In 2008, Finance and Accounting Outsourcing (FAO) is being embraced as a transformational lever — to get costs, processes, compliance and business strategies in line with operations. Cost reduction and process efficiency are still key drivers for FAO, but customers are adopting a wider scope of contracted services upfront and are expanding existing engagements as their confidence builds and better-than-expected benefits are achieved.

FAO Research sees numerous examples of FAO servics being contracted in a much more strategic manner than ever before, with the “lift and shift/fix my mess for less” mentality declining as the finance community understands more fully the value they could realize with FAO. FAO contracts are broader in scope than pure transaction processing; as customers are exploring analytics, re-engineering and help with strategic planning. FAO is being used to facilitate consolidations, restructurings and globalization initiatives.

Customers finally seem to be understanding that finance is the “backbone” supporting all business operations, so its proper functioning affects every move that the pieces of its whole make … and FAO can help them succeed.

We have termed latest generation of service adoption emergence as “FAO 2.0” differentiated from less sophisticated market demand for FAO, or “FAO 1.0.”

Recognizing that FAO 2.0 Exists
As further proof of an evolving market, there even is a set of awards in the outsourcing space for FAO customers, their advisors and service providers collaborating to provide industry leadership in improving finance and accounting operations for competitive advantage. Our “FAO Research Awards of Distinction” (second year running) validate effectiveness in meeting challenges presented through proactive teaming with an experienced supplier to reach F&A business objectives. This year, we recognized FAO contracts that exemplify “best practice” cases of achieving dramatic, measurable results by leveraging FAO.

We received nearly double the number of FAO contract nominations this year as compared to last year, the result of which, we believe, is that FAO is becoming a more acceptable operational alternative, and companies are willing to “show off” the positive impact of their outsourcing decisions. The types of well-known companies that were nominated for our awards are impressive.  As FAO propels businesses forward within a 2.0 mindset, companies are seeing it as beneficial to demonstrate publicly the business impact of FAO.

In Mar. ’08, we recognized the winners with greater than $5 billion in annual revenue, namely:
1). Unilever Europe (and IBM)
2). BT (and Accenture)
3). GlaxoSmithKline (and Genpact).

For FAO customer organizations with less than $5 billion in annual revenue, we gave the FAO top honor to Avago Technologies and Wipro BPO.  We also recognized Centrica (with Alsbridge and WNS Global Services), and BBC (with PwC and Xansa).

Some of the reasons that the nominated contracts moved into an FAO 2.0 mindset include:

l Leveraging FAO to undergo a major, company-wide, global change agenda
l Started by taking a “toe-dipping approach” to FAO, one function at a time, to a broader outsourcing approach
l Taking a “lift and shift” approach to FAO successfully, transitioning everything at once
l Moving an under-performing shared services model to FAO, helping improve business operations
l Transitioning FAO from one supplier (due to unsatisfactory performance) to a different supplier
l Using FAO to help a new competitor enter into an existing market and an existing competitor enter into an already-established market
l Adding FAO to a company-wide portfolio of outsourcing initiatives.

Success Factors for FAO 2.0
Multiple success factors exist for customers engaging in the FAO process, with the primary goal of lowering costs but a more long-term goal of achieving an FAO 2.0 mindset to leverage the full benefits of their initiative. 

Some success factors for FAO include:

Working with a Sourcing Advisor Upfront: Four of 10 nominees for our 2008 FAO Awards involved sourcing advisors’ guidance that enabled the prospective customers to have a methodology and processes in place that could lead to successful provider selection, and contract, and manage expectations.

Effectively Creating and Demonstrating a Future State: Customers with an FAO 2.0 mindset upfront understand that their engagement is being initiated for more than pure cost-cutting reasons, and that a focus on FAO could help them achieve long-term goals as opposed to short-term wins.

Multiple Supplier Service Delivery Locations: The geographic diversity of FAO service providers’ delivery centers is of extreme importance to FAO 2.0 customers, as they understand that having access to similar cultures and language skills as their employees and customers as well as having different cost options and geopolitical risk spreading are critical factors for their long-term, global business successes.

Industry Expertise: Companies that aim to achieve FAO 2.0 adoption seek to align themselves with service providers who have “been there, done that” with peers in their industry.  Process knowledge and technical expertise requirements differ by industry, as do the drivers and inhibitors for business success in each industry. Innovative companies understand that and aim to leverage the industry acumen of their suppliers to achieve long-term contract success.

Senior Management Involvement in the Project Upfront and Throughout: Every successful implementation and FAO 2.0 engagement involves the buy-in and direct involvement of senior management at the start of the project.

Single, Dedicated Point of Contact: Since outsourcing is a services business based on relationships, single points of accountability are crucial to manage the many parties involved in ensuring contract success, including transition managers, governance leaders, administrative personnel, and the like.

Introduction of Flexibility into Service Delivery: Adding a component of variabiliy accommodate evolving business requirements, seasonal fluctuations, etc.

Previous Business Relationship:  It’s helpful to know the company you are working with from your previous relations with them, but it’s not always imperative.

Establishing FAO Objectives Upfront: These may include cost saving targets, accomplishments desired, or some other types of quantifiable measures so that you can have realistic goals to achieve and also benchmark against after you embark on the FAO endeavor.

FAO 2.0 is something for which FAO customers must strive to achieve.  It’s what we would call in the analyst world a “best case scenario,” as it confirms that expectations are in line with actual service delivery. There are very few, if any, failed FAO contracts mostly because initial and on-going objectives have been set, managed and adjusted with proper oversight. With this next generation of outsourcing adoption, FAO 2.0 imbues new ways of operating an enterprise and produces “value add” beyond initial expectations.

Lisa is the CEO and founder of FAO Research, an independent research firm focused exclusively on the FAO and procurement outsourcing markets. As a leading analyst in the outsourcing industry for more than 12 years, she works closely with customers, advisors and suppliers of outsourcing services.

FAO 2.0: The Next Generation of FAO Adoption, 2008
FAO 1.0 Customer		FAO 2.0 Customer
Motivated by cost cutting  Transaction processing orientation IT support for the finance business process FTE- and transaction-based pricing of FAO contracts Toe dipping; lessons learned; FAO process unclear Functional silos of finance processes outsourced First-time FAO engagements 15 to 20 FAO service providers globally Fortune 500/Global 1000 target market for services Mix of onshore and offshore service delivery Cautious customer approach to offshoring Discussions center on service level agreements Customers ask should we do FAO, what can we outsource, who can we hire		Driven by cost cutting and process improvement, domain expertise, risk mitigation, flexibility and business value Value-added components Decision support for the finance business process Hybrid pricing models, with FTE, per transaction, variable, gain sharing and value-based mechanisms Sourcing advisor led engagements Finance outsourced plus higher-value services such as analytics, re-engineering and strategic support New deals and renewals, extensions, scope add ons Many more choices worldwide and by functional area (niche providers such as accounts receivables only) Mid market/small cap emergence for FAO Widely expanded geographic diversity of service delivery locations — onshore, offshore, nearshore and onsite Customer indifference as to geographic service delivery location for non-customer-facing processes Heavy initial focus on governance, relationship management, incentive building, and proactive partnering Customers ask where do we want to be as a business in two to five years from now and   how can FAO help us get there.
Source: FAO Research