As service providers learn to leverage their assets, they are finding a more receptive crowd of buyers in the mid-market. But has this segment really arrived?

by Andy Teng

Savvy followers of the outsourced, multi-tower finance and accounting market know that growth has been sustained by global enterprises taking an integrated approach in their outsourcing efforts. As these Global 1000 businesses increasingly look to leverage the advantages of FAO, it’s also becoming clear that smaller counterparts may be following in their footsteps.

Most industry observers are well aware that enterprise FAO deals—those encompassing multiple services such as accounts payable, accounts receivable, tax administration, general ledger, and a host of other functions—have been mostly responsible for the growth of the FAO market, but quietly small and medium businesses (SMBs) are honing in on FAO’s riches. For a number of reasons, FAO appears to be striking a stronger chord than HR outsourcing among the mid-market crowd, leading one industry analyst to predict that the number of FAO contracts signed in this strata will grow 65 percent next year and prompting the question: has the mid-market arrived?

Indeed, the mid-market is starting to gain more traction with not only more contracts but also more offerings from vendors who might have once thumbed their noses at buyers with less than $10 billion in revenues. The fact is that while enterprise clients can easily throw millions of dollars into an FAO deal, smaller organizations buying integrated service demonstrate that they, too, offer providers a lucrative revenue source, especially if they look to package a number of services in the deal. Furthermore, unlike their larger brethren, mid-market deals are simpler to construct, cost vendors less time and money to acquire, and can go live more quickly—factors not lost on many enterprise providers rushing into the segment.

Still, while its growth potential is strong, the mid-market remains a small segment of the overall FAO market. Buyers here continue to get short shrift compared with the Global 1000 buyers. And very few vendors in the space position themselves as exclusively for the mid-market, meaning the vast majority continues to put an emphasis on big buyers. Nevertheless, look for the mid-market to really pick up steam during the next year or two.

“I think the mid-market is going to be by far the most aggressive part of the market. I think that’s about a year away,” said Everest Group VP Phil Fersht, one of the sourcing advisory firm’s analysts who tracks FAO market development.

Fersht noted that there is strong interest in the mid-market—which defines this segment as companies with sales of less than $5 billion and as little as $150 million— for numerous reasons. Because mid-market companies are usually in a state of flux as a result of rapid growth, mergers and divestures, and other factors, it’s a natural time for them to consider transformational programs such as F&A or HR outsourcing. These efforts usually help these companies—which until now have put off a deep analysis of their back-office burdens and processes—to realign their finance department to enable future growth.

Furthermore, he noted, mid-market organizations face tremendous competition in their space, from larger industry leaders as well as smaller upstarts looking to win market share. This translates into greater pressure to reduce costs, streamline operations, and maintain headcount while growing back-office operations. These mandates are perfect for outsourcing processing-intensive functions such as accounts payables, receivables, and payroll.

“There’s a lot of pressure on finance departments to investigate outsourcing. I think the CFO’s job has become very, very tough in recent years,” Fersht said. “There has been a fair amount of cost pressures, and they are looking at new ways to cut costs.”

DEFINING THE SEGMENT
If there is commonality among mid-market FAO buyers, it’s their desire to curb costs. Other than that, you might be hard pressed to look for other similarities. While a few industries have embraced outsourcing more aggressively than others, buyers come from all walks of life and range in size. Take Fersht’s gauge of the segment, for instance. Organizations with $150 million in sales are vastly different from those with $5 billion—in scale, F&A needs, processes, geographies, and others traits. So while many industry observers agree that the mid-market is growing, they might disagree over which organizations make up the mid-market.

Jeff Bizzack, the CEO of Accenture BPO Service (formerly Savista), pointed out that the perception of mid-market can vary from person to person. By Accenture’s definition, these companies employ 1,000 to 15,000 employees. He readily acknowledges the huge disparity in outsourcing needs and structure between the two polar ends. He also is quick to point out that revenues or global presence isn’t always an accurate indicator of whether a company is a large enterprise or mid-market. For instance, he added, Coca-Cola is surely a mid-market organization despite having a presence in just about every country. That’s because it only has about 7,500 employees.

He contended that a more accurate indicator of mid-market might be a combination of workforce size and outsourcing need. For instance, many companies that Accenture BPO Services cater to are those that have emerged or are still undergoing a period of hyper growth.

“They’ve gotten past some of the growth issues and are stabilizing,” he noted. “On the other hand, they are saying ‘We have to dial in some of our efficiencies. We have to think much more strategically.’ They are more aggressive about outsourcing.”

Accenture, which earlier this year made its most important move into the SMB segment with the acquisition of mid-market specialist Savista, validated the arrival of the segment with its purchase. Bizzack said he sees the mid-market growing at 15 percent a year, while the rest of the market dawdles along at 6 or 7 percent. As one of the leading FAO service providers to large enterprise customers, Accenture failed to get its own home-grown mid-market unit off the ground. Instead, it made what many analysts say was a savvy move to capture more of the segment through the Savista buyout. Now it has those same analysts believing that additional major players such as IBM will also look to make a similar move either through acquisitions or an internal push.

THE PROVIDER LANDSCAPE
From early indications, those analysts seem to be on the money. Now that Accenture has made its play for the middle, IBM said it will do the same. Chris Gattenio, a partner with IBM’s Global Strategy and Markets for F&A, Business Transformation Outsourcing unit, said Big Blue has SMB clients in its sights. It will begin rolling out in the fourth quarter of this year outsourced F&A solutions in the market.

“Our focus so far has been on the large enterprise, but I think the SMB segment is emerging,” she told FAO Today earlier in the year. “We believe there is a lot of interest.”

Like Accenture, IBM believes it can deliver what the mid-market wants: a standardized, proven package of services that it already delivers to big buyers. By leveraging its existing know-how and technology, Gattenio said her company will be able to offer these at a price point attractive to mid-market buyers.

After all, big-bang FAO has been out of the reach of mid-market organizations simply because of the costs. But that doesn’t mean they don’t desire the same technology efficiencies, best practices, and high-quality service delivery that big buyers enjoy. In leveraging its existing assets, the company will launch SMB offerings focused on accounts receivables and payables and travel and entertainment (T&E) reimbursement. She said IBM will emphasize the company’s knowledge expertise and global platform and service delivery to make a compelling case to prospective buyers with revenues of $2 billion or less.

Both IBM and Accenture’s push towards the middle is indicative of the segment’s allure, said Lisa Ross, the CEO and founder of FAO Research, Inc., the only independent research firm focused on FAO. She noted that many vendors are scrambling after mid-market customers because of not only market demand but also the margins they might make from those companies. By offering standardized solutions built on existing assets, the delivery and pursuit costs involved with mid-market clients are a fraction of those for large clients. While each mid-market contract might pale in comparison with large enterprise deals, the number of SMB buyers is significantly larger. That’s led many providers to take a second look.

“We’re seeing quite a bit of activity in the mid-market space, especially from the more established outsourcer with a mid-market offering,” she pointed out. “There is tremendous competition in the FAO business in the large segment, and increasingly from offshore providers.

Many providers are finding they can add value to mid-market companies, just as they could with the larger companies, and potentially realize that in a highly profitable and scalable fashion.”

Indeed, traditional enterprise providers such as SourceNet. Infosys, Progeon, and Vengroff, Williams and Associates (VWA) are all looking downstream to claim a portion of this segment.

Ross said while it’s easy for these providers to spot the trends, the question will be whether they can execute. For businesses that have traditionally gone after big game, it will be a challenge to make the economics of serving mid-market clients work. They must learn how to configure a one-to-many platform based on their existing assets. For those who have made a living out of customizing solutions for large enterprise buyers, it’s not totally clear if they can bring services to the masses in a competitive fashion.

One comforting thought for providers is that FAO buyers, both large and small, are more receptive to moving processing to offshore facilities. That’s where the real arbitrage occurs. According to Fersht, some 69 percent of FAO deals had offshore components to them. Now, that portion has risen to 81 percent. And he believes it will go higher still.

So as the mid-market heats up and providers shift their focus further downstream, the good news for SMBs is that more offerings will be in the works. This will only further accelerate the segment’s maturation and encourage more mid-market buyers to consider

FAO for their organizations—all of which seems to indicated that, yes, the mid-market has arrived.