According to research quoted in the Wall Street Journal, a third of selection teams decided to keep their finance and accounting functions in-house, despite spending time and money considering FAO. They chose not to outsource because they thought that their organisations couldn’t cope with the degree of change FAO would demand.

Issues to watch out for

What problems are likely to occur during the managing the relationship stage of outsourcing?

The general theme is change management, according to Derek Vaughan, director of finance operations in Europe, the Middle East and Africa with Jefferson Wells. ‘There is a tendency for management to lose sight of the strategic goals of outsourcing once they start negotiating with the outsourcer. Everything then becomes too much of a procurement exercise.’

Vaughan said management often feels that outsourcing has been achieved by this stage, but ‘the most difficult part is actually negotiating the FAO contract – this is where the relationship starts. Strong management backing at this stage is critical.’

Pat McArdle, global SSO leader at PricewaterhouseCoopers, said problems occur because of overselling during early discussions. Providers may overstate their capability and experience to win business, while clients can underestimate the nature of the work, or simply be unaware of its complexity. Project and transition delays, non-functioning systems and staffing issues all lead to strain early in the relationship. Conflicting understanding over control of strategic direction is another common issue.

‘Buyers must be careful not to hand over unwittingly the responsibility for strategic direction to a service provider who may not understand the business imperatives,’ said McArdle. ‘This can lead to decisions being made which later prove restrictive or even damaging to business operations and effectiveness.’

Contract and service level agreement (SLA)

At the outset, organisations should negotiate a contract and service level agreement (SLA). This part of the contract must also state which processes need to change in order to meet the provider’s standard, and which will remain unchanged. For the SLA, it is important to include both qualitative and quantitative measures to monitor and manage the relationship.

If the organisation has selected the correct provider and collected relevant, accurate data, contract preparation should be reasonably straightforward. It is important for clients to get the right team and advisers involved early on because the provider is often more experienced than the client in such negotiations.

‘Organisations must anticipate the need for a dedicated full-time team to work on contract negotiations for several months, because outsourcing doesn’t happen overnight. This can’t be somebody’s part time job – that approach simply won’t work,’ said Vaughan.

Once the contract starts, key personnel may be moved to new roles and replaced by less efficient (or lower cost) operational staff. The latter will not have seen the client business at first hand and their work is likely to involve using scripts or processing documentation in a remote location.

Six recommendations to avoid potential problems:

1. ensure the contract makes clear that the client organisation will set the strategic direction
2. make sure that senior management fully supports the outsourcing decision
3. retain key strategy personnel in the organisation
4. have clear assumptions about how demand will change. It is crucial to involve the whole organisation in commercial and economic models around the contract so that everybody can agree on the correct approach
5. take a high level view initially to ensure completeness of scope – there is a danger of moving on to the specifics too soon.
6. split the process down into smaller components, for example, benchmarking and basic analysis, to work out the size and scope of the project.

Pricing is a key element of any FAO agreement and must be included in the SLA, including a detailed pricing model. As FAO has matured, pricing systems have changed to try to encourage the right relationship between buyer and provider. Cost-plus pricing models have given way to more variable pricing mechanisms and ‘shared-risk-reward’ pricing arrangements.

‘Costing the service competitively at the outset inevitably leaves some gaps or is subject to market pricing’, warned Ian Puhar, director of Veo Transition. ‘If the operational management is under pressure to claw back some profit by the time delivery starts, then service quality or speed will suffer. Organisations need to be aware of this.’

The SLA should also explain how changes relating to the execution of processes will affect pricing. A change in delivery may affect the scope of the contract, for example, new processes may be added and existing ones deleted. Similarly, a change in the volume of work to be undertaken will affect the price, as will new business regulations.

Transfer process and knowledge

Another key part of relationship management involves transferring processes and knowledge to the outsourcing provider. Here formal reporting lines, including roles and responsibilities for clients and outsourcing provider staff, should be documented. They must then be communicated strongly to the client and service provider management team and employees. The outsourcing team should:

• produce a formal organisation chart indicating the reporting lines for service
• provider relationships
• update the chart as the relationship changes
  establish a project plan, milestones and roles for individuals and teams
• draw up a communication plan to reach everybody involved in the outsourcing process, including those whose roles will be changed or eliminated
• transfer employees to the outsourcing provider, redeploy staff to alternative roles or terminate employment
• address negative reactions from staff.

Monitoring and managing performance

Set and keep to regular formal reviews of the contract, even when things are going well. The focus of discussions should be able to move away from the detail and allow both sides to raise issues affecting the overall relationship.
The FAO relationship can be improved if the following steps are taken to manage and monitor performance:

• select people with the necessary authority on both sides to manage the relationship for the duration of the contract
• track the qualitative and quantitative measures in the SLA
• separate formal reviews from reviews of the specific SLAs within the contract
• establish formal troubleshooting processes
• agree a process for changing the contract
• involve senior business managers and end users in steering and shaping the relationship with the supplier.

Vaughan said it is essential to embed the SLA into the performance management metrics, including leading, processing and lagging metrics. He said: ‘There is a risk that your outsourcing partner will charge for monitoring performance if your SLA is not built into the metrics. One company was charged an additional fee for quarterly performance monitoring by their outsourcing supplier.’

As well as turnaround times, metrics should include customer satisfaction, completeness and accuracy figures for 100% of the outcome. Vaughan said: ‘If 80% of the work is completed in less than three days, is the remaining 20% never completed? You do need the full picture if performance monitoring is going to lead to improvements.’

Terminating the contract

McArdle said: ‘Don’t assume that the contract will live out its specified duration. Negotiate to have the right to terminate the contract at your convenience at any time. Agree to liability and cost responsibility in advance. Cap the duration of the contract to no more than five years so near-term flexibility is maintained if things go wrong.’
It is advisable to allow 18 months for the termination of a contract. The following steps are also recommended:

• establish the ownership of company assets, both physical and intellectual
• retain access to named individuals so they can be contacted at any time
• maintain an in-house knowledge of the processes and systems used by the outsourcer, or of your system if you are handing it over to the outsourcer.

By Alexa Michael, information specialist, CIMA.