Why Finance and Accounting BPO is Experiencing Rapid Change

In a nutshell, the number of finance and accounting BPO engagements being signed are continuing to increase at a rapid clip (30%), but are becoming increasingly smaller in size (Source: Deloitte Consulting Outsourcing Advisory Services Analysis, 2007).

Activity was very slow during the 1990s when the first F&A outsourcing projects took place, with the market only really picking up in 2004 with receding concerns over Sarbanes-Oxley compliance and outsourcing and increasing numbers of effective projects being made public.

Since then, we have seen this market triple to 300 current live engagements.

What has transpired is that F&A outsourcing is no longer a market for only the FORTUNE 100 brands, we are seeing many smaller, lesser-known companies move down this path. Why is this happening?

MID-MARKET BOOST

The first key factor is the emergence of the middle-market. We are seeing an increasing proportion of mid-size projects taking place, which is fuelling this strong growth in contracts. We expect this trend to continue for the next few years as the market matures.

According to a new research study from Deloitte Consulting LLP's (Deloitte Consulting) Outsourcing Advisory Services (see figure 1), almost 40% of new F&A BPO engagements last year involved less than 75 delivery staff being deployed from service providers. We expect this ratio to be seen in well over half of the projects this year.

We're also seeing this 'toe-in-the-water approach' from many companies looking at F&A BPO. Companies are adopting F&A BPO, but scaling back the initial scope of the commitment with fewer processes bundled. This represents a similar adoption approach to the adoption of IT outsourcing in the 1990s, when companies experimented with lower-risk processes, before making decisions over outsourcing core processes.

This is often the appropriate approach companies should take before embarking on a wide-scale outsourcing path – to work out whether outsourcing is appropriate for them and whether it dovetails with their operating model and business culture. Unlike the wave of global mega deals after 9/11, the current period of economic prosperity is allowing many companies the luxury of taking their time over vital decisions, rather than trying to make too many crucial changes at once.

ON-SOURCING AND OFFSHORING

There's also a distinct move to what we're calling 'on-sourcing' solutions. We have seen many large companies with existing shared services operations adopting initial small-scope F&A BPO solutions to compliment their sourcing mix. These are typically a small number of processes being bundled and managed by the shared services management to strip out further costs and focus the in-house staff on core activities.

Perhaps the largest surprise of all in the rapidly maturing offshoring industry is the speed in which it is now becoming a commodity service. When we look at the offshoring trends, we are seeing a very different picture from three years ago, where offshoring was reserved largely for the global companies that could transition some of their existing offshore operations to a service provider.

According to Deloitte Consulting's new study, 76% of F&A staff within mid-size projects are now being based in offshore locations (see figure 2). Offshore services are now a commodity business that all service providers are offering, and most smaller-size projects are only economically viable if offshore services are introduced.

BPO PRICING SHIFT

Companies are increasingly looking toward volume-based pricing. Another major shift we have seen in this market is a change in the way in which F&A BPO contracts are priced. As labour arbitrage is now commonplace across all suppliers, there is a distinct move away from products and toward business services as full-time employee-based (FTE-based) pricing is not generally providing desired results in terms of cost and outcomes in many instances.

The early wave of projects relied primarily on FTE-based pricing. Many of the service providers had been previously unwilling to risk pricing their services founded on outcome-based metrics; for example, guarantees of cost efficiencies, SLAs and other business-performance indicators. As recently as last year, three-quarters of the F&A BPO deals were priced this way (Source: Deloitte Consulting Outsourcing Advisory Services Analysis, 2007).

However, we are clearly seeing a shift toward suppliers pricing their solutions based on more variable inputs (for example, by transaction volumes) and also by 'gain-sharing' where the provider will be given performance targets and profit from the gains accrued from the efficiencies achieved.

The Deloitte Consulting study shows as many as 40% of the projects signed so far this year are priced on transaction as opposed to effort (see figure 3), which is a significant step in the right direction as this market matures. Suppliers are becoming increasingly confident in securing positive business outcomes for their clients and are more willing to be creative with their pricing strategies to secure new clients.

Industries such as consumer business, financial services, hi-tech, media and healthcare are following the growth curve previous seen by the energy and manufacturing industries, which dominated F&A BPO since its inception.

To understand why some industries, as opposed to others, have embraced F&A BPO from the onset, we need to look at the types of F&A processes they are outsourcing to understand how they are approaching this industry. Let's take the four largest adopters of F&A BPO: manufacturing, energy, financial services and consumer business (see figure 4).

COMMODITISED PROCESSES

With regards to commoditised processes (accounts payable, accounts receivable and general accounting) there is not a great deal of difference among industries when it comes to the adoption of these processes within contracts.

However, the real differences arise when we look at accounting processes that require a higher degree of customisation – namely management reporting, intra-company accounting and financial planning / analysis. Here, energy, manufacturing, and consumer business companies are clearly more willing to work with third parties than the financial services firms (figure 4), which regard these processes as core to their business with an almost 'emotional' closeness.

Moreover, the early-adopting industries have been more willing to transition their unique processes into an outsourced environment over the course of their outsourcing experience, whereas the more recent adopters have so far been more reticent.

To conclude, the F&A BPO industry is now experiencing a similar growth pattern to IT outsourcing, with the rapid development of offshore services in locations such as India, Eastern Europe, SE Asia and Latin America, underpinning the cost arbitrage.

We believe the key takeaway from this maturation is that the core focus on F&A BPO is no longer one of mere cost reduction and 'body shopping' with lower-cost delivery regions. The core focus now is on accountable business outcomes and quality service provision and innovation, with the cost footed by globalised sourcing and no longer by the shareholder.