Vendors mature to deliver well-developed solutions to a market of at-ease buyers.

by Phil Fersht

The adoption of Finance and Accounting BPO (F&A BPO) showed no signs of relenting in 2007, with 107 enterprises entering into multi-process engagements, where they bundled more than one core F&A process under a single supplier. This represents a 31 percent increase in expenditure over 2006, with total contract values topping $3.9 billion.

Examples of enterprises that have entered into F&A BPO engagements over the past year include Microsoft with Accenture, Colgate with IBM, Philips with Infosys, Cadbury Schweppes with Genpact, Tetra Pak with Capgemini and Tribune Group with HP. Figure 1 illustrates the rapid evolution of the F&A BPO industry over the past five years, which has now seen more than 400 enterprises (most of which are Global 2000 organizations) enter into multi-scope F&A BPO engagements.

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So what is driving enterprises to outsource their F&A processes?

Enterprises are saving between 20 and 60 percent from their original F&A administrative costs by entering into these engagements. This is largely due to the lower-cost labor resources of finance personnel working for outsourcing providers in offshore locations such as India, Philippines, Central and Eastern Europe, and Latin America. Most recent engagements involve at least 80 percent of the outsourcing vendor personnel operating from these offshore locales, with the remaining staff working onshore—and often on-site with the enterprise. Cost is clearly the main driver behind F&A BPO adoption; however, as companies evaluate service delivery options, they are increasingly taking advantage of outsourcing providers’ capabilities to provide technology solutions that can unify financial data across disparate regions and systems. Enterprises are also taking advantage of the process acumen and rigor that experienced outsourcing vendors can bring to the table.

We are also seeing several enterprises seeking to dovetail F&A BPO adoption with an ERP roll-out, and taking advantage of transitioning knowledge and processes simultaneously. Energy firm Williams, for example, made the decision to outsource its transactional accounting processes to IBM in tandem with the roll-out of its Oracle ERP suite, and had IBM manage both the business and IT processes throughout the transition and beyond as part of a multi-year outsourcing contract. We will discuss this case study in depth in a future research article. A handful of enterprises, like Williams, are finding synergies with having the same provider manage both the application and its related business processes, but we still have a long way to go before we witness a wave of enterprises outsourcing both their IT and business processes in a single contract to a single vendor (termed “bundled” BPO). However, we do expect to see a few major enterprises announce bundled BPO deals this year, which should fuel increased demand for greater business/IT alignment within outsourcing engagements.

Which F&A processes are enterprises outsourcing? Figure 2 details three categories of F&A processes that are included in F&A BPO engagements and shows what proportions of each sub-process are included across all current F&A BPO engagements today.

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Transactional accounting. This includes routine, transactional tasks that can be transferred to third-party resources at relatively low risk, and it makes up the vast majority of today’s F&A BPO engagements. This typically involves accounts payable, accounts receivable, and general ledger processes.

Financial reporting. Most enterprises tend to start off an F&A BPO engagement by moving portfolios of transactional processes over to an outsourcing provider, and gradually transition higher-value (and higher-risk) processes across once they are comfortable with their vendor relationship and have the confidence to entrust it with these processes. As Figure 2 details, 40 percent of current F&A BPO engagements now include management reporting processes, and we are also seeing close to a third of these engagements include both statutory reporting and inter-company accounting processes. In most instances, these processes have varying degrees of customization to the enterprise, and the outsourcing vendor needs to devote skilled resources to effect successful knowledge transfer and ongoing deployment.

Financial planning and businessintelligence. These are largely unique processes that sit within the retained organization, once the enterprise has outsourced elements of its transaction and reporting work. These would typically include treasury, financial planning and analysis (FP&A), business intelligence (BI) and audit work. However, we are seeing 20 percent of adopters now include treasury and FP&A work within their multi-scope engagements and a handful of enterprises (10 percent) even including BI services. Typically, vendors will take on administrative elements of these processes such as data-gathering, template population, pre-population of management presentations, with strategic activities—such as development and interpretation of metrics, tax planning, budget planning, and reviews—sitting with the retained organization.

From a cost-savings standpoint, the emerging opportunity comes from the growing capability of outsourcers to take on reporting, treasury, and FP&A processes. The challenge for enterprises is to identify which elements of these processes can be outsourced and how to transition the work to the provider. In addition, enterprises need to determine the enhanced roles of the retained finance organization; i.e., service-level setting, vendor management, and greater focus on controllership activities.

Provider Landscape
The F&A BPO industry was traditionally dominated by the global IT and managed business services and consulting firms; namely, IBM (through its acquisitions of Daksh, Equitant, and PwC’s consulting business), and Accenture , which has largely grown its F&A business organically, acquiring niche expertise such as Meridian and Advantium along the way. Capgemini , HP , and ACS also entered the industry after the turn of the millennium, as they sought to grow their BPO business lines with F&A forming the hub processes. General Electric’s spin-off, Genpact, arrived firmly on the scene after 2004, leveraging a low-cost offshore model to open up the F&A BPO market to a host of new companies, notably from the manufacturing, consumer packaged goods, and life sciences sectors.

Genpact’s arrival paved the way for the global Indian-headquartered IT service providers such as Infosys and Wipro to make their entry points into the market, with Infosys acquiring niche F&A BPO provider Progeon, and Wipro opting for an organic client acquisition strategy. Offshore BPO provider WNS, which was spun out of British Airways’ F&A function, has also been competing for business, dominating the airline sector, and making inroads into both financial services and retail industries. Outsource Partners International (OPI ) has been successful in the middle-market, while Vengroff Williams and Associates (VWA ) has quietly developed a strong onshore offering with its order-to-cash solution. French BPO firm Steria also entered the F&A BPO market via the acquisition of U.K. IT and BPO firm Xansa, which has a dominant position within the U.K.’s domestic public sector, retail, and financial services businesses. Other firms worth watching in this space include EXL Service, with specific F&A services in the insurance sector, and Intelenet Global, which is now making significant inroads into the online travel industry, having had earlier success in the retail and banking industries.

Additional offshore-centric providers—Tata Consultancy Services (TCS ), Satyam , and Cognizant —have also been looking to develop market presence, focusing on developing incremental business process relationships with existing IT services customers. Figure 3 outlines the current preliminary market shares of the F&A BPO service providers, based on percentage shares of total industry revenues (TCVs).

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Accenture proved to be the strongest performer in 2007, taking on major engagements for Thomas Cook and Microsoft, in addition to a host of smaller engagements, in particular making inroads into the high-tech sector. IBM also enjoyed a major upswing in its F&A BPO business, with 10 new clients last year, to consolidate 20 percent of the market. Genpact continued its surge with a strong showing, although less rampant than 2006 as it digests a host of new clients, with ACS and Capgemini experiencing slower growth, although both firms have rebounded strongly this year. HP, Infosys and Wipro enjoyed breakthrough performances in 2007 as all three firms picked up significant new enterprise clients, and they are now all firmly positioned as contenders for winning high-end global contracts this year. The confirmed acquisition of EDS will further strengthen HP’s global delivery scale and depth, and allow the merged entity to compete for F&A business that has crossover into HR processes, namely payroll and benefits administration services (see related stories, pp. 7-8).

The surprise performer has been Vengroff Williams and Associates, as the Los Angeles-based supplier notched up 14 new client wins, which have included providing order-to-cash services to several major healthcare, retail, and consumer packaged good companies. In fact, based on 2007 revenues alone, VWA accounted for a 6 percent market share. (See a VWA healthcare case study on p. 9.)

We are clearly reaching a critical juncture with the competitive make-up of this market, and we are now past the stage where most new entrants can enter the market through organic client growth. However, there are clearly some potentially attractive acquisition options available for several leading IT services firms, which need to add F&A BPO capabilities to their service portfolio, as the trend toward more hybrid application/ BPO engagements becomes more prominent in the industry. We may even see payroll and HR outsourcing services firm ADP make a decisive (and acquisitive) move into this sister market, or one of the niche collections BPO firms such as NCO Group move further up the value chain to offer a wider array of F&A services.

The Challenges
Overall, the F&A BPO industry is beginning to mature and follow a similar path to that of IT outsourcing in the 1990s, where offshore staff began taking on lower-level routine administrative tasks, before moving on to higher-value—and more customized—work as they became more experienced. However, like IT outsourcing, F&A BPO has many challenges for its early enterprise adopters to overcome. An AMR Research article, entitled, “The Survival Guide for the Successful Outsourcing Executive” discusses many of the key challenges today’s executives who manage outsourcing engagements are facing, such as hands-on vendor management, successful contract negotiation, and learning how to manage an outsourcing provider effectively.

What many enterprises fail to realize when they headd down the outsourcing path is the quicker they take control over their vendor relationship and manage their service delivery staff as their own, the sooner they will reach a satisfactory operational state.

So consider yourself lucky if you are now evaluating F&A BPO—you can learn from the mistakes of others and take advantage of a highly competitive marketplace and a maturing delivery model from the service providers.

In my column in the next issue of FAO Today, I will discuss the changing trends towards more volume-based pricing models, the growth of the middle market for F&A BPO engagements, and the increasing trend toward companies bundling their financial applications management with their BPO services. FAO