Can the Financial Planning and Analysis (FP&A) Function be outsourced?

According to research outlined in a White Paper “FP&A outsourcing will become an increasingly standard offering in the marketplace as companies seek to achieve additional savings, improve capabilities and reduce cycle times”.

Is this trend inevitable? Here are some of the key organizational factors to be considered as I see them:

1. FP&A Environment

There are of course varying degrees of sophistication when it comes to the nature of the finance processes, which could lie at any point on a continuum. However for the purposes of this article, we can look at the finance processes in three broadly distinct categories: highly manual, semi-automated and highly automated.

‘Highly manual’: FP&A systems are largely based on spreadsheets with a high degree of data linkages between various files. Data is received from multiple non-integrated internal and external sources, leading to a high degree of offline inter-system reconciliation. Undocumented procedures and processes, resulting in critical knowledge created and embedded in individuals (‘tacit knowledge’) and not in systems or manuals (‘codified knowledge’)

‘Highly Automated’: Data is automatically reconciled and stored centrally, representing a ‘single source of the truth’. Data is extracted by using queries to produce standard reports. Automated budgeting, forecasting and management reporting approaches. Enhanced business review and performance measurement processes.
‘Semi-automated’ A combination of the above environments: the degree of automation versus manual work will depend on the type of organization.

2. FP&A Team Skills and Expertise

There is a direct correlation between the skills and expertise level and the FP&A environment:

‘Highly manual’ : The team usually have advanced levels spreadsheeting ability. They also tend to be experts at building and administering databases when the volume and complexity of data may go beyond conventional spreadsheeting capabilities. Template building, particularly in the area of budgeting and forecasting, is a key skill required to address and overcome some of the challenges from working in a non-standardized environment. Also the ability to reconcile and make sense of large amounts of raw, often incomplete, data. An in-depth knowledge of the business helps to understand the underlying perspective(s) upon which information should be presented in order to optimize decision making. However in reality it is not always possible to demonstrate expertise in generating business insights due to the timescales and labour intensity involved in ensuring data completeness and accuracy.

‘Highly automated’: A ‘single source of the truth’ with appropriate business intelligence tools, can eliminate the day to day operational FP&A tasks associated with maintaining data integrity, large complex spreadsheets, inconsistent reporting formats, inter-system reconciliation. Equips FP&A team to ‘slice and dice’ data in a variety of ways according to pre-defined business criteria and rules governing the data set.

3. Leadership Priorities and Focus

Prior to the development and introduction of a single source of the truth and much reduced processing cycles, many global organizations were in a state of reluctant acceptance that the FP&A function was over-committed with routine activities such as planning, budgeting, forecasting and management reporting. Little, if any time was available for decision support activities, meaningful analysis and other special investment related projects. With the creation of highly automated working environments the situation has changed and the question becomes whether the FP&A team needs to continue operating under the Finance umbrella, or report directly into the business.

4. Business Perception

Many smaller organizations may evolve with a Finance focus that is largely geared to ‘compliance’. A newly created FP&A function may subsequently introduced when the organization has reached a critical point on its development and expansion roadmap and requires an additional level of support from its Finance function. Cultural factors may impact the speed and level of FP&A acceptance by the business in this context. This may be due to a possible misunderstanding of the ‘value add’ that can be brought to the decision making process. Also if the FP&A environment is highly manual, the potential for business partnering may not be realized.

5. Business Environment

Technology has enabled many larger organizations to leverage the single source of the truth concept and directly empower the business user. Marketing and Operations professionals are becoming increasingly financially savvy as many traditional FP&A tasks such as P&L management, expenses monitoring, budget control and forecast variance analysis are decentralized and transferred to the business. In certain industries, e.g. ‘consumer packaged goods / fast moving consumer goods’, non-financial managers are able to independently query the financial systems and find their own answers as to why their part of the business may be over or under-performing.

Similarly a high degree of automation enables many of these managers to prepare their own budgets, forecasts and strategic plans with little intervention from Finance. To this end FP&A serves mainly as a consolidation point at the ‘total company’ level; the business not only has the tools to perform the periodic and routine FP&A activities, but the business knowledge and acumen to subsequently overlay the numbers once produced.
So where does this leave the FP&A function? In a tough spot, no doubt.

It would appear from the marketplace trends referred to by Deloitte that the role and importance of the FP&A function is indeed changing. In my view there are three contributing factors to this development and are beyond the control of the Finance and Accounting profession:

• Technological advances resulting in the commoditization and standardization of complex processes as referred to by Deloitte
• Human resource development trends in the continuous increase of direct financial responsibility within the business
• Research suggests an increasing trend with respect to non-finance managers equipping themselves with MBA degrees containing a strong Finance element

Conclusion

The first thought when discussing the prospect of outsourcing the FP&A function, might be to consider transferring the service to a third party as indicated by the Deloitte. This article shows that for certain organizations in certain industries, there is a different discussion to be had; a potential internal transfer of the FP&A function to the business, without the involvement of a third party service provider. Since business roles have changed dramatically due to technology, this is now a distinct possibility. Under these conditions the case for outsourcing may not be as relevant.

For organizations operating in a ‘highly manual’ environment, a cost-benefit comparison would of course help evaluate a potential move to FP&A outsourcing. However it is important to bear in mind that in these types of business environment, much of the critical knowledge is likely to be highly decentralized, undocumented and tacit in nature. Inherent lack of standardization in the business processes may prove difficult for a third party service provider to adopt the existing role of the FP&A function who have undoubtedly developed their own survival kit consisting of various coping mechanisms, context specific techniques as well as manual workarounds to achieve desired business results.