Outsourcing Finance – Is it the Golden Ticket to Cost Savings?

More and more companies are deciding to outsource their finance department. The multitude of articles and social media are convincing CFOs and executive leadership that outsourcing is the golden ticket to cost savings. The choice for many to outsource is leaving finance professionals around the world wondering if they’re next. The choice to outsource finance and accounting services is a strategy to a next-generation organization that is more focused on strategic initiatives than tactical work. In fact, as of early 2020, 71% of financial service executives outsource or offshore some of their services. Unfortunately, most organizations make this decision without thoroughly evaluating the pros and cons, understanding the future state of their finance organization, or have a clear roadmap of how to achieve it.

The decision to outsource financial services is one that could have far-reaching impacts, including positive outcomes such as significant cost savings and improved business focus and negative impacts like layoffs and security complications. We are going to cover some of the primary considerations for outsourcing and improving your organization’s financial efficiency and the debate for keeping certain key financial services internal to the organization to maintain your current Service Level Agreements (SLAs) with your business partners.

Cost Drivers for Financial Services:

The cost to perform financial functions typically decreases year over year for top-performing companies since they are already marginal relative to company revenue. According to 2019 numbers, the cost for financial services at top companies is about 0.56% of total revenue and 1.6% for small companies. Nevertheless, financial performance and efficiency can be improved by using certain levers on cost drivers:

1. Organizational Structure – Shared Services vs. Dedicated Teams: Most large and global companies share financial and accounting teams across their many divisions to reduce redundancy and standardize processes. Shared services also lead to higher levels of expertise in company goals which enable teams to undertake more strategic functions such as planning, budgeting, and forecasting.

2. Process Optimization – Controls and Governance for Efficiency: By implementing controls and governance and standardizing financial processes, companies can get more out of their teams as opposed to tasks that may require ad-hoc reference and research each time. Driving process transformation and instituting best practices can reduce the time spent on financial activities.

3. Technology – The Case for Automation: 83% of financial companies and institutions are implementing or considering implementing Robotic Process Automation (RPA). Process automation can help reduce manual tasks and allow your teams to focus attention on strategic initiatives or problem-solving.

4. Team of Tomorrow – Invest in People: When companies invest in learning to build the team of the future, finance teams can be more effective in both tactical and strategic work. With the other cost improvements in place, teams can focus on building skills that are a value-add to the company.

Should You Outsource – Pros and Cons

When it comes to outsourcing, you want to ensure that you are not merely shifting tasks from one employee to another. With a clearly defined vision and goals for the transition, the many benefits of outsourcing can be realized.

Benefits:

• • • Cost: The primary driver for outsourcing is cost savings. Organizations are attracted by the prospect of dynamic teams that can be onboarded and released based on seasonal needs. Additionally, the labor cost of outsourced employees is much lower than the cost for salaried employees and benefits since the cost is generally per invoice or at a lower rate.
    • Strategic Focus: With the tactical activities outsourced to service providers, retained organizations can concentrate on strategic and value-add initiatives. Outsourcing firms generally cross-train teams on other processes, so it is easier to provide round the globe/round the clock coverage
    • Technology: Larger professional services outsourcing companies also develop leading technology to align with your business goals. Outsourcing with these vendors allows the tools and automation they bring to process financial transactions faster and reduces the amount of training required for an internal team new to the tool.
    • Expertise: Outsourced professional services vendors can leverage their companies’ other service offerings to provide insights into other areas of improvement. Partners with technical expertise can also recommend tools and the latest technology trends.

Drawbacks:

• • • Loss of Control: Outsourced financial services teams are not directly managed by you, but instead have a direct reporting structure to supervisors within the partner’s organization. This loss of chain of command can lead to decreased influence and authority. In order to combat the loss of control, organizations should request regular status reporting and transparency via open lines of communication. Once financial services are outsourced, your organization will depend entirely on your partner to complete critical company processes.
    • Risk to Security and Privacy: With outsourcing financial processes to a third party comes the risk of security breaches and privacy regulation violations. It is important to select a reputable and trustworthy partner that invests in security best practices before handing over access to your company’s sensitive financial data. Just as cost savings are a benefit of outsourcing, a privacy or security breach is a quick way to reverse the realized cost benefits.
    • Reduced Error-handling and Exception Management: Although outsourcing partners conduct regular audits and compliance reviews, it is difficult to maintain transparency of underlying issues in your new finance department. Exception handling can be messy and costly, since most outsourcing partners tend to charge based on invoices and not hours, and may be less inclined to spend time working on time-consuming exceptions.
    • People, Skills, and Reputation: The news of layoffs and outsourcing can lead to a negative reputation for organizations both for customers (who are unsure of where their personal data is going) and future employees (who may not want to take the risk of an unstable future). One of the biggest drawbacks of outsourcing your financial services is losing experience and tribal knowledge of the organization during the transition.

Wherever you are in your outsourcing journey, CI can help you plan and navigate to success. To learn more about Collective Insights’ Business Transformation offerings CLICK HERE.