In hindsight, 2003 may have been a watershed year, according to some major finance and accounting outsourcing (FAO) suppliers. Cutting costs remained paramount. But, for the first time, companies increasingly used FAO as a tool to transform their organizations toward even higher levels of efficiency and productivity.
Trend 1: FAO Growth is Picking Up Speed
The growth in FAO is “picking up speed,” says Michel Janssen, president, Supplier Solutions for Everest Group. Cap Gemini Ernst & Young saw “a lot of activity; buyers were doing “a lot of shopping and analysis” last year, reports Bob Pryor, president of outsourcing services for Cap Gemini Ernst & Young North America, a global service provider with US headquarters in New York City.
Marc Schwarz, a principal in Deloitte’s outsourcing practice, explains why. Chief financial officers (CFO), much like the chief information officer (CIO) when outsourcing began, have been hesitant to move what they considered sensitive internal company processes to a third party, says Schwarz. “Today, CFOs charged with managing a company’s financial performance must consider the cost of financial management and cannot afford to disadvantage their company with management costs that are not competitive with world-class companies. As a result, there has been an increase in demand for evaluating finance and accounting outsourcing,” he observes.
Tom Eubanks, global leader of F&A Business Transformation Outsourcing for IBM Global Services based in Armonk, New York, says the economic climate accelerated the pace of FAO deals. The economic downturn forced companies to segregate their core and non-core businesses. “In 2003 people realized they had to do something. This elevated FAO market activity,” the IBM executive explains.
The “deals of significance” became more frequent last year, observes Janssen. According to an Everest Group FAO market study released in November, 2003, there were 86 FAO transactions signed since 1991. But 57 percent were signed since January 2002. They included ACS and Motorola; Cap Gemini Ernst & Young and Hydro One (a large energy and transmission distribution system operators based in Toronto, Canada); and Cap Gemini Ernst & Young and International Paper.
In addition, the FAO landscape changed. The industry got a strengthened player when IBM purchased parts of PricewaterhouseCoopers Consulting, a BPO player. The acquisition gave the IT company a legitimate stake in the BPO arena.
Trend 2: FAO Becomes a Business Transformation Tool
“We haven’t experienced a company that outsources F&A purely for the cost,” says Clarence Schmitz, chairman of Outsource Partners International, a BPO finance and accounting provider with shared services centers in Bangalore, India and Dallas, Texas. “They want to amend, correct, or improve something else. They are looking at FAO as a BPM (business process management) tool.”
“There is a marked shift and new awareness within the market that greater, long-term benefits are available by taking FAO beyond the traditional outsourcing model,” reports Pryor. “It’s not about taking your “mess for less” but really driving continuous improvements from finance functions through strategic, transformational efforts,” he explains.
Mark King, president and chief operating officer of ACS, a Dallas, Texas BPO services provider, echoed those remarks. While saving money is still driving companies’ decisions to outsource, they realize they can transform processes — and boost productivity of their entire organization — by outsourcing them. Like other industry observers, he sees a trend toward “convergence;” companies are now combining FAO with human resources outsourcing (HRO) and the IT behind both.
King pointed to accounts payable as a good example of business transformation outsourcing (BTO). It is a highly manual, inefficient, and time-consuming function. However, using today’s optical character recognition (OCR) technology, suppliers can capture an invoice, create its image, and match it with a purchase order, reducing the need for “hands-on” processes.
“Once that’s done, you can send it anywhere around the world for approval by electronic signature,” he says. “Besides eliminating paper flow, you’ve radically changed the whole process.”
Dan Reiff, senior vice president of business development for College Station, Texas-based SourceNet Solutions, an FAO service provider that specializes in accounts payable, says FAO provides “significant opportunities to re-engineer age-old business processes to extract increased value in areas like cash management and treasury.”
Outsourcing’s biggest role in this respect is to act as a catalyst to break down entrenched habits and prompt a rethink of established processes. Companies often find it difficult to stimulate change internally because employees so closely identify the processes they perform with their own jobs.
Trend 3: FAO Goes Beyond Transactions
Historically, payroll, accounts payable, and accounts receivable have been the bedrock of FAO. Reiff of SourceNet says last year many FAO deals started with payables. “That’s where the greatest heartburn and untapped value is,” he says.
However, a few pioneering companies began to outsource their entire F&A function, according to Everest’s Janssen. He predicts next year the market will continue this division: some buyers will only want to outsource the transactional pieces while others will want to outsource the whole enchilada.
Trend 4: Moving Part of the Process Offshore
The sharp rise in the importance of labor arbitrage touched outsourcing in every way in 2003, and the FAO sector was no exception. There is virtually universal agreement among suppliers and industry analysts that the trend will continue in the years ahead.
“Given the transactional nature of finance and accounting functions, it’s just good sense that most FAO agreements have an offshore or nearshore component to obtain greater cost reductions,” says Cap Gemini Ernst & Young’s Pryor. As offshore becomes a requisite business strategy for many companies, American providers without global capabilities are either acquiring offshore firms or developing alliances to build worldwide strategic capabilities. These global service providers can leverage their worldwide operations, taking advantage of labor arbitrage opportunities and handling the intricacies of dealing with the financial laws and customs abroad, according to Pryor.
In 2003 offshoring as an outsourcing tool gained acceptance in the FAO world. Eubanks of IBM says in 2002 if he talked about doing an FAO deal in Eastern Europe or India “the conversation generally would not go very well.” Now that prospective buyers have seen offshoring work for others, “they can physically see the quality, understand the risks and are definitely interested. Clients can see this is not just about low-end transactional processes,” he continues.
Offshoring does make the job more difficult for suppliers. “Content knowledge in local statutory and regulatory areas is critical for a full-service FAO outsourcer,” he says.
Everest’s Janssen says the use of offshore resources is “more of a driver” in FAO than HRO. He says 80 to 90 percent of last year’s FAO deals had an offshore component.
Trend 5: Companies Used FAO to Open New Markets Fast
Janssen says North American companies are leveraging outsourcing supplier capabilities in FAO to enable their Asian market expansion. Companies entering the region often need to launch operations quickly, yet are unable to commit the resources to staff a fully-fledged back office, says Anoop Sagoo, a partner with Accenture Finance Solutions in New York City. “Outsourcing offers a turnkey solution that lets them get down to business more quickly,” he says.
In addition, US companies with operations abroad are turning to FAO to handle the intricacies of dealing with the financial laws and customs of foreign lands. Pryor says Cap Gemini Ernst & Young’s buyers told him, “‘We’re having trouble with our payables in Europe. Please take it over.’ We’re seeing a lot of activity by geography,” he reports.
Trend 6: The Blurring of BPO and IT
Schwarz of Deloitte, which is based in New York City, says process and technology outsourcing began to merge, becoming a “more integrated service offering” last year. He says buyers want a solution that provides high quality and more cost-effective services. “In order to provide this (and have a viable business case), service providers will devise process improvements that require technology,” he says. This year he predicts this trend will accelerate with these solutions becoming “commonplace. Buyers will not segment BPO and ITO when selecting an outsourcing provider,” he says.
What’s Ahead in 2004
Both suppliers and buyers of outsourcing services say the desire to maximize efficiency by linking finance and accounting, human resources, and global technology will be a key trend in the future. The shift to full-service FAO outsourcing that started this year will continue as companies continue to transform their F&A functions. Buyers will take a closer look at outcome rather than input. As an example, Sagoo pointed toward companies looking at outsourcing the entire “order to cash” process. “Viewing the process from end-to-end instead of looking at individual components can deliver multiple business benefits,” he says. For example, in addition to cost reduction, outsourcing the order-to-cash cycle can reduce revenue leakage and improve days sales outstanding and customer insight.
Schwarz predicts “some strong alliances of traditional process outsourcers with content experts to provide customers with deep technical expertise in their specific businesses.”
Rebecca Scholl, an analyst with Gartner, a research and analyst firm based in Stamford, Connecticut, says “US-based providers with offshore capabilities are leveraging a global delivery model and will increasingly do so.”
There is virtually universal agreement among suppliers and industry analysts that the offshore trend will continue in the years ahead. While antipathy toward offshore outsourcing is receiving more negative attention in the media, FAO executives don’t believe it will be enough to hinder the move overseas in the long term.
Scholl says Gartner believes FAO growth will outpace HRO in 2004. Eubanks of IBM agrees. He predicts the market will see a “flurry of deals” this year. Deals that began last spring “will bubble into reality,” he predicts.
Predictions for 2004:
- Companies will look to outsource the whole process, not just pieces. Order to cash will grow in importance.
- FAO growth will outpace HRO growth this year. In addition, technology will start to link the two processes.
- Offshore components will continue to be an important piece of a supplier’s offering.