Risk Mitigation and Industry Expertise Drive Finance Leaders to Seek New Solutions

With more and more F&A leaders ready to incorporate outsourcing as a value driver today, Barbara Hodge asks Raymond Tyne, Practice Director for Wipro BPO's F&A activities, what his clients' top priorities are. Risk mitigation, he tells us, is high on the list – meaning strategic risk management linked to the business planning process. As a result, stress testing is increasingly being built into service contracts. Raymond, thanks for joining me today. Given the broadening scope in Finance leaders’ responsibilities, what are they expecting from outsourcing agreements today? The first and traditional driver is still supporting the core business with lower costs and increased capacity, as it emerges from the recession. But we are seeing two additional factors emerging: one is a focus on the efficiency of the internal finance function and the corresponding transformation of that function, especially as benchmarking against best practices highlights shortfalls; and the other is an increased need to manage and mitigate against risk and compliance requirements. How do you extend financial transformation end-to-end, beyond the scope of an outsourcing agreement? We are seeing a number of clients working with advisors today, and getting good advice from these advisors. This means that clients tend to take a more holistic process view, and that they consider the impact of upstream inputs into the process. So even if we have no direct influence, indirectly we are seeing more end-to-end awareness. More clients are also trying to get procurement involved, so that is a good sign. Risk mitigation is a big concern for Finance leaders, and this is especially important when outsourcing is part of their service delivery model. How do you deal with this? From an outsource provider’s point of view, risk mitigation used to be dealt with as an isolated solution, which focused on delivery risk, disaster recovery, that kind of thing. Today, it’s very different. Most clients have a Chief Risk Officer, or at minimum the CFO will have someone of that capacity on their team. And talk today is really more about strategic risk management, generally linked to the business planning process. Risk is being reported to the audit committee, and there’s a lot more stress testing of solutions. From our perspective, we're seeing more engagements on stress test scenarios and simulated disaster recoveries. That’s something we used to do for financial institutions, but not generally for other clients because it costs money to simulate a stress test and shut down an office: You have to bus people to a remote location and it causes a lot of upheaval, as you can imagine. But the interesting thing today is that many clients want to build stress testing into the contract, so we are pricing for it. That tells me they are much more aware of risk in their operations, and just presenting a disaster scenario report won’t cut it anymore. What are the sources of risk within Financial Operations? There are two dimensions. The first I'll call "process execution risk", and generally this refers to disaster recovery. So: can we get the business operations up and running? Are we capable of recovering within two hours? Within ten hours? What we are seeing now is a little bit more "linkage" across the process, and a focus on the actual process risk. For example, we review the controls and risk frameworks that clients have in place: Are there adequate process controls? Do we have the right delegation of authority? The other dimension is around the end-to-end processes. For example, if we're performing billing and collections, our conversation about risk will extend upstream, into the end-to-end process and we’ll consider the inputs into the billing organization that may not be in our purview but that are part of the risk mitigation exercise. So, what if the feeds into the billing engine don’t happen as they should? As a service provider, how can we react? Do we need to have alternate staff on standby? Do we need to anticipate significant overtime for a few days? That's what I mean by linkage. It's more of an end-to-end process view where we look beyond the part of the process we manage. We're integrating with the client and looking at systemic risk. And that includes assessing what can happen on their side, how that'll impact us, and what we are prepared to commit to, in order to restore the process if things go wrong. So it's a much broader view than in the past. [inlinead] In light of this, how are you measuring the impact that you have on a client's business? This "value" occurs across multiple dimensions. We have one view that we share with the client, and then we also have an internal view. Typically, when we measure our clients' successes, we really look at it from a cost metric: cost of renewals, cost for cash remittance processed, that kind of thing. We also look at the next level of process-based metrics, like accuracy, timeliness, productivity. The other dimension is the business metric. This could include a number of different measures, for example in accounts payable we generally look at a couple of metrics: are payments happening on time? What is the impact on DSO? The focus here is on metrics that impact the business, and must be monitored carefully. So we're seeing those metrics bundled together in our discussions with clients. But we have additional metrics on our side, which we consider during internal reviews. Obviously, we measure the voice of the customer through a variety of surveys, but lately, clients are also expecting us to build innovation into our contract. A simple case in point could be that they ask us to report quarterly on additional insights, in terms of what’s happening in future state processes, or new developments in the industry that they should focus on. Or they’ll want to know, based on our investment in analytics, where else we can add value, or drive out cost, or improve efficiency, or enhance capability. It could be social media monitoring for clients who aren't doing that themselves. It could be looking upstream at their billing processes. Let me give you another scenario, where we leveraged analytics. One of the metrics we track for our clients is the value of innovation we bring them. For one client, we decided to run some analytics on the accounts payable process. Normally you don't bother too much with AP other than timeliness and accuracy but we really felt there was some opportunity there. We found that a significant percentage of their payments were being made early, without taking discounts. It was costing them hundreds of millions of dollars in cash flow. So that's the kind of insight we’re talking about. Who carries the cost of this analytics? Is it something you charge out to a client? So far, it’s really been Wipro's investment. As you know, we operate in a highly competitive marketplace, so to deepen our client relationships, we're making those investments in tools that allow us to run this analysis, and we’re sharing it with our clients, basically without cost. It's just built into our overall investment scheme. New clients, especially, tend to take it for granted. They are assuming we deliver productivity, and cost savings, … but they want to know what else we can do for them. The sales cycle is very different to how it used to be. It’s a fairly level playing field on cost, productivity, etc – but we differentiate ourselves through analytics. The criteria for decision making seems to be hinging on innovation. We typically commit to what is called a Business Value Board. For a medium size F&A engagement, we'll typically dedicate 2-3 consulting FTEs who constantly bring opportunities to the client based on industry, or on insights from other clients. If we see an opportunity, we’ll discuss the option of us investing on their behalf in return for a gain share, or payback. Within the end-to-end Finance spectrum, where do you see the biggest opportunities for improvement? That is always such a fascinating question because most of our engagements are on the end-to-end process and when you look at it from a cost perspective, I think we're already addressing probably 80-90% of the cost of the function. Where I think the biggest value is, and where clients are starting to show interest, despite a bit of hesitancy, is really around business forecasting – analytics, and some of the business insight. The value won’t necessarily accrue directly to the finance organization but it does accrue to the company. An example of this is a client we have recently taken on. I think the part that is going to add value is our commitment to them on the analytics front. So, for this particular client, the biggest issue is customer churn so that's one of the first areas we're going to focus on: What’s the reason for the churn and what’s the segmentation and the analytics and the insights behind that? They've not been able to do that yet because traditionally it's been expensive. The fact that we can bring low cost, quality resources to bear in looking at that particular challenge for them is a big plus. If we can find a way to address their customer churn or at least give them actionable insights, that'll be a huge value to them far beyond the typical outsourcing savings. So we are moving beyond addressing the cost issues in the finance function, from a dollar and head count perspective, to business impact. And that, in my opinion, is a bigger benefit to the client. What decisions are companies making about technology investments that support these kinds of analytics? From an F&A perspective, clients have the typical data warehouse structure – that's what they have the budget and money for. What they don't seem to have are the higher-end insight tools, or the staffing, to be able to run the multiple scenarios. Now, financial institutions are a different kettle of fish. They tend to be heavily invested internally. But for most F&A clients, their infrastructure tends to be around reporting and typical business planning segment analysis. I don't really see a lot of clients outside of the financial industry that have what I would call the more traditional analytics capabilities. Most of our F&A clients don't have the kind of analytics capability we can offer, and we typically own that software. We have our Base)))™ tool that has multiple dimensions within it and multiple products that are folded into it. We also have a number of analytic tools and we’re running some BPA solutions. So while the clients typically own the system of record, most of the enabling tools that they're asking for, we bring to bear. Where are you building up domain expertise? Where are you prioritizing your investments? In the good old days of, say, two years ago, we used to be able to talk about our service line capability. Meaning: "We have X number of F&A FTEs" – and that tended to be a great conversation starter. Nowadays the conversation seems to start with, "We know you're an F&A capable provider. We've run the various reports on you from Everest or Gartner. But what do you know about our industry?" So, we've been making investments in subject matter expertise from a delivery as well as a domain specific perspective. Let me talk about the front-end for a moment. We have been engaging in bringing in people that are industry-focused. So, for example, if you think about Wipro from an F&A perspective, you know, we have a good presence in manufacturing, retail, CPG. Now we're hiring domain experts in those industries, with F&A specific knowledge. For retailers, inventory allocations and chargebacks are very unique processes. For manufacturing, it's more about cost accounting and how you optimize SAP. In insurance, it tends to be around claims adjudication and some of the claims processing, or customer processing. For banking, obviously, it's a whole different animal. So, from a front-end perspective we're investing in bringing in domain experts. So now when I visit a client, I take my domain expert with me so we can offer more detailed analysis, not just of F&A but also of the particular F&A wrinkles in their industry. We are also making sure that we have the appropriate expertise in our delivery practice, and we are using innovation councils that are working on particular industries. So say we do some interesting work with a retail client, on improving their process efficiency, we'd try to export that to our other retail clients. It's extremely important that we can demonstrate vertical expertise from an F&A perspective but also a broader industry perspective. That's the conversation that we are typically having with clients: How well do you know my industry? I have heard conflicting views on the extent to which this industry verticalization really offers value. How do you measure this additional service? What gets you in the door is the process expertise – no question about that – but overlaid with that is a conversation about industry-specific process expertise. In the last two months I’ve been in front of quite a few clients where the discussion started with process F&A but the clients immediately want to know, "Who are your other clients in my industry? What do you know about my industry and the F&A nuances?" We're actually seeing those two conversations coupled together now, which is why we're making the investment in terms of people. For example, we are actually engaged in a conversation with a semiconductor manufacturer now where we're looking at some best practices, and their comments were, "Don't bring me manufacturing best practices, you need to bring me semiconductor best practices". So it's interesting that clients are assuming we've got the process expertise but they're now asking us to demonstrate their particular industry expertise. At least, from a US perspective we're seeing that happen a lot. How is the retained team’s role at the client end changing? That is actually a fascinating question. What we used to see – and again, I’m really just talking about three years ago – was a "checkers checking the checkers" approach. The retained organization tended to be a little bit heavier than is the case today and their functions included a lot of error checking, compliance reporting, that type of thing. And bear in mind that F&A tended to be more focused on pure processing; not doing a lot of judgmental or value-add work. We are witnessing a change today. First of all, clients are using high quality advisors like KPMG, and these advisors are counseling their clients about the importance of properly designing the organization, and the roles that need to change. This is important when discussing what’s in scope verses out of scope. The role of retained organization now needs to focus on policy setting and metrics reviews, not fact checking, or error checking. And there's a lot more judgmental work that is now included in scope, for example, approval of journal entries or of invoices if they're within a certain level. As a result, the exceptions that used to be fed back to clients are significantly lower and we're seeing our role shift towards process metrics review – accuracy metrics and business metrics. So our conversations are based on how these metrics are looking and whether there are any issues that need to be escalated. We are having real business conversations now. So how do you measure your real impact on your clients’ business, given this broadening of scope? There are two main dimensions of service delivery. There’s what I'll call the contractual dimension, where we are measuring all the SLAs, the KPIs, process efficiency, business metrics – and making sure we're hitting all of those, that all the lights are green and everything is good. The other dimension we measure is the client relationship, because what we've learned over time is you can actually succeed in your business metrics but you can still fail from a client relationship perspective. So we do client surveys – fairly in-depth relationship surveys, and we survey client users, just to make sure that our efforts are being perceived correctly. It’s a softer measurement and we try to approach it from a client's view, not from our view. At the end of the day we marry the two views and determine where we are having any issues. This approach is important because we don’t want to get too myopic with an internal view. Thank you, Raymond, for your time.

Risk Mitigation and Industry Expertise Drive Finance Leaders to Seek New Solutions

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