A few organizations have outsourced parts of their operations for many years. Recently, however, interest in more widespread use of outsourcing has increased dramatically. This trend is documented in a recent research report which states that outsourcing has become “a growing business phenomenon and possibly even a cultural phenomenon.” Early outsourcing focused on relatively low-skilled support functions such as janitorial, food service, guard, or data entry services. However, a recent international outsourcing study found that outsourcing in some areas, such as information technology—including information systems development—is growing rapidly. Some organizations have also begun to outsource functions dependent on information technology, such as customer service, research and development, logistics management, and finance and accounting. While outsourcing is growing, the concept is not clearly or uniformly defined. Definitions of outsourcing can be viewed as ranging from the prolonged use of consultants to perform a simple task to transferring the responsibility for performing an entire internal function to a third party. In our recently issued glossary of terms associated with government privatization initiatives, we state that “under outsourcing a government entity remains fully responsible for the provision of affected services . . . while another entity operates the function or performs the service.” We also state that this approach “includes contracting out, granting of franchises to private firms, and the use of volunteers to deliver public services.” Consistent with this definition, we have defined outsourcing for this report as applied to nonfederal organizations as contracting out the continuous performance of a process, activity, or task that was previously performed within the organization. One form of outsourcing used in the federal arena is cross-servicing, an arrangement where one agency provides support services to another agency on a reimbursable basis. Cross-servicing can range from providing computer and software timesharing services to full-service administrative processing. An analogous arrangement in the private sector is the use of shared service centers, which are locations or organizations within a large organization that provide common services to operating locations or business units. 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. To illustrate, an organization’s finance and accounting function is comprised of processes, activities, and tasks. The payroll process includes various activities, such as calculating employees’ gross compensation for the pay period, determining and deducting amounts from gross compensation to calculate net pay, and printing and distributing payroll checks. Each activity, in turn, includes one or more tasks. The activity of calculating employee compensation, for example, includes such tasks as collecting time cards, tabulating time worked or leave taken per employee, and multiplying hours worked or leave taken per employee by the appropriate pay rate. An organization would have the option to outsource an entire process, one or more of the activities, or merely one or more of the tasks. OMB Circular A-76, first issued in 1966, encourages agencies to obtain reliable, internal cost and performance information before acquiring goods and services from the private sector through outsourcing. The circular established the policy and procedures federal agencies must follow in determining whether existing federal government commercial activities should be outsourced. OMB officials told us that they consider outsourcing to be a viable tool for improving financial management in the federal government and stated that they would like to see federal agencies outsource as much of their accounting and finance functions as possible to other government agencies or the private sector. At present, a number of federal agencies have their payroll processed by the Department of Agriculture’s National Finance Center through a cross-servicing arrangement. Several other agencies, including the Department of Justice and the Agency for International Development, have outsourced portions of their financial operations. Recently, there has been considerable interest in outsourcing DOD’s support activities. In August 1995, the Deputy Secretary of Defense directed the military services to make outsourcing of support activities a priority. A May 1995 report by the Commission on Roles and Missions of the Armed Forces identified financial management as a prime candidate for outsourcing in DOD. Further, an August 1996 Defense Science Board (DSB) Task Force report on outsourcing found that functions such as accounting, payroll, travel reimbursement, invoicing, debt management, and other support functions are routinely performed in the private sector by a range of outside vendors and recommended that those functions be outsourced. A November 1996 DSB report estimated that such finance and accounting outsourcing could result in substantial savings for DOD. However, subsequently, while agreeing that the potential for savings exists, we questioned the size of DSB’s savings estimates. In addition, a number of studies to determine the feasibility of outsourcing certain DOD finance and accounting activities, such as travel processing, payroll, and contract disbursements, have been requested by the Congress and are now under way. 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. To accomplish our reporting objectives, we obtained information on finance and accounting outsourcing from an outside consultant with unique information on the business process outsourcing market. We also conducted an extensive literature and Internet search on the subject of outsourcing, and we interviewed individuals from a number of organizations representing varying perspectives on outsourcing finance and accounting operations. Our interviews included 12 judgmentally selected private sector corporations, 1 large international quasi-government organization, 1 state government organization, and 1 city government organization. These organizations represent a broad cross-section of U.S. industries ranging from commodities to the transportation and manufacturing industries. We selected the organizations based on either (1) literature citations indicating that they had outsourced one or more accounting functions or (2) size, industry, and level of accessibility. All but one of these organizations had annual revenues in excess of $1 billion and about two-thirds had annual revenues exceeding $15 billion. Our interviews of cognizant key officials in these organizations focused on first determining if they used finance and accounting outsourcing to improve their financial management organization. If they used this type of outsourcing, we asked them to describe the factors they considered important to a successful outsourcing arrangement. We also asked executives at each organization about outsourcing trends they were aware of in their respective industries. We contracted with G-2 Research, Inc., to provide us with detailed information related to the finance and accounting outsourcing market. G-2 Research is the market research firm that identified business process outsourcing (BPO), which includes finance and accounting outsourcing, as an emerging market approximately 5 years ago. At the time of our fieldwork, G-2 specialized in tracking and compiling data on the BPO market. G-2 informed us that it uses annual interviews of nearly 3,000 corporate executives as well as its regular contacts with major outsourcing vendors, to track the outsourcing market and identify trends and major market participants. Through an extensive literature and Internet search, we identified outsourcing vendors, customers, trade organizations, consultants, and knowledgeable academicians and obtained information on the finance and accounting outsourcing industry capabilities and trends. We subsequently talked with 13 major outsourcing vendors and 12 consultants who are active in the outsourcing industry. Many of our discussions with private sector organizations addressed information of a sensitive business or proprietary nature. To protect this type of information, our report does not identify either the outsourcing service providers or end-users that we talked to. Finally, we synthesized and analyzed the numerous documents acquired from our search or provided by the various organizations we interviewed to determine procedures and factors that are generally accepted as vital to successful outsourcing. We provided a draft of this report to our consultants at G-2 Research, Inc. and the President of the Private Sector Council. We incorporated the technical clarifications they provided as appropriate in the report. We also provided relevant sections of the report to those organizations included in our review that are referred to in specific examples throughout the report and incorporated their comments as appropriate. Our work was conducted in accordance with generally accepted government auditing standards from July 1996 through September 1997. Organizations have a number of options for improving their financial management operations. In addition to outsourcing they can, among other things, reengineer their business processes, consolidate the performance of functions in shared service centers, or implement new enterprisewide accounting and information systems. Over the past several years, organizations have to varying degrees and in varying combinations used all of these financial management improvement approaches. The use of outsourcing to help improve finance and accounting activities is growing and there are clear indicators that more large private sector organizations are actively considering it as an option to improve efficiency and drive down administrative costs. A 1996 American Management Association (AMA) member survey found that finance and accounting outsourcing, while used less frequently than other types of outsourcing, has grown rapidly since 1994. Eighteen percent of the 619 responding firms were outsourcing all or part of one or more finance and accounting functions other than payroll. Payroll was outsourced in whole or in part by 38 percent of the responding firms. In addition, the survey found that larger firms—those with 10,000 or more employees—were more likely to outsource one or more financial processes. This buttresses the results of a 1995 survey, conducted for an outsourcing firm, of 400 senior managers of medium and large firms on business change strategies. That survey found that 25 percent of the respondents considered payroll and accounting processes best suited for outsourcing. A research organization has predicted that business process outsourcing (including finance and accounting outsourcing) will grow by over 20 percent a year until the year 2000.