The Hidden Profit Leak: How Digital Outsourcing in Food Retail Chains Can Stop the Back-end Bleed
In Brief:
● Food retail chains are increasingly embracing digital initiatives to stay competitive.
● Back-end digitalization, however, tends to get neglected by most Quick Service Restaurants (QSRs).
● This article explains how to leverage digital outsourcing to bridge this critical gap. We discuss four key back-end functions that fast-casual restaurants need to digitalize to plug hidden profit leaks.
Introduction
Fast food retail, an industry which had taken a massive knock during the COVID years, is back on a roll and in what an impressive manner….
The global fast food retail market size, as per a recent report, stood at $731.65 billion in 2022 – a figure larger than the GDP of many countries! The market is expected to cross the $1000 billion mark by 2031.
If we look specifically at Quick Service Restaurants (QSRs), restaurants that offer food items which require minimal preparation time and are delivered in a short time, the picture looks even rosier. According to Fortune Business Insights, the global quick-service restaurant market size is expected to grow from $846.75 billion in 2023 to $1,777.97 billion by 2030.
However, there is a flip side to the story.
Along with growth comes cut-throat competition. As more and more players jostle for space in an already overcrowded QSR segment, the fight for market share keeps getting more intense.
Almost half of restaurant operators surveyed in 2023 by the (US) National Restaurant Association stated that they expect competition to be a lot tougher this year. We are seeing the same theme playing out in the Asian markets as well, and hence the scenario at India is not so different either….
Add to this the constant upward cost spiral, and increasingly diverse and demanding customer preferences – the scenario starts looking even bleaker.
How does one stay competitive without bleeding cash?
Well, as is the case with most other industries, digitalization and automation hold the key here.
Fast food retail needs to embrace digital transformation initiatives to unlock efficiencies and gain a competitive edge.
Savvy restaurateurs recognize this and have been quick to implement solutions. According to Grand View Research, the market size of restaurant management software reached $4.5 million in 2022 and is expected to grow at a clipping 16.3% CAGR for the next seven years.
However, there remains a critical gap in most QSRs’ digitalization efforts.
The Critical Gap in QSR Digitalization
Fast-food retail, I notice, tends to focus on front-end automation. Digital solutions are being embraced increasingly to improve core operation aspects such as customer experience, wallet share, and retention - and this is great
However, the problem is that, often, digitalization of the backend functions – non-core but business-critical processes, such as finance and HR, – gets neglected in this process.
This is a critical gap.
We partner with several food retail businesses. And, as per my experience, backend functions at most QSRs are screaming for a digital makeover.
Rife with outdated processes and legacy software, these functions are often riddled with inefficiencies, which can be a substantial drain on profits.
Boost and Secure:
Complementing Revenue Growth with Back-End Assurance
The best revenue-boosting initiative might not be productive if there is revenue leakage. Recently, we were tasked with handling revenue reconciliation for a food retail giant. As the chain expanded from 130 to 325 stores – a near 3x increase – an effective revenue assurance system was imperative. Our tech-enabled solution was able to guarantee a staggering 99.5% revenue assurance rate across their stores!
What’s interesting is that backend automation, if implemented by an expert partner, is a relatively simple exercise that can yield excellent returns very quickly.
Many a time, the leadership is even cognizant of the benefits that backend digital transformation initiatives can unlock. However, it takes time and conscious effort to make broad-based change.
Organizational resources might not always have the bandwidth to contemplate and optimize processes in some of the more prosaic non-core functions we discussed earlier.
Given this scenario, I recommend that QSRs seriously consider leveraging on digitalization and automation capabilities of BPaaS players for their back-end processes.
BPaaS solution providers/ digital outsourcing is the practice of working with third-party experts to implement and operate digital products and services is the way forward.
The immediate access to the expertise, innovation, and experience of your partner enables you to cut costs and improve processes.
So what value essentially BpaaS/ Digital outsourcing provider shall bring, to streamline and enable the processes to run in the straight through manner without much of human intevention.
As processes get streamlined, hidden profit leaks get plugged, and new efficiencies emerge. Organizational resources get freed up to direct energy towards the core business, creating a climate for growth and innovation.
But where and how do you embark on this digital outsourcing journey?
The 3 Back-End Functions Ripe for Digital Outsourcing
In this article, I have tried to identify processes where QSRs can get the highest ROI on digital outsourcing partnerships. I find these processes are usually spread across four essential back-end functions:
Let us discuss automation and digitalization opportunities in these functions in greater detail.
1. Finance & Accounts
Many processes that fall under the Finance & Accounts functions in QSRs are tedious, time-consuming, rule-based tasks.
Performed conventionally, they are prone to inefficiencies, leading to profit leaks. However, if they are digitally outsourced, automation and tech-enabled Shared Service Centers (SSCs) enable far more efficient and cost-effective operations.
Experienced outsourcing partners provide access to innovative processes and solutions, unlocking value. Also, the pay-as-you-go service options available via the digital outsourcing route offer food retail chains unprecedented scalability and cost flexibility.
I find five F&A processes respond particularly well to digital transformation efforts:
Let us consider them individually:
A. Accounts Payable & Cash Management
Accounts payable (AP) can be an incredibly information-intensive process. Often, even when dealing with just one location, procurement teams, supervisors, and vendors struggle to stay on top of AP.
When you zoom out to broader geographies and multiple locations that QSR leaders need to oversee, it becomes evident that without a comprehensive, effective AP system, top management risks being out of touch with the actual, on-ground picture.
Digital outsourcing can be a lifesaver here. The right provider can help you streamline the AP process by integrating payment automation for primary payables and auto-tracking vendor invoices into the ERP.
Take the case of one of our clients, a leading American fast-food chain that wanted to scale up its business in India. While the QSR sought rapid growth, it was adamant about maintaining 100% business continuity and consistency across all stores, even during the scale-up phase.
We provided them with a digital solution that automated 80% of their payables process, which led to precise expense accruals and ensured nearly 100% of their payments were made within the due date.
Costs were controlled, as late fees were minimized. And even more important, timely payments ensured uninterrupted services and set the base for operational consistency. The risk of negative customer experiences and reputational problems that arise from inadvertent payment failures was mitigated.
Getting into specifics, our solution was built around a self-serve vendor portal that eliminated daily invoice hassles. The portal allowed vendors to track their payment status directly. It provided for the onboarding of new vendors (typically a document-intensive process) and allowed seamless, secure management of sensitive contracts.
The outcome? Less load for the procurement team, efficient AP governance, and happier vendors – which, as you would expect, translated into happier rates.
Recommended by LinkedIn
Optical Character Recognition (OCR) technology was another critical feature of the solution. Often, invoices vary drastically in format, and if the AP software is not geared to tackle this challenge, it makes for a poor investment.
Our solution paired OCR technology with invoice format standardization to streamline the invoice matching process, unburdening ground-level procurement teams and enabling management to cut operational costs.
The automation also provided granular visibility and transparency, enabling management to identify
process efficiencies and potential roadblocks at an early stage.
Along with accounts payable automation, fast casual chains should also consider digital outsourcing of their petty cash management.
Petty cash expenses are a vulnerable point for a food retail chain operating from multiple sites. A robust system that tracks and verifies petty cash expenses ensures accountability and easy dispute resolution. It allows regional leaders to monitor the bigger cash flow and expense management picture through a consolidated dashboard.
B. Accounts Receivable & Reconciliation
With the rise of food aggregators, Accounts Receivable (AR) automation becomes an essential requirement for QSRs. Whether collaborating with a food court or partnering with a leading food delivery app, digital outsourcing solutions can facilitate the automation of commission invoice bookings and reconciliations.
The ideal outsourcing partner will be able to offer you sophisticated solutions which can ensure every transaction is matched against its corresponding commission structure, identify discrepancies, and provide quick resolutions. As a result, errors are dramatically reduced, and the AR teams can breathe a sigh of relief, knowing that the numbers add up.
Automated reconciliation solutions offered by outsourcing providers too help in plugging profit leaks.
Traditionally, reconciliations were batch-processed, often monthly, or even quarterly. This lag in time can accumulate small discrepancies into sizeable financial gaps, causing significant headaches when it's finally time to balance the books. Studies show that finance & accounts organizations that do more frequent reconciliations have a 20% lower operating cost.
Digital solutions enable organizations to realize marked improvements in operational efficiency by merely increasing the frequency of revenue reconciliation—shifting from a monthly to, say, a weekly or even daily cycle. Along with cost savings, the food retail chain will be able to build better trust with partners, ensure timely payouts, and maintain a seamless cash flow.
C. General Ledger Accounting
In the realm of accounting, simplicity can often be key. Take journal entries, for example. These basic, yet countless, records can become a potential pitfall when managed manually. However, automation of line-item verification can yield significant benefits here.
Research shows that companies which automate their accounting/ journal entries perform better. They spend 20-40% less and efficiently oversee six times more general ledger (GL) accounts than compared to the median performers.
Enter digital outsourcing and Shared Service Centers (SSCs), freeing up the core finance team to concentrate on more strategic tasks.
Digitalization of key F&A processes as mentioned above enables QSRs to automate general ledger accounting and bring an added layer of efficiency. Moreover, the financial model is also appealing. Many providers present a flexible pay-as-you-go approach, letting businesses scale services based on demand.
D. Compliance & Risk Management
Compliance is a complex issue. Tax laws and compliances vary not just from one country to another but also between two states in the same country. Late fines and legal issues can cost money, time and, most importantly, a customer's faith in a company.
Hiring local experts and outsourcing partners that provide localized SSCs are instant steps towards better compliance. This pre-emptive step strengthens your risk management measures.
Along with providing subject matter expertise, the right outsourcing partner will also equip you with compliance automation solutions so that core teams can save the time they usually spend checking if they are up to date on their filings, registrations, and licenses.
For instance, many food retailers renting multiple properties in India find the Ind AS 116 Accounting Standard made mandatory by the government recently a little tricky to navigate. With the right software solutions, the entire Ind AS 116 computation and compliance process can be automated.
2. Resource Management
Optimal resource management is usually an uphill battle for QSRs.
While no restaurant wants to carry extra baggage, neither does it want to face the nightmarish spectre of running short on supplies and disappointing customers. A strong digital outsourcing partner can help here.
On the inventory management front, going digital enables expiry and stock levels to be managed in real-time to be responsive to consumption. When a sale is made, the bill of materials automatically gets updated on the back end, and stores are alerted if the stock drops below a certain level.
Improved inventory and order planning allow real-time responsiveness to stock-level information and customer demand, leading to lower stock-outs and consistent front-end service. We also see significant cost savings, as overordering is curbed and wastage curtailed.
Vendor & and supplier management systems also benefit from digital outsourcing.
Typically, each store in a fast casual food retail chain sources its supplies from several diverse vendors. Digital solutions enable a centralized database that allows the management to consume and view the information they need in a slice-and-dice format.
Good digital solutions allow seamless upload of vendor documents and can usually be integrated with existing ERPs for order processing.
Integrated systems simplify and streamline invoice processing, payment processing, and contract management, leading to higher vendor satisfaction and better price negotiations.
Moreover, centralized vendor information allows for better vendor selection and price comparisons.
3. Human Resources
Good talent is difficult to find and even more difficult to retain – especially in the restaurant industry. Many studies in this segment across the globe have led to the same conclusion that the restaurant industry generally experiences significantly a high employee turnover.
Such high annual turnover rates have ripple effects beyond just short-staffing. They can shrink profit margins and intensify financial strains for restaurants as employee attrition poses high costs for the company - ranging from job posting fees to recruitment expenses to training new hires.
Additionally, with constant new staff on board, seasoned employees often bear the burden of compensating for the inexperience, leading to a stressful work atmosphere and potentially compromising service quality.
Leveraging technology-driven solutions offered by external partners specializing in the Human Resource Outsourcing (HRO) function can be an invaluable asset in tackling this challenge on several fronts.
Digital outsourcing enables restaurants to access a wider talent pool. The hiring process becomes more seamless with digital tools that can quickly sift through applications, match job requirements with applicant qualifications, and schedule interviews.
The onboarding process can be automated, too, streamlining the entire hiring journey, from the initial application to document management. This not only reduces ramp-up time but improves the offer-to-join ratio significantly as well.
Once onboarded, digital platforms can assist in continuous training and skill development, ensuring employees stay on top of the latest industry standards and practices.
Performance monitoring becomes straightforward with analytics-driven dashboards, making it simpler to identify high-performers and areas that require improvement. Additionally, the offboarding process can be managed systematically, gathering feedback from exiting employees to refine the overall working experience for future staff.
Digital payroll management solutions can be leveraged to handle everything from payroll administration to tax filing and check printing. Benefits administration software can be used alongside for health, insurance, loan transactions, and retirement benefits.
Timely salary and benefits administration reduces the headache for HR teams while improving the overall employee experience.
Incorporating digital outsourcing into employee lifecycle management also facilitates compliance. Restaurants, like many businesses, are subject to a myriad of labour laws, health and safety regulations, and industry-specific standards. A digital approach, managed by experts in the field, ensures that every step of the employee journey adheres to these regulations.
From the moment an employee is hired, digital tools can track mandatory training sessions, ensure certifications are up to date, and manage work hour restrictions.
With evolving labour laws and industry standards, having a digital system in place can automatically update processes to remain compliant, reducing the risk of oversights and potential penalties. Moreover, it aids in maintaining transparency and documentation, which can be crucial during audits or inspections.
Final Thoughts: The First Step is the Last Step
Future-focused QSRs are fast realizing that digitalization is no longer a choice. Rather, it is an essential requirement on both the front and back end, the question when to embrace..
Another dimension… Should the food retail chain invest in developing the capabilities in-house or outsource them to an external provider.
Hmmm…
Let me help you. Take a long, cold, hard look at your operations and answer three critical questions:
The fact is that companies tend to underestimate the complexity of developing solutions from scratch without external help. A Gartner survey found that less than 10% of enterprises had developed the skills for infrastructure automation as of 2021 – (and) “without the relevant skills, automation technologies become black boxes that aren’t well understood or integrated”.
Digital outsourcing can be an efficient way of sidestepping some of these hurdles and jumping straight to the finish line.
So, look beyond the self-service kiosk, identify the back-end functions you’d like to overhaul, find the right provider, and get started on your digital journey.
An important footnote: Digital outsourcing will only work if you get your approach and strategy right. I’ve often seen large chains approach outsourcing partners with a transactional outlook. Reevaluate this approach, as there’s a lot more to be gained from a strategic relationship. Work with your provider to set up efficient processes for digital transformation to harness true value.