Make or buy - thoughs around organizing transactional finance service delivery

Introduction

This article covers my perspectives related to organising service delivery for transactional finance and accounting, having a particular focus on considering an inhouse/captive and Business Process Outsourcing (BPO) options in a broader shared services and Global Business Services (GBS) context.

The main purpose is twofold;

1. Bringing up my views on how to go about it, not in terms of giving the ‘right answer’, but rather what type of a thinking process I would encourage one to go through
2. Sharing broader perspectives that may be useful in navigating discussions on this subject that often are flavoured by both objective and subjective opinions

For starters it is relevant to note that you may take a much different approach on this depending on whether it is a true strategic consideration, or whether it is a tactical approach aiming for incremental improvement/change only. This article focuses on the former approach.?

While it is quite a typical make or buy consideration, it may be a relatively big move that you should not take lightly - and by making a sound strategy, you typically have something that lasts for a number of years.??

Taking a helicopter perspective, there are two main choices; the service delivery model choice, and how to get there (how to implement).

Lastly, while my personal experience is heavily focused on and influenced by finance function setting, I believe many of the thoughts should resonate and match other functional contexts too.???

BPO is not dead…yet it is not a silver bullet either?

First off, this piece is not intended to be a promotion of the BPO model, or the captive SSC model for that sake, rather I want to avoid taking a stance on 'one being better than other'. And actually, I would argue that there is no single best choice, but there are many viable choices that one needs to choose from. So you could replace the ‘BPO’ in the headline by ‘captive’, I think.

However, just to dispel the notion that seems to make it to the headlines every now and then (and typically during crisis times) - the finance BPO is not dead, on the contrary it is a multi-billion dollar industry, projected to continue growing. And not only it is a prominent part of shared services delivery models, but also it is assumed to have a considerable role in digital transformation play. Some fresh insights are available e.g. in Garner’s report (Magic Quadrant for Finance and Accounting Business Process Outsourcing, published 10 May 2023).

Furthermore, a fairly recent SSON market report suggests that a bit over 60% of shared services organisations apply some outsourcing as part of their delivery models (SSON’s State of the Shared Services & Outsourcing Industry, Global Market Report 2022).?

Then again, it sure is not a static position - as we speak, companies and organisations are making moves both ways, outsourcing work and bringing it back in, for multiple reasons.

Drivers for change

Making a choice between inhouse or outsourcing certainly has both strategic and practical aspects, and you may find it in front of you from time to time - a change may be triggered e.g. in these instances (all recent real-life examples);

• A mature shared services organisation moving to a BPO model in order to accelerate digitalization and development more broadly?
• Insourcing/inhousing BPO service in order to strengthen control and transparency over the operations as well as have a stronger cultural alignment
• Going for a BPO model due to an external partner being considered stronger in operating and continuously improving processes and also leveraging offshore delivery capability?and true global reach
• Existing strategy and/or operating model becoming outdated due to inability to respond and adapt to changes in the marketplace?

This, similarly to any other operating and service delivery model consideration, should be approached in the light of a broader context, for instance thinking;

• Generally much stronger awareness and focus (on shared services) outcomes, impact being made as well as customer and/or employee experience??
• F&A BPO getting far away from pure offshore backed labour arbitrage play (that may have been a primary starting point back in the days), having so much more to bring to the table, such as strong transformational approach, outcome based commercial models, and generally contracts being written in a much different way, reflecting flexibility and ability to respond to rapid changes in our environment, e.g. triggered by pandemic and other crises
• Marketplace narrative and reality shifting from automation to hyperautomation and technology disrupting ways of organising and running finance processes (and beyond)
• Location strategies being rethought - physical working locations becoming less relevant that in turn opens new opportunities when it comes to attracting, developing and retaining talent??

Then again, I think it is fair to say that the reality in many organisations today is that transactional finance is not automated to a massive extent, and generally there are a whole lot of interventions and pure manual efforts associated with keeping it all straight. In other words, someone needs to take care of it on a daily basis, hence making it a practical everyday challenge that deserves attention if it is not in order.

BPO or captive, or does it even matter...?

Answering the headline by another question, isn’t it so that the end game is the same; you want your operational finance processes to run in a super smooth way so that you barely see and hear it existing, striking a good balance between efficiency and effectiveness, generating real value, and all that good stuff???

Well…of course it matters, but instead of drilling straight down to this choice, there is a range of questions one should answer, including but not necessarily limited to these;?

• What are the goals and aspirations for the whole finance function and finance shared services, and how do you become successful and reaching those
• What is the medium / long term vision for your finance shared services / GBS organisation in particular
• What is the chosen overall operating model for promoting and executing the chosen goals and aspirations
• How do you create measurable value with the intended delivery model, be it BPO or captive or hybrid

By going through foundational aspects, and the essence of the whole function, you can establish a solid starting point for make or buy evaluation as well as build and promote common understanding among the stakeholders.?

I find the latter point highly relevant given that this subject often raises a variety of opinions, some of those formed through a filter of personal experience, some being more beliefs.

Best practice - does such a thing exist?

The previous chapters lead me to the question whether a best practice of some kind exists. Well, in my experience it heavily depends on who you ask…and honestly, I think there are enough sound arguments to justify multiple viewpoints on whether BPO, captive or hybrid set-up represents best practice.?

I tend to think there is a time and place for everything in this matter too. That is to say, one has a whole range of options between maximum BPO set-up and having a full captive model, and plenty of nuanced ways of organising the service delivery in that space. And you can simply arrive at different answers at different points in time.??

In this respect I would put aside discussion of best practice - at least as an isolated question I think it is very much incomplete. And no, I’m not saying that you should not look around for any trends and get inspiration from other organisations, or perhaps learn from costly mistakes made out there.???

More importantly, it is about selecting a model that fits you in the light of questions posed in the previous chapter and some further aspects covered later on, and executing it well. Sounds simple, but I would argue that it is essential to carefully consider your strategy and think if/how you can pull that off.

Not a huge decision in the grand scheme of things?

Let’s face it, when it comes to the most transactional finance (e.g. purchase invoice handling, cash application, General Ledger accounting, updating master data records), it is not strategic in the sense that most companies/organisations could easily tap into some true competitive advantages within this domain. Hence it is understandable that it may not be on top of the CFO’s agenda, unless it is a massive headache in the organisation.

Also, looking at the full breadth and depth of any finance function, cost-wise the transactional finance is often a relatively small portion out of the total, especially with organisations that have established a shared services model or a BPO setting, relying on near-/offshore delivery capabilities.

If we expand the perspective to a typical finance shared services scope - some might say ‘operational finance’ and moving towards some FP&A - it is of course becoming more sizable. And I’m not saying that it is a good idea to leave money on the table.

Setting the aim right and positioning the change

With the starting point outlined in the previous chapter, how does one position BPO vs captive consideration, and also get enough attention from the key stakeholders and decision makers?

Considering what organisations have in place today, it is almost certain that there are ways of further optimising it - after all, it never becomes ready. By refashioning the service delivery, and essentially any capabilities around it, organisations often aim for balancing between cost and quality (in simplified and plain terms) - you also may apply ‘efficiency’ and ‘effectiveness’, putting possibly a slightly different spin on it.

Typically there is either aim for maintaining existing quality level and taking out some cost, or aim to increase quality and maintain or decrease cost associated with these operations. This could be illustrated by a simple matrix as follows;

In order to go towards the upper right hand corner, you would need to ‘offset’ the increasing cost level by something exceptionally valuable - and let’s remember, by no means we are talking about strategic processes. On the other hand, in this example there is very little or no room to decrease quality from the existing level, making the bottom part a ‘no-go zone’. That is to say, improving cost efficiency does not really matter if your delivery is not acceptable from a quality perspective. So, the point of this simplified diagram is that it is important to build understanding around the target, and that it certainly is at least a two-dimensional consideration.

One other key point associated with this is the following; further streamlining transactional finance delivery may not be a money making machine (i.e. not squeezing out plenty of cost e.g. since it already is pretty lean), but if the qualitative side is not there, you may have much larger issues in the organisation. This can be for instance a poor employee experience as a result of additional admin and daily firefighting included in virtually all the roles related to Source-to-Pay and Order-to-Cash processes.

It evidently comes down to striking a good balance between the two dimensions - in reality you cannot put all the money behind doing transactions exceptionally well, but on the other hand it is not fun to reach the other end of the road and being a very low cost operator, having a very low (sometimes unacceptable) quality level also.???

Making your pick - the service delivery model choice

Taking a (over)simplified view on the delivery model choice, it is a question whether you want to manage people vs SLA? Or is it??

I think there is a vast amount of sources for pros and cons related to BPO or captive (or hybrid) models, and hence I will not cover those here extensively. In brief, you often see/hear arguments like;

• A captive model does enable better control, transparency and cultural alignment as well as direct influence on people, and possibly somewhat lower attrition due to that
• All of that is typically shadowed by a longer set-up time and initial investment required, especially in case of a ‘greenfield’ shared services operation
• A BPO model on the other hand may be faster to implement and there is somewhat less investment required, relying on partners’ existing capabilities and infrastructure, etc.
• With a BPO partner you get ‘built-in’ economies of scale, broad footprint with a variety of delivery locations, broad access to talent and improvement/transformation capabilities including digital assets that you can tap into

Now I think some of the items are debatable, and one also needs to keep in mind that there are different types of BPO operators, ranging from large global Tier 1 BPO houses to small local and niche players. Naturally you also may go for the ‘best of both worlds’, and you may do that for your whole transactional finance operation or individual process domain for that sake.????

Instead of debating around pros and cons in general terms, I would emphasise that you will need to consider it from your own standpoint, understanding that already the basic question on BPO vs captive triggers multiple other aspects to be addressed. To name a few key ones;

• Delivery location strategy; particularly relevant for captive/hybrid models though I would argue it is considered in the case of BPO model too
• Timezone and language considerations related to services in question
• Transition strategy and approach?
• In case of BPO path being selected; BPO sourcing strategy, commercial model, SLA framework, etc. etc.

Also I’m lining up below some pitfalls and challenges that based on my experience are sometimes underestimated or overlooked;

Captive model:

• Investment to core capabilities such as attracting and hiring talent (sometimes facing fierce competition), employee onboarding and managing attrition
• Effective continuous improvement capability, leveraging all the knowledge and experience out there
• Complexity related to getting the service delivery established, especially once setting up a new center?
• Lack of scale, and as a result nonoptimal cost structure

BPO model:

• Tendering process timeline and complexity?
• Contracting and shaping a commercial model that is acceptable and effective considering interests of the both parties
• Effective service and vendor management capability, having enough dedication and capable people onboard
• Additional handoffs in processes and additional tools requiring integration?

Hybrid model, in which there is a mix of BPO and captive models e.g. by processes, geographies or business areas:

• Complexity related to a mixed approach, leading to benefits of BPO being shadowed by additional complexity in the setup
• Size of deal becoming marginal and not interesting for some service providers as there’s not enough skin in the game (evidently this can be mitigated by considering Tier 2-3 players)

It’s all about creating value

At the risk of using a very worn expression, I got to say that one truly needs to consider value creation once making a service delivery model choice of this nature. After all, driving a change means a disruption of some degree, and you better have a sound benefit case behind it.??

Also otherwise, it may be that the foundational and other qualitative perspectives discussed in the previous chapters do not provide crystal clear direction - if so, you can ask yourself a question whether your organisation or a partner is better positioned to meet the aspirations and become successful, considering for instance the following aspects;

• Ability to drive transformation and continuously improve the operations across processes, competencies, technology, etc.?
• Broader customer or employee experience associated with the services in question (think about the number people who are dealing with e.g. purchase invoice handling on a daily/weekly basis in our organisation)
• Building, utilising and maintaining technology/digitalization solutions and accelerators related to transactional finance processing and customer engagement, etc.
• True flexibility and agility - essentially readiness to respond on service delivery disruptions
• Location strategy and whether you can build and operate a footprint in line with that
• Operating cost in general, but also thinking broader perspective as in total cost associated with transactional/operational finance (also reflecting what the organisation beyond finance function needs to put in)?

Having done the thinking, you should at least start leaning towards a solution. However, it also might be that you discover that while you have a strategic direction, on certain aspects it contradicts with the other main option in terms of what it has to offer. In that case, it is relevant to be mindful about it and articulate how it is mitigated/levelled out.????

You need to get there…

It sounds like a no-brainer, doesn’t it? Anyhow, in parallel to considering the delivery model configuration, it is relevant to consider whether you can pull that off, and sustain it over time. Naturally you should face this once building a sound business case for the transformation.?

As a starting point, you need to understand one-offs / investment required to implement and effectively maintain the intended delivery model. Obviously it is not easy (some might say possible) to justify a change and transformation in this context without at least a decent payback profile.?

The transformation approach (or transition strategy and approach) could be a subject of another article, so keeping it pretty lean here - essentially depending on the chosen strategy, the positive aspect is that there are many paths and variations to think about, and again, I think this should not be considered in isolation, following the BPO vs captive choice.??

Closing remarks

Having all this said, I’m hoping it triggers some thinking, after all it is a relatively complicated matter with plenty of nuances to be considered. And the bottom line is the following; I think you owe yourself a thorough thinking process in order to have a solid answer to the ‘WHY' question. Not only one needs to explain what is the essence of the delivery model, but also - and more importantly - why is that in place.