HOME | ABOUT US | CONSULTING | RESEARCH INSTITUTE | JOURNAL | EUROPE | PAPERS | SUPPLIERS | FOCUS AREAS | EVENTS | NEWS | CONTACT US

Current Stories
More Stories

Profit Recovery and Finance & Accounting Outsourcing

2008 Market Predictions: FAO, Global Sourcing, HRO, ITO, and PO Markets

Outsourcing Order-to-Cash (O2C) and Procure-to-Pay (P2P)

Finance and Accounting Outsourcing (FAO): Global Sourcing in FAO

Finance & Accounting Outsourcing (FAO) Market Update - Global FAO Supplier Landscape Preview Deck - June 2007

What Buyers Need to Know about Accounting for Outsourcing Implementation Costs

Financial Accounting Outsourcing (FAO) Annual Report - January 2007

FAO Market Update - Everest Research Institute - November 2006

Mellon Treasury Insights

The CFO - Moving from back-office to frontline strategy

As recently as January 2006 we reported that the barriers to entry for new Finance and Accounting Outsourcing (FAO) suppliers were low (see "Why Finance And Accounting Outsourcing Will Experience Double Digit Growth") but that was then and this is now. The BPO industry changes rapidly and windows of opportunity tend to be short lived. We are now seeing signs that the barriers to entry are rising due to four evolving developments.

1. Process Complexity

A couple of years ago an FAO suppler could hope to grow rapidly and meet all of its customers' needs by offering low-cost basic transactional services such as accounts payable (AP) and general ledger accounting (GL). Now, however, buyers are outsourcing more sophisticated and complex processes. They want a single FAO provider that has both a low-cost structure and the sophistication to handle processes such as credit-card processing, mortgage processing, circulation accounting, policy administration, data mining, business analytics, financial analysis, and regulatory compliance. Buyers are looking at end-to-end process optimization and scale leverage by outsourcing Order-to-Cash (O2C) and Procure-to-Pay (P2P) processes to create business impact by reducing days sales outstanding (DSO), efficient closing of account books, increasing cash flow, fixing bad debts, and improving Sarbanes-Oxley compliance.

The suppliers offering these services today evolved their capabilities by first cutting their teeth on the basic transactional services. Today, even buyers of basic transactional services increasingly want suppliers who have multiple process capabilities to allow for the possibility of services expansion over time.

2. Technology

The bar is rising for the required level of technology sophistication. FAO buyers typically do not change their core ERP systems that provide their financial functionality. Early FAO suppliers seized the opportunity offered by this situation, realizing that without a change in systems they only needed to provide labor in lower-cost locations; this lower-cost labor performed the same transactional accounting work over a Web interface. The labor arbitrage was the entire value proposition.

Today the supplier offerings are more robust and complex. Leading FAO providers have established alliances with leading niche technology players as well as ERP vendors to obtain best-in-class tools including process mapping, data warehousing, data mining, business analytics, accounts-receivable optimization, and expense management.

3. Established Provider

A couple of years ago, FAO was the Wild West; it was a land grab, and no single provider appeared to be entrenched. Now however, there are 20+ legitimate suppliers in the market with the capability of providing full-service F&A outsourcing services to their clients.

Accenture and IBM continue to dominate the space but face tough competition from the likes of Genpact, which is closing the gap quickly. In 2005-2006, several other players like Capgemini, HP, and Xansa also made dramatic increases in market share. Because FAO is comparatively clean-cut, transactional, and easily quantifiable, traditional IT players such as Infosys, Wipro, and now more recently Cognizant, are competing successfully for FAO deals.

The market has also seen several players like WNS and Genpact evolve from being a captive into a successful third-party provider. The rise of entrenched competitors with a growing client base, ever increasing expertise, and growing market influence is the new reality for new potential entrants.

4. Talent Shortage

The market for accounting talent in India has heated up. The total number of new students enrolling in India in accounting each year is only 35,000¹. The pass rate for Chartered Accountants (CA) in India is only seven to eight percent². India has only 130,000 Chartered Accountants (CA) and produces fewer than 8,000 per year². The current shortage for CAs is estimated to be in excess of 30,000².

There is no easy fix; it takes years to train an accountant and the shortage is not limited to India; there is a global shortage of accountants³. India is now in the process of introducing an easier syllabus, which is expected to increase the pass rate for new CAs from the present seven percent to as much as 50 percent² and to increase student enrollment from 35,000 to 50,000 per year.

Yet even with the expected increase in new accounting students and CAs, given the current shortage and the rapid growth of the FAO industry, it will continue to be a "seller's market." New accountants in India know that they are in high demand and the companies with a recognized brand, a strong balance sheet, career growth opportunities, and a proven track record are going to be the employers of choice. It is going to be increasingly difficult for new FAO provider entrants to attract the required accounting resources.

What Implications Does this Have for Buyers?

There is good news and bad news here for buyers of FAO services. The bad news is really not all that bad. The constant threat of new entrants exerted downward price pressure on all market participants. As the threat of new entrants lessens, there is the potential that prices will rise. The good news, however, outweighs the bad news. A more stable supplier community will translate into growth of capability for existing suppliers. Growing suppliers will have more resources, more experience, more clout with the providers of software tools, and increased economies of scale to leverage investments in innovation.

What Implications Does this Have for Suppliers?

Potential new entrants are going to have to consider an acquisition strategy to enter the market given the new barriers to entry for an organic start-up. New entrants may have greater success with alternatives to an organic start-up, such as the commercialization of or purchase of existing captives or acquiring one of several existing competitors. Others, like Cognizant, will continue to try to leverage capabilities in other areas to enter the market; but our view is that this type of organic start-up is going to be increasingly difficult.

Existing suppliers will not be faced with significant new supply but an intensely competitive market. They will need to continue expansion of capabilities and find scale economies to spread the cost of new tools and best-practice research. Organic and inorganic investments in better tools, increased process expertise, and increased global footprint will allow suppliers to continue to move up the food chain to handle more sophisticated processes and enhance their value proposition.

Lessons from the Outsourcing Journal:

• The opportunity window for easy entry into FAO services for potential suppliers is an opportunity window that is quickly closing.
• Increasing process complexity, technology sophistication, entrenched suppliers, and scarce talent are all contributing to a rise in the barriers to entry for new suppliers.
• New supplier entrants, facing new barriers to entry for an organic start-up, are going to have to consider and acquisition strategy to increase the chances of a successful entry.

Footnotes:

¹ India Education Network, Institute of Chartered Accountants of India (ICAI) update examination and training measures [http://news.education4india.com/1094/institute-of-chartered-accountants-of-india-icai-update-examination-and-training-measures]

² Merinews, From rarity to glut of CAs , 13 December 2006 [http://www.merinews.com/catFull.jsp?articleID=123914&catID=8&category=Business]

³ The Hindu, Country facing shortage of chartered accountants, 06/08/2006 [http://www.hindu.com/2006/08/06/stories/2006080614910300.htm]

Publish Date: May 2007

For more information...
Printer friendly...

Copyright © 2007 - Everest Partners, L.P.

[Previous Story] [Next Story]