By Dan Berthiaume
Although finance and accounting outsourcing (FAO) buyers have been taking a cautious approach since the global economic crisis of 2008, better times for FAO appear to be arriving. Everest Group is predicting a strong rebound for the global FAO market this year, and BPO Outcomes recently had the chance to ask Abhishek Menon, Practice Director of BPO Research for Everest Group, what specific factors are driving this resurgence.
Contract Renewals, Improving Economy Aid FAO
According to Menon, the worldwide FAO market should grow by about 11% this year compared to 2011, reaching about $4.5 billion USD in actual contract value (ACV). That rate should reach even higher levels in the next couple of years. One reason for impressive growth pace is a simple matter of contract timing. “A large number of current FAO deals are up for renewal,” said Menon. “In 2012, $14 billion worth of contracts are up for renewal. Buyers have been taking a cautious approach and sales cycles are long.”
However, as the global economy improves, Menon said BPO buyers will be more willing to sign shorter outsourcing contracts. In addition, he said that although FAO has traditionally been focused on large enterprises with annual revenues of more than $5 billion, the improving economy is also encouraging more small- and medium-sized businesses to start purchasing FAO services. “New buyers are coming in and contributing to growth,” he commented.
Furthermore, while customers located in the US, UK and Western Europe have traditionally been responsible for driving the bulk of global FAO activity, Menon said more recently customers in the Asia/Pacific and Latin America regions have been “rapidly” increasing their purchase of FAO services and will “drive a significant part of growth going forward.”
FAO Services Get More Complex
Although FAO services traditionally focus on lower-level transactional functions, Menon said he is noticing an increase in what he described as “judgment-intensive” work, such as financial planning and analytics (FP&A). “The market is maturing,” he said. As evidence of this shift, Menon cited Everest statistics indicating that 50% of FAO contracts included FP&A in 2007-08, but this figure grew by more than 20% to 61% by 2010-11.
Similarly, 19% of FAO contracts included risk management in 2007-08, but 28% di d in 2010-11, an increase of close to 50%. And Menon said the number of FAO contracts including internal audit services more than doubled in that time period. New Industries, Destinations Get Involved FAO growth is also driven by the involvement of new industries and destinations in the marketplace.
The traditional FAO industries of manufacturing, high tech/telecom and financial services continue to account for the majority of contracts. However, Menon said new industries such as professional services, which accounted for 5% of FAO contracts in 2007-08 but 14% in 2010-11 (almost triple the amount) are taking a more active interest.
Analyzing trends in regions providing FAO services, Menon said India still provides the majority, but other nations in the Asia/Pacific region (especially China) and Latin America region (especially Brazil) are becoming increasingly competitive.
Captive, Outsourcing Models Coexist
In terms of what BPO model FAO buyers are leveraging, Menon said captive (which broadly includes shared services) and traditional outsourcing models co-exist in the market.
“The relative benefits of captive and outsourcing have been debated multiple times and it keeps coming up,” said Menon. “Captive services will continue to exist and the market is growing, but what will happen is the FAO market will move toward a hybrid model where they keep some captive services and have some performed by a third-party provider.”
Menon said this move toward a hybrid FAO delivery model also applies to shared services, which he described as captive services performed onshore. “Core processes will remain performed in shared services centers,” he said.
M&A, Technology Shape FAO Future
Looking ahead, Menon predicted that the “significant” consolidation which has occurred due to mergers and acquisitions (M&A) in the FAO provider market during the past few years will continue, further shrinking the pool of potential FAO delivery sources. Despite there being fewer providers, he said more SMBs will get involved in purchasing FAO services. Menon also sees technology having a major impact on the development of FAO.
“Traditionally, service providers have used the buyer’s technology,” he said. “But in the future, the augmentation model will pick up. The service providers will add on technology to existing buyer technology platforms to improve performance, efficiency and standardization. Furthermore, Menon said service providers will develop industry-specific FAO solutions, rather than use the broader ones more currently available, and continue to provide more judgment-intensive services as the profit maturity framework of the FAO model continues progressing.