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Finance and Accounting has become one of the most attractive and straight-forward (relatively speaking) functions to outsource and offshore due to the level of transactional work involved and the maturity of financial tracking processes in most companies.
The market for Finance & Accounting Outsourcing (FAO) has slowed slightly during the recession, but most advisors and service providers are predicting a thriving market in 2010. Early buyers such as financial institutions have slowed their pace but newer markets such as retail and media, and buyers outside of the US and UK, are stepping in to continue driving the growth.
Here are StratForm’s latest views on trends in the FAO market and advice for potential buyers.
The recession created a trend towards smaller deal sizes, as buyers looked for immediate savings and tried to avoid long-term or transformation-type arrangements. As the economy continues to stabilize, our prediction is that deal sizes will grow. Service providers have matured their capabilities to not only perform services but also provide system platforms and consulting. Offshore finance resources have become knowledgeable, efficient and plentiful. And early adopter buyers have demonstrated that risks can be managed. So the net result is that companies will continue to become comfortable letting third-parties take on more responsibility for what is generally viewed as a standardized, non-core function.
Platform offerings have become a popular marketing topic, with SAP and Oracle increasing their investment in service provision so that they can deliver “bundled” system and service offerings. Larger companies have financial systems which are tightly woven both internally and outside the organization, so the technical viability and business case for replacement is limited at best. But these platform solutions are likely to be of interest to small and mid-sized companies who do not yet have fully integrated and developed financial systems and may be facing large investments in the future.
The debate over the best pricing structures continues. Should you focus your service levels on outputs (e.g., the number of invoices matched) or outcomes (closing the books on schedule)? Is it better to pay by full-time equivalent resources or transaction volumes? The recession has created situations in which buyers using outcome and FTE-based structures felt that they were overpaying when their business volumes dropped. However, other than for highly transactional functions like payables, it is often difficult to create a purely variable pricing model that is both accurate and easy to quantify.
The reality is that both ends of each spectrum should be considered for every specific service, and the right one to use depends mostly on the maturity of the buyer. Outcome and volume-based pricing works well for a buyer who already has a clear baseline of service levels and knows what a reasonable benchmark price per transaction should be for specific services. However, most first-time buyers don’t have this insight and are more likely to know during renewal time rather than their first contract.
The market for Finance & Accounting Outsourcing (FAO) has slowed slightly during the recession, but most advisors and service providers are predicting a thriving market in 2010. Early buyers such as financial institutions have slowed their pace but newer markets such as retail and media, and buyers outside of the US and UK, are stepping in to continue driving the growth.
Here are StratForm’s latest views on trends in the FAO market and advice for potential buyers.
The recession created a trend towards smaller deal sizes, as buyers looked for immediate savings and tried to avoid long-term or transformation-type arrangements. As the economy continues to stabilize, our prediction is that deal sizes will grow. Service providers have matured their capabilities to not only perform services but also provide system platforms and consulting. Offshore finance resources have become knowledgeable, efficient and plentiful. And early adopter buyers have demonstrated that risks can be managed. So the net result is that companies will continue to become comfortable letting third-parties take on more responsibility for what is generally viewed as a standardized, non-core function.
Platform offerings have become a popular marketing topic, with SAP and Oracle increasing their investment in service provision so that they can deliver “bundled” system and service offerings. Larger companies have financial systems which are tightly woven both internally and outside the organization, so the technical viability and business case for replacement is limited at best. But these platform solutions are likely to be of interest to small and mid-sized companies who do not yet have fully integrated and developed financial systems and may be facing large investments in the future.
The debate over the best pricing structures continues. Should you focus your service levels on outputs (e.g., the number of invoices matched) or outcomes (closing the books on schedule)? Is it better to pay by full-time equivalent resources or transaction volumes? The recession has created situations in which buyers using outcome and FTE-based structures felt that they were overpaying when their business volumes dropped. However, other than for highly transactional functions like payables, it is often difficult to create a purely variable pricing model that is both accurate and easy to quantify.
The reality is that both ends of each spectrum should be considered for every specific service, and the right one to use depends mostly on the maturity of the buyer. Outcome and volume-based pricing works well for a buyer who already has a clear baseline of service levels and knows what a reasonable benchmark price per transaction should be for specific services. However, most first-time buyers don’t have this insight and are more likely to know during renewal time rather than their first contract.
Our advice to buyers is to be realistic and use a pricing model which works in their current situation. And build terms into their agreements to allow pricing and service levels to be changed on an annual basis instead of shortening deal length and thereby losing leverage. And finally, do not allow yourself to be led by service providers who want to use a pricing model that is in their best interests and not yours.
Finally, what is likely to happen in the service provider market? Leading players such as Accenture, IBM, TCS and Genpact continue to cement their share of the market and develop more vertical (market) depth of focus. This is making it more difficult for new and emerging providers to compete effectively, many of whom are likely to give up and focus into other niche areas.
Buyers are also looking for transformations to be built-in to deals, for example committing to converting a percentage of a suppliers to submit electronic invoices. Larger, more-established providers have both leverage and centers of excellence to make these commitments and, where they don’t have sufficient expertise, they are acquiring it. The result is going to be continuing consolidation, and buyers should carefully evaluate the long-term viability of each service provider as an independent entity.
Overall, a consolidating market, mature delivery models and more experienced service providers have created an FAO market which is no longer leading-edge and is likely to enter a rapid growth mode. If your organization has not yet investigated outsourcing its finance and accounting functions as a potential lever for savings and growth, then there has probably never been a better time to do it.
Finally, what is likely to happen in the service provider market? Leading players such as Accenture, IBM, TCS and Genpact continue to cement their share of the market and develop more vertical (market) depth of focus. This is making it more difficult for new and emerging providers to compete effectively, many of whom are likely to give up and focus into other niche areas.
Buyers are also looking for transformations to be built-in to deals, for example committing to converting a percentage of a suppliers to submit electronic invoices. Larger, more-established providers have both leverage and centers of excellence to make these commitments and, where they don’t have sufficient expertise, they are acquiring it. The result is going to be continuing consolidation, and buyers should carefully evaluate the long-term viability of each service provider as an independent entity.
Overall, a consolidating market, mature delivery models and more experienced service providers have created an FAO market which is no longer leading-edge and is likely to enter a rapid growth mode. If your organization has not yet investigated outsourcing its finance and accounting functions as a potential lever for savings and growth, then there has probably never been a better time to do it.
Trends and Predictions for Finance and Accounting Outsourcing
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