“Physician, heal thyself” is an adage that can well be applied to today’s stressed finance leaders. In a global business environment in which every item of spend is under the microscope and every cent of revenue is increasingly hard fought, the finance and accounting (F&A) organization is no longer outside the purview of review for both performance and cost effectiveness.

As every CFO knows, the F&A organization’s effectiveness is today being measured against demanding expectations in an increasingly complex, uncertain global business environment. With such a backdrop, the Cost of the Finance Function (COFF) can be a handy tool that can be deployed and computed rather easily. In essence COFF is a holistic measure of all outlays required to deliver the F&A services that an organization needs. It should include the cost of all resources allocated to the F&A function and may be then expressed as a percentage of total enterprise revenue. Hence,

COFF (%) = Total Cost of F&A Function / Total Enterprise Revenue x 100

To be truly meaningful, COFF must aggregate all costs: from the processes starting with data capture and transaction processing, to review and analysis. Remember to include all direct and indirect costs, and then compute allocations from other functions to the F&A function based on its team size or desks used by it:

• Human resources
• Technology (including amortization):
  • Hardware costs, whether maintained onsite or offsite
  • Software costs, including OSP (Ongoing Support Plan) providers and AMC (Annual Maintenance Contracts)
  • Primary and backup telecom link costs, telecom, etc.
• Property/facilities: Work out a per seat cost for the entire organization, including enabling functions and add shared services, like the cafeteria, before allocation.

With COFF now at hand, you have a starting point to benchmark the F&A function. In that sense, COFF is really a SMART goal (Specific, Measurable, Attainable, Realistic and Time-bound). When the data is captured and the underlying trend analyzed over a period of time (say, the trailing 4-8 quarters), you are ready to embark on a transformation journey with set short and medium term goals.

Former Chief of Staff to President Obama, Rahm Emanuel once said, “You don’t ever want a crisis to go to waste; it’s an opportunity to do important things that you would otherwise avoid.” And with the threat of a double-dip recession all but real now, we still have only part of a looming crisis. Tremors of the Eurozone crisis are being felt in every European economy. Business confidence has dwindled in emerging economies, even including the BRIC countries.

It is hardly surprising that every CFO is looking at bottom line performance ever more closely to squeeze out every single opportunity that optimizes costs. As a measure, COFF is thus a key indicator of the operational efficiency of the F&A function and can provide valuable insights to economize and optimize it.

With technology and the business climate changing fast, being nimble and adaptive is crucial for businesses—but all that requires investments. On the other hand, newer “delivery models” make a compelling case for us to look within and without for services and products. For example, hosting one’s own hardware/software versus SaaS and cloud-based service subscriptions can be attractive options. Or, as in some innovations from BPO (business process outsourcing) providers, choosing a “variable-ized”, bundled solution that blends personnel and technology costs. To “variable-ize” operational costs and provide effective hedges business cycle fluctuations, outsourcing providers are offering platform-based BPO services coupled with transaction-based pricing. To look at it from another angle, companies with a multi-locational footprint can compare the COFF at different locations and consider consolidating the F&A function at one location, or share best practices and improve the overall measure.

COFF may be benchmarked at 0.5-1% of revenues for an efficient organization, while for an “average performer” it could be 1-2% of revenues. However, there are many companies that carry COFF between 2-5%, an alarming number indeed! Obviously, figuring out how to get to where you wish to reach with COFF depends on where you stand today. The question thus is: where do you stand? Note the gap between where you are and where you can be—and the size of the opportunity becomes obvious.

One of the easiest ways to improve your COFF is to leverage current capabilities in the outsourcing marketplace. A third party BPO vendor allows CFOs the flexibility to link costs with enterprise business performance —and make F&A costs more “variable”.

Another immediate impact area to target is to shift levers from “employee KRAs” to “vendor SLAs”. Historically, finance leaders have been managing the delivery of their key outputs by linking them to the performance of individual team members, in many cases as monthly employee KRAs. While this helped keep the team on its toes, it also requires significant management time and bandwidth that can be better deployed elsewhere. Remember, on average most CFOs feel the quality of their MIS (management information systems) has lots of scope for improvement! The focus can shift to producing better MIS enabling quicker, proactive, “actionable intelligence”.

Consider past industry experience and studies that point to how outsourcing has helped organizations to leverage global, industry best practices. Add the resource optimization benefits from outsourced services and your business case becomes complete. Note here that the payroll function that was traditionally a key F&A function delivered in-house is now routinely outsourced to external providers. More and more CFOs are including finance and accounting outsourcing (FAO) as part of their strategy and those that have already outsourced are consistently outperforming their peers (who have yet to do so).

To conclude: when you have worked out the COFF and identified improvement opportunities, the next step should be to evaluate potential partners who can validate them, perform a cost-benefit analysis and help you prepare the business case for transformation. Start on your transformational journey with a time-bound implementation project to realize cost savings and improve the effectiveness of the F&A function.