Stan Lepeak, Managing Director, EquaTerra Global Research

This is the seventh 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:

• Key items on organizations’ corporate agenda for 2010
• What is on the CFO’s agenda
• Strategies and tactics to enable the CFO’s agenda
• FAO Future Plans
• FAO Benefits Sought and Achieved
• How Strategic is FAO Today?

FAO Success Factors

Numerous EquaTerra client engagements and the results from the FAO market study illustrate the value successful FAO efforts can bring buyers, both in terms of reducing F&A costs as well as enabling the F&A function to perform a more strategic role within the organization. The challenge lies in ensuring the FAO effort is successful.

There are a variety of factors that contribute to the success of an FAO initiative. They include developing a realistic and consensus-driven business plan, ensuring that adequate and skilled resources are applied to the sourcing, transition and governance efforts, and gaining active and meaningful executive support for the initiative. Buyers must also ensure there is as good a fit as possible among their FAO strategy, their culture and operating style and the service provider selected. This may mean the largest, highest ranked or incumbent service provider is not the best choice for a new FAO effort.

The market study assessed what current FAO users feel are the factors most critical to creating a successful FAO effort. Respondents identified their top three choices from a selection of twelve factors.   All of the top five factors identified relate to service providers and service provider selection (see below).

• Service provider industry knowledge, experience and expertise is identified as the most critical factor in a successful FAO effort, cited by 41 percent of respondents.
• The next four factors selected are clustered in the high 30 percent range and include service provider global service delivery capabilities, buyer cultural fit with the service provider, the obvious picking the best service provider and the ability of the service provider to deliver both strategic and operational F&A services.
• Respondents from different sized organizations have different opinions on the top success factors. For example, respondents from the largest class of buyers polled ($20 billion+ revenue) are much more likely than respondents from the smallest class of firms ($3-$10 billion revenue) to value service provider global service delivery capabilities (42 percent versus 15 percent) and the ability of the service provider to deliver both strategic and operational F&A services (42 percent versus 26 percent).

FAO Risk Factors

Tied closely to striving to achieve key FAO success factors is identifying and addressing key FAO risk factors and concerns. Buyers must recognize that addressing outsourcing risks is a perpetual process which involves developing the optimal deal structure, selecting the best fit provider, and deploying a skilled and capable outsourcing governance program.

A good outsourcing governance program focuses on balancing risk mitigation with the realization of value, ensuring that expected deal benefits are achieved. Buyers must ensure this program is holistic and focuses equally on service quality, issues, change control and commercial management, and overall compliance and risk management. The risk management program must take a systematic approach to identifying potential major risk factors, evaluating each risk (e.g., probability, scale, severity, volatility) and then developing and maintaining programs to mitigate them.

The market study assessed the greatest perceived FAO risks and concerns of FAO buyers. Respondents selected their top three choices from a list of twenty factors (see below for the top five selected choices).

• The most commonly cited risk is loss of control of outsourced F&A processes, cited by 42 percent of respondents. This is a natural concern when work is first being transferred outside the organization. It is also one of the six FAO myths EquaTerra believes buyers can address and overcome by clearly defining service performance levels, implementing a solid outsourcing governance program, and putting mechanisms in place to efficiently and effectively address any performance problems that arise.
• The next four risks and concerns cited all garnered response levels under 30 percent and include service provider issues such as risk of service provider failure, service provider inability to deliver and a deterioration in service quality, loss of institutional F&A knowledge and data, information security and  related privacy risks.

FAO is not easy or simple, especially for larger and more global buyer organizations, but its benefits are potentially compelling. While any FAO buyer must identify all potential FAO risks and concerns, they should not view them as gating factors but rather as challenges to overcome and account for in structuring the FAO deal. Nothing worthwhile in business is without risks and challenges, including FAO.

Next up:  Taking FAO to the Next Level

Filed under: Finance & Accounting, How to..., Market Trends and News, Outsourcing by EquaTerra