For corporate treasury, the recent global economic downturn has been a pivotal event – but perhaps not in expected ways. Under a glaring spotlight, chief financial officers (CFOs) and their finance organisations had to address urgent capital acquisition, cash flow and revenue challenges. But volatility and uncertainty also drew them into more frequent boardroom conversations about forecasts, profitability, risk management and strategic decisions related to supply chains, pricing and production. As a result, CFOs are emerging with far more influence within the corporate structure, having a strong voice in not only financial matters, but also in infrastructure and business development. While the importance of core finance responsibilities has not diminished in any way, CFOs’ focus on company-wide concerns has increased sharply. Simply stated, chief executive officers (CEOs) and boards are counting on their CFOs to be fact-based voices of reason and insight.
The current cash scarcity is an opportunity for CFOs to energise their organisation into becoming a more useful function. Treasury is an important function, but quite often has not been afforded the glamour it deserves. The past two years have catapulted the CFO’s agenda back in front of the board and reminded many organisations of the importance of a progressive and high-performing treasury function. The world the CFO now lives in is different – technical accounting skills are not as important. Finance must get closer to the business and partner with them to achieve objectives. Finance must also be confident enough to challenge the decision-making process.
Without an accurate view into cash flows, a CFO will never truly have transparency to cash or risk. This is why more financial executives are now looking at things like risk across the accounts receivable (A/R) portfolio, and weighted forecasts using historical trending in order to have a clear view into forecasted cash from receivables and counterparty risk. They are increasingly keen to gain increased transparency to receivables. Further, we have seen increased traction in the use of receivables to generate working capital. Once an approved invoice or receivable goes out to bid, financial institutions can fund the invoices as a very attractive and lower risk investment.
Working Capital – Raising Awareness of O2C Functions
Short-term cash management is very closely linked with working capital management. CFOs are not generally involved with inventory management, but are being increasingly involved in receivables and payables, which were traditionally under the firm operational control of the accounting department. In the past, financial executives were often given only predicted inflows and outflows.
Working capital management has become a ‘C-suite’ topic. When liquidity was flush in the marketplace and bank credit was plentiful, treasurers had a multitude of funding alternatives and as a result working capital management was not a top agenda item for some companies.
However, during the recent crisis, as credit dried up and access to liquidity became more challenging, working capital management moved up the priority ladder within all corporations, and boards started reviewing it intensely. Consequently, with this increased senior focus within corporates, it has expanded the CFOs role as an integral partner of the commercial business divisions to assess risks and opportunities within the supply chain to help optimise working capital to free up liquidity trapped in inefficient processes.
Alternative Delivery Models to Achieve Working Capital
Today’s CFO needs to be strategic, but not a generalist. In strategy discussions, the highest value added by the CFO is the financial perspective. The CFO needs to be a key player in the process of formulating strategy but, even more importantly, a trusted advisor in the process of executing strategy. Company executives are looking to maximise efficiency and cut out infrastructure costs. They are continuing to ask themselves:
- How do we drive efficiency?
- How do we drive working capital?
Looking towards the use of alternative delivery models – such as shared services centres (SSCs) or outsourcing – for financial transaction processing is 69% more common among efficient finance organisations than their counterparts.
This, in turn, allows companies to drive standards adoption. Process consistency, for example, is twice as common among those using alternative delivery models. Each organisation must determine the finance delivery model configuration that will work best in its individual situation. When deciding which functions will be provided internally or externally through outsourcing, companies should consider the level of control and flexibility offered by each alternative, as well as the business outcomes each enables, not just its potential to reduce cost.
Some companies have achieved their desired return on investment more quickly by outsourcing a particular finance function before trying to standardise it. This ‘ship then fix’ approach can sometimes break the internal gridlock that is preventing global optimisation and speed the realisation of benefits.
Companies seeking to realise cost savings, quality improvements and process harmonisation, look towards innovative technology-based solutions deployed across the entire scope of BPO and standardising processes and systems. Several alternative multi-provider ‘end-to-end’ models are now prevalent, with providers currently developing their ability to work together with other providers and take on risk for the integration of third party services as an alternative to a client assured multi-provider delivery model.
There is an increase in providers’ ability and readiness to construct relationships and contracts to deliver increased productivity, transformation or innovation often via the use of outcome based or risk reward pricing. As a result, corporations have greater access to information for decision-making and continuous improvement, as well as a flexible delivery model that can adapt to changing business needs.
By outsourcing, many companies are able to accelerate the path to order-to-cash (O2C) business process outsourcing (BPO) transformation, accomplishing in less than four years what has historically taken other companies as many as 10 to 15 years. In addition, outsourcing has allowed finance organisations to release its energies from transactional processes and focus its expertise on the company’s core business.
Building or expanding coverage within an SSC environment is a large trend in 2010 and beyond. Many CFOs are considering setting up various regional (in country) SSCs. Some of the functions would be subcontracted to both onshore and offshore providers, but the overall controls and management of these functions are being centralised into a SSC managed and governed by the company’s finance executives.
Continued Move to Full Service OTC BPO for Mid-Market and Large Enterprise Firms
To date, the majority of OTC outsourcing has been focused on outsourcing two or three functions, such as invoicing, cash applications, and collections. This trend is shifting as buyers are moving toward outsourcing their entire OTC process instead of just selected functions. CFOs need and want the complete end-to-end OTC.
With businesses more cognizant than ever about the bottom line and customer satisfaction, finance and accounting BPO users want exactly what the acronym implies – business process optimisation. To meet their objective and please their shareholders, CFOs are moving away from outsourcing parts of a function to obtain modest savings or process improvements. Instead, they are taking a more holistic approach by looking at the entirety of their F&A processes to gain larger savings and process improvement opportunities.
For mid-market firms, the main issue is cost reduction and realising that they need to look at the full spectrum to gain the savings required to justify leverage the outsourcing model.
On the opposite side, enterprise firms have realised the one solution provider for the full spectrum has not been providing the efficiencies that they had hoped, primarily in the credit to cash (C2C) cycle, and will continue to pull these functions out of scope with global BPO firms. Also, large corporations are currently facing the challenge of minimising risk in the supply chain as it relates to critical vendors providing the BPO services and are turning more to solution providers who can offer multiple solutions, rather than one provider for one resolution.
Technology’s Role in O2C BPO in 2010
Technology will play a much more invasive role in BPO solutions moving into 2010 and well beyond. CFOs realise that effective use of technology can help unlock significant value, and suppliers are leveraging technology to create differentiated position in the market. Suppliers have made considerable investments in creating technology-led finance outsourcing solutions. As the constriction on available capital to buyers continues the ‘make-versus-buy’ debate is likely to swing hard towards the buy-side of the deliberation. If there’s a service alternative in the market that allows a company to forego the outlay of precious capital, that is increasing appetite to go that direction.
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