The Market
1. The market will continue to grow rapidly as it reaches maturity.
The Everest Research Institute anticipates the multi-scope FAO market will reach $2.5 billion next year. It predicts the total number of these multi-scope deals to surpass 300, which gives the market a compounded annual growth rate (CAGR) in excess of 30 percent.
HP has seen a 25 percent increase in 2006 and expects significant growth again in 2007, according to Tom Ormseth, Vice President, Managed Services for HP. “Growth is on the uptick. The opportunities are pretty large since the overall adoption rate is still small,” says the HP executive.
Ormseth says FAO is prospering because of “collegial CFO to CFO discussions.” With companies and colleagues sharing their successes, more and more CFOs are taking a hard look at outsourcing.
2. The middle market will emerge.
Scarcity of accounting talent, combined with intense competition for deals and lower delivery costs from the major providers will open the FAO market to buyers with finance departments with as few as 50 staff members, according to Phil Fersht, Vice President, FAO Research, Everest Research Institute. The emergence of lost-cost Indian mid-market providers will enable more mid-market buyers to explore workable options, he adds.
The Suppliers:
3. The big suppliers will put more emphasis on FAO.
The major outsourcers are realizing they need finance and accounting competences to compete for major global deals with multi-tower elements, according to Paul Nowacki, Engagement Director at Everest Group, who specializes in FAO. He includes Accenture, ACS, Capgemini, EDS, and IBM among suppliers increasing their global delivery competency.
4. The big suppliers will create a global footprint.
“Mark 2007 as the year when all significant suppliers establish a meaningful local presence in all continents,” says Fersht. The leading Indian providers are already making significant investments in South America, while most of the Western providers continue to bolster their presence in Central Europe, China, India, and the Philippines.
5. The Indian suppliers will play a bigger role.
India has already firmly established itself as the prime offshore location for FAO work, according to Fersht; the Indian FAO suppliers now account for nearly 30 percent of all FAO contracts signed to date. What will be new next year is these suppliers are making concerted effort to significantly increase their market share. “Several have competed successfully with the global outsourcing giants,” he says. In his opinion, Genpact is the leader of the pack in FAO with WNS Global Services, and Infosys (Progeon) as major contenders. EXL Service, Tata Consultancy Services, and Wipro “are shaping up to compete aggressively,” he says.
6. New entrants will appear.
Nowacki says a small number of buyers with strong F&A service-delivery competences may enter the market as suppliers. This is possible because barriers to entry continue to remain low.
7. Suppliers will have intermittent capacity constraints.
This is an ironic occurrence. While there will be an ample number of suppliers fighting for each deal, some suppliers will experience capacity bottlenecks because they were too successful, according to Fersht. “Some suppliers will struggle to integrate their many new large clients,” he says.
8. 2006’s shortage of FAO experts will continue in 2007.
Nowacki points out the industry has seen a shortage of FAO experts this year. “Look for an exacerbation of this problem in 2007,” he says.
9. Suppliers will continue to increase their capabilities.
This year IBM and Genpact successfully completed their integrations of their Equitant and Creditek acquisitions. This year Accenture purchased Savista and Meridian and EDS took over MphasiS. Nowacki believes suppliers will continue to purchase niche players to expand their capabilities to build out more complete offerings.
Another way to do this is to acquire captives. This year Capgemini acquired Unilever’s India FAO/BPO center. “Look for more of these deals in 2007 as suppliers use these acquisitions to round out their geographic capabilities and gain market share,” says Nowacki.
A third possibility: establish a joint venture-type arrangement with a specialist in a particular function already well positioned in its market. “Suppliers are evaluating the probability of success to develop functional experience from scratch versus the potential to acquire or establish a JV,” says Nowacki.
10. Suppliers will focus on technology to ensure ongoing improvements.
Today labor arbitrage is just table stakes to get into a deal. “But labor arbitrage doesn’t allow suppliers to cut buyer costs year after year,” points out Gianni Giacomelli, Head of Global Strategy for BPO at SAP. He believes technology will become the next key differentiator and enabler for sustainable FAO transformation. “Suppliers will be looking at how to embed software in their offerings to automate processes and move up the value chain beyond what is possible through mere labor arbitrage. Automation leads to standardization,” he says.
An Everest Research Institute study found nearly 70 percent of the respondents felt the role of technology is critical to the success of an FAO relationship.
11. Supplier consolidation will occur.
Leon Busch, President and CEO of SourceNet Solutions, a subsidiary of Mellon Financial, says buyers’ segmented approach (see No. 14) will compress deal size. Smaller deals make it more difficult for suppliers to prosper; Busch believes some will go away or form alliances with others to survive and thrive.
The Buyers:
12. A buyer’s market will appear.
Competition will heat up, creating a buyer’s market, according to Fersht. New players have entered the market (like Convergys) who have joined the fray for flagship deals. Last year providers with small market shares–like Genpact, Xansa, and Infosys–made dramatic increases. “2007 will be an intense battle for market share,” says Fersht. He believes some suppliers will take on new customers at lower margins to develop scale and market presence.
13. FAO will move up the buyers’ food chain.
This year buyers moved beyond the pure transactional process, observes Fersht. He predicts buyers will expand into services like financial analysis and management reporting in 2007.
Ormseth says HP buyers are asking for higher level accounting services, examples being analytics and treasury services. “Deals that were three processes yesterday are now four-to-five processes today and will be six-to-seven tomorrow,” he says.
Adds Ann Vezina, President of the Commercial Solutions Group at Affiliated Computer Services (ACS), “Suppliers will find innovative means to reach deeper into a buyer’s processes beyond general ledger to more complex functions, such as customer loyalty programs.”
Two years ago that would have been “a radical concept,” adds Busch. “Today companies want to gain more control over their working capital. So they want to tie accounts receivable and payable to treasury. Now FAO buyers look at the logical relationship between finance and accounting business processes and other areas of the organization. The value proposition is changing,” Busch says.
Ormseth agrees. He says HP is having more discussions about including additional processes; “it’s about moving up the stack.” The majority of buyers will continue to pursue multi-supplier strategies.
Busch predicts buyers will continue to outsource just pieces of the finance and accounting process. “FAO buyers have learned from HRO and ITO, looking back at these deals to see the successes and struggles. They have decided to outsource in segments instead of holistically,” Busch says. This approach favors best-in-class suppliers, he adds.
However, Fersht feels buyers will be more prepared to consider single-supplier, multi-tower options when a supplier can demonstrate increased cost savings and operational synergies across processes.
Ormseth says the deals are “situational.” HP is working on three bundled deals although “the broader trend remains best in class,” he says.
14. Buyers are becoming even more comfortable with offshoring.
Ormseth says buyers are becoming even more comfortable with moving the work nearshore and offshore. In addition, he says they are now more at ease in choosing the right location that best meets their needs.
The Deals:
15. Multi-tower bundling will increase.
The Everest Research Institute reports multi-tower deals account for 14 percent of the market currently. Fersht says “we will see continue growth in multi-tower deals in 2007.” Increased synergies will develop across human resources (HR) and F&A towers; buyers will increasingly add procurement processes into the mix.
16. Pricing structures will become more complex.
Fixed versus per-full-time employee (FTE). Transaction versus consumption based. “Deal complexity is likely to increase as simple bases for transaction charges are no longer applicable,” says Nowacki.