As always, cost cutting through elimination of jobs is a principal driver for outsourcing, and this can often involve "re-badging" hundreds of department employees from the client firm to the employ of the outsourcing service provider. These days it is even more likely to mean moving hundreds of jobs offshore to lower-wage venues–places like India and Ireland in particular have been hot spots for large-scale outsourcing centers because they boast educated populations that speak English. "The financial analysis done by any company that is considering outsourcing has become very strategic in nature," says Gartner Inc.'s outsourcing analyst Lisa Stone. "But when we do a survey of outsourcing buyers, cost always ranks as the No. 1 or No. 2 reason for doing it. And over time, cost becomes even more important."

By the end of last year, the total value of outsourced contracts was estimated at close to $110 billion, according to a joint study by Gartner and the University of Pennsylvania's Wharton School. The report indicates that the total will exceed $175 billion in five years–a hike of about 59%. Of that 2002 statistic, $11.4 billion involves the outsourcing of finance and treasury operations. But by yearend 2007, that number is slated to jump 75% to $20 billion. And even with that impressive increase, there is still plenty of room for more. Today, somewhere between 5% and 10% of the 1000 largest global firms are outsourcing finance functions; in five years, that penetration is likely to move up to 20%. "I won't say finance outsourcing is in its infancy at this point," says John K. Jalvey, the partner in Milbank Tweed in charge of the outsource practice, "but it's still a teenager."

Outsourcing already has some powerful champions among corporate giants. Microsoft Corp., for instance, has been using Equitant to outsource some of its treasury operations in Europe. According to Equitant's Kunal Mehra, vice president for strategy, alliances and market development, Equitant has saved Microsoft $20 million a year in costs, while "putting $500 million to $600 million back on their balance sheet," primarily by "cutting the company's accounts receivable essentially in half in Europe."

Tommy Eubanks, global finance and accounting leader for IBM's Business Transformation Outsourcing Services, one of the largest outsourcing providers, says his company's "rule of thumb" is that outsourcing should lead to savings to the customer of between 20% and 50%. Those savings, experts like Eubanks say, come from the high level of specialization in personnel and technology being purchased.

That's certainly been the experience at BP, one of the largest and most extensively outsourced of major global enterprises. Beginning back in 1990, the company first experimented with outsourcing finance and accounting for its North Sea operations, which it turned over to Andersen Consulting (now Accenture). Today, the oil giant has been outsourcing the bulk of its global F&A operations. While the F&A contract did not come cheap–$1.5 billion over five years–the savings have been substantial.

Avoid Dependency

Tom Blewitt, head of control for BP's North American Exploration and Production division, notes that the providers have a financial incentive to cut costs: They get to keep 50% of first-year savings. Over the past two years, outsourcing has trimmed BP's overall F&A costs by 30%.

BP, which was formed by the merger a few years ago of British Petroleum, Arco and Amoco, actually has two separate providers handling its finance and accounting operations–Accenture and IBM, the latter firm having acquired the outsourcing operations of PricewaterhouseCoopers. Accenture had been handling F&A activities for British Petroleum, while IBM, via PwC, was the outsource provider for Amoco.

Interestingly, Blewitt says there is no plan for the fully merged BP to consolidate its F&A functions with one provider. "Although it began as an accident, we're where we want to be with two providers," he says, suggesting that this divided approach keeps the two providers in a competitive mode. "I'd advise companies against getting too deeply dependent upon one provider," he cautions, "so you can't be held hostage later." Firms always need to have an exit strategy, he suggests, and having two providers always leaves a company the option of going with one or the other.

Says Blewitt, "We've outsourced all our transactional activity in finance and accounting, cutting our finance staff by about 80% to 100 people." Many of these employees were picked up by either IBM or Accenture, although the move overseas of sizable operations has meant that less re-badging can occur. Those who are re-badged, however, move from being "an expense if you are an accountant at BP" to "an asset" for the outsourcing provider, Blewitt notes.

Shifting work to an outsourcing service provider can be a plus in another way, too, as Robert Corron, the treasury manager at Worthington Industries, a $2-billion steel fabricator in Columbus, Ohio, discovered. Corron was having trouble hiring and retaining in one area of treasury where staffers were required to handle a load of mundane daily calculations on cash flows. "It took a lot of time, involved a lot of administrative tasks and, if you made an error, it took ages to fix," he says. "It was all real time and you were dealing with cash."

His solution: Hire JMH Treasury, an Atlanta-based specialty outsource provider of treasury services, and convert the position into a career-enhancing plum that involves the employee in strategic decision-making. "We eliminated the problem completely," says Corron. "They also brought in treasury workstation capability without our having to pay any of the upfront costs. We just log into a Web site in the morning, answer questions already prepared for us and forget about it."

While cost is by all accounts the common driver for F&A outsourcing, Douglas McKibben, a Gartner analyst and former treasury employee at GM and Citibank, says increasingly companies are finding something more when they outsource. "More and more, it's becoming a transforming decision," he explains. "When you look at outsourcing your back office treasury operation, for example the handling of foreign exchange, you look for someone who brings best practices to the table–someone who's really good at it. You might even pay more for a vendor to do it for you than it was costing you to do the job in house, but it will free you up as treasurer to work at the real business goals of your company."

Mike Jansen, a partner at Everest Group, a consultancy that advises on outsourcing arrangements, says that looking ahead he expects to see a rapid spread of F&A outsourcing, particularly by U.S. firms. "I think that the skittishness about outsourcing F&A that we have seen in the past is becoming less and less of an issue," he says. "Also, at the same time, the definition of what is a core competency is shifting all across the corporate world. People are coming to realize that by focusing on the transactional aspects of F&A, and because they are dealing with a lot of clients, outsource providers will do a better job than you can in-house, and that frees you up to deal with strategic and policy issues. Senior financial executives want to get rid of the transactional business."

Conflict of Interest

One concern of companies considering outsourcing finance was the potential for an outsourcer to be servicing competitors. For instance, besides Lucent and Microsoft, Equitant counts among its clients Cisco, Hewlett-Packard and DoubleClick. Does this concern Lucent? "Their asset management teams are dedicated, with a pretty significant Chinese wall," he says, adding with a laugh, "I actually got a call recently from someone on their team saying, `Hey, we beat out Microsoft on payment recovery,' so their own teams are competitive."

While there are sure to be missteps along the way, it seems clear that outsourcing of accounting and treasury functions is not only here to stay, but that it will become far more commonplace in the next few years. Says Gartner's Stone, "CFOs like to have control over their departments, but there is already a different thought process than there was two years ago. People are now asking, `Is this a technology I need to own?' Before, people who looked at outsourcing were asking if it was a valid business need. Now, they're realizing they can gain functionality and save money, too."

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WHAT WORKS IN OUTSOURCING

- Craft a contract that provides incentives. Outsourcing is an ongoing relationship, and the provider needs incentives that align its interests with the client's.

- Be sure to have an exit strategy. When you outsource, have a plan in advance of how you could transfer the work either back inside or to another vendor.

- Don't outsource so much that your company loses domain knowledge. Remember, if you have to break a contract with an outsourcer, you can't expect your current outsource provider to train the replacement team.

- Explain what is happening to employees TO AVOID ANXIETY. While outsourcing can provide advancement opportunities, the initial reaction is almost always panic.

- Once you have an outsourcing arrangement, don't micromanage the outsourcer. Concentrate on getting the end result you want, not on how you get there.