The McKinsey Global Survey of Business Executives : Confidence Index, January 2007

Go beyond the basics

Many finance executives limit offshoring to commodity and transactional activity. They believe that only such basic tasks can be performed remotely; everything else is strategic and critical to the business and must therefore stay local.

Some companies are thinking bigger: certain GE companies, for example, have successfully offshored as much as 35 to 40 percent of their finance activities. The offshored operations include not only typical accounts-payable and time-and-expense work but also a full range of accounting and control functions, decision support and regulatory activities (including some management reporting, 10-K and 10-Q preparation, and SEC filings), and expert functions such as tax compliance and cash management within treasury (Exhibit 1).

Furthermore, some forward-looking CFOs are moving away from piecemeal, task-level offshoring. Using offshoring as a tool for a fundamental redesign of the finance operating model, they are reconsidering which finance functions absolutely must be performed in or near headquarters. At one global high-tech company based in the United States, the CFO went so far as to offshore significant portions of all the finance functions systematically, including procure-to-pay, order-to-cash, record-to-report, financial reporting, planning and analysis, treasury, fixed-asset management, and taxes. He believes that in his end-state model, advances in communication and work flow technologies will make it possible to locate more than 75 percent of the finance operation far from the corporate center or country headquarters. This company now sets the low benchmark for finance costs in its industry.

Ship, then fix

Too many executives believe that processes, and the underlying IT applications supporting these processes, must be optimized perfectly before they can be sent offshore. Many Fortune 500 companies that have embarked on projects to implement financial systems or commercial enterprise-resource-planning (ERP) applications, for instance, believe erroneously that it would be wrong to offshore processes and systems while such projects are under way. Some want to wait until all finance activities or processes have been completely migrated to the new ERP system, others until general ledgers have been fully integrated. This propensity to fix processes before outsourcing them-the "fix, then ship" model-is single-handedly responsible for much of the gap between leading-edge offshorers and average ones.

In our experience, offshoring a process first and then implementing continuous-improvement efforts-the "ship, then fix" approach-typically delivers one-and-a-half to two times the net present value of the "fix, then ship" approach. Offshoring generates higher savings at a faster rate than large process-redesign and automation exercises, which often take three to four years for benefits to accrue.1 The difference in value is especially visible in large, high-cost markets (such as Australia, Japan, and the United States), as well as some Western European markets (for instance, Scandinavia, Switzerland, and the United Kingdom). Companies in these markets typically have stable, stand-alone IT systems, are large enough to achieve scale in offshoring, and benefit from labor laws favorable to it.

Smaller companies or those in markets with restrictive labor laws2 can still benefit from the "ship, then fix" approach. We've seen several implement significant offshoring programs without any internal job losses by aggressively reducing the use of outside contractors and temporary personnel, retraining and transferring finance personnel to other functions, and leveraging early retirements. When these methods don't apply or a market doesn't have critical mass on its own (because it has very few finance professionals or the scale of a company's business in it is small), a more gradual "fix, then ship" approach could be preferable.

Some global companies may want to strike a balance between the two approaches by simultaneously migrating businesses to new systems platforms and moving finance and accounting resources to regional or global shared-service centers. This line of attack is particularly suitable for companies that have already mastered offshoring transitions and developed clear and detailed transition methodologies.

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