This discussion will focus upon the first three questions; however, that is not to infer that questions 4 through 6 are less important and should be ignored. The BPO trend is sustainable and many companies continue along that path. However, as with any business process trend (for example Company-wide ERP systems; Shared Services; Off-shoring, etc) over the long-term clear pros and cons become obvious that are not readily apparent for the early adopters (the pros/cons of Outsourcing are well documented and are listed below).

What is clear is that there are no panaceas that fully address all aspects of an Organization’s objectives. There is not one perfect solution that meets all of a company’s goals for back-office processing. A careful consideration of the strategic fit of all alternatives available within our “toolbox” is the wisest approach. In the final analysis, the “best in class” companies will likely have an optimal mix of off-shoring, “near” shoring, “lights out” internal processing, shared services and outsourced functions.

Pros and Cons of Outsourcing

Element	Advantages of Outsourcing	Disadvantages of Outsourcing
Operating cost	Likely “in-scope” cost reduction	Cost-creep risk for unforeseen and ad-hoc activities (add-ons) if not contracted wisely
Cost structure	Transforms many fixed costs into variable costs	Most F&A outsourcing contracts stipulate a higher cost/transaction for decreasing transactional volumes
Performance expectations	Service is equal to, or better, than current	Varies depending upon the Terms and Conditions of the contract
Organizational attention towards non-core activities	Decreased management attention to non-core processes	A “Governance Structure” is required to manage the outsourcing relationship. Management attention shifts from managing the process to managing the relationship
Standardization	High degree of process standardization	Post-contract customization is difficult and often expensive unless specifically stipulated in the contract
Expertise and knowledge	Leverages high degree of external Best Practices and common systems	Institutional knowledge and internal relationships must be learned by the Outsourcer, and takes time to transfer
Staffing	Reduces the need to recruit, hire & retain staff in affected functions	Erosion of the Organization’s F&A skill sets; decreased ability to foster and grow leadership talent
Supporting technology	Significant reduction in technology investment, maintenance costs and staffing	Redundancy of technology costs can sometimes exist between the Organization and the Outsourcer, potentially raising the overall technology support costs.
Cross-functional integration	Outsourcing multiple functions to a “Tier One” Outsourcer enables “end-to-end” process and technology integration (egg, Purchase to Pay)	Raised perception of “loss of control” as multiple functions exit the Organization
The Contract	Very detailed, promotes high degree of due diligence	“Locked in” for a long time precluding unforeseen “better” solutions later on. Difficult to exit or even modify the relationship
Key Point: with the proper level of due diligence, the Advantages are “realizable”; the Disadvantages are “manageable”

A Caution

There are several outsourcing providers with excellent models. However, the outsourcing provider must not drive the outsourcing decision and, in fact, should not be contacted or in any way involved until the proper level of analysis and due diligence has already taken place. Much like we should never allow technology or specific software to drive process solutions, similarly we should not allow an outsourcer to drive the outsourcing decision and design.

It is highly recommended that an internal analysis first be conducted as outlined in this document. It is also recommended that organizations seeking to evaluate the outsourcing decision get some help. Many companies have gone through this process and “best practices” and proven methodologies exist from a variety of sources. In addition, there are a few Management Consulting Firms that specialize in shepherding organizations through the outsourcing process once the decision to outsource has already been made. They can be of great help in navigating this process, particularly in the sourcing strategy, due diligence and contracting areas.

A Suggested Approach for Getting Started

Below is an outline of a recommended process for getting started in evaluating the outsourcing decision. It is designed to ensure the proper level of objective due diligence takes place with a heavy emphasis on delaying the outsourcing decision until a clear analysis of current baseline and strategic fit is conducted. More, it proposes delaying bringing in potential outsourcing partners until that analysis is complete and the organization aligned on the decision. Not surprisingly, a thorough decision making process can be expected to last several months and involve a significant part of the CFO’s executive staff. The recommended steps are as follows:


I. Articulating the Vision

Having a clear vision of the end state is critical. Innovative companies move along the improvement journey for a number of reasons, and certainly all of these reasons apply to some degree to all of these companies. However, companies are unique along many different dimensions and the rationale and decisions for seeking continuous improvement across their business functions ultimately must map to the Organization’s strategic imperatives (this seems obvious however, often companies lose site of the Organizational strategy while in pursuit of functional excellence).

It is recommended that the first step in the outsourcing decision making process be a clear mapping of Organizational support objectives to Business strategy. There are a number of tools to do this, however a simple Process Value Analysis (PVA) will serve the purpose. Developed in the mid-1990’s, the PVA is simply a tool for ensuring that our F&A functional objectives are clearly aligned with Business objectives. For example, a financial executive may assume that lowest process cost is an obvious objective. Yet, upon completing the PVA, she may find that the Organization, in order to meet strategic objectives, is willing to incur higher back-office costs to ensure quality of decision support.


This analysis ensures:

1. Functional objectives are clear and linked to Business objectives, and
2. The appropriate balance of objectives is achieved (egg, the Performance Footprint)

II. Identify BPO Functional Candidates

This step in the process simply lists all the functions and processes that are potential candidates for Outsourcing. Start with the listing of all administrative functions; do not exclude any based on instinct (Rather, step 3 will filter out the ones that are obvious poor candidates). As a general guideline, listed below are those functions typically assessed for Outsourcing:

Finance & Accounting	Human Resources	I.T.	Supply Chain Mgt	Sales, Customer Care	General Administration/Other
End-to-end	End-to-end	End-to-end	End-to-end	End-to-end	Travel management
Accounts payable	Benefits administration	Applications hosting	Strategic sourcing	Invoicing, credit & collections	Mail services
AR, Credit & Collections	Employee life cycle administration	Communications services	Revenue application management	Call center staffing and management	Real estate management
Financial/Mgt reporting	HRMS processing & management	Desktop support and management	Asset acquisition management	Service platform design and delivery	Fleet management
General ledger processing	Payroll, comp and benefits processing	ERP systems maintenance and management	Fixed asset management	Tele-sales and telemarketing	Office and landscaping services
Internal audit	Performance management	Help desk	Inventory management	Marketing campaign design and management	Temporary staffing services
Tax planning and compliance	Strategy & compliance	Programming and development	Logistics and fleet services	Customer communications design and execution
T&E processing		IS security and risk management	Supplier and vendor relationship management	Customer data capture, analysis and delivery
Treasury and cash management			MRP and manufacturing design and management	Shipping and fulfillment

It is important to recognize that there are synergies among and between these discrete functions and it is recommended that an “end-to-end” process view be applied. For example, rather than consider the Outsourcing of payables, there are many companies that have outsourced the Procure-to-Pay activities encompassing strategic sourcing, accounts payable and inventory management.

III, IV. Select and Apply Design Principles and Decision Criteria

The decision criteria for evaluating Outsourcing should become clear once process objectives are mapped to Business objectives. However, it is important to recognize that decision criteria are not equal and some are more critical than others. In fact, some are “design principles” versus “desired”. It is recommended that companies evaluating Outsourcing segregate the design principles since these criteria are the ones that are “must haves” and will act as the primary filter. The desired criteria will then serve as a ranking mechanism assuming limited resources.
The general steps for determining the decision criteria are as follows:

1. Populate the list of decision criteria that map to functional objectives
2. Segregate the list between “design principles” and “desired criteria”
3. Assign a weight or importance to the “desired criteria”

The following example illustrates this three step process. It should be noted that the lists of design principles and “desired” criteria in the example are just that: examples. It is impossible to list criteria that are applicable to all companies. Rather, they are unique to each company depending on their functional objectives and Business goals (see Step I: Articulate the Vision):

Step 1: Select and Apply the Design Principles

(This example evaluates some, but not all, Finance functions. However, it is suggested that this process be applied to all administrative functions as illustrated above in Section II. )

This tool helps us understand how potential Outsourcing candidates map against our “must haves” and provides us the tool for eliminating the most obvious “poor” candidates (so on this example, Audit Services are eliminated from consideration in this particular organization – as mentioned earlier, this is just an example and should not infer that auditing is not an outsourcing candidate in every organization).

Step 2: Select and Apply Criteria to the Remaining Functions

    

In this example (and again, this is only an example – Design Principles and Decision Criteria are unique to each organization) T&E and A/P are good candidates for Outsourcing, with Cash Management also mapping well against key criteria. Applying the Design Principles and Criteria requires some rudimentary knowledge of Outsourcing capabilities, delivery models and benefits. Outside help is highly recommended during this stage of the decision-making process to ensure an unbiased yet knowledgeable perspective.

Summary

The intent of this document was to outline recommendations for the first three critical steps in the Outsourcing decision-making process. As mentioned earlier, this is not to infer that the remaining steps are any less important. It is absolutely essential that good change management approaches are utilized once the decision to engage the Organization is made. Executive alignment throughout this process is crucial yet extremely difficult to gain and maintain, especially in Organizations not having a strong mandate from the top.

It is becoming apparent that Outsourcing of administrative functions is becoming an integral strategy in remaining competitive in a Global economy. Outsourcing, if done well, can have a large impact on business results and free up the Organization to do what it does best: whatever that may be. However, Outsourcing done poorly can easily become a larger distraction that the in-house function ever was. The key differentiator in “good” Outsourcing versus “poor” Outsourcing is the quality of the up-front work in making the decision.