A bigger and better FAO.

by Lisa Maio Ross

We see strong evidence already that 2006 will be a banner year for finance and accounting outsourcing (FAO) market growth. Several FAO service providers are on the brink of announcing new major FAO contracts signed in the first few weeks of this year, and we know of many other service firms strategizing to play more prominently in the FAO domain in 2006. This heightened activity confirms our estimation that demand for FAO services will rise significantly this year compared with 2005. Concurring with our prediction are several renowned sourcing advisors—lawyers, consultants, associations, investment analysts, and other buyer influencers—who regularly provide us with their “feet-on-the-street” perspective of FAO market movement.

Here, then, are FAO Research, Inc.’s predictions as to what will happen in the FAO realm during 2006:

• Prediction No. 1: The number of FAO contracts signed in 2006 will double. Buyer demand for FAO services will rise steadily this year, with the number of enterprise-wide contracts signed in 2006 expected to grow to more than twice the number in 2005. We plan to test this prediction tangibly by comparing the number and types of FAO contracts signed last year to the types of activity that will take place in 2006. We are confident that sole-sourced and multi-tower outsourcing contracts will become much more common in a global marketplace that is more sourcing-educated, cost-conscious, regulatory-minded, and quality control-centric than ever before.
• Prediction No. 2: Large businesses will dominate market demand for FAO services. The vast majority of new FAO contracts in 2006 will come from large corporations that already account for 85 percent of current FAO demand, according to our most recent quarterly review of market activity. Large business has the most to gain from FAO in the areas of: expense reduction (including headcount); process efficiency and quality; regulatory compliance; technology and processing prowess; global capabilities and reporting uniformity; and effective business process management. The real and/or perceived fears of outsourcing by big-firm executives will be diminished as they learn about the many benefits of FAO and also discover that many peer organizations are considering and/or doing it on some level.
• Prediction No. 3: The most widely considered and outsourced F&A functions will be transactional types of services, with an eye towards more complex processes. The majority of FAO contract scopes this year will encompass processing-oriented types of services (accounts payable/receivable, billing, order to cash, etc.). Buyers will leverage outsourcers for F&A functions reliant on process expertise and scalable IT platforms capable of handling countless transactions accurately on a global level. We also predict that forward-thinking buyers will express interest in more strategic, complex FAO services such as decision support, asset management, audit control, product development support, and business process transformation; so we anticipate that a growing number of contracts will contain these value-added elements also.
• Prediction No. 4: The FAO service provider landscape will become increasingly complex. As the FAO market grows, so does the supplier landscape, which is creating healthy competition but tremendous challenges for service providers aiming to differentiate themselves and for prospective buyers seeking to understand this competitive mix. Our recent report analyzing the FAO supplier landscape revealed that this year, there will be 11 different types of service providers offering full-scale FAO services (end-to-end F&A functional expertise, enterprise wide, on an outsourced basis). The current FAO supplier mix includes seven types of providers. As these players become more competitive and expansive, we expect that four additional types of FAO service providers will emerge into this mix in 2006. It’s no wonder that roughly 60 percent of companies retain external, third-party assistance as they make FAO-related decisions.
• Prediction No. 5: Companies under heavy regulatory scrutiny will be the most active buyers of FAO services. Companies in heavily regulated industries are faced not only with tremendous standards to which they must comply but also with increasing economic, product/service development, risk management, and processing pressures. We expect firms in the utilities, financial services, health care, and public sectors to seek FAO more prominently during 2006 than their counterparts in other industries as they strive to reduce costs and streamline F&A functions within their unique industry guidelines. For example, the financial services sector—defined to include banking, insurance, and capital markets—was the “hottest” industry for FAO buyer interest at the end of 2005, according to multiple sourcing lawyers, consultants, and investors we interviewed. We expect this trend to continue.