Amid all the excitement and controversy concerning outsourcing, it's worth noting that when it comes to finance, treasury and accounting, there is still not that much activity; the Hackett Group estimates that in the U.S. only about 4% of finance processes and essentially no treasury operations are being outsourced at this time. What's the difference between now and a few years ago? Finance executives are more interested. Hackett and other consultants in the space suggest finance and accounting outsourcing could as much as double in the next three years.
But standing between executives and the idea of outsourcing is still one large, and potentially insurmountable, concern: Will information be safe? "It's a far more important concern than we had thought it would be," says Jon Watts, a principal at Booz Allen Hamilton. "Companies are definitely worried about the improper use of data, the theft of data and, of course, there is also a reluctance to entrust financial data to an outsource provider when as CFO you have to sign your name to the books."
Watts surveyed 158 U.S.-based finance executives last year about outsourcing and reports that at the top of their list were security concerns. The survey found that U.S. companies saw offshore outsourcing, while offering the most savings in terms of labor costs, as posing a significantly higher security risk. Only 27% of respondents described India–already a leading outsource provider–as having a strong regulatory structure, while just 5% considered China to have adequate legal and regulatory protections.
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There have been plenty of recent incidents to fuel this fear about the vulnerability of data. In March, the theft of a Fidelity Investments laptop exposed client Hewlett-Packard Co. to the possible loss of confidential data on 196,000 current and former employees. A similar incident involving a laptop belonging to an employee of financial services provider Ameriprise Financial Inc. put at risk financial information concerning 158,000 Ameriprise advisers. Both those incidents appeared to have been simple computer thefts. Of more concern was a case last year involving a fraud that tricked personal data vendor ChoicePoint into providing personal information on some 145,000 people to identity thieves posing as corporate customers of the firm. These and other incidents, Booz Allen Hamilton reports, have led 70% of respondents who are using outsourcing services to re-evaluate their strategy.
Although none of these involved outsourcing situations, executives are quick to tell you they feel even less in control when dealing with an outsourcer. Watts says the biggest fear companies have today, with regard to security issues, is actually the potential negative "brand impact" of any breach of security. "If your customer data gets stolen by an outsourcing provider, it's your company that gets the blame," says Watts.
The same thing holds true if the work of an outsourcer were to lead to an SEC compliance problem, he adds. What may be needed before finance and treasury departments at major corporations will consider outsourcing company finance and treasury operations in any major way may be the establishment of national and international standards, and even government regulation. "Simply self-policing–having outsourcers report on their own security systems–will not cut it," says Watts. "There will have to be some kind of external monitoring and third-party auditing." Watts cites the history of the creation of the Financial Accounting Standards Board (FASB) as a model. "You had some big accounting scandals, and then the establishment of the board and a set of standards." Companies that outsource their financial data overseas can insist that outsource contractors sign SAS 70 statements, but as Watts notes, "It doesn't have any real meaning in terms of SOX compliance since there is no independent auditing or regulation."
At present, the U.S. does not regulate outsource providers, and there are no national standards. Only the U.K. is even starting to develop standards and regulation for the industry at this point, according to Booz Allen Hamilton. Watts says the outsourcing industry should actually be working to encourage development of standards since it could give many more companies the confidence to pursue such arrangements.
Watts says that while there have been a number of security breaches at outsourcing providers, especially overseas, none has yet led to a financial loss for a client firm. Such a disaster is, however, inevitable, he warns. "The challenge for the outsourcing industry is to establish a credible way to validate their capabilities before a serious incident causes governments to get involved," Watts says. "They need to get out ahead on this."
Until that happens, the simple lure of cheaper labor costs and of freeing up finance and treasury personnel for more important things is unlikely to be enough to convince companies to outsource finance and treasury operations in a big way. Hackett's senior business adviser Penny Weller says that finance executives may also be more like Missourians than their colleagues in other departments. "I think that for finance people, there's more of a 'show me' mentality," she says. "So you may have to see some big companies outsourcing finance in a significant way, before others start to consider it."
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