Every multi-process finance and accounting outsourcing (FAO) contract signed in 2004 and 2005 featured an offshore component, according to the FAO Market Update released last week by Everest Research Institute. The full-service FAO market had revenues of $1 billion, representing 7 percent of the finance and accounting (F&A) market, OutsourcingFinanceandAccounting.com reports. That market share is expected to grow to at least 20 percent over the next five years.
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“Finance and Accounting outsourcing is mostly about direct cost savings, and offshore – offering a significant labor arbitrage opportunity – has become a fundamental component of the FAO model,” said Joe Fernandes, Managing Research Director at Everest Research Institute. “This is the case across virtually all major geographic markets and industry segments. We’re finding that after call centers, F&A is the most off-shored business process.”
OutsourcingFinanceandAccounting.com reports that full-service FAO enjoyed a cumulative annual growth rate of more than 30 percent in 2005. To meet growing demand, FAO suppliers have been steadily expanding their offshore capabilities. The four largest FAO suppliers; Accenture, Computer Sciences Corporation (CSC), Electronic Data Systems (EDS) and IBM Global Services; have substantially increased their investment in off-shoring capabilities so that the number of full-time employees based in India, of each firm, doubled between March 2004 and March 2005.
According to the FAO Market Update, direct cost savings captured through off-shoring include lower labor costs, lower costs of real estate and overheads, and greater utilization of labor and infrastructure as a result of increased work hours and multi-shift operations.
“There cost savings vary significantly by offshore location,” Fernandes added. “Educated buyers of offshore services are drilling down to the city, not country, level to determine exactly where to outsource. Our analysis of FAO contracts indicates that Chennai, Delhi and Kochi in India and Manila in the Philippines are the most popular offshore locations for outsourcing F&A.”
Companies are attracted to the concept of outsourcing the transactional aspects of their finance and accounting processes because they can reap significant savings without much change. New outsource providers are entering the market, enticed by double-digit growth, even as the purchasers are fine-tuning and standardizing their processes to make them more efficient and wring even more costs from their outsourcing and off-shoring efforts. More importantly, according to OutsourcingFinanceandAccounting.com, they are automating the processes as much as possible. As a result, companies purchasing FAO services have more options and suppliers face increasing competition and the need to differentiate themselves to win market share.
The good news is that last month OutsourcingFinanceandAccounting.com predicted that 2006 will be another year of rapid growth for FAO. Everest Research Institute predicts double-digit growth through 2011.