Finance and accounting outsourcing is moving along the maturity spectrum from transaction processing to true business transformation. Last year, companies realized business process outsourcing can provide a successful road map for process reengineering that will add up to greater profitability.
“In today’s world, clients are assuming that an outsourcer has an efficient, proven transaction engine. They are looking for value beyond the processes these engines serve,” says Mike Atwood, president of Everest Group’s manufacturing, distribution and retail practice. Dave Nass, a Chicago, Illinois-based partner for Accenture’s Global Outsourcing and Infrastructure Delivery Capability Group, says that’s what’s happening in the trenches. “Clients want us to go beyond transaction processing. BPO is no longer debits on the left and credits on the right. Now clients want things like trend data analysis – information that will help the chief financial officer (CFO) make better decisions.”
Greg Arend, managing partner for the BPO practice at Deloitte Touche Outsourcing, agrees. Two years ago the majority of the outsourcing group’s deals focused on transaction processing. “Today, clients want us to manage the business process from soup to nuts. They expect business process transformation through BPO,” he says.
The emphasis on business transformation has flip-flopped the way buyers think about outsourcing. Previously, buyers were interested in outsourcing their IT first. “Now, the process leads and IT follows,” observes Bob Pryor, vice president at Cap Gemini Ernst & Young (CGE&Y) and head of the outsourcing practice in North America. Outsourcing the process “is the only way to shape the function,” he explains.
Dan Woodling, senior director of strategy and business planning at Plano, Texas-based EDS, says clients anticipate more value out of BPO outsourcing today. “Our clients are looking at us as the BPO integrator because we can link multiple processes and vendors together for a greater outcome,” Woodling says. “BPO services are increasingly becoming multi-process and we can generate a higher value through the interaction between processes, creating cross-process efficiencies.”
Mark King, president of ACS, a BPO and IT service provider based in Dallas, Texas, says finance and accounting outsourcing is ACS’ fastest growing BPO segment. Industry numbers reflect this growth. In 2002, the finance and accounting BPO spend totaled $40 billion, up from $36 billion the year before, according to IDC, a research firm in Framingham, Massachusetts. IDC estimates this segment will reach almost $65 billion by 2006, a 12.3 percent, five-year annual compounded growth rate.
The Down Economy’s Legacy
Nass says the down economy contributed to the changing emphasis of BPO. At a time when every dollar counts, buyers are searching for service providers who can provide the analytical data they need “to understand their financial data better,” he notes. CFOs are feeling the pressure for better data at a time when most are looking down the barrel of budget cuts.
The growling bear market had another effect on BPO: some household names decided to outsource their pension fund investments, a world that had previously been the province of companies that had pension assets of $50 million or less. “During the bull market, large corporations felt comfortable managing their pension assets themselves,” explains Myra Drucker, chief investment officer, GM Trust Company, a pension fund outsourcing service provider based in Manhattan. At the end of last year, GM Trust Company had $16 billion under management – excluding GM’s pension fund, which it also manages.
2002 was the year “pension fund outsourcing became a real business” as large companies looked at their investment returns and “felt the pain,” according to Drucker. She explains that companies struggling to survive didn’t want to allocate more resources to their pension fund departments. The corporate treasurer, who is typically responsible for pension fund investments, was preoccupied with corporate funding. For the first time, outsourcing became an attractive option.
The New Importance of Labor Arbitrage
Like the other BPO processes, transaction engines are altering the landscape. These engines are “an idea whose time has come,” states Pryor. Transaction engines are not only about cost savings, even though they can generate generous savings of up to 40 percent for the buyer, he points out. “More importantly, they improve the quality of the data, which is just as compelling as cost reduction,” he says.
Transaction engines rely heavily on their offshore component. “It used to be, you moved the people to where the work was. Now you move the work to where the people are,” explains Nass. He observes BPO’s new power comes from the large concentrations of highly capable workers in other parts of the globe.
Service providers are carefully calculating where the best values are. “Offshore to us means 10,000 people working in six different countries,” says King. Of all the BPO processes, finance and accounting “has the most opportunities for offshore leverage,” he notes. ACS has developed software around a workflow process to deliver work to its multiple locations.
“It requires more than offshore facilities to bring value,” Woodling says. EDS developed what it calls its Best ShoreSM strategy – integrating onshore, nearshore and offshore in any combination “to ensure a consistent, seamless environment regardless of the work location. The industry is moving toward multi-process, multi-client, shared service centers and EDS is preparing to offer those in follow-the-sun locations to keep costs lower for clients.”
One new area powered by offshore labor is the preparation of U.S. individual tax returns. American certified public accounting firms are turning to Indian firms to cut the cost, reports Kishore Mirhandani, president of Outsource Partners International, Inc. (OPI), which purchased the outsourcing division of KPMG.
Predictions for 2003
Pryor senses “there’s a huge anticipation around finance and accounting BPO.” This year he expects to see “major plays with landmark clients – the Fortune 100” — using both Tier One providers as well as niche players. He says no one wants to do the first deal, but “there will be lots of followers after the first big play.” These deals will include “a long overdue investment in financial systems that support this process,” the CGE&Y executive predicts.
He also expects IBM will become a big BPO presence. He anticipates IBM will make big strides in restoring profitability to PricewaterhouseCoopers’ BPO unit, which it purchased last year.
Clarence Schmitz, chairman and CEO of Outsource Partners International, Inc., predicts new outsourcing firms will open their doors in India. (OPI has an office in Bangalore, India.) “The Indian players are eager to enter the U.S. finance and accounting space. Their thinking is, ‘If we build it, they will come,'” he says.
Pryor adds China to the list of burgeoning finance and accounting offshore players.
“Finance and accounting was long overdue for significant outsourcing,” Pryor observes. 2003 may be the year.
BPO Outsourcing Trends for 2003:
- Finance and accounting outsourcing is on a fast track growth rate. IDC estimates the market will be almost $65 billion in three years.
- Companies want to capture cost savings. But they are also looking to BPO for business process transformation. Receiving better data is just as compelling as the savings in the current economic environment.
- Transaction engines and offshore labor arbitrage are crucial elements to growth.
- Buyers today assume a service provider has an efficient, proven transaction engine.