By Dan Berthiaume
The increasing ability for BPO providers and end users to automate both low- and high-level financial functions is altering the finance and accounting outsourcing (FAO) marketplace in ways that are still unfolding. According to Ron Walker, partner at KPMG, and Stan Lepeak, director of global research, management consulting at KPMG, the growing trend toward F&A automation can be seen as shrinking the size of the FAO market in some ways but as expanding it in other ways.
Automation Accelerates Small Deal Trend
While the FAO market has long been trending toward smaller deals, Walker says this trend has been accelerating in the past 18 months, with automation as a driver. “A 100-person deal is considered big,” he states. “Even big outsourcing providers are coming downstream as there is more competition.”
In addition to enabling smaller-scale FAO deals, automation is also bringing the cost of FAO services down to a level where smaller companies can more easily afford them. According to Walker, the availability of automated ERP/financial management solutions such as Workday for Financial Management and the NetSuite cloud ERP/financials software suite are making FAO a more realistic option for small- and mid-sized companies. “It makes sense for providers to go to a smaller client,” he says. “The middle market is going toward FAO.”
Although FAO deals are getting smaller, Walker estimates the overall global FAO market is still posting annual “single digit” growth. According to Everest Group estimates, the annualized contract value (ACV) of the FAO market in 2011 was expected to top $4 billion USD (including contracts worth $1 million or more in ACV with a term of at least three years).
Profitability vs. FTE
Another change automation is creating in the FAO arena is a shift away from measuring contracts by FTE (full-time employee) and toward measuring them by profitability. “Service providers are looking at processes so they don’t have to provide as many FTEs,” Walker says. He adds that Indian providers in particular have traditionally preferred to manage by FTE rather than profitability, but multinational providers are more likely to put a higher value on profitability.
Buyers Obtain More Independence
On the buyer side, F&A automation provides a higher degree of independence in the realm of FAO than they had in the past. For starters, in many cases companies can consider the option of automating their own processes with internally hosted software and avoiding outsourcing altogether.
“Most organizations have challenges with their outsourcing providers, but the great debate is would they have the same challenges internally,” comments Walker.
And even once a company decides to follow the FAO route, automation in many cases eliminates the need for a middleman. “There is not as much representation from advisory service providers,” says Walker. “In some cases I’ve even seen attorneys drive an FAO deal.”
Automation Advantages
Automation of F&A processes can provide an end user organization with several significant benefits. For example, Lepeak says some buyers are outsourcing much more strategic work, such as analytics. “It isn’t the generic accounts payable/receivable well,” he says. According to Lepeak, automation is also leading to the outsourcing of vertical-specific F&A processes, such as best practices in the healthcare industry.
Another automation advantage, especially when outsourcing processes such as reconciliation which involve large volumes of small transactions, is increased speed and accuracy. “With manual entry, there is always error,” says Walker. “Automation allows you to process transactions more quickly and nearly error-free, and you can catch errors faster. It leads to a whole higher level of customer satisfaction.”
Furthermore, Walker says automation can help compensate for substantial turnover than has occurred in the F&A industry during the past year-and-a-half. “Turnover was low during the economic crisis, but as the economy has picked up in the last 18 months, there has been a pent-up demand of people changing jobs.”
Walker says some FAO clients have experienced 60-65% turnover in their F&A employee ranks in the past 18 months. “Labor is not as cheap, and companies can’t keep up with the training requirements.” Automation can reduce the need for manual labor to perform F&A processes, and also entice a higher percentage of existing labor to remain in their jobs, says Walker.
Automation Disadvantages
Of course, nothing is perfect, and F&A automation carries some potential disadvantages, too. “There is cost involved, it takes time,” Walker says. “You can input bad processes into an (automated) system and wind up with a bad system.”
In addition, Walker says that automation usually needs to be client-driven, and often meets service provider resistance. “You have to push through a (service provider) mindset,” he says. “It’s easier to manage FTEs than automation.”
FAO: The Next Generation
“Almost no organization is looking at outsourcing or shared services as their only delivery model,” Walker says. “They want a hybrid model where they manage a portfolio of services.”
Lepeak says automation can enable companies to coordinate F&A service centers across different regions, functioning on the same platform, same instance and same rules and procedures. “You can stay close to the customer,” he says, clarifying that this is more expensive than centralizing services in a low-cost area.
“It’s dynamic,” Lepeak concludes. “There are more specific functions and processes at an individual level. From a historical perspective, you’re not seeing as many big deals, but the market is pretty healthy, especially if you include cloud and SaaS outsourcing. It’s the next generation of FAO.”
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