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FAO growth "is picking up speed" and deals of significance "are becoming more frequent", according to a November 2003. The study found that since 1991, there have been 86 FAO transactions; 57% of those were signed since January 2002.

Not surprisingly, accounts payable, followed by accounts receivable, were the F&A functions most companies chose to outsource. The study learned 81% of the FAO deals included accounts payable and 65 percent included accounts receivable.

What is surprising was -- nearly half the transactions (44%) were full-service in scope. The study confirmed the observation that the FAO marketplace is currently segmented into two distinct pieces - transactional relationships (accounts payable and receivable, tax, payroll, internal audit, and fixed assets) and full-service (the transactional piece plus budget and forecast; treasury and risk management; management reporting and analysis; and strategy.)

Two Suppliers Get an Early Lead

Two suppliers, Accenture and IBM, currently dominate the finance and accounting outsourcing (FAO) space, according to the study. At this early stage, they currently own 72% of the market. The next five suppliers - Exult, ACS, EDS, Cap Gemini Ernst & Young, and Deloitte (in ranked order) account for the next 26 percent of the market. Everest Group reviewed all major finance and accounting outsourcing transactions completed during the past decade and based these percentages on total contract value.

Following the familiar 80/20 rule, nearly 80 percent of the total contract value in FAO was concentrated in just 23 transactions. While the average transaction size was $92 million in total contract value, the 23 largest deals averaged $392 million. Accenture, for example, led the pack with transactions valued at $3.25 billion.

Cost Not the Only Outsourcing Driver

While cost reduction is the still the primary driver for FAO (66%), the study found global executives also appreciated the ability to gain sharper focus on core competencies (55%). Thirty-two percent said outsourcing was instrumental in increasing the business productivity of the chief financial officer (CFO) and the finance staff and allowed their organizations to access best-of-breed talent and technology.

"The FAO market will develop differently than other BPO categories," says Michel Janssen, president, Supplier Solutions for Everest Group. "CFOs are looking for cost savings and offshore can deliver that. But suppliers are also able to offer so much more. We found many interesting value propositions in addition to cost."

Suppliers are providing buyers with four distinct value propositions, according to the study. They include:

• Cost savings. Outsourcing reduced labor costs 30 to 70%, reducing overall net process costs by 20 to 50%. Buyers also reported cash flow improvements. The use of offshore resources is a driver.
• Greater leverage. Buyers have access to supplier leverage gained from infrastructure sharing and process consolidation.
• Improved reporting. Outsourcing made the process more accurate, improved delivery, and increased the speed of reporting.
• Better results. Outsourcing provided greater process transparency, an important component to meet the new US Sarbanes-Oxley Act. Outsourcing left more time for management to dedicate to corporate strategy.

FAO's Business and Strategic Value

These value propositions created valuable business impacts for outsourcing buyers. The study found that outsourcing reduced bad debt exposure and day sales outstanding (DSO) by five to 25 days. Strategically, outsourcing reduced Wall Street reporting times by weeks and reduced working capital requirements, thanks to better cash flows. And North American companies leveraged outsourcing supplier capabilities to help them expand into the Asian market.

Looking ahead, Janssen believes 2004 will be a "key year in the evolution of FAO" as buyers decide exactly what they will and will not outsource. "Because the fundamentals support FAO, buyers are reevaluating what is core to their businesses," he says.

Janssen predicts this year suppliers will develop industry-specific objectives for specific FAO functions in the travel industry, financial services, and railways, among others.

How the study was done: Everest Group conducted the study from July to October 2003. The researchers surveyed suppliers who signed FAO transactions with at least $1 million in annual revenues. In addition, the Everest Group team interviewed executives at the supplier organizations to understand their market strategy and operational direction.

Click here to review a high level summary of the Everest Group study. For more information, contact the Outsourcing Center at info@outsourcingcenter.com

Lessons from the Outsourcing Journal:

• The FAO market is picking up speed. More than half of the deals studied were signed since January 2002.
• Accounts payable and receivable were the most common F&A processes outsourced.
• While cost was the prominent driver (66%), executive focus on core activities (55%) was not far behind.
• FAO reduced bad debt, cut DSO, lowered the Wall Street reporting time, and cut working capital requirements.
• Accenture and IBM dominate FAO; they control 72 percent of the contract value. The next five suppliers control 26 percent.

Publish Date: February 2004

Copyright © 2004 - Everest Partners, L.P.

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