Douglas Flint, FCMA, Group Financial Director for HSBC Holdings, says that one of the greatest challenges facing finance and accounting functions today is that ‘they are increasingly faced with dealing with legacy systems that were developed some time ago, largely on a product basis, when today’s demands from management, and indeed from investor markets are to do with channels, customers groups; a much greater segmentation than underlying product systems were ever designed to deal with.’
ERP systems have limitations. They can improve transaction processing efficiency but CIMA Forum members find that their finance and accounting modules do not support more strategic activities, such as decision support, performance management and ad hoc analysis.
Until relatively recently, there has been a distinction between the enterprise reporting provided company wide by these ERP systems and the analytical decision support provided to particular users by decision-support applications. There is now a trend towards
integrated reporting and analysis.
The major software companies’ recent acquisitions in this area confirm their confidence in these systems. SAP acquired OutlookSoft in 2007 (soon after Oracle had acquired Hyperion), having previously acquired PeopleSoft.
Despite expenditure on these decision-support applications, there is evidence that these are not yet being used as intended and that companies still rely on analysis conducted offline in Excel spreadsheet models. These models often belong to the individuals who develop them. They accumulate complexity over time and can be amended without version tracking. This practice is labour intensive, is prone to mistakes and gives rise to control problems. Yet CIMA research confirms that most accountants still prefer to use spreadsheets offline for analysis and ad hoc reporting, despite the inherent problems (Business Objects, 2006).
Roger Tomlinson of Rolls-Royce commented that ERP systems initially created more work for management accountants, keeping them busy with spreadsheets. Howeve,r with the addition of front-end reporting and analysis systems to the ERP systems, information is provided to business managers in a format that they can readily understand. Rolls-Royce’s experience is that this has significantly reduced the effort expended on re-working figures and increased finance/business partners’ capacity to support the business.
Chief financial officers need to work with their company’s ICT department to address data-quality issues to avoid multiple versions of the truth. They should also work with ICT to build consistency between financial and non-financial information. Responsibility for the accuracy of data also needs to be agreed. Anomalies can distract from the finance and accounting function’s credibility when providing strategic advice or finance/business partnering.
Enterprise performance management (EPM), corporate performance management (CPM), business performance management (BPM) applications, executive information systems (EIS), online analytical processing (OLAP) and data mining, are all supposed to provide more efficient means of extracting, analysing and reporting management information, including the provision of predictive analytics to better support performance management and decision making.
Gartner Research recommends the following CFO finance system priorities:
1. Streamline transaction processing, centralise and standardise core financial applications.
2. Implement CPM applications to provide the right systems to support strategic finance activities.
3. Build consistency between financial and non-financial data.
Shared service centres
Priyan Fernando, chief operating officer at American Express Business Travel said, ‘ ‘At American Express, when we migrated our financial activities from 46 different locations around the world to just three locations, Phoenix in the US, Brighton [in] England and New Delhi in India, our objective was to achieve the benefits of lower cost, economies of scale and improvement in quality and service through standardisation and process redesign. I can tell you that a couple of years later that we have made tremendous progress on all these fronts. Our success in driving efficiencies has in fact enabled us to close one of these centres and now we operate only out of Phoenix and New Delhi. These centres have also mastered the art of process improvement using tools, such as Six Sigma, so now they are predisposed towards contributing higher up on the service chain by extracting value out of the information they process, and they are using this information to make contributions to the bottom line, significant ones, in areas other than traditional cost reduction. This has brought our shared services centres into the mainstream of our business and I can truly say a couple of years later that our finance centres are truly a strategic asset of American Express.’
Shared service centres were originally set up to perform more routine tasks, such as transaction processing and financial reporting. In addition to serving internal clients, they can deal directly with customers, in areas such as enquiries, billing and service support. With their concentration of expertise, they have the capacity to provide higher-value services, such as routine management reporting and performance analysis. Shared-service centres also have the scale to provide training programmes for accounting personnel. Some personnel can even be deployed to operational areas to help drive value and support strategic decision making.
Few companies apply performance management, quality assurance and business process improvement disciplines to sustaining efficiency improvements. Fewer still have implemented the full range of service-centre management mechanisms used by leading companies. These include:
• Service-level agreements
• Physical consolidation of operations
• Joint business- and service-department management of overhead costs
• Performance-based compensation based on key performance indicators
• Benchmarking of performance against outside companies
• Providing access to external services if business units are dissatisfied with internal services.
Many companies have already located routine finance and accounting functions in shared-service centres to achieve economies of scale, through being able to apply standardised processes. For some, this has been an interim step towards outsourcing these services, sometimes offshoring in a lower-cost economy. As confidence in business process outsourcing grows, companies that have not yet formed shared-service centres may see an in-house SSC as an unnecessary interim step towards business process outsourcing (BPO).
Business process outsourcing
Most companies still hesitate to outsource finance and accounting processes, but the BPO market has advanced. Important lessons have been learned from the initial wave of business-process outsourcing. The leading BPO providers now have competencies in business-process improvement that few can match in-house. Initially, only low-value, transactional processes were outsourced. Many higher-value finance and accounting processes now have the potential to be outsourced.
Globalisation gives access to the best people and assets worldwide, and is helping to improve performance, not just cut costs.
The initial phase of finance and accounts outsourcing (FAO) focuses on replicating processes, often termed ‘lift and drop’ or ‘your mess for less’. The providers’ proposition was simply that they could take over these routine tasks and perform them for a reduced cost.
Important lessons have been learned from the many unsatisfactory initial BPO experiences.
• Cost minimisation is an adversarial approach from the outset and is not best suited to developing a relationship with a long-term business partner working together to mutual advantage.
• BPO providers have much greater expertise than their clients in negotiating the terms of a BPO agreement. A third-party adviser with the relevant expertise should be engaged.
• The workload in the implementation phase of a BPO project tends to escalate. BPO providers may underestimate this and not price the project enough to be able to apply their best people to the task – Equaterra’s research supports this observation of the CIMA Forum (EquaTerra, 2007).
• Project-management and change-management disciplines have to be applied when implementing outsourcing. The project has to be properly resourced, with a governance structure that ensures people at the right level are engaged.
• Ongoing relationship- and performance management requires service-level agreements, benchmarks, charge-backs, but it also requires a commitment to work together to resolve problems and improve processes. The BBC, Glaxo-Smith Kline and Kimberly-Clark all emphasise this partnership dimension in their decision to outsource.
• The risks in BPO can be managed. As their regulator, the UK’s Financial Services Authority considered the risks in Aviva’s outsourcing to India to be acceptable and probably no greater than conducting these processes in-house and onshore in the UK.
• Despite the vast population of English-speaking graduates available, the demand for suitably skilled staff in established BPO centres is causing wage inflation and the poaching of skilled staff. The greatest risk in outsourcing to India is the resulting attrition rate of experienced staff. Dependence on individuals can be offset by staffing levels and career-development programmes.
A series of major BPO deals over the past year, including the BBC, Linde, Kimberly-Clark, Glaxo-Smith Kline and ICI, suggest an increasing confidence in business-process outsourcing.
BPO is no longer seen as just an opportunity to save costs through wage arbitrage. It can also provide an opportunity to achieve a step change more rapidly than can be achieved in-house. In areas like systems implementation and business process improvement, BPO harnesses the expertise that is now available offshore through BPO providers.
Many are still wary, but BPO has developed and therefore should be considered.
About the Author
Charles Tilley is chief executive of the Chartered Institute of Management Accountants. He is a regular commentator on a range of corporate governance issues, international standards, narrative reporting and strategic management issues concerning the profession and the Institute.