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Value Proposition of FAO Solutions to Buyers
Finance & Accounting Outsourcing (FAO) has emerged as a viable offering in the market, and has evolved beyond the “pioneering” stage. FAO has successfully provided significant savings on the direct cost of the entire F&A function primarily by leveraging cost arbitrage and process efficiency improvements. While this traditional FAO value proposition has gained acceptance, interest in expanding the value proposition beyond labor arbitrage is now on the rise.
Leading buyers are now pushing the envelope of the traditional value in FAO to improve the coverage of their other expectations including business process excellence, complexity reduction, and access to expertise. At the same time, the supplier competitive landscape is changing rapidly and purely labor- arbitrage-driven offerings are no longer a source of competitive advantage. Consequently, leading FAO suppliers are making investments in expanding their FAO value propositions. The interplay of drivers for outsourcing and
types of value has resulted in three broad areas of advanced FAO offerings:
- Industry oriented
- Process oriented
- Value lever oriented
However, progress towards the adoption of advanced FAO value propositions is taking time. While most mature FAO buyers want an expanded value proposition, they are constrained by internal challenges that reduce their ability to implement new offerings. Leading suppliers are trying to be responsive to buyer needs by making corresponding investments; but the risk, uncertainty, and complexity in undertaking such initiatives is still fairly high, resulting in slow adoption. Several solution-design elements such as skill sets, delivery model, and role of technology, pricing, and service levels are changing to deliver on the advanced FAO value propositions; but not all have reached maturity levels to enable broad-based adoption.
A lot of the success in FAO to date can be attributed to its simple yet powerful value proposition resulting in a low-risk profile and high success rate. Advances to this value proposition are needed, but they should be implemented in a step- by-step incremental or “phased” approach based on increasing levels of confidence, trust, and success over time.
Direct-Cost Impact is Becoming Hygiene
Direct-cost impact is now considered “hygiene” .The demand and supply dynamics are creating pull and push factors to drive an expanded FAO value proposition, as follows:
- Inefficient financial supply chains continue to be pain points for most buyers. High manual intervention, large number of paper invoices, lack of data visibility, large working capital, dispute resolution, long lead time, write-offs, and lack of compliance continue to be the pain paints for most finance organizations, even those that have outsourced some parts of F&A.
- Competition in the FAO market is at an all-time high with 25+ established FAO suppliers. Suppliers therefore need to differentiate their offerings.
Buyer expectations also vary significantly by industry, geography, size, and several other organizational factors. Based on our interviews with leading buyers of FAO services, we identified the following dimensions of “drivers to outsource” and “desired impact:”
Drivers to outsource
- Cost driven – Reduce operational costs, improve efficiency
- Excellence driven – Improve quality and control, world-class delivery
- Complexity driven – Streamline processes, standardization
- Expertise driven – Improve hiring and retention, improve focus on core activities
- Direct cost impact – Labor cost reduction, productivity improvements
- Business impact – Working capital reduction, reduced risk, improved visibility
- Strategic impact – Business transformation, better control in emerging markets
Key Areas for an Enhanced FAO Value Proposition
There are three emerging areas for an enhanced FAO value proposition based on various combinations of drivers to outsource F&A and desired impact.
- Industry-oriented offerings. While most F&A processes are horizontal, some variations are present from an industry standpoint. As buyers become comfortable with horizontal areas of scope and the supplier gains knowledge, more scope is considered. Additional scope is typically more complex, requiring industry-specific knowledge but adjacent to the existing scope.
- Process-oriented offerings. Typically, buyers enter into an outsourcing contract with fewer F&A processes that are typically transaction-intensive (e.g., AP, AR, and general accounting). Expansion of process scope into related areas represents an emerging area for expanding the FAO value proposition. Process-oriented offerings have three different flavors:
- Judgment-intensive process. As contracts progress and buyers mature, the overall confidence increases and the number of processes included increases. The increase in the deal scope is primarily due to increased inclusion of judgment-intensive processes like management reporting and analytics, internal audit, and treasury management, among others.
- End-to-end process. In the past AR and AP solutions did not focus on an end-to-end approach but had a more piecemeal approach. Expanding scope from AR/AP to Order-to-Cash (O2C) / Procure-to- Pay (P2P) represents a significant shift in the development of FAO solutions.
- General and Administrative (G&A) scope aggregation. F&A is at the core of the G&A function and overlaps with Human Resources (HR) and procurement. F&A deals can be extended into other G&A functions to drive synergies.
- Value-lever oriented. FAO offerings have traditionally focused on labor arbitrage and process efficiency as the key value creation levers. The emergence of other value levers is now increasing in two main areas:
- Specialized skill-based offering. Gaining access to skills that are scarce, uneconomical, and difficult to build internally (e.g., process quality (Six Sigma, Lean), analytics, and category managers for non-core procurement categories). Gaining access to services such as consulting or business process reengineering for business transformation bundled with the outsourcing offering.
- Automation-based offering. Changing the role of technology from a process enabler to a key value-creation lever. The impact of technology can be delivered by refreshing/replacing existing core F&A systems or selective deployment of add-on solutions (this is more prevalent). The applicability and use of technology differs by F&A process type (analytics along with end-to-end processes like O2C and P2P have maximum potential), the existing system’s landscape of the buyer, and the level of customization required. 0l>
Emerging Trends in FAO Solution Design
While FAO solution design and delivery is changing to deliver on the advanced FAO value propositions, it is yet to reach the maturity levels required to create broad-based adoption.
- Skill sets. Emerging FAO solutions need access to scarce and/or better skills at lower costs, the F&A workforce is now changing, as there is an increasing focus on judgment-intensive F&A processes. Different specialists are being hired for different roles. There is an increasing investment in client and stakeholder management, as strong middle management and thought leadership from a client perspective is emerging as one of the key parameters in vendor selection.
- Delivery model. A blended model of onshore-nearshore-offshore is fast becoming the norm. Offshoring continues to be a key driver for FAO on the basis of the high offshorability of F&A processes, access to a large labor pool, labor arbitrage, and productivity. New emerging drivers for offshoring beyond labor arbitrage include an improved operating model by providing flexibility and superior output of quality by engaging with a highly educated workforce.
- Technology role. It is imperative for suppliers to have a “tie-and-run” capability in FAO, as over 80 percent of FAO buyers retain ownership of core F&A systems. Hence, ERP capability is a must-have. Stronger differentiation and higher value is being offered through technology augmentation through “add-on” tools that aid decision making / analytics and improve existing functionality. A platform-based FAO approach is being pioneered in many flavors but has not yet been proven.
- Pricing structure. FTE-based pricing continues to be the dominant model, but use of volume-based pricing has started to increase. However, volume- based pricing structures are not the nirvana for all issues, and there are pros and cons of both pricing structures along process applicability, governance, transparency, risk management, and flexibility. It is not necessary to make “either-or” decisions on pricing structures, as both volume-based and FTE-based pricing can coexist in the same contract. An emerging best practice is to start with FTE-based pricing and evolve to transaction-based pricing post stabilization.
- Service levels and KPI focus. While there is no fundamental shift in the service level agreement (SLA) philosophy, interest in utilizing business- oriented metrics is rising. The purpose of metrics in FAO has primarily been “diagnostic”, i.e., to measure history (manage consistency of business results at the desired performance levels) and forecast the future (facilitate collaborative preventive management). This is now changing to become more business-oriented to ensure strategic alignment with the buyer’s business objectives.
Recommendations for Buyers
- FAO is a journey towards a vision. New buyers need to understand the role of outsourcing in their vision for the F&A business and create a roadmap towards achieving that.
- Scope evolves over time based on core versus non-core. A singular focus on rule-based and transactional work restricts the value potential of the engagement.
- The FAO supplier is a partner. A partnership-based approach creates a win-win situation and cultivates an open and honest relationship where the parties do not have to refer to the contract for every decision and service. Understanding the global sourcing supply chain vision of the supplier and its implications for the buyer organization is important to anticipate future options and access to alternative labor pools.
- Success of a deal is multi-dimensional. Service levels are important but need to take a pragmatic and wholesome approach to determine success of a deal. Success of a deal is dependent on achievement of business goals, realized savings versus planned, timely transition, change control, satisfaction surveys, and the buyer-supplier relationship. It will be important for buyers of FAO services to develop a vision for the finance & accounting business and define a roadmap towards that vision.
Finally, buyers are seeking greater value addition from FAO and expect business and/or strategic impact through process excellence, reduced complexity, and access to expertise. As a result, leading FAO suppliers are investing in building differentiated service offerings by focusing on providing industry-oriented, process-oriented, or value-lever oriented opportunities. The FAO market is gradually moving on in the journey towards greater value creation, and the strength of the buyer-supplier relationships will determine the success of individual engagements.