Financial Management

According to the Office of Management and Budget, the federal government spent more than $7 billion in fiscal year 1997 to perform, maintain, and improve finance and accounting operations. Auditors, however, continue to report that these operations are plagued by deficiencies that undermine the government's effectiveness and drain resources that could be used elsewhere. Outsourcing--contracting for a function previously done in-house--is one approach being used by the private sector, as well as state and local governments, to reduce costs and improve financial management. This report provides information on (1) the extent to which private sector and nonfederal public groups use outsourcing 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.

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.