“Incent and Reward” versus “Lift and Drop”

guest blog on finance and accounting outsourcing (FAO) comes from Bill Frech, 
Partner & Managing
Director, CFO Services North America, TPI.

Standardization of processes and implementation of best practices requires a degree of maturity, but instead of explaining the nuances, some analysts have jumped on the bandwagon of blaming F&A outsourcing for missed expectations. Is their finger-pointing on target?

The waters are muddy, and we decided to clear up some common misconceptions by surveying a number of clients involved in TPI-advised deals that have been in place for over a year. Some were multifunctional, others were just finance and accounting deals, but they all have one thing in common: the deals are operating and proceeding well.


We admit that all has not been smooth sailing. Bumps in the road were
inevitable, especially with provider attrition, deficient resilience,
and lack of transparency. Add to that the risks attributed to changes
in processes, providers and timeliness, lack of innovation, frequent
contract renegotiation, and expressed need for provider
micromanagement, and FAO can quickly become a growing pain.

So why have our clients indicated that they would select the same
provider if given the opportunity to re-evaluate? Do they not learn
from their “mistakes,” or have they realized the added value from
F&A outsourcing?

When establishing deals, buyers of outsourced services primarily look
for cost savings and process consolidation, focusing on transactional
elements. Deals are negotiated to that end, given the current
Sarbanes-Oxley environment and risk-averse CFOs. As such, providers are
cornered into delivery of services and may not allocate resources to
innovation either within the scope of the contract or synergies with
non-F&A areas.

But at TPI, we recommend incorporating mechanisms within a contract to
incent and reward provider innovation and process standardization.
Establishing a cost and gain sharing mechanism – first piloted on a
small scale and ramped up over time – improves operation and client

Once the outsourcing relationship has demonstrated a successful track
record, the rules of the game change. The appetites for risk acceptance
surface as additional benefits become apparent. Maturity improves
strategic governance on both the provider and the client side, paving
the way for innovation and process re-engineering.

And this is where our clients get a workable contract that stands the
test of time. Despite the initial challenges, clients embrace F&A
outsourcing activity acknowledging its benefits and have no plans to
terminate or renegotiate their deals for lack of performance.

The road to maturity is a bumpy one, and without clear directions, many
become lost as they succumb to the temptation of taking shortcuts. And
that’s where advisors can help clients through the selection and
contracting process, guiding them past near-sighted objectives and
focusing on long-term goals.