Can technology replace the FD?

What value is the UK’s three million-plus SMEs getting from a financial director – or even the finance department? Web-based technology now offers cost effective outsourcing that delivers relevant management information within a clearly-defined cost structure. So why keep finance in house?

For an innovative nation with a high proportion of SMEs and owner-managed businesses, the UK has retained a surprisingly traditional approach to management roles, alongside a somewhat cynical view of the potential benefits that technology can deliver.

As a business expands, bodies are added to the finance function and a financial director appointed to the board – but what value is that finance function delivering to the business? Cost, certainly – but value? Undoubtedly the information provided by the department is critical to the business. But what value is each individual in the department – from accounts clerk to FD – delivering to the business?

Indeed, how many businesses still complain that key information from budget versus actual to strategic forecasting is delivered too late, or is inaccurate or incomplete? And how many highly skilled finance staff spend more time number crunching, wrestling with inadequate, often outdated finance software, than analysing information to improve the business?

To date, few SMEs have considered the alternative; using secure web based technology to enable the finance function to be managed by an expert third party. Yes, some may use external payroll providers and, when smaller, rely on a local bookkeeper. But how many really understand the options for replacing the entire finance team with an external supplier?

Understainding the outsourcing process
Many SMEs are cynical about the outsourcing process. And that comes as no surprise, given that even some leading organisations happily combine everything from the wholesale outsourcing of a bank’s processing to India to the use of local bookkeepers within the ‘outsourcing’ tag. It is no wonder that the results of studies into the efficacy and value of outsourcing arrangements are often confusing and conflicting.

Opting to outsource the finance function to a third party is a different service. This is not, necessarily, about cost reduction – although there are potential savings to be made. How many FDs spend time managing staff, coping with training, paternity/maternity leave and illness – rather than undertaking the key role of strategic management? Simply removing recruitment costs can deliver a significant bottom line advantage.

But cost savings alone cannot be the primary outsourcing objective. The focus should be about measuring the value of that finance function, and leveraging the skills, expertise and infrastructure of a third party to attain excellent, timely and relevant management information.

For many companies, the primary concern is one of control: how can a business keep a handle on credit control or ensure that business critical changes are immediately reflected in the information provided within the outsourced monthly management accounts?

Today’s online technology that leverages the fast connections offered by broadband and ADSL, combined with the quality of financial software used by an external provider, offers a significant commercial advantage.

Taking this approach, an SME has access to a financial software product far more functional and sophisticated than any they could afford in house. It also provides scalability, allowing the organisation to grow without incurring the huge costs associated with software and infrastructure upgrades and replacement.

How the process works
The process is simple from day one, when information from existing systems can be imported into the external supplier’s system to get the company up and running within a couple of days – a far cry from the 12 to 16-week timeframe associated with an in house software implementation.

Once the agreement is in place, information – such as invoices and expense receipts – are regularly collected by the outsourcer and scanned into the system, and invoices paid based on pre-defined time periods via BACS or other electronic payment systems.

Critically, the SME has full visibility of this process. Online access delivers not only improved management information but also a real-time, up-to-date view of invoices, purchase orders or credit control figures.

This is a real time process that supports the immediacy of budgeting and financial processes required in today’s competitive position. Indeed, the SME can also have access to budgeting and forecasting software online, hosted by the outsource provider – on a continual or ad hoc basis.

Without question, most SMEs will see the quality and relevance of financial information improve if they take the outsourced route.

How it is costed
Obviously, outsourcing is not something that can be undertaken immediately by every SME organisation. Most will have an investment in infrastructure, including IT systems, that cannot immediately be written off. But for those undertaking significant change, from growth that demands new finance software to MBO or acquisition, outsourcing should be a consideration.

Costs are controlled, supplier performance is contract based with strict Service Level Agreements (SLAs) – and financial penalties – providing a quantifiable cost versus value for every business function. For example, the external provider will have a set number of deliverables each month, such as ensuring all reconciliation is completed to a set date. Missed deadlines or failure to supply one of these deliverables will result in a financial penalty.

The flexibility of the finance software also ensures that the system can be tailored to meet the needs of each SME, including the capture of identified Key Performance Indicators, such as sales per square foot for those in the retail sector.

In addition, SMEs can exploit the specific skills of external suppliers for strategic direction. At a basic level, the management accounts can be supplemented by commentary that highlights key issues – such as shrinking margins or escalating costs in specific areas.

But such an organisation can also exploit its wide expertise in financial management to aid strategic direction, taking advantage of the business insight within the management accounts to provide relevant, tailored advice. For any business without an FD, this level of strategic understanding and input is invaluable, providing a different perspective on the business performance, potential and climate for change.

The value of outsourcing
Outsourcing the finance function is not simply about reducing costs – indeed, any organisation with this simple focus is missing the point. Yes, if you take into account IT infrastructure, office space and salaries, outsourcing can be a cheaper option. But this is not about using a bookkeeper to undertake basic finance processes.

This is a tailored service designed to deliver measured business improvement: it provides cost control, improved business information and quantifiable value from finance for the first time. So why retain a costly, in-house finance function that is still failing to deliver the insight required for business success?

And for those that take up the option, where does this leave the finance director? For SMEs that already have one, a straightforward process-based outsourcing agreement will provide the improved management information that releases the FD from personnel management and administrative tasks to concentrate on delivering real, quantifiable business value through strategic business guidance.

But, for SMEs, if management information and strategic guidance is today so readily available from a third party, is the FD role prerequisite or simply a case of following tradition?

David Rankin is managing director of Vantis Outsource.

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