The latest Everest study proves what we all suspect: Full-service outsourcing is growing at a faster rate than the rest of the market.

by Andy Teng

Corporate buyers continue to look for multi-prong solutions when outsourcing finance and accounting services, helping to drive growth of multi-process FAO to $1.1 billion last year, a new study has found. According to Everest Research Institute, this segment of FAO is growing at four times the rate of the overall $15.1 billion F&A market. The findings show that corporations are leaning toward full-service outsourcing solutions rather than piecemeal buys, even though transactional, or single-process, F&A contracts still account for the overwhelming portion of the entire market. Nevertheless, multi-process FAO is estimated to be expanding at 31 percent each year, compared with 8 percent growth for the entire market, according to the advisory firm.

The allure of full-service FAO may be related to its impact on a broader range of improvements, compared with three basic goals that most buyers look for today: labor cost reduction, productivity improvements, and process excellence. More meaningful improvements, according to Everest, are not being addressed. Also the most difficult to achieve, these transformations include reducing working capital and operational risks, better decision making and control in emerging markets, and business transformation. Even so, companies in ever-increasing numbers are looking to outsource their financial and accounting functions.

MARKET GROWTH ACCELERATING
The numbers are undeniable. Since the first FAO deals were tracked in 1991, 108 contracts have been signed. Of those, 70 percent were created when the market saw a sharp rise. According to Everest, about 33 deals are expected to close this year, which would eclipse last year’s record of 31. The consulting firm noted that FAO growth only accelerated in 2002, when the number of signed contracts jumped to 18 from 7 in the year before.

Although data show the number of contracts signed has steadily grown over the past four years, their value has varied from year to year. Since 1991, the cumulative value of FAO has totalled $12 billion, but the contracts have been spread out over the past 16 years. This year, total value of contracts signed is expected to exceed $3 billion, up from a record $2.9 billion last year.

While what’s driving growth are corporate efforts to cut costs, many organizations are also beginning to realize additional benefits such as productivity gains from outsourcing. Moreover, the companies can achieve even more value if they leverage outsourcing to transform their internal F&A system. Everest said many only turn to providers for tools but would garner a greater return if they externally sourced core systems.

Many buyers currently see gains from a reduction in direct and indirect labor and overhead costs related to accounts payable and receivable. They also realize process improvements through self-service, better customer service quality, and the availability of tools such as document management. All are found in most existing contracts, but a few are starting to address more transformational issues. Everest pointed out that only a handful of contracts today cover the client’s business performance and technology/capital effectiveness. Their value, though, goes beyond simple cost cutting.

For instance, by leveraging outsourcing to rationalize legacy environments and standardizing systems across the enterprise, organizations may gain access to new technological tools and establish uniform reporting methods, helping to simplify their operations. At the same time, it can reduce operational risks through a well-constructed contract that comprehensively addresses compliance requirements. Although Everest said companies are increasingly seeking these benefits in their FAO deals, these value-adds will never displace cost savings as the No. 1 incentive drawing companies to outsourcing.

It’s a trend not likely to change because outsourced costs are being pared even lower as offshoring grows in popularity. Everest data show that the billing rate per full-time employee today is $68,000 to $72,000; in the U.K. the rate is $82,000 to $86,000. By contrast, the rates are $18,000 to $22,000 in India and $15,000 to $19,000 in China. Even as demand grows from offshoring, rates will change little. By 2009, the cost in India is expected to rise to $24,000 to $30,000, while in China the cost will climb to $20,000 to $26,000.

Based on potential savings and location maturity, Everest identified three key overseas cities ideally suited for FAO: Manila, the Philippines and Chennai and Bangalore, India. Other attractive cities include Prague, Czech Republic; Budapest, Hungary; Mexico City; and Toronto.

As expected, North America accounted for the largest number of contracts and the highest value of accords signed at 52 percent of the 108 deals and 62 percent of the $11.9 billion total contract value. However, Europeans were the largest consumers of services provided under those contracts.

TWO KEY VENDORS
While a growing number of vendors are offering FAO services, the bulk of the contracts are held by a handful of providers. In fact, Accenture, the leader in the number of accounts held, accounts for 33 percent of the total number of contracts (28 percent of the total value). IBM is in second place in the number of contracts placed. Genpact is third and the only other company with a double-digit share of the total number of contracts. Other players include ACS, Xansa, Capgemini, WNS, and EDS.

As providers jostle for their market positions, both IBM and Accenture continue to dominate the landscape. According to Everest, they have combined to capture 66 percent of new annualized contracts in the past six quarters. As market leaders, the two have significant offshore scale and high delivery capabilities, offer a broad scope of FAO services, and are in the process of acquiring complementary emerging suppliers. Those in the second tier are looking to catch up by building offshore facilities, enhancing delivery capabilities, and building on their outsourcing experience. A number of other providers are working toward the same goal but have much more limited capabilities and scope.

With many choices in the market, how can organizations considering outsourcing make the best choice? Everest stressed that companies need to examine many facets of their business, including deciding what are core competencies, what unique requirements must be met to satisfy compliance issues, and how FAO can create a significant impact on the enterprise. Other issues to consider are deciding where to offshore services and how to treat F&A systems in light of an FAO agreement.

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More information about the study is available from Everest Research Institute, (214) 451-3000 or at everestresearchinstitute.com .