Routine reconciliation and financial reporting: For many recently downsized staffs, this is tedious work that takes up too much of their already overworked days. Wouldn't it be great to hand the job off to someone else? That's the current thinking of the new CFO of a $900 million Midwestern manufacturing company.
After she was unable to fill two vacated senior-level positions recently because of cost constraints, the CFO started considering how to accomplish various prosaic duties and still have time left for everything else. "If I lose one or two more of my staff, I am dead in the water," she says. "We'll be starting to look at 18-hour days."
Even worse, the mind-numbing, labor-intensive work takes her staff away from tasks that are infinitely more strategic or projects that could further develop important skills. "They're a great group. And I don't want them to burn out," the CFO says.
Her favored solution: Outsource the job to an outside firm--but take it slow. Because the company has done little outsourcing before, she prefers to start with one task, expanding to other activities should the move prove to be successful. "I'd like to dip my toe in the water first," she says. (Because she hasn't yet broached the subject with her boss, the CFO asked that her name not be used.)
Such a reaction is typical of many executives interested in outsourcing finance functions these days. Attracted by the potential cost savings, companies that had never used outsourcing services before have started to do so over the past year. Or, they've decided to expand existing services.
But, in many cases, they're not opting for soup-to-nuts, end-to-end solutions. Instead, they're turning to companies able and willing to provide outsourcing of more discrete processes. Most often, that includes tax management, auditing, billing, accounts receivable or accounts payable, although there is demand for management reporting, general ledger and yield management, according to Cathy Tornbohm, vice president of business process research at the Gartner Group, a Stamford, Conn.-based market research firm.
Indeed, adoption of discrete processes, rather than comprehensive systems, is fueling the lion's share of current market growth, according to Tornbohm. About 80% of companies are choosing just one or two functions to outsource, instead of a larger solution, she says. As companies become more willing to sign contracts, Gartner predicts the overall market will grow from $13.5 billion in 2008 to $15.9 billion in 2013.
The big attraction is that outsourcing these small-scale processes can provide companies with a quick bang for the buck. That's partly because it takes 18 to 24 months before companies start seeing any real return on the typical large-scale outsourcing effort--comprehensive finance and accounting systems supporting multiple locations in multiple countries--according to Peter Redshaw, research vice president for banking and investment services research at Gartner. And the buying cycle for such large contracts is also long. "It's easily 12 months from the decision to outsource to signing a big deal," says Tornbohm.
In addition, most of the demand has been for more known quantities, the typical tried-and-true processes that are generally regarded as reliable and safe to outsource. "People are saying, 'I need to save money fast, so let's push something that's mature and where I have a big volume of transactions,'" says Redshaw. "It's all about return on investment and time to break even."
Take Corefino, a Sunnyvale, Calif.-based outsourcing company that provides such basic accounting functions as accounts receivable, billing and collections, using a software-as-a-service (SaaS) model. CEO Karen Watts says Corefino's customers are up and running in as little as a month. (The CFO who is considering outsourcing has blogged anonymously several times for the Corefino Web site).
In some cases that's meant adding to existing processes, rather than picking an entirely new one. According to Katrina Menzigian, vice president of BPO research at Everest Research Institute, a Dallas-based firm, while she can't provide exact numbers, spending from existing contracts drove a significant share of market growth last year. That's sometimes meant adding more than just one or two functions, however. For example, says Gartner's Redshaw, "People who have been outsourcing certain transaction services for overseas operations are now adding domestic operations."
For newcomers, on the other hand, opting for a few specific functions also has another benefit: It offers them the chance to get some initial experience outsourcing a financial process before deciding whether or not to expand. "You can test the waters," says Carla Yrjanson, vice president of tax research at Sabrix, a San Ramon, Calif.-based outsourcing company acquired late last year by Thomson Reuters.
Of course, a need for cost savings has been behind much of the activity. At Corefino, for example, according to Watts, customers typically save 25% to 40% by using the service. She figures her service is cost-effective for companies able to reduce their head count by at least three people.
But cost savings aren't the only attraction. The economic downturn has also increased the complexity of some financial transactions and, as a result, the need for companies to outsource those activities. Calculating taxes charged by state and local jurisdictions is one example. Many financially strapped municipalities have been clamping down on businesses selling in their areas; in some cases, they've hired more auditors.
"Governments are getting really tough by scrutinizing how businesses are remitting their taxes," says Yrjanson. "Audits are a great revenue source." Sabrix, also a software company, outsources services aimed at small to medium sized businesses wanting to hand off the calculation and preparation of taxes from multiple locations.
In other cases, the motivation is to make things simpler. Planar Systems, a $174.9 million, Beaverton, Ore.-based company that sells visual displays, started using Sabrix's software in-house 10 years ago. More recently, according to Mark Montgomery, director of tax and treasury, the 450-employee company decided to outsource the tax calculation function and combine it with Sabrix's compliance services. That's allowed Montgomery to consolidate both functions with one vendor; before, he'd been using two.
Still, cost has been an issue for Montgomery. He figures he's cut expenses by about 25% a year by using the Sabrix service.
Many existing, well-established suppliers are still choosy about the size and scope of the deals they'll entertain; many have large delivery networks they need to put to good use. According to Anoop Sagoo, a managing director at Accenture in New York, his company has continued to emphasize its traditional service, providing multiple transactional functions across multiple locations. "We steer away from single-process arrangements," he says.
Despite that, however, Sagoo says he's observed an increased demand for discrete services overall. "It doesn't surprise me that some clients are choosing to dip their toe in the water, rather than go for the full-process approach, especially in this economy," he says.
What size company is behind the trend? The answer isn't clear cut. According to some researchers, it's larger companies. In fact, according to Menzigian, preliminary research shows there was a decrease in the number of deals signed by mid-market businesses in 2009.
Other experts cite different trends. Redshaw, who mostly works with financial institutions interested in outsourcing, says he's seen a dramatic increase in inquiries from smaller banks and credit unions, instead of the usual top-tier banks. "They're saying, 'We've never had to do this before, but my CFO is jumping up and down. We've got to save money,'" he says.
Many customers are also asking for new pricing models that focus on achieving specific outcomes. While traditional pricing has been based on reducing head count--performing certain functions at a lower labor cost--more customers are seeking to tie contract terms to reaching specific achievements.
For example, more customers outsourcing their order-to-cash processes want to be able to measure a variety of data points related to working capital, such as debt delinquency. "People's buying criteria are a lot more sophisticated," says Sagoo. "Now, they want a performance commitment. They want to make sure the business is operating at the right level."
Still, demand for larger systems could start picking up soon. That's because many companies, paralyzed by the precipitous downturn, put off making buying decisions at the end of 2008 and beginning of 2009. More recently, they've begun the long process of negotiating new deals. "They're starting to pull the trigger," says Menzigian. But, because the buying decision takes such a long time, the deals are only beginning to be signed now.
There might also be a stepped up demand for less basic functions, according to Menzigian. She's starting to see more interest in outsourcing of what she calls "judgment intensive" areas, such as record-to-report processes.
But, at the moment, the action seems to be in less ambitious and easier to deploy applications. In much of financial outsourcing, at least for now, small really is beautiful.
Going for Software as a Service in a Big Way
What a difference a software-as-a-service (SaaS) provider makes, especially to a small- to mid-size company.
Just ask Mark Montgomery. The director of tax and treasury for Planar Systems, a 450-employee, Beaverton, Ore.-based company that sells visual displays, recently started using the services of an SaaS provider to handle the calculation of taxes levied by municipalities as well as tax return compliance responsibilities. Now, his provider, San Ramon, Calif.-based Sabrix, hosts the software used to perform these functions, freeing up Montgomery's IT staff to do other things. "We've become really streamlined," he says.
The latest buzz in outsourcing is SaaS. But, the most aggressive adopters of the technology aren't the big guys. Rather, they're small and midsize enterprises (SMEs), which are moving ahead of the pack, especially in their adoption of SaaS for even critical finance applications.
The trend shouldn't come as a big surprise, says Bruce Guptill, a managing director at Saugatuck Technology, a market research firm in Westport, Conn. "SMEs are known for pursuing IT innovations aggressively as they mature to cost-effective, mass-market solutions."
In fact, about 64% of SMEs with fewer than 1,000 employees recently surveyed by Saugatuck either use SaaS for finance processes now or plan to by 2011. That compares to 52% of businesses with more than 1,000 employees. Only 32% of smaller companies had no plans to adopt such processes, compared with 41% of larger businesses, according to Saugatuck.
Why the difference? Smaller businesses tend to experience greater and more immediate business benefits, particularly reduced costs for services that are more advanced than those they could perform in-house. A company that outgrows its accounting software, for example, probably can replace it at considerably less cost by using a SaaS solution able also to add other finance applications--capabilities that would cost considerably more with, say, traditional software, according to the Saugatuck report.
That's particularly attractive to cash- and resource-strapped SMEs, especially in the current environment. "SaaS tends to be used by finance organizations to add useful or necessary functionality at a relatively low cost," says Guptill.
It's mostly a numbers game. For smaller companies with smaller staffs, using a SaaS model often is more cost-effective than traditional outsourcing. "If you've got more than 50 people in your finance team, moving offshore makes sense," says Cathy Tornbohm, vice president for business process research at the Gartner Group. "If you've got less, than you're probably going to look for a tech-based solution."
Take David Morrison, CFO of Shop.com, a Web-based comparison shopping site with revenues of $25 million to $50 million. In the fall of 2008, sales at the 60-employee, Monterey, Calif.-based company dropped dramatically as retail and ad spending declined. "We had to make very aggressive cost reductions," says Morrison.
That meant slashing overhead by 40%. His solution was to cut his entire five-person accounting and finance team and outsource accounts payable and receivables, billing and reporting to Corefino, a Sunnyvale, Calif.-based provider of SaaS-based accounting services. "It's working as well as anything I had in-house," Morrison says.
In some cases, clients start off with one application, only to move additional processes to their SaaS provider as they become more comfortable with the relationship. Says Guptill: "Suppliers may use a single application as a beachhead to establish trust, and up-sell to a point where a majority of finance operations are being outsourced." --Anne Field