FAO 2010: How Strategic is FAO Today?

Stan Lepeak, Managing Director, EquaTerra Global Research

This is the sixth in an ongoing series of blogs presenting the findings from EquaTerra’s recently completed market study assessing North American and U.K. finance and accounting (F&A) and F&A outsourcing (FAO) market trends. EquaTerra released the results of this market study via a webcast held on January 28, 2010. The blog series has so far addressed the following points:

While the use of outsourcing in general and FAO in particular continues to grow, it is still often viewed as primarily applicable to routine or administrative tasks and a means to reduce costs (e.g., through automation, labor arbitrage, process improvement). While cutting costs is a key driver in nearly all outsourcing efforts, the question is to what degree today’s buyers are also using outsourcers to perform more strategic activities and pursuing outsourcing to achieve more strategic goals.

In the industry’s early days it was often argued that organizations should confine outsourcing efforts to “non-value-added” activities or those that did not “touch the customer.” This logic is flawed. Organizations should eliminate, not outsource, any task or activity that truly does not “add value.” Similarly, if organizations do a poor job of interfacing with internal or external customers, they should consider the role of outsourcing in potentially improving the customer experience.

A clear goal for any CFO is to ensure that business activities are performed as well and as cost-effectively as possible. This should hold true regardless of whether the activities are performed by internal resources or an external service provider. This is where FAO plays a role, particularly as the FAO market continues to mature and the breadth and quality of available FAO services increases. An FAO service provider that focuses on F&A as a core business offering can often better design and optimize F&A processes, and invest more in better, robust supporting IT applications and systems. It can also leverage best practices across multiple client organizations to the benefit of all, and spread the cost of investment across a wider base.

Many FAO deals have, historically, been focused on administrative and back-office tasks. But FAO buyer perceptions are evolving relative to the use of FAO to support both operational and strategic activities. More FAO buyers today recognize that a broad range of activities deemed strategic (e.g., analytics, planning, forecasting) are viable candidates for some level of outsourcing. This is manifested in a trend which gives service providers greater scope, often delivering services end-to-end across the entire process. As indicated, this scope increase is being driven both by growing buyer sophistication and enhanced breadth and quality of services FAO providers can deliver.

This trend was reinforced in our market study results. Just over 50 percent of respondents indicated that FAO is viewed as a tool to address both operational and strategic F&A needs and while it can help reduce F&A costs, it can also deliver strategic business value. The balance of respondents held the more traditional view that FAO is viewed as a tool primarily applicable to administrative/back-office F&A activities and to reduce F&A costs. It is EquaTerra’s opinion that the percentage of organizations which indicated FAO has strategic potential is much higher than it would have been had the poll been conducted several years ago. These findings were similar across all sizes of respondent organizations. U.K. respondents, however, are more convinced of FAO’s strategic potential than those from the U.S. (58 percent compared to 44 percent).

These findings do not mean that operational FAO is becoming less important. Achieving operational goals such as cost reduction is often a prerequisite to addressing more strategic issues such as using those cost savings to fund process improvement efforts or attract more skilled F&A talent. Yet, while FAO has the potential to add more strategic value to an F&A organization, it can do so only if the outsourcing effort is successfully undertaken.

The next blog in this series will examine market study results on key FAO success factors, and identify key common FAO risks and concerns that buyers must address and overcome.

Next up:  FAO Success Factors, Risks and Concerns

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