Nearshore Americas

As BPO Profit Margins Drop, F&A Outsourcing is On the Rise

By Tarun George

With all the purported success of back office outsourcing, why have most BPO stock prices taken a hit since last year? The reason is simple. Pure BPO firms are losing their competitive edge in the sourcing industry, and due to rising employee costs translating into pricing pressure for their clients, they’re finding it harder to sell to the post-recession US market. As a result, profit margins in BPO are becoming smaller.

Finance and Accounting outsourcing by contrast, one aspect of the back office, seems to be on the rise. In fact Everest Group, in its F&A Outsourcing Annual Report 2011, stated that the market for these services will grow 15-20% this year and push past US$ 4 billion in annual contract value. What explains that meteoric shift and why is the overall BPO industry not seeing the same growth rates? Read on for more.

BPO-IT integration

One of the increasingly necessary business shifts for an outsourcing provider is the move from pure BPO into BPO with IT-integrated services. It’s what clients are demanding in an effort to consolidate the services and providers they partner with. This is a tough task for the traditional BPO firms, and one that many of them do poorly. But the ones that don’t attempt it are the ones steadily losing market share.

“The BPO business generally comes from the global arena where there is huge competition. The increasing cost of employees and the change in the rate of inflation increases the pricing and hence, margins are pressured,” says this article about the Indian BPO industry in particular. “Earlier the margins were around 18-20%, but now they have dipped to 13-14%. […] The growth in this sector is muted to only around 2-5%.”

“In Latin America however, the profit margin opportunity for BPOs is a lot stronger,” says Peter Ryan, Lead BPO Analyst at Ovum. “Providers there are a lot less squeezed in terms of attrition and clients know what to expect in terms of wage costs.” In today’s outsourcing, the objective of the buyer is not simply cost savings, but how a provider can add value to the business. Many vendors that started as pure BPOs are extending an IT arm to offer that value.

An F&A explosion?

We think so, but it will be a ‘cautious’ explosion. At least, that’s how buyers are proceeding – going more for phased solutions than a one-shot deal. The Everest report mentioned earlier predicts lots of multi-process FAO contracts with just a few main functions expected from the vendor, over $1 million in ACV, and a contract term of approximately three years. In other words, smaller contracts, but large growth for the finance and accounting sourcing industry. According to Everest, ACV for the sector grew almost 15% in 2010 as compared to 10% in 2009.

However the FAO explosion in the US is slow in coming. An interesting contrast in the market is this: Even though outsourced F&A processes consistently score higher efficiency ratings than in-house ones, companies are still averse to outsourcing F&A. Despite the reported maturity of their processes, many companies continue to shun the use of outsourcing vendors. That was the insight from the latest Ovum report entitled Knowing Your CRM Outsourcing Client.


The most movement in the FAO field comes from the mid-market, and not multinational clients. Of course mid-sized firms will be after lower costs, but they also feel a greater sense of urgency to streamline their processes and improve administrative efficiency than their larger counterparts do. And so a few FAO providers are tailoring their solutions specifically for the mid-market, by offering a high level of customization, and even IT support in some cases. This is a market sector not really targeted by the giant providers – IBM, Accenture, ACS, Capgemini – but more by smaller aggressive Indian vendors like Genpact and Infosys.


The opportunity for Latin America


Does the Nearshore have a role to play in the FAO expansion? Absolutely. “India has so far dominated in business process services, but Latin America has the potential for strong F&A outsourcing work,” says Ryan. “It’s strange that this hasn’t received more attention in the region, especially when we see so much high-end IT work happening in places like Mexico. In some cases, F&A work is just as complex”

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When we think of LatAm finance potential, Uruguay and Panama come to mind, both of which have extremely sophisticated financial services bases, and skilled populations in this field. The question is, will development agencies and government work to promote their competitive advantage in F&A, or would they rather leave it on the back burner and focus on IT. FAO activities have much better profit margins that regular call centers, and they often act as gateways into the IT industry and higher value services.

Tarun George

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