Finance and Accounting Outsourcing | Article

David Narrow Charts the Future

outsourcing consultant discussing service level agreements (SLA)Sometimes you don’t need a crystal ball if you have a napkin.

During the course of a mealtime discussion in Singapore with an executive of a major oil company, David Narrow, partner with global responsibility for finance and accounting (F&A) for PricewaterhouseCoopers’ (PwC) Business Process Outsourcing (BPO) practice in London, played prognosticator and attempted to chart the path of the future.

This much was certain: Gone are the days when every company, regardless of size, had its own accounting department and kept the books in-house. Today corporations in ever greater numbers are outsourcing those functions to vendors, often using the Web. There is more to come: companies know that there is a “next level” of speed, ease of use and cost savings that must occur for them to remain competitive.

How do we get from here to there? What are the next quantum leaps? What is the road map for this journey that will radically reshape the back office?

“We had been thinking of this for a long time and our thoughts were colliding. I realized we had to segregate them into two separate journeys,” the PwC partner recalls. So Narrow drew a simple diagram on a napkin as a way of clarifying his thoughts.

pwc chart

The resulting “napkin chart” of what he sees as the finance and accounting (F&A) journey tries to capture visually the future of global finance and accounting outsourcing.

In addition, there are plug-and-play dimensions resulting from the two journeys. These changes will strategically transform the front office by giving executives the flexibility to react quickly to market conditions and change core applications at will.

The “napkin chart” has become the BPO group’s primary road map, used by its F&A Architecture Team which Narrow leads, to frame the increasingly complex steps needed to reach the next summit of outsourced F&A processes.

Three Components in the Changing Environment

Narrow says he realized three things were certain in the emerging global business environment:

  • The finance and accounting function has to become even more standardized.
  • Service centers must be larger, fewer and placed in the right locations.
  • The process must take advantage of the Internet.

To get there, Narrow’s napkin chart splits the journey into two parts: the process effectiveness path and the cost efficiency path. Both proceed at the same time but at different speeds depending on the difficulty of the specific tasks at hand. In his hypothesis, he assumed a system with 100 employees who would cost an average of $75,000 a year each (see upper left box in chart), a realistic description of a typical operation today. That operation would spend $7.5 million annually processing F&A transactions.

The Process Effectiveness Path

This part of the journey to a foreign land is a virtual one. The goal of what Narrow calls process effectiveness is ” to take advantage of† ‘e’.” Operating on the assumption that new technology “will radically change our processes,” Narrow is working on achieving a five-to-one gain from that technology. He predicts emerging technology will require only 20 or fewer employees to process the transactions that today require 100. If this were possible, he could shave another $6 million from his original $7.5 million base costs. (See lower left box in chart.)

Narrow challenged the experts at PwC’s finance and accounting architecture Lab to devise an end-to-end process that requires no people. “It was a daunting challenge, but they did it,” he reports incredulously.

Most companies are not yet ready to accept a totally automated accounting process. Narrow says they are willing to make some simple changes that can add up to significant cost savings.

One such change is in the purchase-to-pay cycle. PwC researchers have identified 15 specific activities that add extra cost to this fundamental business cycle. Examples include having to enter the same data into the system more than once, having to match invoices with purchase orders, and having to stop things while waiting for crucial data. Removing these and other, similar roadblocks make the process more accurate, more reliable, faster and cheaper. With all 15 obstacles gone, Narrow estimates it could wring out as much as 90 of the current cost.

The Cost Efficiency Path

Narrow also addressed the cost efficiency issue and began chipping away at this part of the $7.5 million hypothetical starting cost basis.

Saving money always comes from scale. So he focused on the geography/location issue, seeing “compelling” reasons to move the work out of the United States — to East Asia, the Subcontinent, or perhaps Latin America. In this part of the equation, Narrow estimates he will still need 100 employees, but quality workers will only cost $25,000 a head, an immediate $5 million savings (See upper right box in chart.

Narrow was certain he could find people with the requisite language and finance and accounting skills in India and other parts of Asia. But would there be enough of them?

Narrow knew this could be the major stumbling block because of his experience in Rotterdam, BPO’s first major Centre of Excellence (shared service center) in Europe, where he had been intimately involved from the ground up.

The BPO group had planned the Centre to employ 1,000 people where the staff does business in eight languages. However, the firm couldn’t grow to its full employment in Rotterdam. “We hadn’t anticipated that our original choice of Rotterdam would cause other firms to follow us and seek staff from the same labor market,” says Narrow.

Fortunately, Narrow felt it would be difficult to outgrow the deep labor pool in a country such as India, where mathematics, accounting and science students abound in tends of thousands.

Stress Testing the Hypothesis

Narrow and his team decided to test its hypothesis that India would be an ideal location for a major non-U.S. center. Joining hands with a major multinational firm, it designed a rigorous pilot program. PwC felt no need to test the finance and accounting technology, since the software had already survived several trials by fire and now was working fine in its Rotterdam facility. Instead, the partners decided to stress test the accounts payable process “to test areas that might blow up on us.”

Accounts payable had two built-in difficulties in India: employees had to deal with each European client country’s value added tax in addition to a language hurdle. (The Rotterdam Centre does business in eight languages.) The partners decided to include an additional degree of difficulty by cutting training time to just two weeks for its new Indian employees.

Narrow’s team constructed the Indian program to mirror a process in the Netherlands, so PwC could compare results easily. While the initial results were “extremely encouraging,” the error rate was still around seven percent, higher than PwC’s target rate of two percent. The executives were not surprised since they had deliberately stacked the deck. Additional training easily reduced the error rate. In addition, the partners noted excitedly noted that productivity in India was higher than in Europe. Importantly, the projected cost savings also proved accurate. The conclusion: India passed the test as a strategic location for finance and accounting.

Putting the Two Together

Narrow hastens to point out that to take the steps necessary to generating savings of the magnitude possible from resolving the process and cost challenges requires a steely commitment from management. Corporations are not ready – Yet. But when they are, Narrow believes the two journeys will culminate in the box on the right, where the combined benefits of creating cost efficiency, building to scale, driving standardization and optimizing location will result in more than 90 percent savings.

“We know this value and savings are there,” Narrow says. “But the question is whether corporate management has the discipline and will to go get it.”

Plug + Play = Flexibility

During the course of this journey, Narrow discovered cost and process effectiveness were just two reasons corporations will embark on these journeys. EEnablement is just as compelling an impetus. PwC’s idea of eEnablement gives corporations the speed and the flexibility to survive and thrive as the world changes.

Narrow wondered: What if the back office finance and accounting application operated like a standard electrical plug and could be plugged into anything?

If PwC could create a plug and play back office, the front office could change its applications whenever it liked. “All the front office would need is a data interface into the finance and accounting plug,” he explains. PwC researchers determined there are 31different interfaces in most business systems.

Currently companies want an application that integrates finance and accounting with their existing systems. If a screw driver is sold in Tokyo, they want that data to automatically show up in Tulsa. “There’s a high overhead to that,” Narrow says.

Instead, the solution is much simpler. In PwC’s† view, corporations “just need to produce data” that crosses the plug into the finance and accounting system. For example, the sales system might only require three of those 31 pieces of information:

  • Name of the customer
  • How much did the corporation sell the customer?
  • How much has the customer paid?

The front office could then have dozens of different systems and change them at will. They would be able to react more quickly to market changes, Narrow explains. He says the real benefit of the process effectiveness path is “to liberate the business staff. No longer will the finance and accounting gang hold them up.”

With the theory in place, PwC approached four large companies “that have compelling business reasons” to test the process. One is a telecom company that will partner with PwC in selling this vision. Narrow says the telecom provider expects to generate new business as part of the partnership. Another partner is a logistics provider which hopes to pass on the savings this program generates to its customers, “causing a radical jump” in its market share.

Narrow says this simple napkin is generating “wild enthusiasm at the board level.” Executives now have a clearer idea of how the new world is developing. This is important, because in today’s world of speed of light change, “drifting along is no longer good enough. Today, any road will not get you there. We’ve developed a map, we’ve done the pilots and now we’re on the road,” says Narrow.

Lessons from the Outsourcing Primer:

  • Companies that just drift along will be at a competitive disadvantage.
  • Significant cost savings are possible by moving the finance and accounting process to non-U.S. locations like India where the talent is capable and cost effective.
  • Using emerging technologies will reduce head count, producing even greater savings.
  • Developing a plug and play approach to finance and accounting outsourcing allows the front office to change systems at will to help them remain competitive in a changing world.
  • Corporations will have to have discipline to achieve these changes.
  • Cost is not the only motivator. So is flexibility and the ability to change.


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