Big D Treasury ConferenceFinance & Accounting Business Process Outsourcing 101or “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

What is the size of the Global Finance Outsourcing Market ?

A) $5 BillionB) $10 BillionC) $25 Billion

What percentage of Fortune 100 companies have placed at least one process with a 3rd party or in a shared services environment?

In the SS&O world, what is GBS?

A) Gigabytes per SecondB) Global Business

ServicesC) Google Branding

Session

Who is 3rd Party Service provider with the largest share of the F&A outsourcing market?

A) AccentureB) HPC) IBM

What is the top emerging F&A destination for 3rd party service providers and Shared Service Centers in EMEA?

321

654

7 8

2

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 PeroxideC) Banker’s Pay

Order

What is the most common finance process to be outsourced?

F&

A B

PO

Triv

ia!!

F

& A

BP

O T

rivia!!

F& A BPO Trivia!!

F& A BPO Trivia!!

• Implications:

− Supplier now owns the process• Responsible & accountable

− Buyer only influences the process• Provide Inputs• Define desired Outputs

Definition of Outsourcing

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Outsourcing is the transfer of a process from the buyer to the supplier

Outsourcing Offshoring

4

Comparison of Outsourcing vs Shared Services vs GBS

Dimension Shared Services Outsourcing Global Business ServicesObjective • Cost savings, improved efficiencies

and occasionally compliance• Typically cost savings driven • Cost savings, efficiencies, compliance, service focus,

agility, scalability, and innovation

Scope • Typically 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)

Scalability • Scalability typically limited to initial scope

• Highly scalable • Highly scalable by design

Efficiency • Leading practice is focused on driving reduced cost and process efficiency

• Leading practice is focused on driving reduced cost and process efficiency

• Ability to achieve greater efficiencies across processes (e.g. handoffs)

Effectiveness • Standardized 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 Savings • Cost savings of 20-50% typically achieved on the processes in scope

• Cost 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

Agility • Agile as it relates to in-scope processes

• Limited by the scope of the contract with provider

• Agility is high because coordinated centrally

Innovation • Very limited • Leverages provider capabilities to drive process innovation but is typically siiloed

• Focus on cross-process innovation drives benefits• Has a focus on developing new services

Transition • Internally managed transition processes

• Managed internally and by providers • Managed internally and by providers if applicable• Leverages leading practices/lessons learned

5

Outsourcing vs Shared Services vs GBS (cont’d)

Dimension Shared Services Outsourcing Global Business ServicesTransition • Internally managed transition

processes• Managed internally and by providers • Managed internally and by providers if applicable

• Leverages leading practices/lessons learned

Performance Management

• Leading practice is SLA-driven• Tends to create siloed approach

• SLA-driven• Tends to be siloed

• Cross-process and integrated• Scorecard, SLA- driven

Relationship Management • Tends to be arms length • Arms length with third party • Strategic partner with the business

Governance • Variety of approaches ranging from siloed to coordinated

• Frequently managed as separate contracts within functions

• Centralized and coordinated

Degree of Change from Decentralized Operations

• Moderate • Significant • Transformational

Culture • Practice 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

Integration • Typically 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 Technology • Alignment 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 Activity • Can 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

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

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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-pointsLimited to no process

standardizationNo 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

ProcessPeople Technology

Finance organizations still face many of the fundamental challenges with people, processes and technology

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

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RisksAdvantages

F&A Business Process Outsourcing

Common F&A Processes Outsourced

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Finance and Accounting Value Chain

Revenue Cycle(Order to Cash)

Cash & Disbursements(A/P / T&E)

Financial /ExternalReporting

Project & CostAccounting

GeneralAccounting

PlanningBudgetingForecasting

BusinessPerformanceManagement

Cash Mgt, Treasury Mgt, Risk Mgt, Tax Planning & Compliance

Record to Report

Performance Mgt/Decision Support Capital Platform Mgt

10% 20%20%

70%70%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% 30%

30%

60%50%

70%

P2P O2CFinancial Planning & Analysis (FP&A)

• Investor Relations

• Budget Policies/ Procedures

• Strategic Planning

• Corp. Dev.

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Tax Value Chain

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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

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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

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F&A Business Process Outsourcing

The Benefits

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Function Typical client situations Leading 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

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 citiesSource: Booz & Company GIC Experience, Booz Allen Hamilton and Duke Offshoring Research , Outsourcing-Center

Strategic and Other BenefitsEconomic 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

US In-House Cost Offshore Outsourcing

Other

Facilities

People

15-20

5-1025-35

3-5

60-70

4-8

70-804-8

Comparison of US Onshore and BPO Services (US$000s / FTE / Annum)

50-65%

Operating cost savings

F&A Business Process Outsourcing

Trends & Pushing Beyond F&A BPO

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.10-15%

• 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 reports3-5%

• 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

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Operating Model Evolution

• 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 ServicesIn-House

BPO/Offshorecapture labor arbitrage

Increased cost reduction / variable structure, scalability, and agility

Op

era

tio

na

l be

ne

fits

5-10%

10-20%

20-40%

50+%

Traditionally Finance& HR SSC

Finance,HR, IT

Next Generation Operating Model

Present – FutureHybrid. On-premise, cloud, (XaaS)

Late 90’s - PresentE-Business, Internet-enablement

Late 90’s - Late 90’sClient / Server. Networking

Pre-80’sMainframe

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, 2011Sample: 336 Buyers of Outsourcing Service

Many companies are looking beyond their G&A functions

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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

• 2nd 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 National Large MultinationalMid to Large

$0.2 B $50+ B$2.5 B $3.0 B $12.0 B $15.0 B

Co

mp

any

Siz

e (

$ R

even

ue)

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”

F&A Business Process Outsourcing

Considerations

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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 termHR

model Service delivery model

Pricing m

odel

goal 1

goal

?

goal

goal

• Cheaper isn’t good enough

• Moving targets for satisfaction

• Marginalized SLA’s

?

Legal

Change management/communications

Finance

HR

Business owners

IT leadershipDefine value

Deals done without an integrated client team

Unclear definition of business goals

and objectives

Why do outsourcing deals fail?

Lessons learned from our work with clients to remediate outsourcing issues

Thank you!

Appendix

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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

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Prolific use of Offshoring Continues

31% 29% 28% 26% 21% 18% 17%

-13%

-3% -3% -5% -5% -4% -5%

26%

19% 20% 20%

18% 17% 16%

-9%

-2% -3% -3% -4% -7% -6%

Application Development & Maintenance

Finance and Accounting

IT Infrastructure Industry -specific

Operations

Procurement Human Resources

Customer Service

Application Development & Maintenance

Finance and Accounting

IT Infrastructure Industry -specific

Operations

Procurement Human Resources

Customer Service

Q. How will your level of offshoring change in the next year? (Outsourcing)

Decreasing Increasing

Source: HfS “State of Outsourcing” Study, conducted with support from KPMG (Sample 312 Enterprises)

Q. How will your level of offshoring change in the next year? (Shared services)

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Operating Models: Outsourcing forms a Critical Lever for an Integrated Services ModelOver the next 2 years will your company increase / reduce its reliance on the following operating models for your general and administrative functions?

Source: Hfs “2014 State of Industry” Study, May 2014. HfS Research in Conjunction with KPMG (Sample 312 Enterprises)