Latin America is rich in opportunities, from growing market reach to rationalizing operating costs, but these opportunities are not exempt from related challenges.
For nearly two decades, we have been working in Latin America in a variety of consulting roles and, more often than not, we see our clients consistently facing one or more of the following issues:
- Managing Complexity
- Understanding Cost to Serve
- Improving Working Capital
- Optimizing Back Office Operations
- Leveraging Technology
We started a series of blog posts to share some of our views and lessons learned on these topics. The first one, Five Pressing Issues Confronting Multinationals in Latin America, provides an overview and sets up the discussion context. In this post, we will explore a topic often overlooked by LATAM Multinationals: Back Office Operations, the role it plays in supporting the organization, and how it should be leveraged to improve business performance.
As the economic environment continues to present challenges to every organization, managers, more than ever, are pressured to deliver the most value at the lowest cost in the least amount of time while maintaining customer satisfaction. With this in mind, the back office is not the first area executives normally turn to when developing a competitive strategy, however, leading organizations know it is a major contributor to their overall success. With the right strategy in place, organizations can effectively assess and manage their back-office operations to increase productivity, reduce errors, minimize costs and maximize the customer experience.
Although the operations of a back office have typically not been thought of as strategic, nowadays it is receiving the full attention of management as more and more back-office functions become major contributors to the success of a business and the customer experience.
Every company has back office functions that include the handling of:
- Claims processing
- Customer service & administration
- Payments/statement processing/adjustments
- Order fulfillment
- Logistics services
- Procurement services
- IT & HR Services
At a fundamental level, back offices repetitively process large volumes of transactions. These processes can be simple (e.g., invoicing & payables), or complex, multi-step, multi-touch processes that span days, weeks or even months.
Individuals involved in the processing of work can range from data entry clerks, to accountants, logisticians, procurement, HR, supply chain capital and IT professionals. But regardless of the function, the business objectives remain essentially the same — to process the work as quickly and accurately as possible, at the lowest cost, meeting service delivery deadlines and ensuring customer satisfaction.
Although optimizing the back office may not be the main focus of most LATAM Multinationals, there are plenty of reasons why this area deserves attention.
Based on our experience, here are some reasons as to why:
- Major Impact to the Bottom Line: Key operations such as multi-channel operations, payroll, customer service and accounting in aggregate represent a large proportion of resources for LATAM Multinational companies, which should be carefully managed to increase profitability.
- Significant Opportunity: Since back-office processes tend to be very staff-intensive and often involve manual, multistage processes, they are a perfect target for automation and optimization, which lead to increased efficiencies.
- Increased Customer Satisfaction: Back-office processes are a significant source of customer satisfaction due to their multiple touch points across the business.
- Impact on Front Office: Issues related to back-office processes drives significant amount of transaction volume to the front office, increasing the cost-to-serve if left unmanaged.
- Customer Loyalty: Positive interactions between clients and the back office can drive increased levels of customer loyalty.
As a result, many LATAM Multinationals are starting to ask themselves:
- Do we have the right back office structure in place?
- What is the nature of the activities where my back-office personnel spend most of their time?
- How can our processes be streamlined and improved to generate greater value?
- What are the efficiencies we might expect as a result of consolidating our back-office operations?
- Which opportunities can be implemented in the short term with low investment?
- Which processes could potentially be migrated to Outsourcing and/or Shared Services?
Granted, these are in fact the critical questions LATAM Multinationals should be asking themselves, but many are having trouble coming up with the right answers as they focus on growing their businesses.
As the saying goes, trying to be the best at everything will make you the best at nothing. Therefore, LATAM Multinationals need to first identify their operational drivers, or those variables that actually create value in a significant way for their business. Some examples include: automated account reconciliations, transactions posted correctly the first time and streamlined process cycles, amongst others.
Nonetheless, identifying these drivers is not enough, developing high performance back-office capabilities is a direct consequence of not only doing the right things –effectiveness, i.e: cost of capital, days sales outstanding, days payable outstanding, billing accuracy, effectiveness of controls, etc. – but, also doing things right –efficiency, i.e: cost as a % of revenue, cost per invoice, cycle times, manual vs. automated, preventive vs. detective, etc.–. Thus, achieving high performance means focusing both on “effectiveness” and “efficiency” simultaneously.
By concentrating on improving these operational drivers, LATAM Multinationals can positively impact their financial drivers such as increasing revenue, containing cost and improving capital productivity, thus creating value for shareholders.
The Journey. Start From the Top. Assess the Opportunity.
An opportunity assessment is a baseline analysis of the company’s people, processes and technology to uncover potential improvement opportunities and associated implementation roadmap. This assessment focuses on performing quantitative and qualitative analysis and observations that quantify the potential opportunities and support the business case.
If you are wondering how “strong” the business case can be consider the following: In an article entitled: “Automating the bank’s back office,” McKinsey details the experience of a bank that was pressed to increase the efficiency of its back office that had until then been characterized by its manual processes that were costly, slow and prone to errors.
Consequently, the company decided to implement a combination of business process-management software and electronic forms to create an automated and digitized workflow. As a result, the amount of time back-office staff spent handling account changeovers fell by 70%; generating a return on investment of 75% with a payback period of 15 months.
As more enabling technologies that improve the productivity of the back office come to existence, the additional cost savings only strengthen the business case. But, these savings—mainly coming from a reduction of SG&A expense— are not the only factor to consider.
From our experience, 60-80% of all F&A activities in most organizations are transactional and non-value-adding. With this in mind, LATAM Multinationals need to understand that: how much they pay their employees matters, as much as what they are paying them for matters.
Hence, provided a business case to support an investment in back-office capabilities exists–and it often does–LATAM Multinationals should seek to employ an approach based on “best practices,” or methods or techniques that are prescribed as being correct or the most effective for a certain process/activity– to deliver process efficiency, operational quality and continuous value to the organization.
This optimization approach has five dimensions:
- Standardization and automation of processes
- Communication and knowledge sharing
- Clear governance and performance monitoring
- Realistic KPIs (key performance indictors) and
- Repetition, with a focus on continuous improvement
By implementing this approach, we have uncovered with our clients many “best practices” that are not confined to a specific industry or organization, and most likely could be implemented in your business.
The following are just some that relate to Accounts Payable and Accounting Operations:
- Electronic invoice presentation for payment (EDI, etc.)
- Rules-based matching, exceptions and automated workflow
- Imaging and workflow to effectively manage paper invoices
- Electronic catalog for web-based purchases
- Vendor portal for invoice inquiries and supplier self-service
- Reducing/eliminating manual journal entries and reconciliations
- Automated tools for error-checking
- Availability of JE, reconciliation and accrual-supporting documentation
- Regular review and clearing of suspended accounts
- Robotic Process Automation
- Automated T&E expense management
Developing your company’s back-office capabilities in house is not the only option. Managers should also consider the Shared Services Model and Business Process Outsourcing (BPO).
Organizations that have chosen this path in the past have enjoyed benefits including: scalable operations, labor arbitrage, standardization, productivity, increased service levels and the ability to focus on the core business with less degree of complexity in terms of implementation.
Whether you chose to develop these capabilities in-house or outsource them, LATAM Multinationals need to stop and ask themselves:
How is my company leveraging its back office to improve business performance? At Auxis, true to our motto, we believe in growing your business, not your back-office.