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The fortune at the bottom of the Fortune...
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 |
Everest Research Institute's 2005 FAO Report: Growth, Offshore Key Findings By Michel Janssen, Managing Director Everest Research Institute, Nikhil Rajpal, Vice President, Everest Research Institute
Why? Chief financial officers (CFO), forced to cut costs to thrive or even survive, are increasingly using outsourcing to drive down the transaction processing costs of the corporate finance function. CFOs are recognizing the significant cost reduction that outsourcing can deliver but they are also starting to look at the business impact finance and accounting outsourcing (FAO) can create. And CFOs have discovered outsourcing can help with their compliance initiatives, a must now that section 404 of the Sarbanes-Oxley Act can send them to jail for false financial accounting. For that reason, visibility has risen to the highest levels for decisions that affect financial processes. The report, entitled "Finance and Accounting Outsourcing Annual Report 2005," found the largest companies with the most complex corporate structures are causing the growth spurt. Multiple Process FAO's Growth SpurtThe first FAO transaction was signed in 1991. Of the 108 multiple-process FAO contracts signed since then, almost 70 percent were signed since 2002. In fact, the Everest Research Institute found 41 companies signed large, multi-process FAO contracts in the last 16 months. The Institute found the multi-process FAO market, which still comprises just seven percent of the overall F&A service market, is growing four times faster than the overall finance and accounting outsourcing market. Multi-process FAO, which totaled $1.1 billion in annualized revenues at the end of 2004, experienced a 31 percent growth rate since 2002. The overall market, which also includes transactional FAO as well as the multi-process component, had an eight percent growth rate during the same period and totaled $15.1 billion.
Contract size has increased, too. Average total contract value (TCV) grew from $94 million in 2002 to $123 million in 2005. Annual spend and term increases accounted for this increase. Currently, total FAO contract value is $12 billion, according to the Institute. Because of the decisive emphasis on cost savings, companies are outsourcing processes that are transactional and repetitive in nature. For that reason, accounts payable, accounts receivable, and general accounting appear in over 80 percent of the contracts. On the other hand, buyers almost never outsource F&A strategy. The Importance of OffshoreThree trends are injecting offshoring into the FAO equation. First, cost savings considerations make offshoring a critical component of FAO today; labor arbitrage is a logical way to squeeze out cost. Everest researchers found cost savings between 55-75 percent currently on functions outsourced and predicted the cost advantage will continue to be significant over the next five years. The Institute discovered 73 percent of FAO contracts have an offshore component. The repetitive nature of financial transactions makes them good candidates for offshoring. In addition, financial transactions rarely have the kind of intense or intimate customer interaction that other processes like human resources have; most of the processes are business-to-business rather than business-to-consumer. This makes them easier to send offshore. Finally, the lower cost of labor means the outsourcing suppliers can afford to provide more and better analytics. The offshore locations have pools of highly educated workers with accounting skills who will work at a lower wage. Suppliers can now afford to have talent scrubbing the data and producing more reports. The final result: a better understanding of the underlying accounting metrics. The Institute's report found the maturity of offshore delivery locations vary. Further, the attractiveness of a location varies with buyer needs. For that reason, the report suggests that buyers find attractive centers just about everywhere. Moreover, suppliers can meet the needs of global firms most effectively from a set of regional and global centers rather than a single center. Not surprisingly, India emerged as the leader with the largest number of FAO centers. Bangalore remains the hub and has led India in building FAO centers. However, the tremendous growth of outsourcing activity in the city is ending due to rising costs and high attrition. To counter this, suppliers are moving to lower-cost locations like Chennai, Kochi, Kolkata, and Pune.
China is demonstrating potential to become a major regional hub servicing Asia. Also in Asia, suppliers are positioning Manila in the Philippines and Kuala Lumpur in Malaysia as strong options. At the same time, Eastern European locations have become an integral part of suppliers' strategy to create FAO hubs to serve European customers. The study found North American-based companies have led the globalization of FAO. The Role of TechnologyThe Institute discovered companies do not outsource their finance functions to gain access to advanced technology. This is a departure from other types of outsourcing, where businesses use outsourcing to drive IT transformation. Everest researchers found the outsourcing suppliers did not provide core systems, only add-on tools for incremental improvement. That's because the buyers' core F&A systems are fairly robust and generally don't need expensive replacements to make these transactions work. Since they keep the corporate books, companies have invested heavily in them over the years. And these systems are difficult to replace because they are tied into every other system and process within the company. However, the addition of technology tools like workflow or document management benefits both buyers and suppliers by making the processes stronger and more efficient. The report found that over 75 percent of FAO contracts have packaged ERP systems as the underlying technology, with SAP as the cumulative leader with almost 40 percent of the market. The Dynamic DuoIBM and Accenture dominate the market, accounting for 56 percent of the annualized contract value to date. Recent trends show that the market leaders continue to strengthen their position; the dynamic duo captured 66 percent of the new annualized contract value during the last six quarters. IBM dominates the large contracts while Accenture is the leader in the mid-size segment. A wide group of suppliers works in the smaller contracts space with GECIS as the leader. The current FAO growth spurt is opening the doors for new suppliers, since the barriers to entry are not as significant as in other processes like human resources or procurement. The only requirements to entry are:
Credible new players--chiefly IT providers, traditional North American outsourcers, and offshore suppliers--are entering the FAO arena. The report predicted continued merger and acquisition activity is likely because the dominant suppliers will continue to look for partners with complimentary capabilities or scale. For example, IBM acquired Equitant, GECIS purchased Creditek, and Convergys entered the FAO space by acquiring Deloitte's FAO business. Who Are the Buyers?Over half the number of FAO contracts (52 percent of 108 contracts signed by April 2005) and more than half the contract value (62 percent of $12 billion) have originated in North America. However, buyers' European operations have been the most frequent consumers of FAO services (66 percent).
Large buyers (companies with over $5 billion in revenue) account for most of the contract value. Small buyers (companies with revenue under $5 billion), however, have shown significant growth. This year the Institute predicts small buyers will account for 50 percent of the contract signings, catching up to their big brothers. The Everest researchers found most of the FAO activity has been in the energy, manufacturing, and retail industries. What does it all mean? We are witnessing a larger numbers of CFOs that are leading by example and showing their organizations that outsourcing not only works, but works well. Publish Date: October 2005
For more information... Related Articles Copyright © 2005 - Everest Partners, L.P.
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While companies have been outsourcing bits and pieces of their finance and accounting function for 30 years, multi-process finance and accounting outsourcing is reaching the rapid growth stage, according to a September 2005 report by the Everest Research Institute.
