In accordance with the definition of outsourcing used in this report, these intra-organization arrangements are discussed as alternative strategies that nonfederal organizations have used to improve their financial operations. In addition, when considering outsourcing, an organization may focus on an entire function or portions of a function. Objectives, Scope, and Methodology

The objectives of our review are to develop information on (1) the extent to which selected private sector and nonfederal public organizations used outsourcing as a strategy to improve financial operations and reduce costs, (2) existing outsourcing vendor capacity to perform finance and accounting operations, and (3) factors associated with successful outsourcing. Representatives of all of the 15 organizations we spoke to said they had considered outsourcing as a management strategy for improving their financial management operations, and 12 organizations had outsourced portions of their finance and accounting functions. For example, officials from one company stated that their approach to improving financial management consisted of: (1) consolidating the accounting function into as few locations as possible and having each location move to a single system to accomplish the function, (2) simplifying existing processes, (3) developing systems that capture data at the point the transaction originated, regardless of the location within the organization, and (4) outsourcing all or parts of processes that could be done more efficiently or effectively by a third party. In addition, to the extent that cost reduction is an outsourcing goal, reductions in the number of an organization’s finance and accounting personnel does not in itself translate into reducing the organization’s overall costs because such reductions may be offset by increased outsourcing vendor contract costs. Some experts in the field have estimated that in 3 to 5 years, organizations with large, complex finance and accounting operations will be able to outsource their entire accounting or finance function. Factors Associated With Successful Outsourcing Decisions

Our work with outsourcing users, vendors, and consultants identified the following five key factors often associated with successful decisions to outsource finance and accounting operations. Identifying Deficiencies Through Benchmarking Is a Key Factor for Outsourcing Decisions

Benchmarking generally involves identifying organizations that have developed world-class processes and then, using applicable performance measures (such as cost per transaction, average processing time, or error rate), comparing an organization’s performance to that of the world-class organization. Market Research Needed to Determine Capacity and Quality of Outsourcing Vendors

As discussed previously, vendor capacity for large, complex accounting and finance functions is a consideration in the outsourcing decision process. These key factors are (1) maintaining sufficient expertise and controls to effectively oversee outsourced operations and (2) establishing a well-defined, results-based contract with the outsourcing vendor. The contract detailed performance expectations for the outsourced processes, including the timing of reports and the presentation, availability, and quality of accounting and finance information and established a related set of performance measures intended to help determine the extent to which the goals of the outsourcing arrangement were achieved.
Why GAO Did This Study

Pursuant to a congressional request, GAO provided information on the use of outsourcing to achieve cost savings, management efficiencies, and operating flexibility in finance and accounting operations, focusing on: (1) the extent to which selected private-sector and nonfederal public organizations used outsourcing as a strategy to improve financial operations and reduce costs; (2) existing outsourcing vendor capacity to perform finance and accounting operations; and (3) factors associated with successful outsourcing.

What GAO Found

GAO noted that: (1) GAO's analysis of the experiences of 15 private-sector organizations coupled with discussions with industry experts and outsourcing vendor officials and a literature review revealed that nonfederal organizations use a variety of strategies to improve their financial operations and reduce costs; (2) while all the private-sector organizations GAO reviewed considered outsourcing as a financial improvement option, they have relied principally on other strategies, such as consolidating systems and operating locations or reengineering business processes, to achieve their financial improvement objectives; (3) to the extent that these private organizations have outsourced any portion of their finance and accounting operations, such outsourcing was generally limited to routine, mechanical tasks, such as check writing or payroll processing; (4) only 3 of the 15 organizations GAO contacted had outsourced an entire process within a finance and accounting function; (5) the existing limited capacity of outsourcing vendors to perform larger, more complex finance and accounting operations may have constrained wider use of outsourcing by these organizations; (6) experts in the outsourcing field have estimated that it may be 3 to 5 years before this type of capacity is widely available; (7) the experiences of the organizations in GAO's review and GAO's analysis of pertinent literature may provide some lessons for future federal agency outsourcing decisions; (8) factors considered as part of the outsourcing decision process and often associated with successful outsourcing were: (a) establishing an outsourcing policy that specifies what process and criteria to follow in making the outsourcing decision that will achieve the organization's overall goals; (b) performing a strategic analysis to determine the organization's core competencies; (c) benchmarking the organization's processes against those of world-class organizations to determine comparable costs and identify any deficiencies in its operations; (d) performing market research to determine whether a competitive market exists for the outsourcing services the organization needs; and (e) considering carefully the ramifications of potential job loss or other possible adverse personnel impacts that could occur as a result of outsourcing; and (9) after an organization decided to outsource, two key factors identified with successful outsourcing arrangements were: (a) maintaining sufficient expertise and control to effectively oversee the outsourcing vendor; and (b) establishing a results-oriented contract that included appropriate performance measures.