As a New Study Projects 50 Percent growth in F&A Offshoring, Advisors and third-party providers agree that outsourcing is alive and kicking vigorously.

by Peggy Cope

A brand new report from The Hackett Group is trumpeting the news that companies plan to boost their use of offshore resources by 50 percent over the next three years, as globalization of key business processes in finance and accounting rolls onward with the certainty of a steamroller. 

The study is among the first in the industry to poll companies using BPOs and organizations that operate captive shared service centers, revealing some very intriguing differences that would appear to give offshore BPO a serious edge over captives. While companies using either model experience similar cost reductions, timing and performance are clear advantages for those that choose the offshore BPO route.

“Two things in this study are interesting to me,” said Michel Janssen, head of research at The Hackett Group: “First is the length of time, which is right at half for BPOs.” On average, BPOs reach full capacity for processes in scope of a specific globalization initiative twice as fast as captives; more specifically, in about 13 months.

This is, in part, because BPOs hire ahead of the curve, said Janssen, so they have the whole engine in place. He likened BPO to a jet waiting on the tarmac for passengers (the clients). “You’re not sure who’s signing up, but you have the plane warming up. You just don’t know who’s making the reservation for the holidays,” he joked. Continuing that analogy, corporations building their own shared services model might be more similar to people holding the holidays at home, cleaning the house, preparing the meals, and ramping up for the event on their own.

The other interesting feature for Janssen lay in the area of growth. “Once a company started the BPO conversation, they planned to grow significantly. We knew there was substantial growth, but now we have a trajectory. Companies that started with tiny projects representing X percentage of their business are looking at growth that’s substantial in broad numbers, which show huge growth.” Huge indeed, with companies that have started globalization of general and administrative processes expecting to move another 50 percent of their work offshore over the next three years.

According to Clarence Schmitz, CEO of Outsourcing Partners International (OPI), “The outlook for outsourcing is quite bullish, especially given the economic conditions companies face in the U.S. We are starting to see a similar impact in Europe and elsewhere, as well. Levels of interest for our services have never been higher, and a lot of that is due to a recessionary impact. Companies need to contain costs.”

Offshore BPO is one means to achieve some measure of cost reduction, although Schmitz cites technology as another front-runner. “Offshoring has become more widely accepted among CFOs and buyers of our services,” he said. “Nearshoring is no longer enough, and ‘lift and shift’ certainly doesn’t do it any more.”

Advisory firm TPI partner Peter Allen is cautiously laudatory. “In general, we are seeing a bit of an upswing off of a soft recent past,” he said regarding offshore BPO, particularly in finance and accounting outsourcing (FAO). While there is still some skepticism from the buyer side, particularly where FAO is concerned, the first wave of labor-based outsourcing has built up to maturity.

“Many providers are going back, saying, ‘I’ve been doing transactional functions, I understand those well, and I’m ready to take the responsibility’ of additional functions,” added Allen. The question is whether their clients agree. The answer varies by provider and client situation.

In finance there’s a persistent concern that is not unique to F&A, although it tends to be more vocal there, about the line of sight and line of accountability between the CFO and the resources performing various functions, for risk management reasons as well as flexibility, according to Allen.

“The decision maker in F&A is a risk-averse individual,” Allen said. “It’s a longer journey for finance to get to true outsourcing comfort. Companies that have enjoyed a few years of the benefits of labor arbitrage are engaging in conversations about transforming their relationships away from transaction-based engagements.”

Some of the trends are rather surprising. A recent TPI study found that, disproportionately, the vendors that are providing higher end work are the Indian providers rather than the big names such as Accenture, IBM, or ACS. “We talked to clients to ask why that is the case,” he said. “None of them professed to have a strategy going into the relationship to give them that work—they had simply earned the right.”

While multinationals have traditionally been prevalent in the transactional domain, Genpact, Infosys, Wipro, WNS, and the like are now commonly seen in the strategic realm. This argues positively for offshoring, according to Allen.

“Our takeaway is it’s a three- to five-year journey to demonstrate proficiency and show you have the training and infrastructure to get to that level of performance,” he said. But that’s the journey of the recent past. Time will tell if that journey’s duration will compress as the industry continues to mature and comfort levels increase.

Group chief operating officer of WNS’s Global Services, Anup Gupta, said, “All of us are watching the economic downturn closely. We are seeing a lot of activity—on the banking side there is a slowdown, but the pipelines are busy. We remain pretty confident, and we are bullish about the prospects of BPO in general.”

Among the many trends bending the current of offshore BPO, Gupta noted several on the positive side; for example, the fact that companies are under cost pressures that force everyone to look at how to manage business with reduced expenditures. “Offshoring is an obvious thing to do in that respect,” he said. Companies are looking at offshoring more seriously and undertaking it at a quicker pace.
 
Where to Offshore
In addition, he has noted evolution in how companies determine the best location for a particular piece of work. More are asking whether nearshoring or offshoring is the best solution for a given value chain, as global delivery models gain momentum. “We are seeing as corporations get more mature about offshoring, they are looking for partners to become more global, as well,” said Gupta. “We are pursuing that aggressively, in Romania and the Philippines; in coming years we will be much more global than we are today.”

Along with the Philippines, Eastern Europe is emerging as a destination to contend with. As companies seek to meet language requirements, such destinations as Morocco or Egypt, Latin America for Spanish speakers, and China for companies with Asian business, should develop further with new centers and capabilities.

Genpact senior vice president of F&A practice Shantanu Ghosh noted that the traditional centers of offshore BPO are continuing to be pretty strong. But in addition, he has heard discussion of Malaysia, the Philippines, Russia and the Baltic states, Scandinavia, Eastern Europe, and China. “Clearly, as global companies try to encompass a bigger footprint, they will try to find out what they can do in new locations,”’ he said. “We have offerings in Poland, in Lublin, where we can do [more European] languages.”

As companies are expanding the locations out of which they provide BPO services, they concurrently enhance their offerings to keep up with client demands. Genpact, which has traditionally been strong on the process side, has added a compliance arm to its business, with the purchase last summer of Axis Risk Consulting Services, an independent India-based risk consulting firm that provides such risk assurance services as internal audit, business performance improvement, Sarbanes-Oxley documentation and compliance testing, and enterprise risk management.

“Now, there is a great opportunity to go to higher levels,” he added. “Customers are more open to looking at outsourcing holistically and taking it on end to end. They typically start with a small portion of it, but now are doing the whole thing. A substantial part of that has to do with the business outcome of processes.”

Even companies that are tackling outsourcing for the first time are considering higher processes right out of the starting gate. “Some of the cynicism that said nothing that was complex or which required decision making could be done has been reduced. We are in the midst of closing a contract where strategic sourcing is part of the procure-to-pay model,” he said.

“Clients are definitely saying ‘Give us strategy’ rather than taking a transactional approach,” he added. “That’s what we would like to do. From our perspective, it’s going the right way.”

Many things appear to be going the right way for Genpact. Fresh off a recent deal with Hyatt Hotels that inked a five-year contract to provide finance and accounting services to the hotel giant’s shared service center arm, and acquiring a new delivery center in Guatemala from GE Money, Ghosh noted, “We keep winning against all the global guys, who keep us on our toes.”

The company’s margins have made dramatic improvement, and earnings were up 26 percent in the second quarter of 2008. Ghosh attributed this to efforts over the past 12 months to go into high value-added services that have a real business impact for its customers. “We are now able to position ourselves as offering value for customers more than doing tasks for customers.”

Rohit Kapoor, president and CEO of EXL, agreed that providers are getting more adept and specialized in terms of the capabilities they are developing. “We are getting more specialized in insurance, banking, and the F&A space. We are able to broaden our service offerings, to deepen our offerings so we can handle processes that are end-to-end. This is creating a much higher level of confidence among clients to give out their core processes…they now believe they can be offshored, if they work with a partner with whom they’ve been working for three to five years.”

Kapoor has noted a layering of functions. A lot of EXL’s clients started outsourcing process by process and are expanding on those early contracts over time. In the future he anticipates that some new clients might think about taking a leap of faith and outsourcing all functions at once, from soup to nuts.
“When they go to visit offshore locations and see the full end-to-end capability, they will have confidence. Given what’s happening with the economy, clients will be thinking about offshoring more holistically, rather than doing it in an incremental manner, prompting a multi-layered approach.” 

Stay tuned to future issues for more information on Hackett’s research and the future of offshoring and shared service centers.