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The 2006 Finance and Accounting Forecast
By Beth Ellyn Rosenthal, Editor
Finance and accounting (F&A) is the second largest component of general and administrative (G&A) expense outsourcing, with revenues of approximately $15 billion last year and an annual growth rate of eight percent, according to the Everest Research Institute.
Within this market, the full services outsourcing market (FAO), which includes at least three F&A processes, is the largest-growing market segment. This year the full-service FAO market made up seven percent of the F&A market and had revenues of $1 billion. However, full-service FAO is growing much faster than the overall market, enjoying a 30 percent plus cumulative annual growth rate (CAGR.) The Institute predicts this market will grow to at least 20 percent of the total F&A outsourcing market in the next five years.
Here are the trends that may impact F&A in 2006:
- There will be an increased number of players coming into the F&A marketplace.
To become a player in the human resources outsourcing world, a new supplier has to have deep domain expertise and enough cash to make a huge investment in the requisite technology, according to Michel Janssen, President, Supplier Solutions, Everest Group. The opposite is true for F&A suppliers. Janssen predicts new players will enter the market next year "because the barriers to entry are low," he says. "It's really a labor arbitrage play," he explains.
- There will be an increase in contact signings early next year.
ACS CEO Mark King says this fall ACS's prospect pipe line began picking up after an industry lull that started in March. He believes the pent-up demand will lead to more contract signings in January through March.
Bob Shultz, HP's Vice President and General Manager for BPO, believes that some F&A processes, particularly accounts receivable and payable, will become as mainstream as their older brother, HR. "Boards will not question F&A outsourcing but will start asking about it," he predicts.
- There will be more momentum around electronic invoice presentation and payment and larger deals in the payments area.
Eric Eisenberg, Vice President and General Manager for North America BPO for Unisys, says smaller banks have been outsourcing payments for years because of the economics. But next year he expects large banks "that would never consider outsourcing before will now see the writing is on the wall." Their interest will set the stage for the signing of larger outsourcing contracts.
While electronic data interchange has been around for 30 years, the penetration rate is still relatively low. "Companies are looking to their outsource providers to provide multiple avenues to move documents to digital," adds Leon Busch, President and CEO of SourceNet Solutions.
- Older F&A buyers are starting to insist on process transformation.
Busch says buyers who signed five-year contracts in 2003 or 2004 were thrilled that the offshore component did a great job of wringing out cost. But now, 24 to 36 months into the contract, they want more than low-cost processes. Now they are asking the supplier to transform their processes using best-in-class technology. "Buyers are asking us, 'What's next?'" he reports.
"Buyers today are savvier about outsourcing," says Busch. "They now understand offshoring has a place in driving down costs, but they also realize there are other ways to advance process and technology to achieve significant cost savings. Building an efficient process to manage an exception transaction is not as cost effective as eliminating the exception altogether." Instead, managing and eliminating exceptions in the accounts payable process and eliminating paper processes are prime examples.
Anoop Sagoo, Executive Director, Accenture Finance Solutions, says process optimization will also apply to the retained organization. For example, a customer might be refusing to pay a bill because the sales department billed it incorrectly.
- Buyers will combine different aspects of the process in surprising ways.
Buyers have already paired payroll with their human resources processes. But Busch believes buyers will continue to pair business processes where it makes sense. For example, he thinks companies will combine accounts receivable and payable with treasury services to better manage their working capital.
- Buyers will move up the F&A mountain.
Sagoo predicts in 2006 buyers will demand value as well as cost reduction. "Next year buyers will demand more complex goals," he says. For example, once buyers standardize their F&A infrastructure, "we can see more clearly what is eroding value," explains the Accenture executive. Really understanding data in this manner allows buyers to mine value from that data "further upstream in the process."
Shultz sees a handful of buyers--the early adopters--moving up the mountain to the general ledger. In that vein, Sagoo sees buyers looking at outsourcing processes that influence F&A, like working capital and tax costs.
- Multi-tower deals will gain traction around F&A.
Sagoo calls F&A "the glue that holds all the other BPO processes together." He thinks next year multi-tower deals will experience "a lot more comfort and acceptance" in the market place. He defines a multi-tower deal as one that combines two or more BPO functions or IT. "Organizations now understand the complexity of implementing changes. They see a lot of value in changing just once," Sagoo says.
- Financial institutions will move even more functions offshore this year.
Once banking legislation allowed banks to process images of checks instead of the real thing, suppliers could legally send check processing work offshore. This trend started in 2004. But next year Eisenberg predicts offshore's scope will expand and the speed of acceptance will accelerate.
The Unisys executive says many banks will continue sending their payments work to India because it has a history of payment processing. "Banks like going to a place where the process has been done before," he points out. But Unisys sees buyers also looking at other places in Asia as well as Eastern Europe. "India may be the first choice, but it's not the only one," Eisenberg says.
Publish Date: November 2005
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Copyright © 2005 - Everest Partners, L.P.
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