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This issue discusses the viability of outsourcing the finance function. It then moves on to discuss the functions of the finance department and the importance of identifying the informal functions carried out by the department.

Viability

There are two questions that need to be answered when you are determining the viability of outsourcing the finance function.

1. What will be the impacts upon the organization?
2. What are the real benefits of outsourcing the finance department?

Impacts upon the organization

The major impact upon the organization will be that your internal departments, who currently use the services of the finance department, will become "customers" of the outsourced finance function. One of the myths that has been developed in many organizations today is that of the "internal customer". In fact, in most organizations, there are no "internal customers". Internal customers exist when one company in a group buys products or services from another company within the group. Otherwise, the "internal customer" is a myth. Real customers do a number of things.

1. They pay you. Your real customers pay you; your internal customers do not. They may have a budget or appropriation that they can spend with you, but the effect is of a number being moved from one ledger to another. No real money changes hands.
2. They can go elsewhere. Your real customers can abandon you; your internal customers have to use you. Regardless of how bad your service is, despite how badly you treat them, they have to stay with you.
3. They shape your business. Your real customers shape your business, by being the market that you have to satisfy. Their needs can change and you have to change with them. Internal customers do not have a choice. They cannot even "take it or leave it": they have to take it.

When you move to outsourcing, the departments to whom you provide services become real customers, because they are the people whose needs must be satisfied by the outsourcer. Real money will change hands; the departments will have expectations of world class quality.

organizations that have adopted the "internal customer" myth of total quality management can often have a harder time moving to outsourcing than organizations who have never regarded their user departments as "customers." This is because the myth can induce the belief that the user departments behave like customers and are treated like customers. In reality, they are not.

Where the myth has not been promulgated, the user departments are often more easily able to grasp the opportunity of becoming customers, in a real sense.

Benefits of outsourcing

There are many reasons for outsourcing.

Some of the reasons that are generally expressed for the finance function are:

1. Outsourcing will allow greater flexibility in finance management and reporting.
2. Outsourcing will establish firm policies and procedures for the finance function.
3. Outsourcing will establish performance criteria and measures for the finance function.
4. Outsourcing will reduce overheads.
5. Outsourcing will increase benefits.
6. Outsourcing will free resources for core business processes.
7. Outsourcing will offer world class capabilities.

All of these can occur, provided that you decide that they are what you want and that you plan carefully in order to make them occur.

flexibility

Outsourcing can provide greater flexibility, although there will be costs associated with this.

Many customers of outsourcing imagine that they can "unload" their old hardware and software onto the outsourcer and then get the outsourcer to provide the latest technology. Often, the old systems were inflexible and did not allow the customer to take advantage of new technologies. These customers imagine that they can move to new systems which will provide information through intranet or executive information systems.

Actually, they can move to new technologies with an outsourcer, just as they can move to new technologies without an outsourcer. They will still have to bear the costs of doing so.

It may be that the outsourcer already offers greater flexibility and enhanced features to its existing customers, and this is especially true of the finance function. There is, however, a premium to be paid, and you must be aware of what this premium is and be ready to justify the expenditure against real benefits to your organization.

policies and procedures

An outsourcer may certainly be able to provide you with a set of policies and procedures for the finance function.

There is an important limitation on the establishment of policies and procedures, however. If your organization has been unable, in the past, to implement and retain proper controls, then there is no reason why the presence of an outsourcer will increase your chances of keeping controls in place in the future.

performance criteria and measures

An outsourcer will be expected to provide performance measures to its customers, as a matter of course.

Often, outsourcing can be seen as a way of introducing performance criteria and measures into an organization.

The important feature of performance measures is not the fact that they exist; it is the way that they are used in the organization. If you have no effective means for using performance measures to make decisions about the areas that your organization should focus on, then having performance measures will not help you.

As well as having the outsourcer reporting to you, you must have a means of interpreting and acting upon the reports.

reduced overheads

There are many overheads that can be removed or reduced through outsourcing.

There are also many that cannot be removed or reduced. If you own or lease a head office building, then shifting your finance out of it to an outsourcer may not reduce the overhead of that building. Indeed, with fewer people within it, the unit costs of housing your head office personnel may rise.

You have to be able to define where real savings will be made.

increased benefits

There may be some initial benefits of outsourcing that will justify the charges made by the outsourcer.

As time passes, the partnership between an outsourcer and a customer should enable the outsourcer to offer increasing benefits to the customer. These will usually be for additional charges.

Eventually, the yardstick of the original costs of the finance function, before outsourcing, may be exceeded by the outsourcer's charges. It is important to bear in mind that the services and benefits received from the outsourcer will have grown considerably from those provided by the original finance function. The original yardstick will therefore no longer apply.

It is a truth of outsourcing that both benefits and costs will increase over time. The important action is to ensure that incremental cost increases provide appropriate benefit increases. The original yardstick will become irrelevant.

resources

Many resources will be managed in different ways.

In the previous in-house finance function, expansion was handled through capital expenditure. With an outsourcer, it is managed through increased current expenditure. The finance function is therefore no longer engaged in the annual "capital expenditure round", where it had to compete for capital with other areas of the business.

With outsourcing, the organization's capital investment can be focused on the parts of the business that provide real competitive edge and which meet the business's commercial objectives. (We shall examine these aspects of competition and criticality later.)

world class capabilities

This may be the single most important aspect of outsourcing for some organizations.

They will finally be able to abandon their "legacy": the historical methods, tools and systems that have bound them into a particular way of working.

With a suitable outsourcer, they will have access to recent, proven techniques and activities that could help them to run their business more effectively.

Functions

You may need to determine what tasks are done by staff working in the finance function.

This may seem to be an obvious statement. After all, in most organizations the finance department will have certain objectives that have been agreed and documented. There will be performance measures and targets. There will be job descriptions for staff. The job descriptions will be related to the performance measures. The performance measures and targets will, in turn, be related to the objectives of the department.

Let me therefore repeat the statement at the beginning of this section.

You may need to determine what tasks are done by staff working in the finance function.

This means going beyond the job descriptions, the performance measures and the objectives and finding out what it is that people in the finance department actually do.

informal tasks

As an example, it may be that a person from the finance department works on your organization's reception desk whenever your receptionist takes a break. This task may not be documented: it may be a task undertaken by a finance person because they enjoy it and because it is useful.

There may be many other tasks like that throughout the department. They may not be documented anywhere. If they were documented, it is unlikely that they would be documented in the department's objectives or performance measures.

These tasks, performed informally at the discretion and convenience of staff, may be very useful to the organization. In our example, the receptionist is able to take breaks and the reception desk remains manned.

The role of receptionist may actually be occupied, unofficially, by a number of people. In addition, when a communication is sent to the receptionist, the receptionist may actually pass that communication on to the other people who occasionally fill the role. An example of such a communication may be a note telling the receptionist of arrangements for handling visitors to a particular manager. In order to ensure consistency, the "official" receptionist may pass copies of the note on to the other "unofficial" receptionists.

In Scotland, there is a form of land title known as "flying freehold". It was common, in terraces of buildings, for one building to be extended upwards higher than its neighbours and then to be extended horizontally across the top of its neighbours. Although this new horizontal extension would be physically above a neighbour's freehold site and supported entirely by the building on that site, it was possible for the extension's owner to be granted a "flying freehold" over it.

With a flying freehold, you would have full title over your extension, even though it could not exist if your neighbour's building was demolished.

Some roles and responsibilities in your organization may operate on a "flying freehold" basis. They may be fully autonomous "on paper" but unable to exist without other roles and responsibilities to support them. Demolition of these supporting roles will destroy the supported roles.

To return to the example of the receptionist, the receptionist's role and responsibilities may be clearly defined "on paper" although the receptionist could have difficulty to performing them without other "unofficial" receptionists.

1. When the receptionist needs to take a break for a short period, they may call someone from the finance department to "cover" the reception desk.
2. When a visitor arrives who needs the focused attention of the receptionist, they may call someone from the finance department to provide assistance to other visitors.
3. When the receptionist needs to escort a visitor to their destination, they may call someone from the finance department to handle the reception desk in their absence.
4. may need to determine what tasks are done by staff working in the finance function.

You may indeed need to determine what tasks will no longer be done by staff working in the finance function if the finance function is outsourced.

If you have not carried out this kind of research, you may find, unexpectedly, that your receptionist is less happy than previous, that your reception desk sometimes has nobody behind it, and that visitors become increasingly unhappy with delays in dealing with them.

If you have not carried out your research and been able to take positive action to maintain the high level of service given to visitors at your receptionist desk, then you may take inadequate measures once the problem arises. In the case of a reception area, you might purchase a bell and a sign to go beside it. This will not return your level of service on your reception desk to what it was before. The only answer may be to replace the previous informal support for the receptionist with an alternative source of informal support.

formal tasks

The finance department may also undertake a number of formal tasks for which a new "home" may have to be found.

Often, the finance department is the guardian of rules and procedures within an organization. It is unlikely that this guardianship could be undertaken by an outsourcer.

Also, in many organizations the finance department acts as the asset manager, with roles going beyond the purely financial aspects of asset management.

In these instances, alternative service providers may have to be identified within the organization.