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by Tim Wilson

Outsourcing finance or accounting? Bring a measuring stick

Opinion
Jul 09, 20034 mins
Enterprise ApplicationsFinancial Services Industry

* Measuring outsourcing deals by gut feel?

A study published last month by Accenture and the Economist Intelligence Unit indicates a strong trend toward the outsourcing of finance and accounting functions in companies across the globe. However, the report included one data point that was even more compelling and alarming: most companies have no way to measure the success of these outsourcing engagements.

In surveys of some 280 senior corporate executives, Accenture and the EIU found that approximately 30% of respondents are outsourcing at least some of their finance and/or accounting functions. About 70% said they expect their use of third parties for finance and accou nting functions to increase over the next three years.

In the course of the survey, however, Accenture and EIU also uncovered one shocking data point: 82% of companies that outsource finance or accounting have no formal metrics in place to measure the success of their outsourcing arrangements. Essentially, these outsourcers have no formal service level targets to benchmark their efficiency.

Such an oversight might have been acceptable a decade ago, when outsourcing contracts were made on a handshake and service-level agreements were unknown outside the telecommunications industry. Today’s market, however, is a horse of a very different color.

Most immediately, there is unprecedented scrutiny on finance and accounting functions as a result of misdeeds at companies such as Enron, WorldCom, and many others. If ever there was a time to hold your financially-related outsourcer to a very high and specific standard, it is now. Such outsourcers should not only have to report their activities and achievements, but they should be able to match those reports against specific, preset goals and objectives outlined by the client.

Secondly, the technology for measuring service-level performance is better than ever. While service-level management has often been viewed as a technical term for measuring system or network performance, companies such as Mercury Interactive and Kintana are delivering next-generation technology that not only measures IT performance, but the performance of the business processes associated with it. There are many such tools and applications on the market that could be adapted to aid in the monitoring of finance and accounting outsourcing services.

To their credit, many of the respondents in the Accenture/EIU survey believe that they can measure the success of their outsourcing pacts. Some 65% of companies that outsource finance and/or accounting functions characterized their arrangements as “successful” or “very successful.” About two-thirds of those respondents said that cost savings was the primary benefit of outsourcing the functions, while 32% said that the benefits of their outsourcing deals go beyond cost savings to include improved business productivity.

However, if 82% of respondents do not have formal metrics for measuring outsourcing success, then these latter characterizations can only be based on anecdotal information or a “gut feeling” about the outsourcer’s performance. Without formal metrics in place, there is simply no way to accurately gain a true measure of a third party’s success. Although they may feel strongly in their responses, the senior executives can only be guessing about their outsourcers’ service levels.

What’s alarming is that despite this lack of hard data, senior executives are planning to increase their use of third parties for finance and accounting functions. In the world of networking, no telecom manager would ever contemplate the expansion of services without a detailed study of the need for the expenditure, the cost-effectiveness of the service vs. in-house options, and some measurement of the service provider’s performance.

Executives who plan to outsource accounting and finance functions should apply these same difficult standards to their own service providers, and insist that they be measured empirically. There are a number of tools that can help. More importantly, the companies that don’t employ such metrics soon may later find themselves answering some hard questions about the performance – or misperformance – of their finance and accounting outsourcers.