Outsourcing Office of the CFO

The Chief Financial Officer (CFO) is one of the most important executive position in any Company.  The position of a CFO can be compared to that of a Barometer.  A Barometer is a scientific instrument which is used to constantly measure Atmospheric Pressure.  Any change – normal or abnormal – in the atmospheric pressure readings is studied to predict potential weather changes and issue warnings and guidance as appropriate for the health and safety of all.

Similarly a CFO is the torch bearer of the Financial Health of the Company. The CFO is the barometer that predicts the fiscal wellbeing of the company and issues appropriate guidance or warnings in case there is a potential exposure to the financial wellbeing of the company.

In addition, the CFO is the brand ambassador of the company when it comes to interacting with Analysts on the company’s performance or while negotiating with Banking and Insurance partners for appropriate arrangements around Finance and Risk Mitigation strategies.

Traditionally the role of the CFO was more centred around Accounting, Planning and Budgeting and Cash Flows.    Their main focus was to oversee the core operational aspects of the company they served.  They were involved in negotiating with the banking sector for necessary finances and facilities that ensured working capital for the going concern.  In case of any Capex decisions, they would help propose the right borrowing strategies.

However with time much has changed.  In addition to overseeing the core financial and accounting operations of the Company, the CFOs have, over the last two decades, been consulted in matters of Strategic Importance thus advising the CEO and the Board in their decision making, influencing their peers – Head of Human Resources, Chief Procurement Officers, Chief Marketing Officer, Chief Technology Officers etc. as a Catalyst, ensuring effective Risk Management, Compliance and effective Internal Controls working with Chief Risk Officers, Legal and Tax Departments and the Audit Community.

In today’s times, the CFO is consulted in digital initiatives and automation that can help drive efficient processes using Robotics and Machine Learning.

In a recent study that was published by a leading analyst firm based on a survey they conducted with the CFO community, following are some of the functions reporting into the Modern CFO.

  • Corporate Strategy
  • Treasury and Risk Management
  • Enterprise Risk Management
  • Internal Audit
  • Mergers and Acquisition (both Strategy and Execution)
  • Regulatory Compliance
  • Information Technology
  • Digital Transformation (Including decisions around RPA, Machine Learning etc.)
  • Board Engagement
  • Cyber Security
  • Commercial
  • Physical Security
  • Investor Relationship
  • Environment Social and Governance (ESG)
  • Talent Acquisition and Management

Looking at the above, it will appear overwhelming as one has to be a Super Human to be effectively and efficiently involved across the various topics above.  This is all the more critical as the mantra today is ‘Do More with Less’.  One does not have the luxury of building large teams with necessary expertise to co-ordinate the sheer number of topics.

The proportion of time the CFO spends outside of the core area of Finance and Accounting is significantly high in the recent times.

Operating in a VUCA world presents a far greater challenge in ensuring desired outcomes of the Company and the various functions within it.  This need not be emphasised as we all experienced the impact the recent pandemic had on the economy and the financial health of the companies across the globe.   A lot has been said and written about the VUCA world we operate in.

With a hybrid workforce and uncertainty in areas of supply chain, Working Capital availability, Regulatory and Tax changes many companies were required to reinvent their business model.  As ‘Adaptability is the New Norm’, what is required today is at bare minimum, some of the following:

  • Agility and adaptability of doing business
  • Real time information
  • Faster decision making
  • An adaptable automation platform supporting ever changing business models and processes

The task for the CFO will depend on the company they are serving.  Some of the factors influencing the expectations from the CFO would be

  • Vision and Mission of the Board
  • Nature and Size of the Company’s Operations
  • Number of years in Operation (i.e. Is it a Start-up)
  • Revenue
  • Number of Employees
  • Geographical presence/operations, etc.

Accordingly the CFOs have varying degree of challenges.  While in case of well established companies whether large enterprises, MNCs, SME’s etc. the size and the scale of the operations will be medium to large, so will be the size and complexity of the challenges.

In case of start-ups it is an altogether different reality.  The funding is secured and now effective financial management to support the growth and revenue strategy is key.

I would not like to dwell much into the various other dimensions, but irrespective, a point that is always open is – whether a Company or for that matter a CFO can they call for help?

What are some of the options available     

  • Outsource the entire CFO function
  • Appoint a CFO on a time bound contract
  • Outsource part of the CFO responsibilities. This could cover the tasks that fall under the Operational and Stewardship functions.
  • Specialised Areas like Cyber Governance, International Taxation etc.
  • Outsource specific tasks like, Pre IPO activities, M&A execution, Capital and Debt Restructuring, Regulatory implications and impact analysis, Tax Planning, etc.

When it comes to outsourcing decisions,  there are certain options like a well-established BPO, Advisory firms or more importantly in the recent times a firm or a partnership formed by ex CFO’s themselves.

Persons retired from their mainstream career as CFOs or have quit their active jobs as CFOs, Controllers, Finance and Account professional are a part of such firms.

Some of the high level benefits that such service providers bring are:

  • Multiple man-years of practical experience.
  • Collective thinking providing the necessary assistance and lending their expertise
  • Faster Decisions and solutions to scenarios
  • Better networks that can be leveraged as well

For many growth-oriented Companies – large, medium, small or start-ups, the advisory landscape is a booming market segment.  In the current highly competitive market landscape, such companies need experts with the appropriate experience who can offer support in the areas of corporate finance with strong execution and delivery capabilities and facilitate their growth journey at all points. One of the main purposes of such companies is to help carve a niche not only in the general Finance and Accounting advisory space but also in the strategic finance advisory as a whole by bringing together the collective experience of professionals. In case of start-up companies as they often need the right guidance in effective financial management as they would like to completely focus on the launch and expansion of their business, such an access to experienced professionals will be beneficial.

From the recent virtual conferences where representatives from the OCFO outsourcing firms presented their perspective, following are the excerpts that I would like to share.

Broad expertise that such firms offer

Professionals serving in such firms have been in the executive positions in the area of Finance and Accounting, CFOs, CEOs of Tier 1 companies from different industry verticals for several years. It is therefore a ready access to strategic leader across different areas of business with special emphasis on CFO services. They work as an internal management member and are a part of the leadership team in most situations and therefore are perceived as trusted advisors amongst their customers.

Services include fixed duration or assignment based roles in the areas of Finance, Administration, HR and IT.  They also offer bespoke corporate finance advisory services in strategic areas like finance led digital transformation, mergers and acquisitions, Capital and Debt restructuring, IPOs etc.

Specific business functions served.

Some of the functions include reporting and analytics design and development, 5 Year business plans and forecasting processes, Customer and Product profitability, Financial Models, Pricing strategy and Cost control / reduction measures, Internal Controls Design, Enterprise Risk Management strategies etc.

By partnering with the top management, such firms formulate an agreed action plan and ensure timely implementation of initiatives and strategic decisions and projects.  In case of startups who cannot afford a CFO on full time payroll, these firms help them build internal process efficiencies, regulatory compliance and guide them to secure appropriate VC / PE Investment. These engagements may be full scope or an interim arrangement as per the requirement.

Financial Transformation on cloud

In the corporate roles, professionals working with such firms have been SAP end users and / or been part of ERP implementation decisions and processes.  These are interesting times and many of the customers they serve run SAP to manage their enterprise operations.  Many of their customers are deliberating on their IT landscape and exploring the option to move to the cloud.  From a finance perspective, this is an important decision as it impacts the cash flows and the manner in which applications are consumed to support business processes.  Moving an on-premise landscape to the cloud environment at a very broad level would for the CFO mean moving from CAPEX to OPEX in cash flow terms.

However that being said, cloud deployments offer the ability to consume the software as required and hence the benefits can be more effectively measured against the software subscription.  With the extensive depth of offerings in the area of finance deployed on cloud, customers can manage a hybrid business process more effectively and efficiently.  Business Process Outsourcing decisions are easier to make as investments are not locked in the on-premise software licenses.

If we try and understand from the above, what could be the benefits or the downfall of the above approach of an outsourced business model, following are some of the points that can be listed:

Benefits

  • Ability to hire experienced professionals for a fixed term or against any specific business requirement without having to commit long term and depend on an individual skill set
  • Collective experience of such firms can be leveraged for the best decisions and outcome
  • The right skill set can be aligned to the relevant requirement that needs to be addressed
  • Outside in approach
  • Leverage their experience to drive the right amount of Digital Transformation to improve process efficiencies
  • SAP Implementation Partners can provide value added services by having such experienced professionals as part of their project implementation services. In other words, they can provide value added business transformation services to help drive digital transformation around Finance and Accounting processes

Downsides

  • Lack of an understanding of the technology and application landscape with the client, thus delaying effective performance during the period of the services tenure
  • Clients not able to develop and nurture in-house skills
  • Safeguarding Confidentiality can prove to be a challenge as certain specific tasks and initiatives can be extremely strategic in nature
  • Additional overheads around training on the applications and technology used by the clients served by such firms
  • There can be potential conflicts between the persons deputed under such contracts and the stakeholders at their clients leading to differences of opinion

It will be interesting to explore how such service providers can tie up with a platform service providers, Implementation Partners to offer end-to-end automated managed business process service.

It will be worthwhile exploring the possibilities of how such business models will operate….leaves us with certain unanswered questions like:

  • How can they leverage technology to offer real time insights around their service offerings ?
  • Can they play an important role in finance led digital transformation by bringing in their collective experience ?
  • Can they offer reusable content in specific areas around Internal Controls, Risk Management, Treasury & Working Capital Management, Tax Planning etc ?
  • Can we in SAP leverage the expertise of such firms in demonstrating the value of our solutions to our customers ?

Perhaps going forward more such value added services models can be leveraged by customers who can consume not just the right technology but along with it, the appropriate expertise as and when required for best possible outcomes……unless the VUCA world has more surprises in store for us…..where readiness to act with agility and adaptability would the constant.

I look forward to reading your comments on this blog, to continue the discussion.

In addition, I will also encourage you to follow the following topics

1) read the SAP S/4HANA Finance topic page

2) ask your question here

3) read other blog posts on the topic.