A call for help: daring to outsource the financial functions.

Daring to Outsource the Financial Functions

Should you outsource your financial functions, asking someone to provide the very skills you spent your whole career polishing? After several years of persuasion by outsourcing vendors toting loads of data that say outsourcing is the way to go, some companies still resist.

But the idea of handing over the business processes surrounding the corporate finance department is taking hold: In 1997, the finance function has been the most outsourced business function, according to a study by the Outsourcing Institute and Dun & Bradstreet. Accounting for 22 percent of all new outsourcing activity, the finance function finally overtakes the perennial outsourcing favorite, information technology, which checks in at 12.8 percent of new activity.

Read the tales of two companies - both of which needed help with their finance functions fast - that are convinced outsourcing is the answer.

The California Earthquake Authority Tim Richison, CFO

Outsourced:

* Pension fund management

Tax Payroll

* Short-term investment management

* Accounts payable/recievable

Asset appraisals/valuations Internal audit Leasing Real estate management

* Accounting

* Treasury management

"The California Earthquake Authority is unique because it s the state's first effort to privatize government and its first attempt to issue insurance. Created two years ago by a legislative act, the Authority's purpose was to resolve the homeowners' insurance crisis after the North Ridge earthquake, because California residents were having trouble obtaining insurance. We were operational December 1, 1996, just 60 days after the legislation passed, which was part of our mandate. Our current sales premiums are between $600 million and $700 million, and we have a financial capacity to pay claims through traditional re-insurance, nontraditional re-insurance and financial markets of about $7.5 billion.

Because we had to become a national operating insurance company so quickly, we outsourced all of our major functions. In our first month, we sold more than $75 million of insurance with a staff of five and our outsourcers. Our 21 employees now serve in a control capacity, making sure projects get done on time.

Why outsource? I didn't want to worry about accounting principals or the regulatory financials. I wanted professionals who had done this kind of work whom I could rely on to set up the infrastructure and work as a team, so I could manage our finances and be prepared to pay claims quickly and efficiently when an earthquake occurs in California. We never envisioned bringing any of this in-house, but we didn't want a master/slave relationship with a vendor. We wanted a partnership.

I also wanted to produce our financials quickly. Most insurance companies take more than 30 days after the close of the month to complete their financials. We now send them to our board of directors 20 days after the close of the month. Our outsourcers put the financials together and we review them. I don't worry about the computer going down or whether the accounts are paid. Those are the outsourcer's problems.

On cost savings ... Because we are publicly managed, we had to look especially hard at the potential cost savings of outsourcing. Could we hire and train our own people ? What would that cost? How would that compare to the cost of an outsourcer? Believe it or not, we don't think there's much difference in development costs - that is, bringing in the outsourcers versus hiring our own employees and buying the right equipment. The big cost savings are in the day-to-day operations, where we estimate we're saving $100,000 to $200,000 a year by having our outsourcer do all of our financial accounting.

On the contract ... We issued a request for proposals to about 40 U.S. finns we knew could provide the outsourcing service, from a local CPA firm to the largest accounting firms. Within the RFP we created a grading matrix so each vendor knew the areas on which we would be evaluating it. Then we asked a panel to review the bids and called in the finalists for their last pitches.

Within three days of choosing our outsourcer, we had set up a master agreement that includes all the basic boilerplate about liabilities. But what's unique about our contract is we attach one- or two-page exhibits to the master agreement that spell out the work we're contracting for and the price for each job. If a job surfaces that isn't in the exhibits, we can easily create another exhibit with new prices to replace the outdated exhibit.

Before the state would agree to our multi-year outsourcing contract, we had to prove we were writing a solid contract with an established fee for the first year and with controls over that fee that are agreeable to both parties for the remaining years of the contract. We ultimately approved a three-year contract with two one-year options and had to insert language into the document to allow us (or the vendor) to get out of the deal at any time. Our governing board - made up of the governor, treasurer and insurance commissioner - had to understand why a multiyear arrangement was necessary. Once we explained the situation to them, the board members agreed to the contract terms established.

On compatible cultures ... Our mission for this project included establishing a certain kind of culture in our organization. To develop a partnership with our outsourcer, we felt we had to find one with the same vision, the same culture. We hit it off right away with our outsourcing contact and his staff. In fact, I don't consider them an outsourcer; I consider them my accounting department. They're part of the company and they understand our business and our goals. The more I trust that, the further I can back away to concentrate my efforts in other areas.

On managing the relationship ... Initially, I was involved daily. I spent December through March hammering out the project. Many of the outsourcers practically lived at the Earthquake Authority with us. When they weren't with us, we were constantly on the phone or faxing back and forth. We wanted the outsourcer to develop all the procedures for our finance function and that included preparing a procedures manual.

Eventually, the infrastructure was in place. I've had only two conversations in the last ten months with our outsourcers. Of course, my senior accounting officer spends several hours with them reviewing the monthly financials, but as the months go by, we're devoting less and less time to their projects because everything is falling into place. Our vision is that by the end of 1997, we'll be contacting our outsourcer only on an exception basis.

On being a government entity ... Since we're part of the government, we face some unique requirements when it comes to outsourcing. For instance, in choosing a vendor, we have to make certain there are not only no conflicts of interest but no perception of conflicts. That's a twist to the outsourcing project that's very difficult to manage.

We also have to look at our outsourcer's business with other clients. If the outsourcer gets bad press, regardless of whether any negative allegations are true, we have to worry about it.

On the positive side, our internal audit department helps gather intelligence, and the state attorney general is our first source for legal matters. Plus, we have other state resources we can call on to help look at a particular vendor when we need to.

If our project is successful, we may soon see a lot of growth in outsourcing and privatization within state governments. California is definitely watching us to see if a door can be opened for other areas to be privatized. And other states are watching, too.

On geography ... Because we're on the west coast, our time zone is two hours behind that of my primary outsourcing contact, and this is a problem. If I need to telephone him at 3:00 p.m. Pacific time, it's after 5:00 p.m. for him. Obviously, I hesitate to page him when he's off work and my problem isn't an emergency. So I end up putting off some task until the next day. In short, I have to be very sensitive to my partner's timeframes, even when we're setting up meetings via teleconference. I have to manage the project a little differently than I would if the outsourcer were in the same time zone.

On the CFO's role ... Many CFOs have difficulty letting go, so outsourcing the financial function is going to be difficult. To me, outsourcing frees up my time to be more creative and to plan strategically. As we all know, if you're not constantly changing and looking ahead, you're not going to survive. I have to think about how I'm going to finance catastrophic events five, 10 or 15 years down the road. Outsourcing the basic financial functions allows me to plan for different kinds of financing."

SunLite Casual Furniture Peter Duff, senior vice president and COO

Outsourced:

* Pension fund management

* Tax

* Payroll

Short-term investment management

* Accounts payable/receivable

Asset appraisals/valuations

* Internal audit

Leasing Real estate management

* Accounting

Treasury management

"In early 1997, one of U.S. Industries' subsidiaries, Jacuzzi Outdoor Products, Inc., purchased the outdoor furniture division of Sunbeam Corporation. The new company, SunLite Casual Furniture, is a seasonal business with sales of a little more than $100 million and, at our peak, we employ 1,300 people. When we took over the division, we were underresourced and needed a lot of expertise in a very short time. That's why we chose to outsource the financial function. We had to spend our own time orienting the company toward customer service and tailoring the whole factory to service the business faster. If we didn't, we knew we'd be out of business.

We're approaching the project in phases. Our first objective is to reduce our production process from 15 to three days. Next year, we want to spend less time focusing on financial transactions, so our financial staff can look at the equation between sales and sourcing, since we'll be sourcing product not only from our domestic factories but from outside of the country. We need to concentrate on those kinds of financial decisions, not on fixed-asset accounting or payroll.

The outsourcing arrangement works for us because we're very comfortable with our outsourcer. It actually boils down to a gut feeling. The outsourcing representative and I were initially thrown together on a due-diligence mission. We had to collaborate closely for long periods of time and keep some strange hours - and we did some unusual analyses of the business. Having that degree of comfort with an individual is important to the success of the outsourcing project.

On cost savings ... Yes, we're realizing some cost savings, because the outsourcers are up and running when we want them, but the motivation wasn't cost savings for us - it was getting resources. We're trying to complete a reorganization in six to eight months that focuses the organization on servicing the customer.

On the contract ... When we finalize our arrangement, we will have a multi-year contract. It may be interesting for the outsourcer to sign with me for a year, but it's certainly not interesting for me to sign with it for just a year. We still haven't gone through the machinations of the pricing, but I suspect we'll end up with a three- to five-year deal. I don't know that we've got the ideal mix, but I know I won't be able to look at transactional processing for the next few years. We're a company that needs to respond to a particular competitive situation, and that's where we're placing our energies.

On choosing an outsourcer ... I don't want to give the impression that we spent a lot of time studying potential outsourcers. We were talking in terms of days for our company to mobilize, so we looked for a vendor with whom we already had a good relationship. Within 14 days after the acquisition by Jacuzzi, we contracted with the firm that does our parent company's internal auditing. This decision was reviewed at the top of U.S. Industries.

On confidentiality ... We trust that our confidential information will remain confidential because we're working with a national firm, we've worked with them before on internal audits and we have a business relationship, one I don't think you can legislate. If you don't have confidence in the relationship, then I don't think any agreement is going to stand up. We pay for our protection.

On managing the relationship... I don t think my relationship with our outsourcer is typical. For instance, we just consolidated several of our plants and moved our corporate offices within Tennessee. Our outsourcer, for instance, quickly set up a new telephone system and office alarm system to get me operating.

On the financial side, I needed a pay plan for my workers in Arkansas, so the outsourcer flew a group of people to study the state's pay scale and report on it over the weekend. Right now, I have daily contact with the outsourcer. I spend a lot of time working through the details of our new business. However, once we stabilize our systems, which is scheduled for December, my involvement will taper off. Then I expect the CFO and human resources professional will still require outsourcer support but not every day.

On staffing ... Because of the rush of the acquisition, we were without a management team for some time. There was a lot of turmoil in the organization during the start-up. I was trying to get a product out within a few days instead of a few weeks, but we had holes in the organization. The outsourcer filled in the gaps as I hired the infrastructure. In fact, my CFO was hired just four months ago.

Beyond the financial functions, our outsourcer also works very closely with another team to design and develop our consolidated plant. We need to move the product through the factory to meet our goal of a three-day customer response - instead of forecasting the demand, making the product and then hoping we deliver it to the right people. To work better with us, the outsourcer is in our production, development and systems meetings. The vendor has been integrated into all the,administrative and operations areas.

An Outsourcer's Turn to Talk

Mike O'Neill, national managing partner, and Greg Arend, national partner in charge of operations, Collaborative Operations Resources (CORe), Deloitte & Touche LLP.

"While outsourcing information technology has been around for 15 years, outsourcing the financial function in a major way has been around for only two or three. But any company that has to compete in the world markets today has to take the position that if it cannot do any process better than someone else, then the company ought to let someone else do it.

Outsourcers in turn have to be in the value-added business when they take on a company's financial functions. They can't just perform commodity transactions. They have to reengineer the financial business processes and approach the project as a partnership, since every client has different needs. A good outsourcer thinks people first, not fixed assets. The way to help a client is to supply the right technical depth of people, the right one-on-one relationships and the right backups. These are the areas to evaluate when choosing an outsourcer.

On choosing to outsource ... Right now, the groups most likely to outsource the financial function are those looking for a strategic change in direction. Some signals that a company may need to outsource the financial function? Excessive turnover in the finance department, a sense that there's a significant amount of redundancy in the department s processes or the feeling that you re just not spending time on the right things. Another very tangible sign of a problem is when a company consistently misses deadlines for producing its financials.

Where is outsourcing not a good idea? At companies that aren't in a tough competitive environment, so their culture doesn't encourage them to re-examine all of their processes. Until they can change the culture, outsourcing the financial function won't work.

By the same token, other levels of outsourcing exist. For instance, sometimes an outsourcer goes into a company, repairs the accounting problems, and a year and a half later decides the job is finished. The right answer - for both the outsourcer and the client - is to move the financial function back in-house.

Finally, many companies wonder if an outsourcer's "better, cheaper, faster" way of performing their financial functions is ultimately cheaper than a company performing the functions itself? Not always. But, remember, "better" may mean a better competitive stance for the company in the future.

Out of Sight, Out of Mind

% of companies
outsourcing the function

                                        1998(*)      1995

Pension management                       63%          42%
Tax                                      57%          40%
Payroll                                  50%          28%
Short-term investment management         31%          12%
Accounts payable/receivable              30%           5%
Asset appraisals/valuations              30%          24%
Internal audit                           30%          12%
Leasing                                  29%          19%
Real estate management                   21%          10%
Accounting                               16%           4%
Treasury management                      10%           2%

* Projected

Source: Economist Intelligence Unit survey

On the contract ... You can spend months trying to list in your contract every imaginable service and product you're going to provide your clients - but the document is outdated the next day. The right approach for a vendor is to say, okay, here are the basics we're offering, but we're your business partner and we'll work together to decide on the service and deliverables throughout the relationship. For business process outsourcing, the contracts are typically three to seven years in length.

On the start-up ... It's very important during the transitional stage that the outsourcer work very closely with the company. But once the operation is set up, senior management shouldn't be spending a lot of time managing the function. In fact, a company should plan for a 120-day window for the start-up. During this time, outsourcing professionals will literally live in the company, as we did with the California Earthquake Authority. They're spending the time to get up to speed on the project but also to learn the corporate culture.

On merging technologies ... We're frequently asked if outsourcers use the company's information systems or their own. It depends. If a client just spent a lot of money installing SAP or Oracle and then thought, gee, I really don't want to do accounts payable anymore, the outsourcer probably will interface with that client's system.

SunLite Casual Furniture was a unique case. It didn't have any systems inhouse, so the firm placed its own hardware and software person in the outsourcer's accounting center, not in the corporate facility. SunLite owns the equipment, but it stays with the outsourcer. The bottom line is an outsourcer tailors the technology to meet the client's needs.

On the CFO's job ... The CFO will not lose his job because of outsourcing. That's guaranteed. But the CFO will lose his job if he doesn't look for the most innovative, cost-effective ways to do things.