How Mature is the Global Outsourcing Market for Finance and Accounting in 2013?

In reviewing global outsourcing today, and comparing the status quo to that of five years ago, what stands out is how little has changed, on a superficial level. The average length of contract [5 years] and average size of contract ($4.7 million for F&A) is relatively unchanged, according to recent Everest Group research. However, a closer look at the numbers tells us that growth in outsourcing is slowing down, and that the market may be nearing saturation – companies for whom outsourcing is an option have probably already gone that way. However, there have been some pretty massive restructurings under the surface, which completely alter the outsourcing landscape. Seasoned inhouse practitioners, with decades of outsourcing experience under their belts, as well as newbies, would do well to know what they are up against. A brief review is in order. Overview There are obvious signs that the market for shared services and outsourcing are rapidly maturing and saturating. Many larger enterprises are more confident about their service delivery models, are looking for a value beyond cost, and are focusing on long-term partnerships with BPO providers, so renewals are increasingly an important aspect of BPO. In addition, we are seeing lower numbers of new inhouse shared services/GBS set up, especially in the technology and the BFSI industries (previously leaders) – again, a sign that the market is near saturation, or maturity. The BPO providers have been quick to recognize growth opportunities in extending services out along the process, beyond F&A or HR. So, we are seeing more activity in order-to-cash linking through to order management; and supply chain leading through to sourcing. Providers are also leveraging new tools where they can lay their hands on them, including technology-enabled change, analytics, social, etc. What this all leads to is industry specific knowledge and expertise becoming an effective form of differentiation, and one that clients are now demanding during their preliminary conversations. But let's take a closer look at the numbers. First of all, the absolute growth in outsourcing, while still moving upwards, is slowing down, according to recent research by Everest (see report link below). Specifically, the number of outsourcing transactions in 2012 were 17% lower than in 2010 (down to 1,633 from 1,978). And if you dissect each quarter in 2012 the trend was consistently downwards, except for a small uptick in the Q4. Examined from a regional perspective, all areas experienced a steady decline in transactions between 2010 and 2012 (though the UK is notable for showing more resilience). Considered across verticals, the public sector, health care, and BFSI all saw a slight uptick, while the rest of the market declined. Where BPO providers may see a light, however, is in the small and midsize market (revenues under $1.5 billion). This segment's share of all outsourcing deals announced in the first half of 2013 stands at 62%. That's a statistic no provider can ignore. And the sheer number of companies that make up the SME market is enormous. The other trend that is encouraging is that, while the absolute number of new outsourcing deals and new captive centers have reduced significantly, SSCs are actually expanding in scope (24 expanded scope in the first half of 2013 vs 14 in the first half of 2012). F&A Outsourcing We are seeing a fairly significant maturation of the BPO market for F&A services. First, the SME market’s stake in total outsourcing jumped from 10% in 2008 to 21% in 2012, led by the manufacturing and professional services sectors. North America and APAC saw most of this activity. The mid market’s percentage of the market was steady around 25%, and the large buyers dropped from 66% in 2008 to just over 50% in 2012. So it’s notable that the small to medium enterprise market now drives half the outsourcing market in F&O. Another significant trend is that advisor-led contracts, whether competitive or sole sourced, declined from a combined 37% in 2009, to 27% in 2012. We saw a big jump in "competitive bid, non-advisor led" contracts: from 34% in 2009 to 55% in 2012. This is probably the result of increased competition and the commoditization of F&A services driving buyers to opt for competitive bids. Very large buyers, with complex requirements, are still inclined towards advisor led deals, and emerging economies, on the other hand, tend to see more sole-sourced deals, based on relationships. Most of the outsourcing market’s growth (63% in 2012) came from organic growth, meaning contract extensions and/or renewals. By comparison, inorganic growth (new contracts) accounted for only 37% of total contracts in 2012. This is significant as we are seeing that renewals offer an opportunity to broaden the scope of an existing outsourcing partnership. Once trust is established and both parties more familiar with each other, companies are more comfortable about collaborating with providers to move along the process, so we are typically seeing scope increased on renewal of contracts. When you break down the process scope, AP, AR, and GL continue to be most frequently outsourced, while judgment-based processes [e.g., financial planning and analysis, regulatory compliance and reporting, treasury and risk management] are outsourced in a phased approach, increasingly as part of an extension or renewal. There is a general shift from the silo approach towards end-to-end, meaning upstream process integration from accounts payable to procure-to-pay; from accounts receivable to order-to-cash; and from general ledger to record-to-report. To put a number to this, in 2012, 70% off F&A contracts had elements of end-to-end scope in them, compared to 37% in 2008. [eventpdf] New services emerging We expect to see increased activity and growth in three areas in the short term. 1. Increase in predictive and prescriptive analytics within F&A outsourcing contracts. Most organizations start with reporting and descriptive analytics, and innovators will subsequently graduate into predictive and prescriptive analytics, both of which have a high impact on the business and are increasingly sophisticated solutions. 2. Supply chain management BPO includes the planning and management of all activities across the entire product lifecycle [source and procure, make and manufacture, deliver, returns]. The propensity to outsource is highest in order management, logistics administration, and master data management. 3. Marketing services lend themselves to BPO, when you consider marketing asset management, collateral development, Internet marketing management, and customer and sales analytics. A few leading GBS organizations already provide some of these services [Procter & Gamble, Hewlett-Packard] and a few service providers are also starting down this path [Accenture]. What makes marketing interesting for BPO is that the activities are often fragmented and under managed, therefore lending themselves to efficiency gains through centralization. Source: Everest Group research. Download this summary presentation slide to get the full facts.

How Mature is the Global Outsourcing Market for Finance and Accounting in 2013?

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How Mature is the Global Outsourcing Market for Finance and Accounting in 2013?

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