A study recently released by Everest Group examining the Finance and Accounting Outsourcing (FAO) market and its trends for 2014 reveals that the industry’s 8 percent growth last year was primarily caused by a significant uptick in new contracts as buyers sought providers that can implement competitive and hybrid pricing models, onshore delivery, robotic automation and analytics. The report cites robotic automation and embedded analytics as emerging innovations able to assist FAO providers in the strategic shift necessary to fulfill buyer demand.
The $4.6 billion global FAO market remained healthy in 2013, according to Everest’s report entitled, “Finance and Accounting Outsourcing (FAO) Annual Report 2014 – Transformational Agenda to Combat Reducing Stickiness,” with India and Australia experiencing the greatest growth at 26 percent. This gain, however, is considered inorganic as 45 percent of the overall market increase was attributed to new contracts, up from 34 percent during 2011-2012. There was a corresponding rise in contract terminations, attributed to factors that included buyers seeking providers that could support their transforming strategic agenda as well as suppliers’ willingness to both absorb the costs of deal switching and invest in optimization in streamlining the process.
Large market organizations in the U.S. remained the primary adopter of FAO, although industry growth was led by Asia Pacific, notably India and Australia. Saurabh Gupta, Vice-President of Everest Group, attributes “several reasons behind this [geographically specific] growth:
- Increasing globalization requires firms across the globe to be competitive. Firms in Asia Pacific can no longer afford to lag their western competitors.
- Low levels of current penetration in Australia and India compared to more mature geographies such as U.S. and Europe translates into greater untapped potential.
- FAO solutions and capabilities are becoming more sophisticated to drive a strong business case even without significant cost arbitrage (especially true for domestic India-to-India FAO)
- The competitive intensity in the FAO market is at an all-time high pushing providers to search for new customer segments that they were less focused on in the past
- Denominator effect. Any growth on a smaller base is always more magnified versus similar absolute growth on a larger base.”
Everest Group’s report also examined FAO’s expansion from labor arbitrage to the development of a broader support in assisting the strategic needs of its buyers. Accounts Payable, Accounts Receivable and General Ledger were found to remain the most outsourced F&A processes as more “judgment-intensive” practices, primarily Financial Planning and Analysis, are incrementally introduced.
New, chiefly automative, technologies have also increased FAO’s value proposition as it has allowed the industry to pass along cost savings to its buyers through efficiencies, increased accuracy, scalability and compliance. Gupta sees the implementation of this innovation as complementary to the current FAO landscape. “Robotic automation will add not replace. I think robotic automation will emerge as another value creation driver in addition to existing value drivers (such as centralization, arbitrage, technology, analytics etc.). It will not replace traditional FAO—human involvement will always be required handle exceptions or to process judgment-intensive complex activities. It has the potential to make FAO even more powerful. Also, we should keep in mind that robotic automation is only starting to get pioneered and is still a few years away from hitting main-stream. Thus far it is a promising trend, not a proven trend.”
Service providers are concentrating on the development of analytic tools to further support buyers’ needs. Cited in the report were notable instances of service providers’ investments in analytics to increase their niche capabilities included CapGemini’s launch of CFO Analytics, HP’s addition of financial services and Infosys’ investments in the development of embedded analytics solutions.
Offshoring and nearshoring continued to be the prevalent FAO model, as service providers decreased onshore focused locations to 5 percent of total contracts in 2012-2013, down from 16 percent in 2010-2011. However, service providers have begun to reinvest in onshore locations in order to balance their delivery model. While India and Southeast Asia house the highest number of delivery centers, North America was second, with Accenture, Genpact and IBM as the largest service providers in ACV with approximately 50 percent market share.
Everest Group’s report also examined trends for FAO in 2014. As the market matures, there is a forecasted 5 to 7 percent industry growth, although the expected continuation of deal switching could lead to some contraction. FAO’s purview is predicted to broaden further this year to include aspects of procurement as well as supply chain activities as buyers demand will spur investments in advancing industry-specific offerings. Industry-wide solutions are forecasted to continue its technological investment, with a primary focus on augmentation, increased usage of embedded analytics and robotic automation through partnerships and acquisitions.