Ephor Group is a Management Advisory firm that invests resources in our clients to create wealth producing enterprises.

An Introduction to FAO (financial administration outsourcing)


 

30 years ago, firms did their own payroll; while today the vast majority outsource payroll.  FAO delivers costs savings through financial and administration services that streamline cash collection and provide institutional level financial controls that every business needs to survive, thrive, and create wealth

 

Today, the vast majority of enterprises outsource some component(s) of their financial responsibilities  with the scope of F&A (financial and administration) services depending upon the company’s maturity and complexity. 

 

Accordingly, FAO has grown beyond providing tax services, bookkeeping, and receivables management to multi-process, multi-functional providers delivered via a SaaS platform that includes the following capabilities and benefits that make companies more effective and efficient.

 

FAO capabilities include:

  • Automation of billing and collection across online payment processing tied to bank and financial reporting integration which allows for better cash collection, cash management, and visibility.
  • Efficiency of transactional processing from an average of $15 per transaction to a few dollars.
  • Governance including regulatory compliance and risk mitigation (Leap into 3rd generation governance practices!).
  • Global features including embedded language, user preferences regulatory compliance and reporting across global operations.
  • Complex services such as revenue forecasting, revenue-recognition complexities, total compensation reporting, global payroll capabilities, etc..

FAO benefits include:

  • Replaces “people dependent” F&A model with a “process dependent” FAO model (P2P, O2C, R2R).
  • Personnel cost savings:
    • Rather than buy a CFO, hire a fractional CFO and support with a FAO.
    • Rather than staff a department, hire on-demand a well oiled professional team with 15+ years average experience.
  • Shifts the burden and costs of technology upgrades from the buyer to the FAO provider.
  • Replaces “fixed-cost” model with a flexible cost model.
  • Reduction in DSO, asset recovery, spending, slippage, mistakes.
  • Improvement in inventories and/or labor and job scheduling and costing.

FAO trends include:

  • Buyers continue to be cautious and implementations are done via a phased approach by module, process, or function one or two at a time.
  • The hybrid pricing model continues to become the dominant pricing model (annual retainer plus FTE-based pricing in combination with either transaction-based pricing models).
  • Beyond efficiency of operations, cost savings, and business process improvements, buyers requirements include strategic support in the areas of financial and operational analytics, capital and financing, and overall support of the new role and agenda of today’s CFO including sourcing procurement, ITO, HRO, Risk, and other key functions.
Clients demanding more than labor cost arbitrage; SaaS platform plus analytics an upfront requirement along with broad scope of expertise and then point specific processes and functions delivered via a transaction based pricing model. 

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FAO History


The market for FAO is as big as business itself. While still evolving, FAO technology platforms have been consolidated to a few major players paving the way for global, national and regional service providers to approach the mid-market.

The future players will consolidate into the following camps: solution providers, system of record providers that include a suite of processes, and app providers. 

 

Adoption is increasing along with vertical specialization (i.e. focusing on healthcare dental practices, or restaurants or professionals) with the primary reason for buying being to bypass technology ERP upfront costs while gaining access to the capabilities and benefits of FAO.

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The Mid-Market FAO Marketplace


The most common underlying technology platforms include: QuickBooks Enterprise, Zoho, Deltek, Infor, Workday, NetSuite, SAGE, Intacct, Epicor, and Microsoft.  

 

The FAO solutions provider landscape is highly fragmented with more than a hundred multi-process mid-market enterprise solution providers.

 

The outsourcing marketplace is a highly competitive and fragmented industry that is poised for enormous growth in the next decade as companies fight to maintain their competitiveness and profitability. Ephor Group’s continued focus on the outsourcing industry is driven by several key trends including:

  1. The need for all small businesses and emerging enterprises to outsource multiple business processes and functions to remain cost competitive and to gain access to capabilities/expertise/resources/tools otherwise unaffordable;
  2. Evolving market dynamics such as the increased need for mobility, risk management and governance requirements;
  3. Highly fragmented market;
  4. Economically efficient model driven by recurring revenues (long-term contracts, valuations, high switching costs);
  5. Operational performance driven by people performance, scalable customer acquisition and cost models;
  6. Increased dissatisfaction with service levels from Fortune 500 vendors presents small business and mid-market opportunities

The outsourcing marketplace is a multi-hundred billion dollar industry encompassing tens of thousands of providers selling hundreds of different products and services. When you consider that virtually every business outsources some business process, you can appreciate the total size of this unique marketplace. If you are an outsourcing provider, aggressively targeting small business and the mid-market enterprises, it is critical to secure your position of this marketplace. [ BACK TO TOP ]

Outsourcing Market Opportunity for FAO


In the early days, the term "Outsourcing" typically meant that a single process, such as payroll or benefits, was handled by a 3rd party. Today, the small business and mid-market outsourcing market encompasses almost all business functions and processes; essentially anything not deemed to be core or a competitive advantage can (and perhaps should) be outsourced.


Currently, outsourcing takes many forms as some organizations contract outsourcing service providers to handle distinct business processes, such as benefits management or marketing. And many organizations outsource entire functions. In fact, the majority of businesses outsource to three or more business processes ranging from very common (payroll, benefits, staffing and information technology outsourcing - ITO) to entire functions: financial and administration (F&A) processes, human resources (HR) functions, call center and customer service activities, procurement (supply chain) and logistics.


The Business Case for Buyers of FAO Solutions:

Over the past few years we have seen the FAO market expand as the ability to deploy FAO via SaaS coupled with companies adoption of more agile/flexible cost structures.  Primarily, mid-market senior executives are turning to FAO solutions for:

  1. Controls                 
  2. Intelligence  
  3. Real-time KPIs, Knowledge, Analytics
  4. Performance Targeting      
  5. F&A FAO Platform

Today, FAO providers help companies overcome the barriers to profitability and scale by eliminating non-value added processes, automating key processes, and providing increased resources as needed in support of the business.

Every day more CFO’s make the decision to outsource business process and functions.

 

In fact, the average business outsources part or all of at least two (2) business processes and/or functions. Furthermore, once executives make the decision to outsource the number of processes/functions expands as evidenced by a recent survey: Over 75 percent of the finance executives plan to expand their outsourcing programs in 2010 and over 85 percent of the finance executives are satisfied with the benefits from FAO.

 

Consistent with economic and competitive pressures, the market demand for FAO continues. Of course, the ROI depends on the exact situation and requirements; however, for emerging enterprises, the business case is compelling. Historically, companies had the option to buy an industry specific financial management software, or they could invest in ERP (enterprise resource planning) software. The ERP included financial management software that cost hundreds of thousands (Sage, Microsoft) or millions (Oracle, SAP) in up-front costs, before counting the cost of implementation, setup, maintenance, training costs and process improvements.

 

Driving the adoption and use of FAO are the benefits of a variable pricing model delivered via a SaaS model, combined with technology capabilities and business process excellence deployed via F&A.


Companies can leverage a SaaS FAO platform to outsource an entire function or single process.


Clients financial benefits include reduced operating costs via a pay-as-you-go pricing model, thereby cutting capital expenditures. More importantly than the financial benefits, the capability benefits really drive the adoption of FAO. Technology advancements available today are incredible, like automated processing of payables/receivables and other processing event transactions (no internal human resource costs), or streamlined administration so that reports are generated automatically: the ability to provide operational and financial reporting dashboards and reports in near real-time.  Today's FAO platform provides an alternative to building internal back-office fiefdoms before a company has the time and resources that are appropriate. In addition to gaining enterprise controls and intelligence, cost savings for every business are a priority. And it's even more import for service businesses that depend on their people to offload and automate transactional and routine tasks so that ALL current employees can focus on revenue and client related tasks and processes.

 

Not only are companies challenged with becoming more efficient to maintain the status quo, competition is eroding margins, globalization is causing changes in cost structures, and technology is either a hindrance or a helper.

 

Did you know that the average cost of internally processing a document is $15 per invoice when done manually? Download FAO Industry Reports

The report is clear to business owners, the time and resources spent on processing transactions must be reduced! In the future, companies will spend less time processing and more time on the core business.  Almost all of the transactional processing can be done by technology that did not exist 10 years ago.

  1. Companies will spend less time processing and more time on the core business.
    1. Demand for real-time financial reports as well as non-financial reports and intelligence.
    2. World-class companies are able to close within one day.
    3. Controls and financial reporting reduce risk, cost overruns/rework/errors/theft and variances.
  2. Rising Costs of Processing:
    1. Average cost of $15 per invoice done manually.
    2. Almost all of accounting can be done by technology that did not exist 10 years ago.
    3. Time spent processing transactions must be reduced!
  3. Rising Complexities:
    1. Contingent workers make up a third of the workforce.
    2. Profitability depends on the success of client, job or project specific teams.
    3. Variances and changes in cash, contracts, and margins must be managed in real-time.

 

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Outsourcing Adoption

Most Common Outsourced Functions and Processes



Why did outsourcing take so long to catch on among mid-sized companies?


Factors Driving Outsourcing - Source: AMR Research / Global Services Media, May 2009; Sample: 127 Mid-large Enterprises

One key reason is the lack of stable, sizable outsourcing partners focused on the middle market. Big consulting firms and outsourcing providers have not developed efficient customer acquisition and operating models to service the small business mid-market with their high set-up expenses and the shorter contract lengths on which many smaller firms insist.


While there exists a plethora of smaller, thinly capitalized operations – often offshoots of CPA or bigger company consulting firms that cover just one city or region, the market opportunity to solve the outsourcing needs for small business is prevalent.


Business segments typically outsourced include information technology, human resources, facilities and real estate management, and accounting. Many companies also outsource customer support and call center functions like telemarketing, customer service, market research, and web development.


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Outsourcing Types & Descriptions



  • Business Process Outsourcing (BPO) is the contracting of the operations and responsibilities of a specific business functions (or processes) to a third-party service provider. BPO is typically categorized into back office outsourcing - which includes internal business functions such as human resources or finance and accounting, and front office outsourcing - which includes customer-related services such as contact center services.

  • Financial Administration Outsourcing (FAO): Finance & Administration Outsourcing (FAO) is a maturing market, driven by the need to improve finance and accounting performance, flexibility, controls, and cost. Some analysts see analytical services superseding the FAO market over the next decade as organizations have data overload yet are short on analytical talent, and ripe with business challenges requiring decision-making information. FAO analytical services can provide:

    • Process work to focus on decision-support and solving business problems using financial domain expertise, analytical tools, data simulations, and modeling.
    • Leading organizations are looking at their entire life-cycle of financial management from sourcing (paying vendors) to customers (sales and collections).
    • In this view, analytical services (e.g., revenue leakage, pricing elasticity, cash flow modeling, and market-mix/churn simulation) can be used to generate benefits beyond labor arbitrage and process standardization to improved cash flow, spending, sales, and market share. Analytical services are rapidly being seen as an extension of FAO and generating benefits outside the walls of the CFO’s organization. While the majority of work priced in contracts is full-time equivalent (FTE) or transaction-based, clients are looking for their FAO partner to take greater accountability for improved business results, such as days payable outstanding, days sales outstanding, and closing days. This holds especially true for companies that are looking to their FAO partner to assume responsibility for end-to-end process, supporting systems, and/or need more performance accountability than standard service levels provide. Depending on the FAO scope, another variation is gain-sharing, in which multiple companies invest to provide a capability or solve a problem and then split the benefits based on some predetermined formula. FAO agreements with these types of structures need a level of transparency, integration with the client, and partnership governance model to work effectively. It is becoming prevalent that more existing FAO relationships will evolve to incorporate outcome-based pricing, and captive-shared services centers will be pressured to contract internally at these leveraged market levels.

  • Procurement Outsourcing: Procurement outsourcing is the transfer of specified key procurement activities relating to sourcing and supplier management to a third party — perhaps to reduce overall costs or maybe to tighten the company's focus on its core competencies. Vendor management of indirect materials and services are typically the most popular outsourced activity. Procurement outsourcing solution that addresses the total procurement value chain for maximized results, including sourcing, savings implementation, and transaction management.

  • Human Resources Outsourcing (HRO): Multi-process refers to contracts that encompass more than one outsourced capability but do not rise to the level of covering most or all HR functions. Most of the contracts in the midmarket, therefore, are not end-to-end HRO deals that would be comparable to the comprehensive contracts in the large-company market.

    • Recruitment Process Outsourcing (RPO): Encompassing recruitment and staffing this includes searching for and hiring new employees and a wide variety of services from job boards to staffing and relocation firms, testing and assessment technologies, applicant tacking technologies, executive search/placement firms, background checking services, etc. For the most part, this category ends when the employee is hired.
    • Employee Benefits Outsourcing: This category encompasses a wide variety of employee benefit and related services from traditional health and welfare benefits to worksite/voluntary products, pharmacy benefit programs, benefits administration and communication software, third-party administrators, retirement plan services, and workers' compensation/disability insurance services.
    • Talent Management: This category includes all the human resources services related to managing the individual once they are hired as an employee -- appraisal, evaluation, recognition, promotion, retention, and succession planning services.
    • Training and Development: This category includes the many products and services related to training and developing employees from instructor-based training to eLearning solutions.

  • Payroll Outsourcing: This includes everything from payroll processing companies to companies specializing in specific payroll and compensation services, compensation design, and salary statistics services.

  • Compliance Outsourcing: This category includes all the services related to complying with and managing the various aspects of labor laws, labor relations, legislation, litigation, alternative dispute services, OSHA, HIPPA, etc.

  • Knowledge Process Outsourcing (KPO) is a form of outsourcing, in which knowledge-related and information-related work is carried out by workers in a different company or by a subsidiary of the same organization, which may be in the same country or in an offshore location to save cost. Unlike the outsourcing of manufacturing, this typically involves high-value work carried out by highly skilled staff. KPO firms, in addition to providing expertise in the processes themselves, often make many low level business decisions—typically those that are easily undone if they conflict with higher-level business plans.

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Selling Outsourcing to the Small Business & Mid-Market


Outsourcing Criteria Weight

Economic conditions require employers to operate more efficiently and achieve more with fewer resources. But today's strategic partnerships are also about achieving ongoing efficiencies, innovation and improvement to the mutual profit of both partners. Outsourcing deployed effectively can reduce costs, increase agility, improve service levels.


Beyond startups, there is always a group or committee responsible for evaluating and purchasing outsourcing solutions. The sales challenge as a provider is identifying these committee members, their roles, and creating buying and sponsorship from all influencers.


Outsourcing Decision Drivers: The Two-Headed Monster

  1. Cost/Value aka Price-to-Value
  2. Relationship or Emotional Motivation of the Buyer

Both decision drivers are required to get a deal done.


What to look for in an outsourcing provider?

  1. Pricing:
    • Implementation Fees,
    • Training costs
    • License versus Subscription versus Pay-per-Transaction
      (pay-for-performance)
  2. Services Delivery Model: Technology Augmentation versus Platform Providers
  3. Holistic versus Point oriented
  4. Flexibility and/or customization requirements
  5. Success Stories

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Outsourcing Trends


Employers are looking at outsourcing to better control costs and remain flexible costs structures. Technology is also a major consideration as most companies do not want to manage multiple providers and point solutions nor do they want to re-invest in upgrades or replacements.


Prevalent Outsourcing Trends:



  1. An opportunity for mid-market niche providers to emerge as major consolidation among the larger providers continues.
  2. Buyer adoption will continue to prefer a “Phased” over a “Big-Bang” approach.
  3. The demand for analytics will continue to increase.
  4. Industry specialization will continue especially from services-oriented and labor-demanding industries.
  5. Mid-market adoption will continue and more demand from manufacturing, healthcare, and services sectors.
  6. SaaS adoption.
  7. Shift towards more strategic projects.

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Outsourcing Key Performance Indicators

What Are the Keys to Creating a Branded Company in the Outsourcing Sector?


  1. Vertical Practices and Solutions;

  2. Perform Culture that continually innovates and improves account management, shared services, quality, and productivity;

  3. Communication systems, vehicles and formalization; and

  4. Engagement synchronization regarding the performance against targets/expectations:
    • Advanced coordinated metrics,
    • Shared accountability.

Outsourcing Key Performance Indicators:



Outsourcing Key Performance Indicators

"It's difficult for mid-tier companies to find a partner with the right organizational fit and scalability, particularly if they need services on site in a number of locations; however, forward-thinking organizations have adopted online services delivery models are realizing results." – Garry Meier.

 

 

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