UK: OUT GOES THE MONEY. - More firms are outsourcing their finance operations - but only part of it: outside specialists may prepare the figures on which judgments are made but actual decision-making is kept in-house.

by Malcolm Brown.
Last Updated: 31 Aug 2010

More firms are outsourcing their finance operations - but only part of it: outside specialists may prepare the figures on which judgments are made but actual decision-making is kept in-house.

On 29 February nearly 600 accountants and financial staff at Sears, the retail group which owns Selfridges, packed their bags and left the company. On the same day they and 300 other former Sears staff, mostly information technology specialists, found themselves working for a brand new boss, Andersen Consulting, part of the $8 billion-a-year world-wide Andersen group of accountants and management consultants.

The job they were given at Andersen was very familiar - looking after the finances of the Sears group. Sears is the latest of a small but growing number of major companies that have decided to contract out their finance operations. Having decided that finance is not a core activity for them, they hand it over to a specialist under contract (the Sears deal is worth £344 million over 10 years) and the specialist provider usually takes over the outsourcing company's own specialist staff to do the job. Oil companies BP, Sun Oil and Conoco were among the first to outsource finance. Andersen Consulting is the most prominent of the providers - it runs the BP Exploration, Sun Oil and Conoco accountancy operations from a single office in Aberdeen - but others, such as Coopers and Lybrand, Price Waterhouse and CSL, the outsourcing arm of Deloitte and Touche, are moving in.

The market is very new and still comparatively small in the UK but about to increase rapidly, suggests a recent survey of 300 senior executives from the US and Europe by the Economist Intelligence Unit (EIU) and Arthur Andersen. The number of companies set to outsource some element of their financial functions should increase world-wide from 26% to more than 40% in the next three years, says the report, and in Europe it is expected to double. The most widely outsourced finance-related function is pension fund management, which is outsourced by 42% of companies today and will be either outsourced or considered for outsourcing by 63% in the next one to three years.

The least outsourced function is 'treasury management'. At present only 2% outsource it, but even this is expected to grow over the next few years, probably to as much as 10%. The EIU survey reveals that every area of an organisation's finance function can be outsourced, from tax and payroll to internal audit, and the majority of companies to try outsourcing so far have been satisfied. Questions posed to those who had actual experience of outsourcing as a financial function indicate that, on a scale of one to five where one was 'highly satisfied' and five 'highly dissatisfied', the majority of companies were either highly satisfied, satisfied or neutral.

Only a small minority were either dissatisfied or highly dissatisfied.

Good experience aside, British companies are taking a cautious approach.

The rule of thumb adopted by UK companies is that number-crunching and bean-counting can be outsourced, but that areas of finance and accounting that are strategic or require commercial judgment should be kept in-house.

The outside specialists may prepare the figures on which the judgments and decisions are made but the actual decision-making is strictly a management preserve.

When BP Exploration (BPX) was deciding how to outsource finance, it analysed its accounting services and came up with six main activities, says David Hunter, the company's financial controller in day-to-day charge of relations with Andersen Consulting. These were: computer hardware facilities; software development and support; inputting and processing transactions; preparing output and providing information; business interpretation and analysis; and judgment, policy and service specification. The company decided to outsource the first four activities, which accounted for about 90% of accounting services, but to keep the last two (business interpretation and analysis, and judgment, policy and service specification) in-house. BPX headquarters and operations-based managers are responsible for the ultimate actions taken, including not just the formation of basic policies but day-to-day decision-making.

Most of the 300 accounting staff were transferred to Andersen's Aberdeen office where they carry out the number-crunching, but about 40 were retained at BPX, half of them becoming, in effect, mini finance directors, one for each of the 16 main BPX 'assets' - like the Forties field - reporting to Aberdeen. Each of the controllers has an accountancy background, says Hunter: 'The controller or mini finance director is the one who puts the business interpretation and analysis on why there's a variance in the management information and is the one who should provide the challenge to the asset manager to see how he could do business better, where he can save costs, where he can add additional value.'

Norman Cook, the Andersen Consulting partner in charge of Andersen's Aberdeen operation, says that over time groups like Andersen build up an expertise which would enable them to offer more strategic advice to clients such as BP, but they don't do it. It's not their job. 'We're not paid to do that. Our fee is not geared to the provision of advice. It's geared to the provision of information on which that sort of decision can be made.'

Cook broadly agrees with the rule that one should never outsource vital functions when one is contracting out finance and accounting, but the question then becomes, 'What is a vital process?' In the case of an oil company tax-planning probably is, and is therefore best left in the hands of the internal specialists. At Sears, strategic planning, evaluation of capital projects, performance monitoring, budgeting and forecasting, all of which require the exercise of commercial judgment, have been kept in-house, says Tony Jones, finance director of Sears Retail Services, the central umbrella organisation set up earlier this year to manage the services, such as IT and accounting, that are to be shared with each of the businesses.

'The functions that we selected to outsource within finance were those that we thought weren't core to running a retail or a mail-order business,' says Jones. 'The objective was to free up our business teams to focus on the key commercial issues, not to have to worry about the "back office" side.'

The rationale of outsourcing finance and accounting isn't, of course, just about taking the administrative load off executives to enable them to concentrate on the company's core business. It is also about trying to improve the efficiency of the outsourced services and to reduce their cost.

Does it work? Sears reckons that redundancy and relocation may cost it £35 million this year but it anticipates cost savings of £20-£25 million a year by the year 2000 as a result of the change. BP Exploration, which is much further down the line than Sears, can point to major improvements.

'We've reduced our costs by 30%,' says Hunter. 'We anticipate that by 1999 the cost of our accounting will have halved at a time when our business has increased by 50%.'

Benchmarking also suggests that the BPX decision to outsource was a good one. A benchmarking survey on the efficiency of accounting operations carried out by Price Waterhouse showed BPX winning hands down in virtually all categories of efficiency and expense, says the EIU report.

John Reast, partner at Arthur Andersen responsible for outsourcing advice on business risk management and internal audit, says that examples of wholesale out-sourcing of finance and accounting like that done by Sears and BPX are still relatively few and far between but others are looking at elements of outsourcing. A reasonable rule of thumb for deciding which bits of a business - including the financial and accounting part - are core and which non-core is to ask whether the head of a particular department might reasonably aspire to be chief executive of the whole organisation. As Reast says, 'If they can't - simply because there is no way through from that department to being chief executive - then that function probably isn't core and would be capable of being outsourced more effectively.' The best office cleaner in the world probably wouldn't see a clear path to the top job, though they might become chief executive of a cleaning company.

'In accountancy and finance you might regularly get finance directors moving through to become chief executive, but you'd probably not get the head of an accounts-payable section aspiring to be chief executive of the organisation. It might happen but not that frequently.' By removing the boring, repetitive or high-volume elements of the numbers game from organisations, the finance function is freed up to pursue strategic issues.

It's finance but with the numbers taken out.

Fast-growing firms buy in rather than contract out

Financial outsourcing is primarily a game for big companies - most medium-sized or smaller companies haven't reached the size where asking questions about core and non-core businesses makes a lot of sense. But there is another group of businesses which are now involved in a form of contracting-out that, ironically, might just as easily be described as insourcing. This is where small but fast-growing companies buy in the part-time services of a finance director, not to do the number-crunching but to provide the sort of strategic advice that comes from understanding the numbers. Often these men and women act as peripatetic finance directors, giving a chunk of their time each week or each month to their clients.

Malcolm Durham, managing director of DFM, a chartered accountant who wears four or five such part-time hats, says the trick at this level is to talk finance to the managing director in terms that he, a non-specialist, can understand. What Durham does is often simple, but quite vital. 'In one instance,' he explains, 'I worked for a company that sold a service by phone and employed a lot of people to do that telephone selling. The company was bidding for contracts to provide this service to outsiders. While it's a truism that to succeed in business all you have to do is sell something for more than it costs you, it's often difficult to work out the cost of providing a service. It's then hard to get tenders right. What I did was to find the appropriate financial information - there was a lot of it in the company - pull it altogether and say, "That's how much it's costing us. You should cost your business on that".'.

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