F&A Transformation: Key Trends for 2006

The need to reduce costs while simultaneously improving process and financial visibility is stronger than ever. CFOs are facing many pressures - an increasingly variable economic picture, hypersensitive stock markets, and pressure to improve the standard of reporting and disclosure.

The struggle to protect market value leaves little time to transform finance into a valuable partner for the business. The challenge is complicated by tighter compliance requirements. Sarbanes-Oxley combines significant cost with specific, and challenging demands for real-time disclosure. Many companies struggle to comply without significant process and systems issues.

The Shared Services and Business Process Outsourcing Association (SBPOA) sees finance and accounting (F&A) transformation as one of the main tools to help CFOs to keep control and to continue to deliver positive results. As we enter 2006, here are our traditional forecasts on how the F&A - and overall business - transformation market will evolve and grow.

BUYER IS KING

The buyer is the new king of the F&A transformation marketplace. The negotiating process has shifted towards the purchaser, as the Global 1000 buyer has moved up the learning curve and now has the knowledge and contract buying power to demand service excellence and significant cost savings from service providers.

Service providers will need to focus on delivering business value to maintain market share. To win large outsourcing contracts, service providers will build robust, highly tailored value propositions that deliver economic, strategic, operational and HR benefits. The firms that deliver on these promises will aggressively capture market share and shape the growth of the global BPO market.

VALUE TO BUSINESS

Business value will be driven by business fusion, the integration of software applications and business processes. The BPO firms with a rich technology heritage will use world-class applications to drive process improvements and generate extraordinary value for their clients.

Pushed by buyers to demonstrate business value, service providers will differentiate their offerings based on industry expertise. Service providers will begin to tailor their horizontal process offerings to industry-specific solutions. Service providers that do not have the industry expertise to develop vertical market solutions will rapidly lose market share and be forced to compete solely on price.

To meet industry needs, service providers will need to transform business processes. To achieve this objective, service providers will integrate blue-printing and consulting expertise to design radical change, such as tapping technology breakthroughs, leveraging system integration capabilities and using deep domain expertise to re-engineer business processes. This integrated suite of capabilities will favour the larger IT-organised BPO providers that have a full suite of capabilities.

A CHANGING MARKET

As the outsourcing market moves towards technology-driven utility solutions, the CIO has begun to share outsourcing decision-making with the CFO. This requires BPO providers to build sales teams that can address the needs of technology, process and business unit buyers.

Competition is intensifying as most multi-million dollar BPO opportunities are attracting a growing number of service providers. Fuelled by an expanding array of IT

service providers entering the BPO market, maturing European providers building global practices, and large offshore firms looking to carve out new markets, it is now common for large BPO contract opportunities to attract eight to 12 service providers.

This large number of suppliers provides corporate buyers with pricing and negotiating leverage. The corporate buyer is king in this sourcing environment.

NEW PLAYERS AND CONSOLIDATION

The market appears to be going in two directions. On the one hand, compelled by what appears to be expanding business opportunities, the BPO market is attracting many new firms from different segments of the IT services industry, such as software providers, data centre outsourcers, and offshore application developers. On the other hand, the market is consolidating in a 'Pacman' fashion as the larger firms with deep pockets use M&A to gobble up competitors and expand their capabilities.

In this environment, pure-play process providers will find it difficult to compete against market leaders without an expanded offering and a world-class technology platform. Other firms with a limited number of BPO contracts will not have the scale to deliver the value proposition necessary to win business. Several of those firms will quietly drop out of the BPO market or merge with larger firms who have the resources to compete. The financially constrained, limited-scope BPO providers will not survive the continuing transformation of the BPO market.

BIG DEALS IN 2006

While 2005 was a year of strong growth for the BPO market, we see 2006 as the year that F&A BPO breaks out with several large contracts. F&A providers have achieved the scale and proven track record of expertise to deliver robust value propositions that will overcome internal buyer resistance to outsourcing financial transactions.

As F&A outsourcing takes centre stage in 2006, look for procurement outsourcing to emerge in 2006 and 2007 with real-estate BPO gaining momentum in 2007. The big winner in the BPO race for market leadership will be the firm that can offer an integrated back office solution that encompasses HR, procurement, and real-estate BPO with F&A as the central hub.

By 2008, only one or two firms will have the expertise to truly deliver on a fully integrated BPO back office. Mid-market BPO will finally get traction in 2006, with a new breed of providers that are serious about meeting customer needs.

For the most part, BPO firms have tried to serve mid-market needs by offering 'light' versions of their service offerings, which were initially designed for the Fortune 1000 or Global 2000 markets.

Many mid-market buyers resented these 'light' offerings and held off from implementing enterprise-wide BPO programmes. In 2006, this is rapidly changing, with the emergence of BPO firms structured to deliver mid-market solutions in an extremely cost-effective manner while maintaining high service levels.

The growth of the new BPO firms targeting the mid-market will be the big story of 2005 and 2006.

VIRTUALISATION

It has already started, but virtualisation - the rise of the machines - will fundamentally change how we manage processes and how BPO services are delivered. The BPO firms that cannot embrace the power of this new technology will be second-tier players by the end of the decade. In particular, virtualisation will significantly diminish the long-term growth and value of offshore firms who rely on labour arbitrage to build value propositions.

The above trends underscore not only that F&A transformation is here to stay, but also that it is accelerating and evolving. This means transformation initiatives not only fall under the 'traditional' shared services or outsourcing umbrellas, but also encompass what are frequently considered to be sub-sets of shared services or outsourcing, such as technological enhancements, automation, organizational realignment, centralisation, process improvement and possible relocation to lower cost regions.