By Loren Moss
Finance and accounting outsourcing (FAO) grew at a healthy global rate of 11% in the past year, but a maturing market is slowing the pace of that growth. On the positive side, growth is extending beyond the traditional buyers of large, international and money-center banks, process-intensive insurance firms, customer service and collections call centers, and back office image processing across the spectrum of large volume finance providers.
As detailed in the FAO Annual Report for 2012 released by global research and advisory firm Everest Group, the FAO sector continues to evolve as firms consolidate through M&A activity and service offerings become more sophisticated due to both the maturing of this sector and the broadening potential market for FAO services. Now, even the small and medium size business (SMB) market is able to utilize FAO, as well as the finance and accounting functions of non financial-industry firms.
To gain deeper insight into what’s happening in the FAO sector, we had a conversation with Rajesh Ranjan, VP of BPO research for Everest Group.
NSAM: To capture SMB business, service providers generally cannot use the same deal structure or services offering that they employ with large, global customers. What innovation have you seen by BPO providers adapting their service offerings to serve the SMB market?
Ranjan: In terms of innovation to serve the SMB market, Business-Process-as-a-Service (BPaaS) is emerging as a key model. BPaaS is a standardized one-to-many model based on a shared resources construct across both the operations (i.e., people) as well as technology (software and hardware) layers of service delivery. There are three key fundamental differences compared to the large market deal structure here.
Instead of primarily running the operations, as seen in large markets, the service provider is also responsible for provisioning and maintaining the underlying technology – software applications and hardware infrastructure. 2. Instead of providing a customized set of services, the service provider offers a highly standardized set of services, and instead of a FTE-based pricing model, the pricing is typically transaction-based.
NSAM: The report indicates that “FAO adoption is now not restricted to traditional markets but extended to under-penetrated markets as well.” What are some examples of these under-penetrated and non-traditional markets that are contributing to the growth of FAO?
Ranjan: There are two ways to look at the under-penetrated market segments. In terms of buyer size, we are seeing increasing adoption by mid-market (revenues between US$1-5 billion) and SMB (revenues less than US$1 billion). By geography, Asia-Pacific has emerged as an aggressive adopter compared to the past, accounting for 25% of all FAO contracts signed in 2011.
NSAM: According to the Everest Group report, Accenture, IBM and Genpact account for 50% of the FAO market, down from 65%. Who, if anyone challenges their primacy in terms of market share? If one assumes that their market share is decreasing not because they are losing business, but because the market is growing so fast that the entire market is simply outpacing their growth as room is made for other providers, then who are the up-and-comers in large- scale FAO and what, if anything differentiates their service offerings from The Big Three?
Ranjan: Accenture, IBM, and Genpact continue to very strong players. In recent times, the prominent companies that are challenging their dominance are TCS, Capgemini, and Infosys. Some of them are taking inorganic routes as well to build scale or add capabilities. For example, Capgemini acquired VWA to strengthen their order-to-cash capability in addition to expanding onshore capability and specific O2C platform capability.
NSAM: India clearly remains the dominant FAO BPO destination, accounting for more than 60% of global F&A service delivery. Why has India managed to maintain this dominance in comparison to other outsourcing regions such as Eastern Europe, Latin America, and the rest of Asia?
Ranjan: There are a few reasons behind that. India continues to offer a significant labor arbitrage advantage and has a very large base of talent pool in the commerce/ accounting space. It also offers a large pool of English-speaking talent which is particularly helpful in executing work for North America and UK, which are the largest markets for FAO.
NSAM: What can executives take away from this annual report that will be valuable for strategic decision making and planning for 2013 and beyond?
Ranjan: Some of the key takeaways are that FAO is an increasingly mature concept to create value. However, the value creation is shifting beyond singular focus on labor arbitrage-driven operational cost reduction to process excellence, standardization, access to technology and expertise.
In addition, organizations looking to capture a ‘cost-plus’ value proposition need to put in place enabling elements such as an end-to-end approach (procure-to-pay, order-to-cash, record-to-report), balanced shoring (offshore-nearshore-onshore), greater role of technology (augmenting tools, platforms), and pricing (hybrid that includes transaction-based and/or performance-based components in addition to the FTE-based model).
Also, FAO is no longer a Western market (North America, Europe) practice. Companies in emerging markets in Asia-Pacific and Latin America have also started to embrace it. And it is increasingly important for service providers to differentiate in an increasing crowded market place. Investment, both organic and inorganic, to build capabilities to cater to ‘cost-plus’ requirements and a wider demand base is going to be important to succeed.
Ranjan added that aside from the Indian FAO powerhouse, Southeast Asia saw several new delivery centers come on line to cater to increasing FAO activity in Asia Pacific region, while North America and Western Europe saw new delivery centers begin operations catering to onshore and nearshore sourcing requirements.