The new report from FAO Research says bigger, more mature companies are the best at service delivery. But it also calls FAO “immature.” Can both be right?

by Harry Feinberg, Jay Whitehead

How many years have we known Lisa Ross? Oh, probably five. Back when we started HRO Today magazine, FAO Today’s twisted sister, we published Lisa’s work in the HR services market. She also spoke at the HRO conference we started, HRO World (now owned by LRP Publications). And now that her FAO Research, Inc. is up and running, she has once again become a forceful source of new ideas and deep data dives into the provider community, this time in the FAO space.

Her most recent report, which you can buy if you’d like, is truly a gem. We really think it’s worth your time, whether you are on the provider or practitioner side of the table. Let us give you three little previews.

• First, Ross segments the provider market into seven categories plus five more, which is a much more nuanced approach than our relatively ham-strung three-tier market descriptions. After reading her differentiating explanations, our Tier 1, Tier 2 and Tier 3 categorizations now feel horribly inadequate. We’re going to redo our slide deck right now.

• Second, Ross realizes that bigger can be better (or, in other words, size matters). That’s why she has almost always ranked the two largest provider companies, IBM and Accenture, at the top of the quality and expertise lists. But she also acknowledges that the competition is improving. So if you are of the mind that the twin towers are the only two options for your FAO business, think again. There are at least another dozen viable competitors for nearly every size and shape of assignment.

• Third, every one of the 14 major competitors in the space are given complete, multi-page descriptions of their strengths and challenges. For a syndicated research effort, this is pretty nifty stuff. Research like this is a job for professionals. Children don’t try this at home.

SPEAKING OF RESEARCH
It seems that in recent weeks, we have been getting more and more buyers asking us, of all people, for references on providers. The demand is coming from everywhere—small, mid-size, large, and international companies in several big verticals. This is a very telling development. It probably means two things. First, the buying activity in FAO is heating up. And second, there are precious few CFOs out there willing to give references, even when they’re happy.

Just prior to this writing, we gave an extensive reference on a well-known Indian offshore provider for a mid-size company from Minnesota who is interested in AP outsourcing. The reference-seeker was looking to run a lithmus test that would only involve a few seats to start. For mid-size companies, that’s a pretty cool way to limit your risk. And more and more providers are willing to do it.

Call it the appetizer-before-the-big-meal approach. Try it, you just might like it.

MERGER MANIA?
If you think that FAO is this quiet corner of the world that private equity has yet to disrupt, you would be wrong. Witness Genpact’s reported big merger with Vertex Data Systems, both of which are owned by Oak Hill Capital Partners. The rumor is that the private-equity guys are marrying the two companies to make an even bigger company.

By now, the capital markets must be getting pretty familiar with FAO, what with WNS’s successful IPO in 2006 and ExlServices’ IPO soon thereafter. Nobody feels the heat of a friendly capital market better than the private-equity players. FAO Today calls FAO stocks a buy. But not a buy and flip. Hold these stocks. They will appreciate. And you will appreciate this advice. Happy investing.