Outsourcing the Financial Chain Banks as Partners of Non-Banks in Financial Chain Outsourcing

Outsourcing the Financial Chain Banks as Partners of Non-Banks in Financial Chain Outsourcing Jochen Franke Institute of Information Systems, E-Finance Lab J. W. Goethe University, Frankfurt franke@efinancelab.com www.is-frankfurt.de | www.efinancelab.com

Summary • Financial Chain Management • substantial efficiency potential in financial processes using “industrialization” approach, but… • …”everyone is the best”: managers tend to systematically overestimate their process quality and competencies  cultural barriers to value chain redesign • Efficiency Potential by Value Chain Crossing • Banks as suitable partners for specific sub-processes • Banks with specific competencies in financial processes

Financial Chain Cost and Quality | Sourcing | Sourcing Partners

„Financial Chain“ • Financial Chain as secondary process • efficiency potentials through Financial Chain Management • technical and cultural challenges • cultural problem: readiness to accept that a prospective sourcing provider has higher competencies than the firm • analysis, if there is impact of outsourcing experience on competence evaluation by managers in charge QUALIFY FINANCE Financial Trade Enablement PRICE ASSURE Analysis INVOICE Financial Trade Settlement DISPUTE PAY

Data • CFOs of Germany’s Top 1,000 companies (non-banks) • written questionnaire to top 1,000 firms (revenue) • industry segmentation according to NACE rev. 1.1 • prior to mailing the questionnaire, each company was contacted by telephone to identify the chief financial officer to whom the questionnaire was then directly addressed • 103 completed questionnaires were returned (10.3%) • online benchmarker at http://www.efinancelab.com/benchmarker/

The Financial Chain • processes exist in 85-99% of firms, but often not in sole process ownership of CFO • indication of lack of integration and process orientation • the more units responsible for operations, the less content managers are with processes • industrialization of financial processes by integrating financial chain a promising optimization approach: • majority of the CFOs (77.1%) considers an integration of the processes to yield a higher optimization potential than an optimization of isolated sub processes

Costs of the financial chain • 22% of annual IT budget for financial chain processes • subprocess invoicing • B2B: 67,687 invoices/month (B2C: 230,294) • 67% via (physical) mail • avg. costs / invoice: EUR 15.5 • electronically: EUR 2 • 8.3% of all invoices incorrect, avg. costs per dispute: EUR 128

only 42.5% are content with their financial processes (6.1% fully) one out of two CFOs has already identified areas to improve upon less than 25% have fully documented financial processes But… despite common dissatisfaction with financial chain, only 3.2% consider their financial chain management inefficient compared to industry peers this overly optimistic self-evaluation also found when self assessing quality of IT support for primary processes (supply chain), internal data quality, process costs of FC Quality of the financial chain

Outsourcing of financial processes • BPO to the rescue: outsourcing (parts of) the financial chain as a chance to employ excellent services even for secondary processes higher competencies of sourcing provider as main argument • still, CFOs consider the higher competence in-house (60.9% )  reluctance to outsource • 51.5% of CFOs consider selective sourcing of financial chain possible (32.3% don’t) • less than half of all firms (49.4%) have already evaluated possible outsourcing benefits in the financial chain. • most firms with outsourcing projects reported success, operational cost savings of 10.3%

Suitable sourcing partners • Who are competent sourcing providers for parts of the financial chain? • banks: finance, assure, payment • other FS providers: qualification • IT service providers: invoice and dispute

Value Chain Crossing QUALIFY Bank FINANCE Financial Trade Enablement PRICE ASSURE Empirical study with top 500 banks to subprocess finance Each company was contacted by telephone to identify the chief credit process officer to whom the questionnaire was then directly addressed 129questionnaires were returned (25,8%) Analysis INVOICE Financial Trade Settlement DISPUTE PAY

Value Chain Crossing • What are specific competencies of banks in financial processes? • Fraction of financial process documentation is much higher in banks • Empirical evidence: documentation has significant impact on process quality

Value Chain Crossing • What are specific weaknesses of banks in credit processes? • Internal Integration

Value Chain Crossing • What are specific weaknesses of banks in credit processes? • Multiple manual data entry • Banks‘ strengths are located at the business layer (documentation of processes), banks‘ weaknesses are located at the IT layer (internal integration and multiple data entry)

Conclusions Main findings • substantial efficiency potentials in industrial financial processes • outsourcing of the financial chain still quite rare • cultural barriers due to CFOs systematically overestimating their process quality and competencies compared to process experts • banks are seen as potential partners for finance, assure and payment processes • Financial processes in banks are much better documented • A lot of optimization potential lies in the internal integration of IT systems Further research: cooperative sourcing • coordination mechanisms for “financial value chain crossing” • e.g. db-eBills for invoicing

http://www.efinancelab.com Jochen Franke franke@efinancelab.com

Outsourcing the Financial Chain Banks as Partners of Non-Banks in Financial Chain Outsourcing