Finance Transformation

1. In association with
FINANCE TRANSFORMATION –
THE OUTSOURCING PERSPECTIVE
A FINANCE & MANAGEMENT SPECIAL REPORT
SR31 | DECEMBER 2010
BUSINESS WITH CONFIDENCE icaew.com/fmfac

2. FINANCE TRANSFORMATION – THE FOREWORD
OUTSOURCING PERSPECTIVE
A special report published by:
Finance and Management Faculty THE STORY CONTINUES...
Chartered Accountants’ Hall
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London EC2R 6EA
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E fmfac@icaew.com
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Chris Jackson
Head of faculty
T +44 (0)20 7920 8525 It is six years since the Finance & Management Faculty produced its special
E chris.jackson@icaew.com
report ‘From outsourcing to offshoring’. In that time I expect that the vast
Emma Riddell majority of large businesses will have considered outsourcing at some point,
Technical manager and many will have taken the plunge with varying degrees of success.
T +44 (0)20 7920 8749
During those six years we have also experienced the international credit
E emma.riddell@icaew.com
crunch and are said to be entering into the age of austerity. These
Rick Payne circumstances have required all businesses to review their cost base and to
Finance direction programme
consider if their structure is fit for purpose. The finance function is not
T +44 (0)20 7920 8451
E rick.payne@icaew.com exempt, and has no doubt been under the spotlight in many organisations.
With this in mind this special report ‘Finance Transformation – the
Caroline Wigham
Outsourcing Perspective’, is timely. Many of the key issues from 2006 remain
Services manager
T +44 (0)20 7920 8508 the same: deciding what and with whom to outsource, negotiating terms and
E caroline.wigham@icaew.com managing the associated risks. Other aspects have evolved, including the
range and attractiveness of outsourcing locations available and the use of
The aim of this series of special reports is more blended models combining onshore, offshore, in-house, outsourced and
to provide faculty members with a review various styles of management. You should find these two reports
of a topical theme within the subject areas
of finance and management, offering
complementary; for details of how to access the previous report see the
both analysis of the relevant theory and further reading section on page 28.
review of the practical application of Whilst this report does focus on outsourcing, many of the topics discussed
appropriate management techniques. will also be useful if you are considering other solutions such as in-house
Comments and suggestions should be shared service centres. The authors, Capgemini, share their expertise on topics
addressed to Emma Riddell. including service level agreements, people management, and innovation and
The information contained in this and technology. Equally whilst this report is aimed at larger businesses there will
previous issues of this publication is
be some useful lessons for smaller organisations.
available (to faculty members only) on the
faculty website at icaew.com/fmfac The number of case studies in the report is necessarily limited; however we
would be really interested to hear your experiences. Have you outsourced any
F&M SPECIAL REPORTS part of your finance function? If so, which? Do you have any lessons that you
... are produced on behalf of the faculty by
could share with your fellow members? We would also be very pleased to
Silverdart Publishing,
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London SE1 0LH. join in the conversation at www.linkedin.com – ICAEW Finance &
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Contact: Alex Murray or Hannah Buck
enquiries@silverdart.co.uk
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EMMA RIDDELL
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to any person acting or refraining from
action as a result of any material in this Chris Jackson is head Emma Riddell is
publication can be accepted by ICAEW or of faculty, Finance & technical manager,
the author(s). Management Finance &
Faculty, ICAEW. Management
ISBN 978-0-85760-079-0 Faculty, ICAEW.
icaew.com/fmfac

3. FINANCE TRANSFORMATION – THE OUTSOURCING PERSPECTIVE
CONTENTS
02 INTRODUCTION 20 FURTHER DEVELOPMENT
MARKET OVERVIEW CONTINUOUS IMPROVEMENT LEADS TO WORLD CLASS
Recent trends in the sourcing market are discussed, along PERFORMANCE
with ways in which outsourcing can benefit your company. Here we look at how to become a world class performer, by
focussing on complexity reduction and operating excellence.
05 CHOOSING A PATH
SELECTING THE RIGHT SOURCING MODEL 24 PROCESSES
Here the potential models and motivations for sourcing are TRANSFORMATION THROUGH INNOVATION AND NEW
highlighted, along with the possible risks. TECHNOLOGY
The possibility of further development from implementing
09 THE FINAL SELECTION up to the minute technology is assessed.
MAKING THE DECISION
The importance of location, pricing, security and ease of 26 CONCLUSION
transition are outlined in this section, with information to TRANSFORMING FAO
help the decision making process. Transforming your organisation is a challenge, one which
can benefit from a good sourcing partner.
13 CONTRACTS
CONTRACTUAL ISSUES AND GOVERNANCE MODELS 27 APPENDIX
A good sourcing relationship is dependent on establishing a GLOSSARY
clear and unambiguous contract. Key questions and things
to consider are outlined here. 28 ADDITIONAL RESOURCES
BOOKS, JOURNAL ARTICLES AND MORE
15 CUSTOMER SERVICE
SERVICE LEVEL AGREEMENTS AND QUALITY ASSURANCE 29 PREVIOUS SPECIAL REPORTS
The importance of KPIs, benchmarking and service level
agreements to maintaining high levels of performance are
discussed in this section.
18 HUMAN RESOURCES
PEOPLE MANAGEMENT
Maintaining a keen workforce is crucial during such massive
organisational change. We offer some advice on ways to
ensure a smooth transition.
FINANCE & MANAGEMENT SPECIAL REPORT December 2010 01

4. INTRODUCTION
MARKET OVERVIEW
This introduction provides an insight into the outsourcing market, and
discusses the recent trends seen in the area, as well as how your company
can benefit from employing this strategy.
Global sourcing
The finance and accounting (F&A) sourcing strategy The global finance and accounting outsourcing (FAO)
must focus on cost, quality and flexibility. What is market is part of the global sourcing market, which
more, the days of chief financial officers (CFOs) encompasses both in-house and outsourced
looking to offshoring and outsourcing solely for cost centralised sourcing of all business and IT functions.
and compliance control are gone irrevocably. For a more comprehensive perspective of the FAO
In the aftermath of the global financial crisis, CFOs marketplace, it is worthwhile considering the
are being compelled to balance cost pressures against dynamics currently at play on the global sourcing
business outcomes. There is a myriad of options for market, which continues to flourish, with 498
transforming the organisation’s finance function into a transactions concluded in Q2 2010 (from 444 in Q1
‘business partner’ capable of carving out value by 2010). Yet, though more transactions were
activating effective finance infrastructure; decision- concluded, they concerned narrower scope and/or
making support; and enhanced assurance. shorter terms.
That’s why a shared services sourcing strategy – In the period, the market heard about the opening
regardless of whether implemented internally or with of 38 captives by well-known players such as JP
an external partner – needs to consider how to assure Morgan, Oracle, Microsoft, Western Union, Shell, HP,
cost reduction and standardisation whilst demanding Huawei and Intel. At the same time, 32 business
that added value be squeezed out of the back office to process outsourcing (BPO) delivery centres were set
drive insight beyond transaction processing. up, mostly in India.
For readers who would appreciate help with Though the transaction volume grew, the
definitions, we have included a glossary on page 27. aggregate annual contract value (ACV) declined. The
growth was led by the BPO market, which witnessed
‘A shared services sourcing strategy needs to consider
how to assure cost reduction and standardisation whilst
demanding that added value be squeezed out of the
back office to drive insight beyond transaction
processing’
ABOUT THE AUTHOR
Carole Murphy is vice president at Capgemini Consulting where she leads the global
finance & employee transformation practice. She joined Capgemini in 1996 and has
been vice president in the UK since 2006.
Carole works with global organisations to develop and implement finance and HR
strategy and transformations which incorporate shared services and business process
outsourcing.
Prior to joining Capgemini, Carole worked in industry as a finance controller. She
was born and educated in Dublin and is a qualified management accountant and
lawyer.
For further information on Capgemini, see page 26.
02 icaew.com/fmfac

5. ‘Cost saving remains the key criterion for
organisations in the process of defining the
right sourcing strategy’
15% and 33% increase in transactions and ACV, Trends in ‘how?’
respectively (measured quarter-on-quarter). The Organisations are proactively balancing:
banking, financial services and insurance (BFSI) • the scope of shared services operations – operating
vertical contributed one-fifth of market activity, ie 102 multiple functions and processes and servicing a
transactions in Q2 2010.1 number of business units from global or regional
centres;
The FAO market • how they source the services – flexing between
The global FAO market is differentiated by the scale outsourced and in-house service delivery under a
and experience of delivery that the F&A BPO vendors number of smaller contracts; and
have. Based on the value of commercial contracts • where the shared services centre (SSC) operates –
awarded in the first half of 2010, the top 10 service leveraging the labour pools, shrinking the cost
providers in the FAO space are, in alphabetical order: base, and minimising risks of geographies, across
• Accenture; the globe.
• Capgemini;
• EXLService; Trends in ‘where?’
• Genpact; The current BPO offshore delivery locations for F&A
• HP; are Brazil, Canada, the Czech Republic, Hungary,
• IBM; India, Ireland, the Philippines, Poland and Romania.
• Infosys; Based on current trends and market activity,
• TCS; Gartner expects China, Costa Rica, Jamaica, Malaysia,
• Wipro; and Mexico and Vietnam to come to the forefront, as
• WNS.2 strong FAO providers.5 In the second quarter of 2010,
high offshore activity, ie the most service centres set
Analysts’ forecasts of market value and growth rate up, was noted in China, India and the Philippines.6
vary within a wide band – they expect compounded Low-value transactional processes, requiring limited
average annual growth rate (CAAGR) of between 8% language skills, are being located offshore and
and 11% to between $16bn and $30bn of market processes requiring customer contact and specialist
value by 2013. language skills are tending to stay nearshore for a
Nevertheless, all analysts predict the market will combined delivery model.
remain strong and will continue to expand, especially Notably, half of all Top 2000 captive service centres
given the fact that overall client satisfaction from FAO and Top 50 supplier centres set up in India during
continues to rise every year.3 the last year were in Tier 2/3 locations, ie outside the
major outsourcing locations. However, this growth
Sourcing trends has been mainly restricted to third-party suppliers.
Captives continue to prefer Tier 1 locations.7
Trends in ‘why?’
Cost saving remains the key criterion for organisations Trends in ‘pricing’
in the process of defining the right sourcing strategy. In the last two years, deals are emerging with a
But even in low-wage countries such as India and blended pricing model, which also utilises elements
China prices are rising and margins are becoming of full-time equivalent (FTE) and transactional pricing.
tighter. “Today, most F&A BPO deals are with clients Although the majority of deals are fixed-price or
that want to source F&A administration processes price-per-FTE based with the supplier expected to
from lower-labour-cost locations and garner better streamline and standardise accounting processes,
F&A practices. Buyers must look at a provider’s organisations are looking to suppliers for
quality, vertical market expertise (which is becoming transformational services.
increasingly important as providers learn about The use of service level agreements (SLAs) is also
specific industries’ finance needs, such as payment evolving. In the first few years of a contract,
terms and supplier types), and global delivery models customers stipulate a number of service levels, and as
to ensure a full evaluation of providers’ abilities.”4 a deal matures, the number and type of service levels
Customers recognise that it is possible for shared used is streamlined.8
services to go beyond transactional/operational work FAO customers have learned that the success of a
to achieve new productivity gains and new revenue service from a supplier is directly proportional to the
streams by implementing new practices through continued input and guidance of the customer’s
unique, creative methods of implementing finance and IT team. Research shows that the most
standardisation and automation, driving continuous satisfied F&A BPO customers actively participate in
improvement, and assuring world-class performance. F&A BPO service delivery issues.9 As a reflection of
FINANCE & MANAGEMENT SPECIAL REPORT December 2010 03

6. ‘The focus on both sides is to move to a more
end-to-end process-oriented view beneficial
for both parties instead of just haggling over
the production of activities in batches’
this, some contracts provide for gain-share
mechanisms, as well as bonuses for high REFERENCES
performance, rather than penalties for low
performance. Working in partnership also ensures 10 Everest Global, Inc.: ‘Global Sourcing, Market Vista
alignment, coordination and control of both supplier Q2 2010’, 2010, slide E2-3.
and business needs. 20 TPI: ‘The TPI Index: An Informed View of the State
Fearing that their services will become of the Global Commercial Outsourcing Market Q2
commoditised, as reflected in falling revenues and 2010’, slide 12.
plummeting margins, suppliers are developing 30 Tornbohm, Cathy, ‘Magic Quadrant for
proprietary best practices and processes and are Comprehensive Finance and Accounting BPO’,
advising on and suggesting process improvements. Gartner, 17 December 2009, p. 3.
The focus on both sides is to move to a more end-to- 40 Tornbohm, Cathy, ‘Magic Quadrant for
end process-oriented view beneficial for both parties Comprehensive Finance and Accounting BPO’,
instead of just haggling over the production of Gartner, 17 December 2009, p. 3.
activities in batches.10 50 Tornbohm, Cathy, ‘BPO: What Does Good Look
Like in 2010?’, Gartner Outsourcing & IT Services
Summit in London, June 2009.
60 Everest Global, Inc.: ‘Global Sourcing, Market Vista
Q2 2010’, 2010, slide II-1.
70 Everest Global, Inc.: ‘Global Sourcing, Market Vista
Q2 2010’, 2010, slide II-5.
80 Tornbohm, Cathy, ‘Magic Quadrant for
Comprehensive Finance and Accounting BPO’,
Gartner, 17 December 2009, p. 3.
90 Tornbohm, Cathy, ‘Magic Quadrant for
Comprehensive Finance and Accounting BPO’,
Gartner, 17 December 2009, p. 3.
10 ‘Q&A Interview with Tom Bangeman’, Shared
Services & Outsourcing Network, July 2010, p. 3.
04 icaew.com/fmfac

7. CHOOSING A PATH
SELECTING THE RIGHT SOURCING
MODEL
When considering sourcing it is important to look at all the possibilities. Here, the
different models, motivation and risks are analysed.
Captive sourcing vs outsourcing • the fact that the business is under intense cost
A decision to undertake transformational change to back- pressure and needs to deliver immediate results;
office operations often culminates in a decision between • the view that the amount of spend and/or change
captive shared services (CSS) and business process required would be very hard to achieve internally
outsourcing (BPO). Shared services refer to the grouping and needs to be handled in partnership with an
of skills into a separate unit and the provision of a expert; and
common service by the one unit. • a lack of specialist legal knowledge to run an
In the CSS model, that grouping is done in-house – offshore location.
while BPO is the delegation of the provision of business
processes to a third party. Which operating model is Sourcing models
chosen depends on the maturity, ambition and culture of Selecting the right sourcing model means finding the
an organisation. Figure 1 (below) graphs the variance in right combination of ownership, location and
the key decision levers in the two operating models. management. Figure 2 shows how these decision
Typical drivers for CSS include: drivers interact to create different sourcing models.
• the desire to realise all initial cost savings;
• concern of loss of process knowledge to a third party; Ownership axis
• fear that BPO may restrict flexibility and cause Successful companies are using multiple or selective
inefficiency; sourcing not just to save money but as a best practice
• the objective to develop own shared services offering in which increases organisational flexibility and
the market; and decreases time to market. They are taking a closer
• the opportunity to improve internal operations before look at their processes and sub-processes to decide
looking to an outsourcing partner. which sourcing option is best on a case by case basis.
Disciplined multi-sourcing offers a new framework
Typical drivers for BPO include: for greater control over sourcing decisions and
• the decision that back-office activities are non-core and ensures that customer-supplier relationships deliver
would be better handled by a third party specialist; value and support business strategies.
Figure 1
Diagram 2 Operating model options and key levers for realising benefits of
Operating model options and key levers for realising benefits of shared services
Labour arbitrage Process efficiency Economies of scale Soft benefits
Both captive shared Both solutions use best Both solutions employ Outsourcing of processes
services and outsourcing practice and continuous economies of scale but does transfer a large
can benefit from cheaper improvement to refine outsourcing often levers element of control to the
labour but outsourcing functions but this is more this through outsourcer.
tends to be more critical for outsourcing consolidated centres.
location flexible. success.
High
Labour arbitrage and economies of
scale allow outsourcing to operate at
Leverage
a lower cost base, however the client
Med must transfer a significant element of
process control over to the supplier.
Low
Captive shared services Outsourcing
FINANCE & MANAGEMENT SPECIAL REPORT December 2010 05

8. ‘Successful companies are using multiple or selective
sourcing not just to save money but as a best
practice which increases organisational flexibility
and decreases time to market’
Location axis back from offshore activities. The key lies in careful
There are three types of locations in sourcing: onshore, planning, implementation and management of the
nearshore, and offshore: delivery.
• onshore offers best cultural and language alignment Many organisations are combining the models into
and access to experienced staff; yet it is not likely to hybrids for flexibility in assuring the right level of risk
be the lowest cost option; and cost savings while maximizing benefits such as
• nearshore means cultural similarity but at a lower improved leveraging of capabilities and expertise.
cost and provides access to highly educated staff. Figure 3 (opposite) illustrates how the lines between
Yet, the staff may not be as experienced and the the models are now blurring, as organisations select
language skills might be limited; and and design hybrids to best fit their own business reality
• offshore is the lowest cost option that provides and needs.
access to highly educated staff. There might be
stronger cultural differences, greater potential for loss A word about risk
of interaction and liaison, and access to language The perceived risks of outsourcing are related to the
skills is limited. commercial relationship between the insourcer and the
outsourcer. The benefits of the outsourcing deal might
The terms ‘bestshoring’ or ‘rightshoring’ are be outweighed by the costs and perceived risks
commonly used to describe the location mix choice in associated with outsourcing in the following areas:
which processes are where the organisation can be • operating model;
assured maximum leverage of the shared services • knowledge transfer to third party;
model for a particular business function. • vendor selection;
• negotiating price;
Management axis • ensuring quality and continuity;
It takes a lot of management effort to realise the • organisation change management;
expected benefits of shared services and offshoring. • service level management;
Poorly managed cost-saving strategies can end up • vendor governance;
costing far more than the original savings planned. • geographical and political risk; and
This has resulted in a number of companies pulling • data privacy.
Figure 2
The split in scope of process functions between shared services and the retained organisation means
a need for different competencies and skill sets in the two organisations.
Captive offshored Spin off
(eg offshored SSC) (eg new company)
Shared support organisation
(eg facility power house)
Horizontally outsourced
LOCATION
(eg BPO vendor)
Offshore
Vertically outsourced
(eg managed
service provider)
Near shoring
Onshore Light management
T
EN
EM
Tight management
AG
Optimised house solution
AN
(eg in-house SSC)
In-house Outsourced
M
In-house BPO vendor
Selective sourcing or multiple
sourcing is a combination of
various sourcing options
OWNERSHIP
06 icaew.com/fmfac

9. ‘The perceived risks of outsourcing are related to
the commercial relationship between the
insourcer and the outsourcer’
Though risk mitigation has been gradually losing
importance as a factor key to sourcing decisions,
organisations still tend to choose their sourcing
strategy based on risk mitigation. By selecting an
SSC, organisations want to ensure proximity to the
business, avoiding dependency on external suppliers
and loss of knowledge.
Figure 3
New models blending onshore, offshore and ownership decisions
Added
value/scope
Global
Hybrid model Global external delivery farshore
• Own captive consolidated centre • Transactional activity consolidated to
within ‘sphere of influence’ a single delivery centre delivered
• Outsource partner externally from a farshore location
Regional consolidation Regional consolidation delivered
externally from nearshore
Location
• Consolidate as much activity as
possible in one chosen location • Transactional activity consolidated to a
• Build critical mass single delivery centre delivered
• Professionalisation achievable externally from a nearshore location
In country consolidation and external
In country consolidation
delivery
• Consolidated operations country by
• Consolidated operations country by
country
country
• Standardisation achievable
• Standardisation achievable
• Suitable for operations with local scale
• Suitable for operations with local scale
Local
In-house provision Ownership Outsource
Shift in corporate Global business
ambition alignment
FINANCE & MANAGEMENT SPECIAL REPORT December 2010 07

10. ‘The integrated distributed model is focused
on using onsite, nearshore, offshore, and
client teams’
CASE STUDIES: WHAT SHORE IS BEST?
The integrated distributed model is focused on using Benefits:
onsite, nearshore, offshore, and client teams, with • Headcount down 10% after first year and by an
common tools and methodologies to maximise additional 5% after second year.
leverage in meeting clients’ process, language and • Around 50% cut in cost for the services transferred
service needs. from US and Western Europe.
• Enhanced quality (eg error rates reduced compared
CASE 1
with pre-outsourcing).
Hub and spokes structure for optimal localisation of
• Improved control environment, as reflected in cleaner
front- and back-office support
internal and external audits.
• Centrally orchestrated and co-ordinated continuous
Front office, Poland
improvement and KPI/SLA compliance assurance and
quality control.
Client
Back office, China
Collections centre, Guatemala CASE 2
Centralised F&A function for standardised processes
Company:
The Danfoss Group is an international business
specialising in the research, development and
production of mechanical and electronic components
Company: and solutions.
A global manufacturing business.
Business issue:
Business issue: Danfoss had local accounting departments in each
The company’s transactions were executed within each European country (plus South Africa), which operated
country of operations by localised accounting on fairly standard SAP solutions and generated
functions. There were no uniform procedures and no variations in local processes.
centralised overview of transaction processing.
Solution:
Solution: Selected European F&A processes were moved into a
Transaction processing moved to two centralised front- single location – Krakow – to assure standardisation,
office locations plus back-office support. Krakow, automation and lower costs.
Poland front office provides problem resolution,
collection and other functions that require ongoing Benefits:
contact with client and third parties. Guatemala City • Significant productivity savings.
front office handles voice services for North America, • Reduced number of FTEs performing accounting
providing dedicated collection activities. Guangzhou duties.
Centre, China delivers transactional tasks. Krakow is the • World-class quality of accounting processes.
command centre for all three locations, driving • High level of transparency.
additional controls, process improvement, and • Standard solution to be applied for the new US and
operational conference calls with the client. APAC scope.
08 icaew.com/fmfac

11. THE FINAL SELECTION
MAKING THE DECISION
Once the decision on sourcing has been taken, crucial aspects to consider include
managing the transition, arranging security and disaster planning. Some advice is
offered below.
In order to make the right sourcing decision, the to ensure the provided responses are incorporated in the
organisation must be clear about the objectives of its contract, the better the contract and the resulting
sourcing strategy. Whatever operating model is selected, sourcing relationship.
its implementation will not be easy. Thus, it is imperative
to involve the right stakeholders. To have the strong What you can and cannot outsource
support of the executive board, an excellent business case The pooling of skills into silos for greater standardisation,
must be built, one that goes into details, showing a good automation and control makes sense. Yet, though the
rate of return and payback, and demonstrating benefits derived from such a practice have began to shift
meticulous planning. To clearly know and understand from labour arbitrage and cost cutting to top-line
what the change will mean for the organisation, change augmentation, what can be outsourced has not changed
management activities must be effectively measured and all that much.
tracked. The basic rule of thumb is – if tasks can be
Strong governance is key and the decision process the documented to an 80/20 level or higher, if they can be
organisation follows must be rigorous, starting with a repetitive, and if they can be learned in no more than six
request for information (RFI) and then a request for weeks given a certain skill level then they can be
proposal (RFP) – also possibly with the assistance of an outsourced. Thus, this model of delivery can be applied
advisor firm, especially if the organisation is making this to transactional activities, not to value-added activities,
type of decision for the first time and/or would like to decision taking, strategy or policy.
accelerate the process. The more thorough the questions It is important to note that in most organisations,
posed in the RFI and the RFP and the more care is taken such transactional activities account for 80% of the
Figure 4
Typical division (%) of business processes into those that can be pooled into shared services and those that cannot.
• Receive invoice
• Scan invoice
• Check invoice
• Automatic purchase
order based invoice
matching
• Resolve invoice without
purchase orders with
Diagram 5 Typical division of business processes into those that can be pooled into shared services and
customer
•those that cannot.
Raise standard accruals
• Maintain vendor
master data • Receive payments
• Make payments • Match customer
• Resolve vendor queries payments with invoices
• Identify disputes • Book standard accruals
• Identify collection • Close
100% ‘problem accounts’ • Reconcile general
• Forward non-paying • Manage bank accounts • Register assets ledger with sub-ledgers • Produce standard
problem accounts to • Reconcile bank • Depreciate assets • Prepare statutory reports
either a collection statement according to accounts
agency or a lawyer depreciation policies
50%
30% 30%
20% 20%
Accounts Accounts Cash and Fixed Financial Management
payable receivable banking assets accounting reporting
20% 20%
30% 30%
50%
• Set credit policy • Make physical
• Resolve customer • Communication of inventories • Post non-standard
queries expectations regarding • Perform physical accruals and write-offs
cash movements tagging • Perform business
Shared activities reviews
• Liaise with tax
Non-shared activities authorities
FINANCE & MANAGEMENT SPECIAL REPORT December 2010 09

12. ‘In order to qualify what would be best to
keep in-house and what would be best to
outsource, the organisation should follow a
structured decision matrix’
headcount. Figure 4 provides a clear overview of the remain in-house, as in the case of Coca-Cola Enterprises
typical scope of F&A shared services. (see the case study, below).
In order to qualify what would be best to keep in-
house and what would be best to outsource, the Best location
organisation should follow a structured decision To select the right sourcing location, organisations need
matrix. A typical decision matrix will look at the to step beyond short-term location trends and make a
interplay of: decision based on robust evaluation criteria tailored to
• complexity – the more complex a process, the the specific requirements of the organisation and of the
more likely it is to be delivered in centres of market in which it operates. The choice of sourcing
expertise specialised in the processing of a single location cannot be solely based on cost but must factor
function; in environmental, political and operational
• the relationship with the core business – the higher considerations. See Figure 5 (opposite) for the three
the strategic impact of the process, the more likely factors relevant to the localisation decision.
they should be retained in-house;
• critical mass – the higher the volumes and the Pricing methodologies
potential for standardisation, the easier to achieve The four most common pricing mechanisms are:
economies of scale; and
• the local impact – the higher the local impact Fixed price
(regulations, language, flexibility of support), the The model provides for a contractually defined profile of
more likely to keep activity in the country rather charges for the term of the contract, which incorporates
than in a central hub. both the variable and fixed costs of service delivery.
Typically, these fixed monthly charges decrease over the
Additionally the organisation can conduct a term of the contract due to committed productivity and
benchmarking exercise to determine maturity and efficiency improvements. Fixed pricing is based on the
stability of each process and sub-process. Then, process principle that baseline business volumes, and therefore
maturity can act as the decision lever for what process the work effort and cost required to process them, remain
or sub-process to outsource and what is better to constant throughout the contract term.
CASE STUDY: COCA-COLA ENTERPRISES
Coca-Cola Enterprises achieves major cost savings through road to achieve efficiencies with the least risk was to outsource as
finance optimisation project much of the transaction work as possible, and at the same time
do more centralisation of the higher level transaction processing
Company: in its established shared services centre in Tampa, FL.
Coca-Cola Enterprises (CCE) is the global marketer, producer and CCE and Capgemini implemented a solution throughout CCE’s
distributor of Coca-Cola products. global business to create an efficient process in a cost-effective
environment for order-to-cash services, purchase-to-pay
Business issue: accounting and record-to-report activities. Capgemini’s solution is
CCE was not realising the full benefits of a centralised shared delivered from three offshore locations:
services centre. It set the goal of saving $20m a year in • collections, deductions management and customer service are
transaction work costs through a finance optimisation project. provided from Guatemala City, Guatemala;
• order-to-cash, record-to-report and purchase-to-pay processing
Solution: are provided from Krakow, Poland; and
To identify what processes were mature enough for outsourcing, • back office functions in master data, cash application, credit and
CCE went through a benchmarking exercise with the Hackett
various other activities are from Chennai, India.
Group to see how the organisation’s effectiveness and efficiency
stacked up against the competition. The Hackett Group assessed Benefits:
the maturity and stability of each sub-process within CCE’s order- • Accelerate the transformation and help achieve near world-class
to-cash, procure-to-pay, and record-to-report functions. While the
performance by standardising and streamlining operations.
company was doing pretty well on the scale of effectiveness,
• Deploy a global unified solution across all CCE business units to
approaching world class, it had a way to go in terms of efficiency.
The study identified that to become more efficient, CCE would support the business that includes standardisation and process
need to conduct as much of its transaction processing as possible improvement while maintaining high standards of control and
in a low cost country, either with a third party outsourcer or a compliance to achieve a minimum savings target of 25%.
captive shared services centre. • Mitigate risks while transitioning the work and implementing
Since CCE was not active in a low-cost country, the quickest new tools, systems and technologies.
10 icaew.com/fmfac

13. ‘As soon as the most beneficial sourcing
model has been selected, an implementation
scenario needs to be defined’
FTE based pricing costs of delivery and an allocation of fixed costs.
Under this model, monthly charges are calculated by Whereas the ARC/RRC mechanism described above is
applying a rate card to the actual number of FTEs used to periodically adjust a fixed charge within a
used to deliver services. defined volume band, full transactional pricing is
calculated bottom up each month by multiplying the
Fixed price with ARC/RRC mechanism volume of transactions processed by the applicable
This is a variant on the fixed price model that transaction price for that volume band.
addresses the issue of changing business volumes
using additional resource charges (ARC) and reduced Depending on an organisation’s attitude toward risk
resource credits (RRC) that reflect the variable cost of and reward, the pricing model can provide for a
processing one more or one less transaction. They are gain-share mechanism to incentivise both parties to
used to automatically adjust fixed price contracts to collaborate to further reduce the costs of service or
reflect moderate volume fluctuations throughout the deliver other business benefits.
contract term.
Transition
Transaction pricing As soon as the most beneficial sourcing model has
Under this model full transaction pricing units are been selected, an implementation scenario needs to
defined in the contract for different volume scenarios. be defined. Organisations should assess internal
These transactional prices include both the variable services, decide what they want to achieve, and
Figure 5
A closer look at the interplay of the three factors underlying the sourcing localisation decision
Government and industry regulation
Economic and currency stability
Local stability Pro-business regime
Environmental and
political factors
Political stability and openness
Natural disaster/security risks
Geographic logic
Proximity to large conurbations
Labour force availability Language capability
Technical skills
IT and telecoms reliability and speed
Infrastructure and accessibility
Transport links
Time constraints
Define project and transition requirements
Development and retention capabilities
Operational
factors
Greenfield/brownfield
Business logic Business engagement requirements
Proximity and access to customers,
suppliers and head office
Cultural fit with organisation
Operational context
Proximity to other shared services
Government grants and other incentives
Stable taxation rate
Cost factors
Current operating costs Labour costs
Financial logic Space and infrastructure Operating costs
HR Labour force trends
Employment regulations
Expected cost inflation
FINANCE & MANAGEMENT SPECIAL REPORT December 2010 11

14. Figure 6
Shifting from traditional to transformational methodology for more rapid transitioning and
productivity gains
Traditional approach Transformational approach
Lift Shift Consolidate Improve Lift Transformation Shift Improve
As-is Processes to Processes Transitioned As-is Processes to New Transitioned
processes new from many services to processes new processes services
from client centre(s) entities to drive up from client processing into fewer drive up
locations fewer productivity locations model centre(s) productivity
centre(s) and/or
system
Increased transition complexity but delivers greatest
Lowest risk but delays benefits and productivity gains
productivity in shorter period
determine how to get there. There are four intellectual property are often cited as key reasons why
implementation possibilities that might be organisations choose not to outsource to an external
considered: provider. BPO providers must ensure sufficient security
• lift – the process is handed over in the current condition measures to limit the risk of intellectual property theft or
to the BPO or SSC; breaches of confidentiality.
• shift and lift – the process is first transformed before it is Security procedures should address data security,
handed over; physical security, and intellectual property protection.
• lift and shift – the process is first handed over Regardless of the exact procedure implemented to
whereupon transformation commences; and assure security, it is important that international security
• step by step – programmed transformation. standards are observed and that regular audits (both
internal and external by the relevant institutions) are
In the transformational approach, while processes are carried out. The industry benchmark is ISO/IEC
lifted they are also studied and matched against best 27001:2005. It specifies the requirements for
practice and adjusted to minimise variance. The establishing, implementing, operating, monitoring,
combining of the number of actions into one timeframe reviewing, maintaining and improving a document
means a much quicker leap to improvements – see Figure information security management system within the
6 (above). Also, the organisation and the vendor can context of the organisation’s overall business risks. It
agree that during the transition a defined level of specifies requirements for the implementation of
standardisation can be implemented right away during security controls customised to the needs of individual
the transition. As this is done, the transition team can organisations or parts thereof. ISO/IEC 27001:2005 is
review and suggest an implementation roadmap for designed to ensure the selection of adequate and
further improvements and recommend tools and proportionate security controls that protect information
methodology that could yield further improvements and assets and give confidence to interested parties.
value not only during the transition but also afterwards.
Especially when cost-savings are a primary driver, there Additionally, an organisation that outsources processes
is understandable pressure to get an offshoring move to a third party must be able to conduct regular security
completed as quickly as possible. However, process audits of the processes on the third party’s premises.
mapping and documentation cannot capture every detail
of a process and the gaps should be filled by sending the Disaster recovery and back-up plans
right number of staff for the right amount of time to Moving work and resources to a new location means
observe the processes in their native location. In addition, having to prepare for new dangers. Just looking at
subject matter experts from the organisation should plan recent history, we’ve seen what natural calamities can
on spending a substantial amount of time in the offshore do. For example, the devastating floods in the
location to ensure that training is done accurately, and to offshoring hot spot of the Philippines damaged
be available for escalation during ramp-up and infrastructure and placed serious obstacles in the day-to-
production cut-over.11 day operations of all businesses. Earlier in the year, the
earthquake in Chile also reverberated not only in local
Security operations but also in the parent organisations of CSS
Assuring security and stability of processes is essential for and BPO centres.
F&A shared services. Confidentiality and risk to Organisations also need to plan ahead for the
possibility of an unplanned disruption in operations and
demand of the SSC or the BPO to have a
REFERENCES comprehensive business continuity and disaster recovery
plan. Such procedures should also be aligned with
11 Liddell, Jamie, ‘Top Ten Mistakes Made When Offshoring’, Shared
industry standards, such as the Business Continuity
Services & Outsourcing Network, September 2010
Institute (BCI) Good Practice Guidelines and ISO 27002
www.ssonetwork.com
Code of Practice for Information Security Management.
12 icaew.com/fmfac

15. CONTRACTS
CONTRACTUAL ISSUES AND
GOVERNANCE MODELS
This section provides guidance on setting out a clear and unambiguous contract when
setting up a good sourcing relationship.
A good sourcing relationship is one built on a
transparent, non-ambiguous and clearly written
contract – a contract negotiated with the backing and
full commitment of senior leadership including the
commitment of the necessary finance management.12 ‘The customer and supplier organisations
Even with continuous high-level leadership support, need to work together to finalise the plan
the amount of effort that goes into contract
negotiation is often underestimated and the sticking incorporating all deliverables,
points may not be what you would expect them to
be.13 dependencies and tasks and their
Yet, an organisation needs to be as diligent as allocation to the parties’
possible even at the expense of a delay in
implementation. No matter how close the relationship
between customer and supplier, or how confident an
organisation might be in the integrity and stability of
a proposed new location, the due diligence must be
seen as an indispensable part of any offshoring
process.14 requirements for the customer, the development and
The customer and supplier organisations need to sign off of KPIs, as well as a formal mechanism for
work together to finalise the plan incorporating all issue resolution and escalation. The key questions to
deliverables, dependencies and tasks and their be answered during the shaping of a contract are
allocation to the parties, including governance shown below left.15
structure, appointment and training of delivery team, The move to the FAO shared services framework will
confirmation of all policies and regulatory impact more than just the processes. Internal
customers of finance will probably have to be much
more rigorous in how they interact with the external
customer. Third party suppliers may find themselves
having to comply with new requirements. External
customers may find that an outsourcer is the first line
KEY CONTRACT QUESTIONS of cash collection as well as account maintenance. In
addition, there will be a need for activities not needed
earlier, such as contract management.
• Who will do what as far as processes are
Thus it is important that the outsourcing
concerned?
arrangement be clear on how processes are being
• What will the service level from the supplier be?
standardised and centralised and what the
• What will the customer have to do?
organisational impact of any deviations will be16, also
• Who will do the reporting?
so that internal stakeholders are well aware of and can
• What happens if the customer wants to terminate
prepare for the impending impact of the change.
the agreement?
• What happens if anything changes during the
Exit management
period of the contract?
The cause and circumstances surrounding contract
• What happens if the service falls below the set
termination, beyond simple contract expiration, can
KPIs?
vary significantly based upon specific circumstances,
• What happens if the service falls significantly
from a change in executive leadership or business
below defined KPIs?
strategy (as a result of a divestiture or introduction of
• What if there is significant and persistent failure
a new business model), to problems with
against defined KPIs?
performance, desire to renegotiate, all the way to
• What happens if the supplier causes loss to the
provider non-performance or loss of credibility.
customer?
Regardless of cause or category of termination, the
• What happens if the contract is terminated?
outsourcing contract should provide an explicit and
• What happens with regard to transfer of
clear exit strategy, with an accurate transition plan
undertaking of protection of employment rights?
covering the handover process.
• What happens if parties cannot agree?
An exit management clause in the contract should
• What rights does the supplier have to provide
include, but not be limited to, all activities and costs
other services?
related to ensuring the continuity of services,
• What is the overall liability cap for the supplier?
compliance with applicable guidelines, regulations
FINANCE & MANAGEMENT SPECIAL REPORT December 2010 13

16. ‘The governance structure should ideally be
simple, with a single point of accountability
from both the organisations’
and laws, and the transition plan and handover Figure 717 (below left) shows a suggested model for
process itself. A significant focus will be on knowledge governance of an outsourcing relationship, a structure
transfer and most of the time allocated in the hand- that establishes the best platform for governance.
over will be to knowledge transfer. Offshoring is complicated enough without the
added confusion of people not knowing specifically
Getting the governance model right what they’re going to be doing, where and when.
Relationship management is at the core of every Clear definition of roles and responsibilities should be
successful outsourcing relationship. The governance thorough and top down. Key delivery team members
structure should ideally be simple, with a single point should be engaged early in the project to ensure that
of accountability from both the organisations as service migration smoothly transfers into the delivery
follows: phase. The use of the future delivery team in the
• interfaces between the two organisations should transition ensures that the knowledge captured and
operate at various management levels. These need relationships built during transition can continue to be
to be carefully defined so that personnel from both leveraged during the commencement of service
organisations have a clear view as to who is delivery and thereafter.
responsible for what and at what time; The outsourcer’s senior team members should
• while formal structures are necessary, the participate in governance committees during service
development of personal relationships is key. As staff migration and then in delivery. This will ensure
at different levels have contact with one another, continuity of knowledge and ownership of any issues
mutual trust and understanding is built; that arise.
• over 95% of issues should be resolved without
recourse to the next management level or formal
escalation procedures;
• the joint management team should be an open and
honest partnership, with a positive culture of how to
move forward, rather than apportionment of blame;
and
• The governance structure needs to evolve through
time to reflect the transition from a major change
programme to ongoing steady state service
provision.
Figure 7 REFERENCES
Mirroring function governance model for sourcing 12 Scott, Peter, ‘Cutting costs in the finance function’,
Buying organisation BPO provider From Outsourcing to Offshoring, October 2004,
ICAEW, p. 8.
Senior executives 13 Scott, Peter, ‘Cutting costs in the finance function’,
BPO executive
CEO, CFO, COO From Outsourcing to Offshoring, October 2004,
ICAEW, p. 14.
14 Liddell, Jamie, ‘Top Ten Mistakes Made When
Relationship Account Offshoring’, Shared Services & Outsourcing Network,
manager manager
September 2010 www.ssonetwork.com
15 Scott, Peter, ‘Cutting costs in the finance function’,
Commercial
Sourcing Contract From Outsourcing to Offshoring, October 2004,
specialist manager
ICAEW, p. 11.
Global manager Global manager
process ‘A’ Global process ‘A’ 16 Scott, Peter, ‘Cutting costs in the finance function’,
Global
business Delivery From Outsourcing to Offshoring, October 2004,
process
process
liaison
delivery ICAEW, p. 9.
Global manager manager Global manager
manager 17 Tornbohm, Cathy, ‘BPO: What Does Good Look
process ‘B’ process ‘B’
Technology Like in 2010?’, Gartner Outsourcing & IT Services
IT IT
manager manager Summit in London, June 2009.
14 icaew.com/fmfac

17. CUSTOMER SERVICE
SERVICE LEVEL AGREEMENTS AND
QUALITY ASSURANCE
Maintaining standards of service is highly important. The use of KPIs, benchmarking and
service level agreements are fundamental to this.
Service level agreements (SLAs) are the central Figure 8 (below) suggests stages for building an SLA.
instrument to agree for the provision of services The SLA should be a flexible mechanism that allows
between the customer and supplier of shared for adjustments, according to changes in the
services. Under it the customer commits to delivering customer’s business requirements. The contract
the inputs necessary for the supplier to render the should provide for regular review of the SLAs to
service and to supporting the measurement and prepare for changes and also for agreeing to all the
evaluation of performance and continuous implications that such changes could cause –
improvement efforts. On the other side, the supplier together with the proper KPIs that will be used to
commits to the provision of the services, to the monitor the SLA.
coordination of the measurement and evaluation of Procedures need to be defined in the SLA on the
performance, continuous improvement, and to way the metrics are calculated ensuring those metrics
enhancing the services portfolio. To this end, the SLA can be compared across time periods, using the KPIs
must define: as benchmarks of quality targets defined in the SLA.
• the scope of service; It is also important KPIs reflect activities over which
• the contact person; the supplier has control, rather than setting global
• KPIs and target values; KPIs where the customer also has a major influence.
• a measurement process; All KPIs benchmark efficiency, the most basic of
• the change request process; measures focused on time and cost. KPIs can also
• a process for escalation; and measure effectiveness – accuracy and timeliness – of
• pricing and allocation. the delivered services.
Figure 8
A sample staged approach to building an SLA framework
2 weeks 3 weeks 4 weeks 4 weeks 2 weeks 1 week
Defining scope Validate and Implement and
Design framework Develop SLA
and plan review embed
• Assess work done to • Design SLA Framework • Focused session to • Agree additional • Educate and train • Measure post-
date (eg review SLA – Define key define performance activities with end users shared services team implementation success
already in place if contractual terms levels either by and commercial impact members in the SLA (to be carried out by
appropriate, assess KPI (duration of negotiation and/or by • Customer workshops to management process Shared Services and
work done, SLAs for agreement, service characteristic. validate expected • Implementation of tools business owner on an
legal etc.) commencement (Integrate with KPI performance levels with and reporting to ongoing basis)
• Identify key etc) work) business users measure the SLAs (if • Ensure additional
stakeholders • Develop principles for • Develop additional tools • Agree SLA framework required) reports produced are
• Define SLA scope, SLA design and reporting to (including - ownership, • Develop guidance and verifiable and are easily
purpose objective, – Roles 7 measure SLA role and responsibilities, FAQs on SLA presented
Activities
critical success factors responsibility matrix • Identify country governance, escalation • Assessment of potential
• Create project charter, – governance dependencies and time process, commercial future challenges
detailed plan, risk and structure lines of information arrangements) • Identify continuous
issues – commercial provision • Agree detailed service improvement feedback
• Build draft SLA template framework (to cover • Develop levels and dependencies mechanism
• Review early cross charge communication • SLA and framework sign • Handover to shared
requirements eg transfer mechanism, framework off services SLA owner
pricing, tax penalties etc) (channels/methods)
considerations, legal – option for charging • Develop demand
management process
• Define escalation
mechanisms
• Scope Definition • SLA framework design - • SLA developed • SLA and framework sign • SLA go-live • SLA post-go-live
Document to include roles and • Escalation/demand off assessment future
Deliverables
• SLA development and responsibility matrix, management defined challenges identified
rollout plan governance structure
• Stakeholder
engagement plan
• SLA template
• Issue and risk log
FINANCE & MANAGEMENT SPECIAL REPORT December 2010 15

18. ‘Quality management and continuous
improvement underpin the path to service
delivery excellence, efficiency and process
transformation’
KPIs can relate to review process controls, ie policies Quality management system (QMS)
and procedures established and implemented to help Quality management and continuous improvement
ensure effective response to risk. In addition, some underpin the path to service delivery excellence,
suppliers offer to measure the value in business benefit efficiency and process transformation. Quality
terms derived from the provided service (see the box assurance processes are used to identify, evaluate and
below ‘Diamond KPIs’). monitor quality and performance so that clients are
provided with the highest quality deliverables and
Service quality plan work products.
Beyond the SLA, the service quality plan (SQP) is one of The QMS should be implemented to assist the
the key documents that describes how the quality organisation in identifying and monitoring quality of
management system is implemented for a specific the provided services. QMS should be a thorough
customer across multiple centres. The SQP features a top-down mesh of well-documented and monitored
description of the delivery process, standards, procedures policies and procedures, abided by all under clear
and tools that are appropriate for the delivery. and consistent lines of accountability. The quality
It also includes quality procedures, quality review plans, procedures should be documented, controlled and
technical review plans and procedures to check held in a central repository as should process maps
deliverables. Moreover, it defines the financial and desktop procedures.
management process, change management process, QMS should be structured as a coherent
client satisfaction implementation plan, the monthly management system using recognised quality
delivery review process as well as the problem/issue standards, such as:
management process. • quality planning – ISO 9001:2008;
• quality governance – ISO 9001:2008;
• quality assurance – Six Sigma/Lean, OTACE; and
• quality improvement – Six Sigma/Lean.
DIAMOND KPIs
For FAO it is recommended that QMS be compliant
Key performance indicators (KPIs) form the backbone of performance
with ISO 9001:2000/2008 as that certification has a
measurement under service level agreements (SLAs). Diamond KPIs
high degree of focus on process documentation
focus more on the service efficiency (productivity) and show how they
which is so important in accounting and finance.
can help the customer achieve world-class operational performance
Secondly, the quality management principles
defined in ISO 9000:2008 (Quality Management
Effectiveness KPIs
Systems, Fundamentals and Vocabulary) and in ISO
• Credit: % credit applications processed accurately
9004:2000 (Quality Management Systems, Guidelines
• Master Data: % changes processed accurately
for Performance Improvements) emphasise the role
• Collection: % overdue receivables
that customers play in an organisation’s QMS.
• Cash: % lines matched accurately
Specifically, customer requirements guide how
• Query: % queries over 10 days old
services are provided and customer satisfaction
• Reporting: % reports issued on time
evaluates service output.
Control KPIs
Compliance
• Master Data: % detected segregation of duties exceptions
There are three aspects to compliance in delivery of
• Pre-process: % prevented duplications / incorrect scanning of
services:
documents
• ensuring compliance of delivery centres with local
• Capture: % prevented incorrect / incomplete transfers from
laws and regulations of the country in which the
procurement system
centres are located. Here the key control areas are:
• Authorize: % prevented duplicated / fraudulent invoices processed
– human resources, corporate, financial and
• Query: % detected unauthorized requests
taxation requirements, data protection and
• Payment: % detected segregation of duties exceptions
privacy;
– telecommunication, software and other
Value KPIs
controlled components; and
• Credit: % bad-debt write-off
– occupational health and safety.
• Master Data: % compliance
• ensuring compliance with local laws and regulations
• Collection: % Days Sales Outstanding (DSO)
of the country to which the services are being
• Cash: % cash unallocated
delivered remotely. Key control areas here are the
• Query: % change current to previous month queries to invoices ratio
organisation’s policy and regulations, licensing and
• Reporting: % of ad-hoc reports
customer protection laws; and
16 icaew.com/fmfac