 Branches of Accounting 1.10 Role .
