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Big D Treasury Conference Finance & Accounting Business Process Outsourcing 101 or “Everything You Wanted To Know About F&A Outsourcing* *(and were afraid.

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Presentation on theme: "Big D Treasury Conference Finance & Accounting Business Process Outsourcing 101 or “Everything You Wanted To Know About F&A Outsourcing* *(and were afraid."— Presentation transcript:

1 Big D Treasury Conference Finance & Accounting Business Process Outsourcing 101 or “Everything You Wanted To Know About F&A Outsourcing* *(and were afraid to ask!) September 17, 2014 Presented by: Alpesh Kadakia & Bill Shirk PwC HP

2 What is the size of the Global Finance Outsourcing Market ? A)$5 Billion B)$10 Billion C)$25 Billion What percentage of Fortune 100 companies have placed at least one process with a 3 rd party or in a shared services environment? In the SS&O world, what is GBS? A)Gigabytes per Second B)Global Business Services C)Google Branding Session Who is 3 rd Party Service provider with the largest share of the F&A outsourcing market? A)Accenture B)HP C)IBM What is the top emerging F&A destination for 3 rd party service providers and Shared Service Centers in EMEA? Which Fortune 500 company is largely credited for the establishment of Finance Outsourcing and Global Delivery? In the SS&O world, what does BPO stand for? A) Business Process Outsourcing B) Benzoyl Peroxide C) Banker’s Pay Order What is the most common finance process to be outsourced? F& A BPO Trivia!!

3 Implications: −Supplier now owns the process Responsible & accountable −Buyer only influences the process Provide Inputs Define desired Outputs Definition of Outsourcing 3 Outsourcing is the transfer of a process from the buyer to the supplier Outsourcing Offshoring

4 Comparison of Outsourcing vs Shared Services vs GBS 4 DimensionShared ServicesOutsourcingGlobal Business Services ObjectiveCost savings, improved efficiencies and occasionally compliance Typically cost savings drivenCost savings, efficiencies, compliance, service focus, agility, scalability, and innovation ScopeTypically 1-2 non-core processes Can include business critical processes Typically 1-2 non-core process 1 or more providers Typically business critical processes not outsourced 2 or more processes, often including the less obvious choices Includes business critical processes Process are considered for GBS unless core to the business Chooses best solution (i.e. shared services vs. outsourcing) ScalabilityScalability typically limited to initial scope Highly scalableHighly scalable by design EfficiencyLeading practice is focused on driving reduced cost and process efficiency Ability to achieve greater efficiencies across processes (e.g. handoffs) EffectivenessStandardized processes but limited to processes those n scope Ability to drive improved effectiveness depends on the provider Highly focused on driving cross-process effectiveness Highly standardized processes Cost SavingsCost savings of 20-50% typically achieved on the processes in scope Cost savings are optimized across all processes in scope often resulting in enhanced savings AgilityAgile as it relates to in-scope processes Limited by the scope of the contract with provider Agility is high because coordinated centrally InnovationVery limitedLeverages provider capabilities to drive process innovation but is typically siiloed Focus on cross-process innovation drives benefits Has a focus on developing new services TransitionInternally managed transition processes Managed internally and by providersManaged internally and by providers if applicable Leverages leading practices/lessons learned

5 Outsourcing vs Shared Services vs GBS (cont’d) 5 DimensionShared ServicesOutsourcingGlobal Business Services TransitionInternally managed transition processes Managed internally and by providersManaged internally and by providers if applicable Leverages leading practices/lessons learned Performance ManagementLeading practice is SLA-driven Tends to create siloed approach SLA-driven Tends to be siloed Cross-process and integrated Scorecard, SLA- driven Relationship ManagementTends to be arms lengthArms length with third partyStrategic partner with the business GovernanceVariety of approaches ranging from siloed to coordinated Frequently managed as separate contracts within functions Centralized and coordinated Degree of Change from Decentralized Operations ModerateSignificantTransformational CulturePractice is to establish a service- focused culture Typically approached as managing a third party contract Service-focused culture is fundamental Work as a single team regardless of whether shared services or outsourced Transformational change IntegrationTypically depends on number of shared services location Varies depending on size of service provider portfolio Highly integrated sourcing strategy and execution across processes, leveraging leading practices and lessons learned Information TechnologyAlignment with IT depends on whether IT is in shared services Limited opportunity to achieve alignment even if IT is part of contract Strong coordination between IT and processes Becomes a provider of solutions, not technology Leverage common IT platform (not necessarily single ERP) Impact on M&A ActivityCan provide some synergies depending on level of maturity Challenging to bring processes back in-house Opportunity to leverage existing contract Very high degree of synergies can be achieved Speed of integration is improved significantly

6 How is outsourcing different from contracting? Buyer retains ownership over process & results Buyer retains overall control and cost for investments Project based services - e.g. limited time and scope of work Limited involvement of buyer in process No tools, processes, or methods Process ownership is transferred to supplier Supplier owns responsibility for results (accountable-SLs/penalties) Contracts are long-term in nature (3-7 years) Supplier sells “solution” Investment required by either/both parties Buyer benefits from supplier tools, processes, & methods Transfer of employees and/or assets Large economies of scale 6 OutsourcingContracting

7 Why outsource Finance and Accounting processes? Highly compensated staff who perform transatcional activities with 8-12 years of tenure Managers who perform transactional activities, with 1-3 direct reports Inconsistent job classifications and responsibilities across business units A lack of KPIs and SLAs across functional organizations Lack of training to ensure cross coverage of services Unclear career paths for all staff and manager levels 50-60% of processes with manual intervention or touch-points Limited to no process standardization No clear demarcation between processes Poor process controls No documentation or desktop procedures Disparate ERP systems and versions through inorganic growth Homegrown legacy applications Costly legacy infrastructure platforms Lengthy implementation and upgrade cycles Routine and costly maintenance ProcessPeopleTechnology 7 Finance organizations still face many of the fundamental challenges with people, processes and technology

8 What are the advantages & risks in outsourcing? Reduce and control operating costs Improve focus on business Gain access to world-class capabilities Free [up] internal resources for other purposes Access to resources & skills not available internally Accelerate reengineering benefits Increase process standardization Make capital funds available Shared risk of investments Buyer locked in uncompetitive price structure Supplier over commits, but unable to deliver Benefits diminished due to treatment as contract over relationship Inflexibility in contract leads to dysfunctional behavior & over- charging Disgruntled employees => or reward - cultural change in buyer environment 8 RisksAdvantages

9 F&A Business Process Outsourcing Common F&A Processes Outsourced

10 Finance and Accounting Value Chain Revenue Cycle (Order to Cash) Cash & Disbursements (A/P / T&E) Financial / External Reporting Project & Cost Accounting General Accounting Planning Budgeting Forecasting Business Performance Management Cash Mgt, Treasury Mgt, Risk Mgt, Tax Planning & Compliance Record to Report Performance Mgt/Decision Support Capital Platform Mgt 10% 20% 70% 80% 50% 40% 30% 90% Sourced vs. Retained functions Accounts Payable Travel & Expenses VAT Reconciliation Order Capture Credit & Collections Billing / Invoicing Disputes / Deductions Accounts Receivable Revenue Acctg General Ledger Accounting Policies Account Reconciliations Fixed Assets Tax Accounting Project Accounting Cost Accounting Inventory Accounting Financial Consolidations BU Financial Statements Statement Prep SEC Filings Cost Management Customer/ Product Profitability New Product Eval Life Cycle Costing Performance Management Cont. Improvement Periodic Budget Prep Periodic Forecast Prep Cash Mgmt Compliance Mgmt Tax Mgmt Bank Relations Financial / Invest Risk Mgmt Fundraising Debt Mgmt Tax Advisory & Planning Transaction processing Procedure Process maintenance Business Process maintenance Policy management Strategy development Decision making Acceptance /Approval 30% 60% 50% 70% P2P O2C Financial Planning & Analysis (FP&A) Investor Relations Budget Policies/ Procedures Strategic Planning Corp. Dev. Retained activities Centralized activities 10

11 Tax Value Chain Retained activities Centralized activities Policy and Execution Regulatory Compliance Tax Accounting Transaction Management and Controls Risk and Dispute Management Tax Business Planning Establish tax policy and align with corporate vision and strategy Implement and manage tax policies and procedures Post Transaction Integration Choose Tax systems and tools Provision of compliance information to regulators Develop tax and compliance policies Advance Pricing Agreements Personal Income Tax Returns Tax accounting and reporting under domestic regulations and international financial reporting standards Design internal controls Dealing with Tax Authorities Resolve classification Other disputes and issues with the authorities Cross Border Taxation ETR Planning State Strategic Tax Review Tax Valuations Impact of Transfer Pricing Policies Policy Documentation R&D Credits Payroll Tax Withholding Taxes Maintain Tax systems and tools Tax reserve Foreign Tax Capacity workings Sec 988 database working Federal Tax Returns State Tax Returns Reporting for indirect tax Regulatory Documentation Compliance management Data conversions Book to Tax walk Exemption certificates Tax Accounting & provisioning Tax Reconciliations Non- US Tax Accounting & provisioning Estimated Tax Payments Reducing attribution errors Payment and remittance Manage, monitor and report on controls function Manage tax plans and transactions Valuation Allowance Deferred Tax Analysis Analysis, monitoring and tracking of disputes SOX Testing Control Documentation Refunds Incorporate tax and legal entity reporting needs into ERP system configuration ETR Analysis and reporting Preparation of K 1s M&A Tax Due Diligence M&A Tax Modeling Transfer Pricing calculations 11

12 Treasury Value Chain Treasury Policy & Governance Planning & Forecasting Funding Management (Debt & Equity) Surplus Management (Asset) Cash Management (Working Capital) Risk Management Establish treasury policy and align with corporate vision and strategy Provision of covenant tests and info to investors Provision of compliance info to regulators Work with internal & external auditors Co-operate with Board on strategic development Investment appraisal Choose Treasury systems Negotiate, analyze and manage the fee’s and margins of service providers Set funding requirements Raise funds Manage group finance structure Equity repatriation Manage short term investments Manual check management Petty cash applications Bank relationship Open/close accounts Seek natural hedges and offsets within the business Involvement in business insurance Ensure accurate valuation of financial instruments Ensure accurate accounting of Treasury transactions Ensure accurate transaction history and audit trail Intercompany settlements & netting Cash flow forecasting Risk forecasting Operate Treasury systems Ensure quality standards of service providers Tax planning Pensions planning Reporting Repay funds Interest Management Ensure adequate liquidity to support business and obligations Investing surplus cash Manage long term investments Trading Cash concentration Debt factoring Internal banking Confirmation and reconciliation of receipts Disbursement of payments New vendor approval Check Management Cash Collateral Mgmt. Vendor payments Interest Rate risk management Pension risk management Scenario planning, analysis and stress testing FX & Commodity risk management Counterparty risk management Credit risk management Liquidity risk management Retained activities Centralized activities 12

13 F&A Business Process Outsourcing The Benefits

14 FunctionTypical client situationsLeading practices Finance Decentralized process with high volumes Lack of automation Non-standard processes Excessive rework and cycle times Data intensive reporting process, complicated by complex consolidation environment Disparate AR and payroll groups Consolidate number of collection agencies, AP and AR centers Centralize statutory & compliance activities Standardize inputs and automate manual accounting transactions Centralize functions at COE and/or outsource to 3rd party IT Data quality & access Insufficient or manual analytical tools Continued portfolio rationalization. Robust vendor management Adoption of ITIL framework (Plan, Build, Run). Remote delivery of Application Development & Maintenance. Assist with driving adoption rate of standardized reporting. Procurement Lack of standardized processes Excessive number of vendors Redundant approvals and rework High volumes and manually intensive Ineffective use of time savings features within systems. Standardize processes and policies Automate by leveraging standard ERP features. Reduce manual activities Monitor compliance and KPIs User training HR Majority of resources reside in Regions and Areas/Field Issues with adoption rate of mobile time entry Sufficiency of process measures Multiple benefit platforms Increase adoption rate of mobile time entry, self-service functionality and the service center Balance temporary and full-time labor Improve management of international staff costs Streamline benefit plans Many do it for cost, but that is table stakes…. By deploying an alternative service delivery model, $1-5B organizations typically save 20-30% of G&A costs 14

15 … Although 50-65% savings coupled with other strategic benefits makes this model highly compelling for many Note:Costs for US corresponds to Tier 2 cities, whereas, costs for India correspond to Tier 1 cities Source:Booz & Company GIC Experience, Booz Allen Hamilton and Duke Offshoring Research, Outsourcing-Center Strategic and Other Benefits Economic Benefits Access to comparable or better quality talent Ability to build or enhance critical capabilities (e.g., IT, R&D, Marketing) “Follow the sun” 24 x7 coverage Tax advantages especially for moving intellectual property creation offshore Direct and complete control, without relying on immature supplier capabilities Platform from which to expand presence in emerging markets Breakthrough innovation and faster time to market Comparison of US Onshore and BPO Services (US$000s / FTE / Annum) 50-65% Operating cost savings 15

16 F&A Business Process Outsourcing Trends & Pushing Beyond F&A BPO

17 The Survey Says….Finance BPO is a clear priority 17 Based on 358 electronic survey respondents and 10 in- depth interviews with senior finance executives across broad range of industries Company Profile Implement Business Process Outsourcing & Shared Services Standardize Technology / ERP Reduce Business Complexity Simplify the Organization Rationalize Reporting and Data Integrate stewardship and governance type functions & outsource 20-30% Outsourcing Shared Services Centralization Cloud services Reduce the number of applications and instances of financial systems Implement accounting hub technology to increase flexibility Eliminate offline spreadsheets 15-20% Dramatically reduce business complexity: Reduce methods of doing business within company, methods of paying a invoice, number of legal entities, management entities, bank accounts, etc % Simplify the organizational structure through de-layering and increase span-of- control Rationalize roles/titles, review grading and look at down/up skill certain activities Eliminate shadow finance functions 5-10% Simplify chart of accounts to support external financial reporting Rationalize reports to a standard package and enable self-serve reporting, utilize shared services to produce all standard reports 3-5% Consolidate risk/integrate, SOX, Internal Audit type functions Perform integrated assurance with auditor Outsource tax compliance and statutory account preparation 2-4% Typical Cost Impact

18 Operating Model Evolution 18 Increasing consolidation and improved efficiency and effectiveness. Some standardization & increase in service level Single country with single and multi-center structure Well defined serviced levels, 24/7 & KPIs Cost effective technology/bandwidth; Web- enabled workflow Multi-shore, partnering & single global providers Global end to end process standardization Enterprise wide cloud solutions Non-monolithic, multi-vendor environment (ERP ++) “Fabric” of multiple low cost locations, emerging + frontier Self-service models, collaboration/social tools, millennial workforce Unified, optimized governance Disparate systems and ad-hoc solutions Replicated corporate & SBU activities Decentralised Operations, Monolithic Systems Coordinated In-House Practices Shared Services In-House BPO/Offshore capture labor arbitrage Increased cost reduction / variable structure, scalability, and agility Operational benefits 5-10% 10-20% 20-40% 50+% Traditionally Finance & HR SSC Finance, HR, IT Next Generation Operating Model Present – Future Hybrid. On-premise, cloud, (XaaS) Late 90’s - Present E-Business, Internet-enablement Late 90’s - Late 90’s Client / Server. Networking Pre-80’s Mainframe Global Business Services (GBS) Multi-functional Integration (Finance + HR + IT) Businesses adopt alternative service delivery operating models with major shifts in technology architecture… and we are at such an inflection point

19 Emergence of Global Business Services What is GBS ? Why GBS ? An integrated Global Business Services (GBS) strategy will provide your company with the next level of efficiencies. But many organizations have not yet benefited from combining shared services and outsourcing. A well executed Global Business Services (GBS) strategy is distinctly different from the narrower focuses of shared services and outsourcing strategies. GBS identifies corporate objectives and encourages collaboration among internal units and third party providers. Collaboration can create breakthrough, strategic operational capabilities that drive business outcomes resulting in real marketplace differentiation. A full life-cycle GBS framework requires enterprises to ensure goal alignment, execution and ongoing governance. The goal of a GBS strategy is not only to source globally, but also to leverage shared services, outsourcing and third party investments to advance the organization’s objectives. COGS Supply Chain Warranty Management Logistics Warehousing R&D Design & Development Build & Test Data Management Support Sales & marketing Customer Service Marketing Communications Inside Sales G&A Information Technology Finance & Accounting Human Resources Indirect Procurement Legal Tax & Treasury Facilities Internal Audit Source: Hfs Research and the London School of Economics Outsourcing Unit, 2011 Sample: 336 Buyers of Outsourcing Service 19 Many companies are looking beyond their G&A functions

20 Company Size Influences Operating Model Trends Optimizing Service Effectiveness & Cost Most have existing shared service centers and are expanding Many are pushing into hybrid model – SSC/Outsourcing More activity in mid-office functions Beginning the path to Global Business Services models Further segregation of companies based upon culture and competency Using the Operating Model to Drive Strategy Large scale and ability to move operations to emerging markets Integration of multiple centers and governance become critical Hybrid delivery models and Enterprise Business Service models are more prevalent 2 nd generation outsourcing – experience Even aggressive cost cutting companies are reaching plateaus and turning to outsourcing Defining the Operating Model of the Future Start small, initially with a single function (like Finance) Global reach to penetrate new markets Focus on core business functions and hiring Accelerate path to scale advantage by using outsourcing service providers (if appropriate) Grow at a reduced cost basis Strong interest in variable cost models Large NationalLarge MultinationalMid to Large $0.2 B$50+ B$2.5 B$3.0 B$12.0 B$15.0 B Company Size ($ Revenue) Co. size tends to drive level of aggressiveness According to IQPC, “84% of CEOs surveyed now consider operating model reengineering as critical to their business success” 20

21 F&A Business Process Outsourcing Considerations

22 Requirements don’t translate to contract SOW’s don’t capture real needs Change requests overload One sided scope Primary focus on outsourced functions Lack of attention/definition to retained functions Poor documentation of current state operations Leads to service provider ‘conservative’ pricing Operational breaks in the chain Incomplete or inaccurate view of total cost of ownership Lack of focus on root causes Left with wrong supplier or wrong price (or both) Not separating services from solutions in contracting Creates disconnect for service delivery Can be at odds with continuous improvement Intermingling projects and operational services Can lead to duplicate costs Increases possibility of excessive change orders Potential for resource misallocation4 Failure to structure the right deal Contact term HR model Service delivery model Pricing model goal 1 goal ? Cheaper isn’t good enough Moving targets for satisfaction Marginalized SLA’s ? Legal Change management/ communications Finance HR Business owners IT leadership Define value Deals done without an integrated client team Unclear definition of business goals and objectives Why do outsourcing deals fail? 22 Lessons learned from our work with clients to remediate outsourcing issues

23 Thank you!

24 Appendix

25 Globalization of Operations in full swing as Investment Intentions in both Shared Services and Outsourcing reach record high Sources: Hfs “2014 State of Outsourcing” Study, n = 312 Buy-side Enterprises, “2013 State of Outsourcing” Study, n = 399 Buy-side Enterprises, “2011 State of Outsourcing” Study, n = 226 Buy-side Enterprises 25

26 Prolific use of Offshoring Continues 31% 29% 28% 26% 21% 18% 17% -13% -3% -5% -4%-5% 26% 19%20% 18%17% 16% -9% -2% -3% -4% -7%-6% Application Development & Maintenance Finance and Accounting IT InfrastructureIndustry - specific Operations ProcurementHuman Resources Customer Service Application Development & Maintenance Finance and Accounting IT InfrastructureIndustry - specific Operations ProcurementHuman Resources Customer Service Q. How will your level of offshoring change in the next year? (Outsourcing) DecreasingIncreasing Source: HfS “State of Outsourcing” Study, conducted with support from KPMG (Sample 312 Enterprises) 26 Q. How will your level of offshoring change in the next year? (Shared services)

27 Operating Models: Outsourcing forms a Critical Lever for an Integrated Services Model Over the next 2 years will your company increase / reduce its reliance on the following operating models for your general and administrative functions? 27 Source: Hfs “2014 State of Industry” Study, May HfS Research in Conjunction with KPMG (Sample 312 Enterprises)


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