From the February 2009 issue of Treasury & Risk magazine

Opportunity Knocks Twice

When Educational Testing Services (ETS) acquired Prometric from Thomson Corp. in 2007--the companies faced an immediate challenge. They had just four months to create a stand-alone finance and accounting system for Prometric. Previously, Baltimore-based Prometric relied on Thomson shared services. Further complicating the transition, Prometric, which specializes in computerized testing, is a for-profit company headquartered in Princeton, N.J. ETS, known for the SAT, ACT, MCAT and LSAT tests, is a nonprofit.

With limited time, ETS turned to Accenture BPO Services LLC , which is based in Wichita, Kan., to provide the staff and systems that are required for procurement, accounts payable, expense reporting, general accounting and financial reporting services, all supported by an Accenture proprietary enterprise resource planning (ERP) network. Accenture also contributes to back-office functions, including accounts payable and fixed assets, notes Prometric CFO Chris Derr. "They offered us a quick, ready response that couldn't be duplicated in-house," he says. The project was finished on time, allowing Prometric to supply ETS with its 2007 financial data. "It had to be done," says Derr. "There was no other option."

Speedy implementation is not an unusual request for medium-size companies, says Rob Sherman, president of Garden Grove, Calif.-based Vengroff, Williams and Associates Inc. (VWA). While the average life cycle at larger enterprise companies is nine months, mid-market executives increasingly expect and often get, 120-day turnarounds, he says. With 2007 revenue of $803 million, ETS is one of a growing number of mid-market companies reaching outside their companies for finance and accounting (FAO) services. With the global economy in chaos and credit pinched, CFOs face mounting pressures to slash costs, increase productivity and eliminate, or at least shrink, costly accounting errors and compliance breaches. Outsourcing provides the economies of scale, cutting-edge technology and best practices that can help mid-market companies achieve those objectives, says Katrina Menzigian, vice president of Everest Research Institute in Dallas.

It's a view shared by more and more mid-market companies. "If you can outsource something non-strategic like sales and use tax and not only save money, but also achieve a higher degree of compliance, it makes sense," says Debbie Rosenberg-Lansford, CFO of Berkshire Hathaway's furniture rental business CORT based in Fairfax, Va., which relies on Sabrix Inc.'s Managed Tax Service. MTS includes address validation, tax rate maintenance, determination and calculation, signature-ready return preparation and audit research and documentation.

Yamaha Corp. of America in Buena Park, Calif., endorses outsourcing as well. After hiring VWA to manage electronic invoicing payment and processing (EIPP) services, the music and sound products maker, with more than $800 million in revenue, reported significant savings in three years. Required resources fell 36%; the 60-day delinquency rate dropped to 1.2% from 4.6%; manual processing of adjustments and cash applications declined 57%; and unapplied cash and credits dropped 65%.

Not that there aren't challenges. Prometric, ETS and Accenture encountered some in meeting a tight deadline, from Sept. 1, 2007 to Jan. 1, 2008, so Prometric could merge its annual results with those of parent ETS. Mastering foreign exchange transactions was the big one. "We went to a brand new system that required mapping all our accounts into a new financial reporting system for consolidated reports," Derr says. And with 30 units around the world operating in multiple currencies, FX was complicated. "But it got easier every month and it's much smoother now," he says.

While mounting economic pressures are driving global mid-market growth, outsourcing demand from large companies is waning, Everest Research says in its recent report, Understanding The Waking Giant: The Midmarket and FAO. Business from companies with $500 million to $5 billion in sales climbed an average of 38% on a contract basis over the last five years, about twice the 18% to 20% reported by big corporations.

"The enterprise market still has traction, but they are less aggressive," says Sherman. "For every one enterprise buy, you see four mid-market opportunities." Or as George Evans, managing director of Outsource Partners, International (OPI) in Los Angeles puts it: "The big bang transactions of large companies are a thing of the past."

Shifting demand has prompted IBM, Accenture, Affiliated Computer Services (ACS) and other vendors that traditionally have served large companies, to fish deeper into the pond for business. "They are ready and willing to take on engagements to get their foot in the fast-growing market," says Phil Fersht, Boston-based AMR research director for global services and outsourcing.

Just how deep is the middle-market pond? Definitions range from a low of $250 million in revenue to a high of $5 billion--with a consensus settling in the $500 million to $2.5 billion range. Despite the wide variation, the same trends are holding true across the revenue continuum.

One is the expansion from simple, transaction processing, such as accounts receivable, accounts payable and general accounting, to more sophisticated analytical functions, such as treasury and risk management, budgeting and forecasting. "In the last four or five months, we have seen increasing interest in real-time business intelligence services for insight daily," says Trey Campbell, CEO of Accenture--more than from large companies.

Growing interest in incorporating best-of-breed solutions in FAO processing, rather than relying on just one supplier for all FAO solutions, is another trend. "It's becoming more of a menu process," says OPI's Evans, with customers picking and choosing niche providers because they think that "no one provider is good at everything."

Accenture's Campbell disagrees. His company continues to offer only proprietary services. "We encourage customers to think clearly about how many relationships they want," he says. Accenture focuses on businesses with $500 million to $2.5 billion in revenue. Opinion is split on whether companies in this segment prefer to limit outsourcing to the U.S., or if they are part of the crowd of global companies that go abroad to save on labor. Some are spooked by the loss of control when business is shipped overseas, especially following the massive fraud charges leveled against India's Satyam Computer Services Ltd.

"Outsourcing can be a dirty word," says Pam Kostka, corporate marketing director for San Ramon, Calif.-based Sabrix. Because Sabrix' experts must stay on top of national and local laws, they are all in the U.S. Sherman, too, says mid-market executives "want to make sure there's a local presence to speak to, and to keep the complexity of offshoring off the table." Campbell, among others disagrees. "Not many turn down the opportunity to save through labor arbitrage," he says.

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