Outsourcing Finance and Accounting in Germany’s Mid Market Segment

At last year's SSON conference in Berlin, one of the sponsors participating caught my particular interest: Greenlight Consulting. An innovative, award-winning company founded in 2006, Greenlight was originally founded as a consulting firm, focusing primarily on restructuring Finance and Compliance processes. What’s interesting is that, three years ago, Greenlight saw sufficient potential to launch a separate Accounting services unit in Germany. Among industry experts there appears to be some agreement that Germany is one of the biggest growth markets for the shared services and BPO industry. Fast forward three years and Greenlight Accounting Services employs 40 Finance and Accounting specialists at two sites in the South of Germany. They are clearly committed to Germany as a location for their service centres, even though they cannot offer the labour arbitrage of competitors with offshored delivery centres. According to Greenlight’s management, cost is not the primary motivation for their large and mid-sized customers, however. Their customers require highly qualified Finance staff nearby, as well as native speakers. In addition, they appreciate a provider who not only understands the German business culture but is also flexible and agile enough to adapt to a customer’s processes. Even for their international subsidiaries, German-based customers, meanwhile, seek Greenlight’s support to centrally manage their Accounting processes and resources. What these customers are looking for is an international network along with local know-how where necessary, or legally required. During my career as a manager in Finance and Accounting roles, I have worked in companies that had to build Shared Services Centres fast, primarily to leverage offshore or nearshore labour arbitrage opportunities. I was surprised, therefore, to learn about Greenlight’s success and wondered whether outsourcing F&A processes to onshore providers might be becoming a new trend these days. Among industry experts there appears to be some agreement that Germany is one of the biggest growth markets for the shared services and BPO industry. In a recent study entitled "Business Services in Germany" by GTAI (GTAI or Germany Trade and Invest is the economic development agency of the Federal Republic of Germany), I read that outsourcing in general is expected to grow by more than 10% per year, in the near future. The main elements of this growth will come from the outsourcing of Finance and Accounting as well as HR processes. According to the GTAI study (original source: Pierre Audouin Consultants/2013), the Finance and Accounting outsourcing market in Germany will grow to 622m Euro in 2016 (nearly double the 360m Euro of 2012). If we believe the report, change is on the horizon. However, there still seems to be a lot of scepticism about outsourcing Finance and Accounting. According to a recent study by Finance-Research in cooperation with HP ("BPO in der Finanzabteilung"/2013) only 23% of the 189 CFOs and senior Finance managers interviewed in companies of more than 100m Euro revenue, had already outsourced Finance processes. However, 34% planned to do so within the next three years. Looking at the different segments of the German economy, it is worthwhile distinguishing the development of Germany’s large enterprises (i.e. DAX 30) from the mid-market and small companies. Only 23% of the 189 CFOs and senior Finance managers interviewed ... had already outsourced Finance processes. However, 34% planned to do so within the next three years. As I learned at last year’s SSON conference in Berlin, most of the large German multinational enterprises have by now established a Shared Services Centre structure, many of them multifunctional and with locations in Germany and abroad. Depending on the maturity of their Centres, some of them have taken the next step and outsourced either selective processes or a whole centre. Their preferred providers are usually the top outsourcing leaders in the industry. It is well known that Germany has a large number of small and medium sized enterprises. The German mid-market segment could be particularly interesting for outsourcing, and, in fact, GTAI see the biggest outsourcing potential for back office services in mid-market companies (revenue from 20m Euro to 1bn Euro). These generate 39% of total revenues and employ 29% of the total workforce. Some of the most innovative companies in Germany are mid-market companies – so called "hidden champions". Several of them are still family owned. Another unique factor is that these companies tend to be rather decentralized, with multiple sites across Germany and, if internationally active, also abroad. GTAI see the biggest outsourcing potential for back office services in mid-market companies (revenue from 20m Euro to 1bn Euro) According to some of the leading outsourcing providers, the large mid-market companies are a very important market segment. Nevertheless, they are lagging behind UK and US mid-market enterprises in the adoption of SSC/outsourcing models. According to Finance-Research, German CFOs still prefer to have their Finance departments in-house and in a German location. If mid-market companies decide to establish Shared Services Centres, they are usually built near company headquarters, or in one of the regions with low infrastructure and moderate labour costs (e.g. regions in the East of Germany, Berlin). Offshoring has become less attractive in the last years as Germany has clearly increased its competitiveness. The average labour cost increase of the last 10 years was a moderate 1.6%, the lowest of the 27 EU countries. Some of the typical nearshoring countries like Hungary, Poland and the Czech Republic, meanwhile, have increased their labour costs by 6-7% annually. Another reason why mid-market companies may be more reluctant to offshore is the potential negative impact on their public image. Since many of them are family owned they are often deeply rooted in their region and have played an important role in creating jobs in rural areas or smaller German cities. [inlinead] Due to the structure and scale of many of the smaller, mid-market companies, it would not make sense to even establish a Shared Services Centre. Instead, many CFOs are simply centralizing their Finance & Accounting staff in their headquarter location. When Finance-Research/HP asked CFOs what their outsourcing plans for the future were, 34% of them said that they planned to outsource within the next three years, focusing on high volume and standardized processes that don’t provide a competitive advantage for their companies. The processes most commonly in scope are Accounts Payables, Accounts Receivables, Collection and General Accounting. For large German enterprises, outsourcing is not seen as an option to standardize processes. Most CFOs want to get their processes in shape before they outsource. Cost reduction is no longer the only reason for outsourcing, it appears. Some of the CFOs commented, in interviews, that they wouldn’t even expect substantial savings – especially when outsourcing to a German based provider. What seems to be even more important is flexibility, process stability, and the improvement of Finance service quality. Talking to Greenlight’s management and other outsourcing providers, they see some additional reasons or trends that might convince CFOs to consider outsourcing: Many mid-market companies have outsourced or offshored core processes for years, especially in the manufacturing industry. Functions like Finance will increasingly be asked why they are not following suite. Particularly for the mid-market and small companies, financing challenges have increased since the financial crisis. Outsourcing entire processes, including IT infrastructure, may be an option to avoid having to make investments. Focusing on core processes is a general trend in many industries and also in Finance: CFOs and senior Finance managers are increasingly getting involved in strategy development and performance management of their companies. Outsourcing of transactional processes could give them the time and space they need to accommodate these changed priorities. Due to Germany’s overall demographic development, the market is also changing for qualified Finance staff. Mid-market CFOs will realize that the competition for talent has reached the Finance function, too. Cloud-based applications will make it much easier to outsource standardized Finance processes and may remove some of the concerns about the complexity of an outsourcing project. On a general note, the trend towards specialisation seems unstoppable. With technology as an enabler, Finance – like other back office functions - will increasingly be broken down into processes that can be assigned to a network of specialists, be they onshored or offshored, captive or outsourced. In spite of the scepticism and concerns of German CFOs, there are obvious opportunities for new mid-sized outsourcing providers, as Greenlight has demonstrated. Blending a consultative approach with outsourcing capability, and a clear commitment to Germany as a location for service centres with the flexibility to adjust to customers’ processes, seem to be the hallmarks of success for firms like Greenlight. Note: Rita Thies wishes to thank Mr. Wockenfuà, Greenlight Consulting; Mrs. Steinegger, Steria Mummert Consulting; and Mr. Zitzen, PWC Germany, for their input.

Outsourcing Finance and Accounting in Germany’s Mid Market Segment

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