FAO Today’s publisher spells out the five things that the fast-growing FAO industry should fear the most. If none of these things happen, no need to worry. If they do, be scared—be very scared.

by Jay Whitehead

Sometimes when I talk about how much the fast-growing FAO market is changing, I feel like an old Marine. The Jarhead joke goes like this: The U.S. Marine Corps was founded in 1789 with one officer. The next year, when the second officer joined, the first officer lamented, “Oh, it’s not like the old Corps any more.”

If you’re not an old Marine, it’s a funny story. Marines are famously nostalgic for the (bad) old days. But if you’re a long-time FAO character, you probably pine for the days when you were the only one among your peers outsourcing F&A functions. Now it’s just commonplace—mundane, de rigueur, positively normal. It’s not like the old FAO market any more.

Now FAO’s over $50 billion in size, global in scope, 10 domains deep, and even becoming popular among mid-market firms. Yet despite the market’s size and growth, there are phenomena that could stunt the market’s development, limit customers’ choices, and restrict vendors’ ability to continue to grow. I think of them as the Five Fears.

First is excessive regulation of the vendor community. Some would say that vendors already have heavy oversight; some even call it Big Brother-ish. But when we really look at the detail, it becomes clear that FAO vendors are less regulated than their clients. Truth is, vendors are kept honest by the open market and the hyper-competitive environment in which they operate. Some lawmakers have made noise about clamping down on BPO providers. But the last thing these providers need is more checkers checking checkers.

Second is a pullback in capital-market appetites for the offshore-labor-arbitrage-dominated business model. The strong stock performances of WNS , EXL Service , Infosys , and Wipro are testimony to the financial markets’ appreciation of the potential for the BPO model in particular, and FAO specifically. And now that Genpact is filing its S-1, and at least one other provider is in line to do the same, all signs are that this bullish market sentiment will continue. If the capital markets fall out of love with FAO’s cost savings-and-growth story, market caps will crater. But they are showing no signs of fatigue yet.

Third is a scandal. All it would take is a Conrad Black-like raid of some company in the space to turn this market into the second coming of The Big Chill. The good news here is that unlike some other boom industries, FAO company leaders tend to have heavy-duty accounting backgrounds and are remarkably fiction-averse. That’s not to say that CPAs don’t lie. It is to say that building an industrial-scale FAO shop that’s based on a Ponzi scheme would require a liar born with a bulging brain—a brain bigger than any previous schemer or fraudster. Keeping track of a 100,000,000-transaction-a-year con job would be a task for Super Computer Guy. The movie version of such a feat of legerdemain would be titled “Ocean’s 13,000.”

Fourth is a big merger that causes the acquiring company’s results to go sideways. The model to avoid emulating here is Hewitt’s acquisition of HRO pioneer Exult. When Hewitt bought Exult, its stock started to swoon and has yet to recover. Exult’s contracts were lower-margin affairs than Hewitt’s traditional higher-margin consulting base, and the botched execution of the transition has cost several Hewitt top execs—including the CEO—their jobs.

Fifth is a big client barf-back (that’s a technical term for “we decided that outsourcing is too scary for us and rather than risking a vendor telling us that our past practices were a horror, we want to bring this putrid mess back in-house where we can bury its oozing carcass deep in our gargantuan bureaucratic graveyard”). In ITO, JP Morgan Chase brought its account back-in-house after outsourcing it for a short period, saying that IT was part of its core competency. That event shook investor and customer confidence and helped put the chill on the ITO market for a protracted period. While the FAO industry would surely survive one such event, deal flow would fall off a cliff for a while.

If I were an odds maker or a gambler, I would put the odds of all five happening in the next 18 months at 1:1,000. four, 1:500. three, 1:100. two, 1:10, one, 1:2. While I’m not a betting man, my bet for continued fast growth is still on FAO.