“Incent and Reward” versus “Lift and Drop”

Today’s guest blog on finance and accounting outsourcing (FAO) comes from Bill Frech, Partner & Managing Director, CFO Services North America, TPI.  

Standardization of processes and implementation of best practices requires a degree of maturity, but instead of explaining the nuances, some analysts have jumped on the bandwagon of blaming F&A outsourcing for missed expectations. Is their finger-pointing on target?

The waters are muddy, and we decided to clear up some common misconceptions by surveying a number of clients involved in TPI-advised deals that have been in place for over a year. Some were multifunctional, others were just finance and accounting deals, but they all have one thing in common: the deals are operating and proceeding well.

We admit that all has not been smooth sailing. Bumps in the road were inevitable, especially with provider attrition, deficient resilience, and lack of transparency. Add to that the risks attributed to changes in processes, providers and timeliness, lack of innovation, frequent contract renegotiation, and expressed need for provider micromanagement, and FAO can quickly become a growing pain.

So why have our clients indicated that they would select the same provider if given the opportunity to re-evaluate? Do they not learn from their “mistakes,” or have they realized the added value from F&A outsourcing?

When establishing deals, buyers of outsourced services primarily look for cost savings and process consolidation, focusing on transactional elements. Deals are negotiated to that end, given the current Sarbanes-Oxley environment and risk-averse CFOs. As such, providers are cornered into delivery of services and may not allocate resources to innovation either within the scope of the contract or synergies with non-F&A areas.

But at TPI, we recommend incorporating mechanisms within a contract to incent and reward provider innovation and process standardization. Establishing a cost and gain sharing mechanism – first piloted on a small scale and ramped up over time – improves operation and client satisfaction.

Once the outsourcing relationship has demonstrated a successful track record, the rules of the game change. The appetites for risk acceptance surface as additional benefits become apparent. Maturity improves strategic governance on both the provider and the client side, paving the way for innovation and process re-engineering.

And this is where our clients get a workable contract that stands the test of time. Despite the initial challenges, clients embrace F&A outsourcing activity acknowledging its benefits and have no plans to terminate or renegotiate their deals for lack of performance.

The road to maturity is a bumpy one, and without clear directions, many become lost as they succumb to the temptation of taking shortcuts. And that’s where advisors can help clients through the selection and contracting process, guiding them past near-sighted objectives and focusing on long-term goals.

Comments

[Partha Bommireddy]

Bill,

'Incent and Reward' is becoming a necessary competitive differentiator for a us in the market today when responding to a 'Lift and Drop (or Shift?)' type of opportunity.

Clients are also able to recognize the benefits delivered in a 'Incent and Reward' model, where we take more risk and also offer upfront reduction in costs of operations and demonstrate clear efficiency improvements thru appropriate use of 'process frameworks' and 'technology-based tools'.

Maturity in such engagements comes thru practice. We have demonstrated many a time thru a delivery model that is the result of integration of (technology-based) tools and processes.

This is especially true when large organizations, with disparate IT (ERP/custom) systems, would like to outsource undocumented multi-locational F&A processes in granular way by identifying specific targeted processes such as P2P, AR, etc.

My colleagues and I have some interesting business cases that we can share with you to fortify your views here.