Sunday, October 17, 2010

An Entrepreneur’s Delight

Outsourced CFO Models – A growing niche with brilliant prospects*

The recession that followed the financial meltdown has been a wake up call in the whole world. Where as many have argued that offshore-outsourcing will be adversely hit, the trend has not indicated any signs of adverse impact. On the contrary, now when the dust is settling, the offshoring outsourcing models for many business processes and functions seem to be standing tall. The offshore-outsourcing model has withstood the tornado. It has re-emphasized the need to be lean in structure.

One of the business processes and functions which is gaining momentum is Outsourced CFO models. The most commonly outsourced finance operation is transaction processing. The savings in this area can be potentially significant. But CFOs are now willing to move from outsourcing transaction-processing activities in finance to outsourcing business decision-support activities such as planning, control, and management reporting.

It is now the ‘Lean Is In’ mental setup among the corporates, which will further drive the prospects for outsourcing market for many other business processes and functions. Companies are reshuffling and juggling their business strategies in order to tone down the corporate structures. Naturally, this gives rise to higher potential for the outsourcing models. The potential is growing even from India’s standpoint too. In this article I am going to highlight the burgeoning entrepreneurial prospects for outsourcing CFO business models. Earlier [refer to my article: Importance Of Identifying A Niche Segment For An Entrepreneur], I had written about one more outsourced business function as the entrepreneurial opportunity – Marketing Consulting as outsourced business function.

Captive Offshore Centers are not a new concept at all especially with many MNC banks, who have set up their captive offshore center in countries like India, China, Philippines, Brazil and Indonesia. But this model is getting greater acceptance with other organizations that see advantage in setting up their own captive centers for financial processes. According to a report by Deloitte, tax planning and compliance is emerging as an important opportunity for offshoring.

Primarily the captive option for offshore outsourcing offers following advantages. The advantages are listed based on weightage they provide on the overall scale of advantages: Process efficiency, Process Quality and Cost Reduction. Since the finance operations are very information sensitive, it makes a good option for companies to set up their own captive centers. This gives the companies a better hold on the process control.

The second type of option for offshoring/outsourcing finance operations is outsourcing it to a vendor. This type of option gives organizations to scale up to the offshoring arrangement rather quickly. The advantages of this type of option, based on the weightage on the scale of overall advantages, are: Cost Reduction and Leveraging Technology Expertise. These two advantages make significant impact on the bottomline of an organization. This option will work for a company whose primary focus is cost reduction.

A third option for offshoring/outsourcing finance operations is that in which both vendors and the company have stakes in a pre-agreed proportion. The most popular form of arrangement in this model is Build-Operate-Transfer (BOT) and Joint Ventures (JVs). As the name suggests, in BOT, the vendors establish the set-up, manage the operations for few year [or any time frame agreed upon] and then transfer back the entire operations setup back to the company so that it becomes a captive center for the company.

Till now the general perception of outsourcing has been where a company in the West offshores the outsourced function to India. But corporate India today is facing few challenges like rising cost of retaining employees and increasing rentals and price of the real estate. It makes a lot of sense for India Inc. to outsource their business processes and functions, and focus on the core competencies. It pays to adopt change early.

Whichever outsourcing model a company chooses, you as an entrepreneur will have an edge over others, only if you carefully consider your human capital around some important variables like subject knowledge and understanding of tax and company laws of various locations across the globe. If you want to venture into this niche as a service provider, then you must deem knowledgeable human capital as the winning strategy for your business.

Anjana Vivek is one of the entrepreneurs to have ventured into Financial Consulting as outsourced business function. Tune in after a few days to read her interview to understand better the prospects of the Outsourced CFO model.