As the F&A labor market continues to tighten, FAO suppliers must fine-tune how they manage—and think about—hiring and retention.

by Katrina Menzigian

The Finance and Accounting Outsourcing (FAO) market continues to attract both buyers and suppliers. As the Everest Research Institute (ERI) wraps up its analysis of 2007, we find that ongoing buyer demand translated into year-over-year growth in the number of signed contracts and a diversification of the supplier landscape. A big piece of the FAO story revolves around access to and management of F&A labor pools around the world. To date, a key component of the FAO value proposition, although not the only one, has been the ability to leverage global sourcing in order to significantly rework the underlying labor cost structure of finance processes.

In fact, ERI research finds that 83 percent of the 45,000 to 50,000 people employed around the world by FAO providers are located in “lower-cost” geographies. Along with labor costs, global sourcing in FAO has also meant access to a seemingly limitless pool of qualified finance talent, at both staff and managerial levels. While this model has enabled dramatic expansion of the FAO market, there is reason to believe that, going forward, the ability to attract and retain qualified F&A talent will become a key attribute for FAO providers. The time has come to take stock of the global F&A labor pool and to ask the question: “How can FAO suppliers provide client value and grow their own business in an increasingly tight F&A labor market?”

Let’s take a step back and look at the big picture. Over the past 12 months or so, numerous press articles and studies have highlighted a growing gap between the number of qualified finance and accounting workers and general market demand for these employees. While estimates of the size of this gap vary, the findings all point to the same message: The gap is growing.

A recent study by Robert Half International , a global staffing services firm, found that across the 17 countries it surveyed in North America, Western Europe, and East Asia, approximately 56 percent of participating companies indicated having difficulty filling F&A positions. The types of positions ranged from general accounting, to financial analysis, to executive levels. Furthermore, these same respondents indicated that the recruiting process takes an average five weeks for a staff-level position and up to eight weeks for a management-level position. In the U.S., the Bureau of Labor Statistics reports that from 2003 to 2007, the rate of unemployment for experienced financial operations workers has gone from 3 percent to 1.9 percent, respectively, well below the national average of 4.6 percent. This finding is especially interesting because it implies that while outsourcing in F&A was growing, the rate of unemployment was dropping. Lastly, recruiting on college campuses is up, and graduates in accounting, finance, and mathematics are enjoying strong employment offers.

Since many of the factors contributing to this unmet need in finance departments are unlikely to change in the near future, it’s worth taking a look at some of the underlying reasons. As with so many other areas in the global economy, demographic shifts play a role, with large numbers of Baby Boomers expected to retire, or at least decrease their contribution to the workforce, over the next decade or so. The impact will be felt most in those areas where specialized finance experience is required, which leads to our next factor.

Changing requirements around government regulations have left finance departments continuously playing catch-up in terms of finding and retaining qualified compliance professionals. The Robert Half study found that the one attribute most desirable in executive-level finance professionals is expertise in compliance. These results held true across all major world geographies. The last major challenge seems to be competition from attractive employment alternatives. Today’s experienced F&A professional might end up in investment/trading, venture capital, private equity, or consulting, a departure from more traditional public accounting firms or corporate finance departments.

Where Does FAO Fit In?
The reason this crunch for talent matters to the world of FAO is that it will drive, and potentially inhibit, market growth. Over the next two to three years, FAO suppliers will be well positioned to help enterprise clients proactively manage the changing realities of the talent aspects of their business.

One of the key benefits an enterprise organization gains through FAO is the opportunity to partner with its service provider to proactively address ongoing talent management issues. This means relying on the FAO provider to develop best practices for recruiting, hiring, training, and managing staff. This would include staff that would otherwise be in the client’s finance and/or IT departments. Given the statistics cited earlier, relying on an FAO provider to deal with staffing for larger organizations helps ensure continuously high levels of service from the finance department to the rest of the organization. Furthermore, FAO providers have teams in place dedicated to seeking out and attracting resources qualified along specialized skill sets, such as general accounting, compliance, and international finance. Lastly, through FAO, clients can more readily access tools and technologies that make the work of both retained and outsourced staff more efficient and productive.

Perhaps one of the more strategic aspects of FAO has to do with enabling clients to shift focus from activities that are “critical” to those that bear “strategic” importance on the agenda. By transitioning transaction-centric F&A processes to an external service provider, the role of the retained organization shifts from managing operations to supporting strategic growth initiatives. This often means enhancing internal skills (which apparently are sometimes hard to find) related to financial analysis, pricing models, M&A analysis, and yes, managing the outsourced part of the business. The trick here is for each FAO buyer to identify which areas of talent are best served by which sourcing model.

Sustaining Your Labor Resources
However, this issue of managing F&A talent also impacts the providers of FAO, although in a somewhat different way. FAO providers must address the issue of sustainability of their labor resources. In reality, while FAO providers do have dedicated practices for ongoing recruitment and training, they are faced with high annual attrition rates. Combined with wage inflation pressures, and ever more sophisticated requirements from clients, it is clear that FAO providers must take an aggressive approach to managing their talent on a global basis in order to continue taking on new clients and achieving sustainable and predictable service delivery.

Let’s take a closer look at India, the global hub for FAO services. Today, we estimate that 70 percent of all offshore FAO workers are based in India, approximately 26,000 employees. Their skills sets range from entry-level operations staff to more senior CPAs. The pool as a whole has experienced a 25 percent attrition rate over the past two to three years. This attrition has driven annual FAO wage inflation rates to about 12 percent.

Talent scalability is an issue beyond the Indian context. FAO delivery locations in Eastern Europe and the Philippines have experienced similar levels of attrition. Recent discussions with FAO executives seem to indicate that targeted initiatives designed to retain staff have helped to somewhat ease attrition pressures. However, these very types of talent challenges could potentially inhibit future growth of the market, as service providers recognize their capability constraints and become more cautious in absorbing new business.

In conclusion, the global pool of FAO talent is undergoing a metamorphosis: one that involves shifts in demographics, geographies, and skill sets. In the numerous ways outlined above, FAO can bring meaningful value to clients by providing methodologies and best practices for accessing and managing F&A talent for the 21st Century. To continue meeting this challenge, FAO providers will have to think of themselves as much in the business of talent management as finance and accounting.

Katrina Menzigian is vice president of Everest Research Institute. She can be reached at kmenzigian@everestgrp.com.