Verticalization. Major changes in the supplier landscape. Melding process and technology to boost FAO processes to the next level. Here is what our experts are predicting for future trends in finance and accounting outsourcing.
Ritesh Idnani, Vice President and Head, Global Sales and Marketing for Infosys BPO, believes finance and accounting outsourcing (FAO) will grow because of four drivers: the deepening of current relationships, the growth of vertically oriented solutions, the opening of completely new sets of services, and the infusion of technology to drive a force multiplier effect.
Don Schulman, General Manager, Finance and Administration for IBM, predicts “an acceleration of adoption” in which buyers will both “begin outsourcing a greater percentage of their F&A processes and look to extend their contracts to include processes that they previously seen as core competencies.” He cites, for example, an increase in buyers looking to outsource portions of their corporate planning process, something they have avoided in the past.
But how suppliers provide FAO services will change. Les Mara, Head of Enterprise Services, BPO business in EMEA for HP, says the sustainability of FAO 10 years ago was based on labor arbitrage. In the future, he questions whether that is “an economically and operationally sustainable business model.” Buyers now want “technology-enabled business models,” he says.
Schulman agrees, adding that buyers will demand more sophistication as the industry matures. “We’ve moved beyond labor arbitrage and basic process improvement to a model that focuses on standardization and embedded analytics,” he reports. What’s next? Buyers will “look to extend beyond process effectiveness into things like increased revenue growth and customer satisfaction, driving additional enterprise business outcomes.”
Schulman says companies that adopt standardized, end-to-end best practice processes “will begin to integrate with their customers and vendors in a way that they never have before,” leveraging the analytics and actionable insights this more mature model drives. He explains when buyers “institutionalize the payment process,” as an example, their suppliers can electronically connect everything together “and make the activity seamless.”
The IBM executive adds that a revised path to transformation is enabling what he calls a “ship then fix” approach to outsourcing, which accelerates the benefits to buyers and shortens the transformation cycle. In the past he says buyers would hold on to their processes, spending significant sums attempting to “fix” their technology before handing it over to the outsourcer. “Buyers have taken a 180-degree turn. Now they say, ‘If I’ve signed up for outcomes, why can’t I just ship you my broken processes and have you partner with me to get them right?'” he says.
The evolution of the FAO market is also driving changes in the supplier landscape. Our experts talked about three.
Let’s explore the key trends in finance and accounting outsourcing and their impact on businesses.
Changes in the supplier landscape: banks opt out
Expect the supplier landscape to look different in five years. Paul Diegelman, Practice Manager, Finance and Accounting Optimization for BancTec BPO, predicts there will be service provider consolidation in the payment processing segment of finance and accounting revenue cycle management. The industry typically refers to providers in this space as lockbox providers. Since the 1950s banks typically provided lockbox payment processes to their commercial customers as a BPO service. But now they are exiting the business — and quickly. “There will be few if any large banks delivering in the lockbox space in three years,” Diegelman predicts.
Here’s why: consumers and corporations are paying an ever-increasing number of their bills and invoices electronically, not with paper checks. “As the payment mix has changed in the United States, banks have shifted their investments to building their electronic payments business, which has growing volumes and much higher margins.”
In addition, he says bank providers are having “a tougher time being in this business from a fully loaded cost standpoint, and non-bank providers with their lower cost structures are perfectly suited to take over this dimension of BPO in the United States.” For example, bank cost structures for IT, support, and corporate overhead are often different from the structures of non-bank BPO providers. Diegelman says “these costs often put banks at a cost disadvantage because they’ve got more cost to recover per unit before they can generate a profit.”
In addition, Wall Street tends to view banks as attractive investment candidates when they have a large percentage of higher-margin electronic business, he continues. “The non-bank provider community does not require the same margins that bank investors require. Given that buyers’ budgets are challenging the margins of bank and non-bank providers alike, investors are not as tolerant of banks delivering this kind of BPO activity as they once were,” he says.
This change means that buyers of these outsourcing services will need to understand their banks will internally not deliver these services going forward. Buyers will source this activity from non-banks at an increasing rate or work with their bank of choice and a non-bank provider in partnership.”
Changes in the supplier landscape: mergers of platform-based providers with process providers
Among the trends in finance and accounting outsourcing is mergers of platform-based providers.
Diegelman predicts there will be a “convergence of platform-based FAO providers with offshore suppliers.” He says the offshore firms often “don’t deliver a scalable underlying technology platform with their services.” If they do, “there’s very little standardization and accompanying process transformation.”
To deliver the next round of cost reductions and process improvements, Diegelman predicts the offshore providers will partner with global technology providers “to marry their capabilities and deliver F&A solutions that are platform based and will fulfill a broader value proposition.”
He says to get to the next level, FAO buyers will have to do more than send work to lower-cost locations. The new game will be “incorporating sophisticated process and technology along with the people.” This will limit the number of people a supplier needs to satisfy the client deliverable, which then drives cost down further while increasing supplier margins.
Change in the supplier landscape: consolidation
IBM’s Schulman predicts that industry consolidation in the next five years “is a natural consequence” of the changing face of FAO, but the pace will “accelerate.” He notes that “only the players that have made significant investments in technology-enabled solutions, standards creation, and best-practice-driven processes will continue to attract new customers.”
In the payment processing area, Diegelman says non-bank providers are now picking up the slack. He says a group of maybe four players “will have the scale and sophistication” to handle the business. “This is a consolidating industry, so there definitely will be fewer viable providers going forward,” says the BancTec executive.
Verticalization
FAO suppliers will increasingly focus on specific industries, notes Andrew Pery, Chief Marketing Officer at Kofax. “They will verticalize and offer end-to-end procure-to-pay and order-to-cash solutions.” He predicts there will be “significant growth” of FAO in the banking industry, the insurance space, and the legal arena.
Pery adds suppliers will focus their investments around financially oriented applications like accounts payable and receivable, sales order processing, and contract life cycle management because today they are still paper-based applications. He points out manual solutions are costly (the cost of processing an invoice is $37) and slow (33 days). “This has an adverse impact on cash management and the ability to take early payment discounts,” he explains. Manual processes also don’t provide much visibility.
For that reason, buyers will seek out suppliers with technological solutions “to feed information back into the ERP system to realize significant cost reductions ($4 per invoice), speed up the process (three days to process an invoice), and improve customer service,” predicts Pery.
The Kofax executive believes customer retention and loyalty are the keys to success for both financial firms and their outsourcers in the future. Suppliers will cement their relationships with their buyers via improving their buyers’ service levels by, for instance, processing customer information faster. “That engenders customer loyalty, which leads to repeat business,” says Pery. He adds that this kind of process expertise will become table stakes for insurance companies and banks selecting outsourcing partners.
Continued expansion of buyer expectations
As more buyers become deeply entrenched in the FAO model, they continue to push their suppliers in terms of solutions and capabilities, according to Katrina Menzigian of the Everest Group. “Client requirements are changing rapidly. This includes technology capabilities, pricing models, breadth and depth of solutions, and relationship management,” states Menzigian. Going forward, the market will see FAO solutions reaching deeper into areas such as compliance, analytics, automation, master data management, and end-to-end processes.
Push-and-pull factors are driving this expansion. Buyers continue to look for ways of driving greater effectiveness and efficiency from their processes, along with identifying additional savings opportunities, she observes. Suppliers, for their part, are seeking ways of creating differentiation in the market and securing longer-term mindshare with individual clients.
Advice for buyers
Diegelman says FAO buyers will have to do three things as the provider landscape consolidates:
- Familiarize themselves with each supplier’s evolving strategy
- Be capable of evaluating more complex supplier offerings
- Consider how supplier consolidation may impact buyer access to services and the ability to realize the contracted outcomes
In conclusion, the trends in finance and accounting outsourcing are driven by technological advancements, regulatory requirements, and the need for strategic collaboration. By embracing these trends, businesses can streamline processes, enhance data-driven decision-making, ensure compliance, and focus on value-added activities.
Lessons from the Outsourcing Journal:
- The supplier landscape will look different in five years. The industry will consolidate. Process firms will merge with technology platform firms to provide the next level of outsourcing efficacy. Banks will exit the payment processing segment of the finance and accounting revenue cycle management, providing an opportunity for non-bank providers to step in.
- Buyers will begin to outsource more of the F&A process and at an accelerated rate.
- Buyers want more technology-enabled models.
