Music for CFO ears : Accounts Payable Offshore BPO

Chief Financial Officers of Fortune 1000 Companies are often compelled to "Walk the Talk" on cost competitiveness of Finance & Accounting operations. Today, pressure is increasing to "stretch the dollar budget " for operations, manufacturing, customer service, marketing etc. Therefore, shouldn't the Finance & Accounting Operations, directly supervised by the CFO follow the same mantra? Is there a benchmark which CFOs follow for cost competitiveness? CFOs typically try to keep the F&A operations budget within 0.5% of the overall revenues of the company.

Thankfully, most of the worlds leading companies have established the foundations for taking Finance and Accounting operations to the next level. These foundational steps are (a) Consolidation (b) Standardisation (c) Automation and (d) Internet enabled ERP. Let us explore each in detail.

(a) Consolidation. Agile businesses needed to provide autonomy to business units for achieving business success. As a result within a few years, each business unit had their own Finance & Accounting Operations. Consolidation refers to the physical consolidation of personnel who work the F&A operations of different business units. This lever of productivity improvement has already been leveraged by business organizations world wide.

(b) Standardisation. Once the consolidation of personnel was accomplished, the opportunity to adopt best practices and to cut on waste was self evident. New ways of working were defined and manually implemented at first. Productivity - no surprise here - went up.

(c) Automation. While the Y2K bug has got most of the credit for the worldwide implementation of ERP solutions, the secret sauce for successful ERP implementations were standardisation and implementation of best practices. Companies who implemented ERP as a business solution - taking the time to define the right process and then implement it using technology - improved productivity by leaps and bounds.

(e) Internet enabled ERP. With ERP implementation as the bed rock, Internet enabled ERP took the possibility of work getting done from any part of the world a reality.

Therefore, the foundational steps for F&A offshore BPO have now been implemented by leading business organizations world wide.

Where would the CFO begin offshoring? Would it be in mature processes like Accounts Payable, Travel and Expense etc or would it be in GAAP Accounting? For example, the GAAP Accounting work is currently being done by a CPA in the United States. Therefore, wouldn't it make sense to have a Chartered Accountant (CA) in Chennai, do GAAP accounting, resulting in more dollars of savings? The flip side of course, is the risk associated with such a decision.

9 out of 10 CFOs, typically vote in favour of Accounts Payable for their indirect purchases as the first process for offshoring. Reasons are easy to understand. AP as it is called within the Accounting world, is a part of Procurement Accounting and therefore deals with suppliers. Secondly, using Internet enabled ERP and Imaging/Workflow systems, operational control can be achieved from 10,000 miles away.

Why indirect purchases? Indirect purchases win over direct purchases in terms of priority for offshoring on account of the business sensitivity of information associated with direct purchases. If Hewlett Packard is buying 10 million hard disk drives from Seagate, would HP want an employee of a BPO firm working in Gurgaon, India to know the prices that HP gets from Seagate and the associated payment terms? Perhaps not.

What are the business benefits of offshoring of accounts payable work? While cost saving is the top priority there is more than what meets the eye. These are (a) Accuracy in Payment (b) Levraging the full benefit of credit period and (c) Remarkable turnaround times (d) Supplier satisfaction (f) Extraction of full volume discounts and benefits (g) Cost per transaction is lower. Let us examine each benefit in detail.

(a) Accuracy in payment. Six Sigma level accuracy is a reality with a few leading offshore BPO service providers.Therefore, duplicate payments become a distant memory.

(b) Leveraging the full benefit of the credit period. Suppliers are often paid late resulting in complications including delayed shipments of future supplies or losing the confidence of the supplier. Paying on time would mean better working capital utilization for the CFO and increasing the confidence of his supplier.

(c) Remarkable turnaround times. Offshore BPO service providers have an enviable record of tracking and measuring non payment reasons, reasons for blocked invoices etc calling them out to the client regularly, thereby bringing the root causes for non processing of invoices to the minimum.

(d) Supplier satisfaction. Now that the work is getting done offshore, it is possible to provide the supplier the options of (i) receiving the cheque by snail mail (ii) arranging the cheque for a personal pick up by the suppliers manager (iii) email help desk which tracks and resolves supplier complaints on delayed payments etc - all within a lower budget.

(e) Extraction of full volume discounts and rebates. Through diligent tracking, many offshore BPO players ensure that the volume discounts and rebates that result out of year long purchases are tabulated, presented and included in the payouts of the client to their suppliers.

(f) Cost per transaction is lower. While cost per invoice processed is not a measure which accurately portrays the value of Accounts Payable Offshore BPO, it is certainly the most frequently measured metric in an ongoing offshore BPO relationship.

United Technology Corporation, the company that owns brands such as Pratt & Whitney, Otis, Carrier is one such beneficiary of Accounts Payable work done in India. The CFO of UTC must obviously be a happy man.

Cheers

Paul Simon Arakkal