AN EXL WHITE PAPER

The CFO’s F&A Dilemma

The Alternative to “Fix, then Shift” and “Lift and Shift”

Vince SparrowVice President, F&A, EXL

lookdeeper@exlservice.com

Written by:

“We know we need to lower costs

to remain competitive, especially in

light of the Affordable Care Act and

low sustained interest rates. I believe

outsourcing my Finance and Accounting

processes and other portions of our back

office is wise because I know a third-

party provider can do it better, cheaper

and faster. The problems I have are my

Business Unit CFO’s are not aligned;

regulatory compliance is a daily struggle;

the processes are decentralized and

disharmonized; and even though we are

on a single instance of our ERP, we are

still performing a lot of manual work. My

service and quality levels aren’t being

consistently measured and reported, let

alone compared to industry benchmarks.

I am thinking I should fix my F&A

operations before going to an outsourcer,

otherwise I’ll be paying to outsource an

inefficient process. What do you think?”

This CFO’s concerns are typical. No large

corporate F&A process is perfect, and

every situation is unique. ‘”Best Practices”

are guidelines that can certainly be used

to chart a roadmap, but someone else’s

solution is never going to be yours. Let

us assume you are in the same or similar

situation of uneven alignment, high costs,

inconsistent execution, and increasing

regulatory demands. What are the

consequences of choosing one path over

the other?

1. Fix, then ShiftIn our experience, this approach achieves

the least desirable outcomes because the

“shift” rarely happens after the “fix” due to

the time, resources and energy it requires

to generate change.

a. Time

F&A reengineering is a lengthy and

expensive process when considering the

work steps involved:

i. Senior leadership alignment – 2 to 3

months, or longer if there are multiple

business units who are used to operating

independently

ii. Obtain funding and form the project

team – 1 to 2 months

iii. High-level design – 2 months

In a meeting with a Fortune 500 insurance CFO last month, the conversation went something like this:

The CFO’s F&A DilemmaThe Alternative to “Fix, then Shift” and “Lift and Shift”

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iv. Detailed design – 3 months

v. Execution – 6 to 8 months, or longer if

the processes must be centralized and

standardized)

vi. Total time – 14 to 18 months, and that

is for one process, not an entire F&A

operation.

By the time the project is completed, other

priorities may have surfaced or leadership

changes could have occurred. This “shift”

may be off the radar screen, and any

potential additional savings will be lost to

inertia.

b. Money and Distraction

F&A reengineering requires dedication

and resources. For a company to own and

drive the transformation on their own, they

must do so with a staff that has to execute

the reengineering while maintaining their

“day jobs.” This leads most companies to

backfill staff, which rarely works because

of training and expertise issues, or hire

consultants, which can easily cost $1 to $2

million in fees. In addition, the organizational

distraction is high. Even when consultants

are hired, the process owners are still

required to be engaged at least 25% of

the time. Bandwidth of the internal team

is further constrained when factoring in

the leadership and steering committee

meetings, status updates and problem/

resolution meetings required.

c. Ownership

Assuming the one- to two-year

reengineering project meets initial

objectives — processes are harmonized

and functions are operating at a high level

of service and efficiency with transactional

functions migrated into a domestic shared

services center—many organizations lose

steam and question the need for further

transformation. Executives look around

the room and ask themselves why make

the shift to a third-party now? Many are

skeptical when the business case of an

additional 30% savings is presented. They

can question whether a third party can

perform at their levels and wonder whether

their environment is too unique to risk

partnering with another firm.

If this happens, the organization will

achieve some but not all of their goals,

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including perhaps a more centralized

and standardized process with moderate

cost savings (typically 12 to 15%). The

organization foregoes the larger 50%

savings associated with a third-party

provider, as well as fail to tap any of the

partner’s superior technology, process

expertise, functional or industry best

practice, and global service delivery. The

company’s F&A organization settles into a

“good enough” state and attention shifts to

other priorities.

2. Lift and ShiftAlthough delivering greater immediate

financial benefits (often as much as 40%

due to labor arbitrage within six months

assuming a stable transition), this approach

carries the stigma of “your mess for less” if

the approach omits process improvements.

The stereotype is not always the reality,

since a certain level of base re-engineering

occurs during the lift process. The first

step includes due diligence and scoping

that results in a deep understanding of

the existing environment. The next step is

designing processes in such a way that they

somewhat mimic the current processes

(e.g., accessing the same disparate

systems, badging over the same workflow,

programming in policies, etc.) while

facilitating a certain level of standardization,

thereby incorporating some process

improvements and identifying others for

subsequent analysis and implementation.

Despite the perception of “your mess for

less”, the real problem with “lift and shift” is

the obstacles it places for post-transition

improvements:

a. Organizational Attention

Once processes has been transferred

and performance stabilizes, the finance

organization typically turns its attention to

other pressing priorities, which reduces the

urgency for further process improvements.

b. Cooperation with the Provider

The nature of “your mess for less” infers that

a problem-infested process is now being

performed by a third party. As a result,

the relationship often suffers.. Fair or not,

the problems that were there before can

now be considered “the provider’s fault.”

Focus moves to governance and patching

the process rather than improving it. A

comprehensive transformation program

becomes secondary to ongoing F&A

execution, reducing the urgency for long-

term improvements.

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c. Client Resources

Once the work has transitioned, the retained

organization is a fraction of its former size.

Working with the provider to implement

long-term process changes becomes much

more difficult because the client lacks the

staff, and often the expertise, to go through

design and implementation. Once again,

patching the process becomes the order of

the day.

Hence, the “lift and shift” approach,

although obtaining decent run-rate savings,

fails to solve issues of quality and execution

while also creating governance issues

and limiting the ability to drive further

transformation.

Given the challenges of typical approaches,

corporate F&A organizations are

increasingly partnering with a provider on a

third alternative:

3. Improve while you MoveMany CFOs now leveraging service provider

capabilities have discovered this third

alternative optimizes cost savings and

achieves world-class F&A performance.

How is this done?

a. Selecting the Proper Provider

Some F&A Providers are better than others

at future-state Service Delivery Model

(SDM) design and implementation. In order

for the “improve while you move” option to

be effective, the service provider must bring

these four things to the table:

i. Enabling Technology

The provider should have proprietary

enabling technology, or strong partnerships

with leading technology providers. For

example, these could include Coupa for

S2P, BlackLine for accounting, SunGard

and many others. Also, BPaaS solutions

are key to leveraging the benefits of the

cloud and are a packaged solution. Finally,

Robotics Process Automation (robotics) can

greatly reduce the need for on-the-ground

personnel to perform routinized processes

in any location.

ii. Best Practices Repository

The provider should have depth, scale, and

a robust repository of F&A best practices

to craft a leading edge SDM. The provider

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must be able to leverage its broad and

deep experience to your benefit.

iii. Improvement Capability

Six Sigma and Kaizan are not new;

however many providers still lack those

capabilities. Select one that can seamlessly

integrate these capabilities into the SDM

planning, design and ongoing operation

management.

iv. Embedded Analytics

The provider needs deep expertise in

analytics, a competency to which many

aspire but few achieve. Ask the question:

“Do you provide analytics as a separate

line of business to your clients?” If they do,

chances are they are good at it since they

have a business providing it. Analytics is

important to future-state SDM by enabling

the CFO to look forward, not just in the rear-

view mirror. During future-state SDM design,

the analytics capabilities will augment Six

Sigma and best practices capabilities to

ensure the best possible outcome.

b. Design First then Move

After a provider is selected, the client’s

finance organization and the provider’s

migration team should collaborate closely

to design the future-state SDM to achieve

both reduced costs and world-class

performance following the completed

transition.

c. Wise Contracting

Since we are moving while improving, the

future state base case will be dramatically

different than the current base case. This

will need to be carefully modeled such that

the staffing glide-path throughout the life

of the contract is well-forecasted with a

high degree of reliability. Shared incentives

to achieve these improved results are an

important consideration.

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