The finance and accounting outsourcing market is expected to rebound this year, with 10 to 15 percent growth, following a slowdown last year.
The market is expected to top $4 billion to $4.5 billion in annual contract value, according to the Everest Group’s Finance & Accounting Outsourcing Annual Report 2012.
Last year, the annual contract value for multi-process finance and accounting outsourcing grew 11 percent, compared to 18 percent in 2010. Total contract values of new engagements also fell last year, compared to 2010, according to the report. The market reached $3.8 billion in annual contract value last year, representing approximately $32 billion in total spending on finance and accounting outsourcing.
“Although the market witnessed slower than expected growth levels last year, we nevertheless saw strong growth with nearly 200 contracts for new, extended and renewed contracts,” said Everest Group vice president Saurabh Gupta in a statement. “Along with fewer new contracts signed and some terminations, we also saw a drop in size of multi-process contracts largely due to cautious buyers opting for risk-averse phased approaches. Looking forward, we expect to see buyers continue to focus on cost plus value proposition solutions that are comprehensive, industry-specific, and end-to-end process driven.”
Finance and accounting outsourcing represents a $150-200 billion opportunity, according to the report, split equally across third-party service providers and captives/shared services. The current penetration of the third-party sourcing market represents only 5 to 10 percent of the overall potential, implying a significant value creation opportunity.
Last year, the market reached an all-time high in contract extensions that, along with contract expansions, represented 70 percent of annual contract value growth in 2011. The study predicts organic growth to continue as contracts valued at $7.3 billion or more are up for extension within the next three years.
Accenture, IBM and Genpact together account for 50 percent of the finance and accounting outsourcing market in terms of annual contract value. In 2011, Accenture, Capgemini and Infosys BPO signed the highest number of new contracts. Accenture, TCS, and IBM accounted for about 50 percent of total contract value signed in 2011, including new contracts, renewals and extensions.
“Competition in the FAO market is gaining intensity,” said Gupta. “The market share of the top three providers has reduced from 65 percent to 50 percent over the last five years. Over the past two years, providers have continued to build up scale and invest significantly across various F&A capability dimensions, most notably around technology. However, service providers’ ability to understand the client context continues to be a significant credibility gap.”
Other service providers’ performances analyzed in the report include Cognizant, Datamatics, EXL, HP, HCL, Intelenet, IQ BackOffice, iGate-Patni, Aditya Birla Minacs, Serco, Steria, Sutherland Global Services, Tech Mahindra, WNS, Wipro, Xchanging and Xerox.
Strong market adoption was seen across most industries, with manufacturing, financial services, high tech and telecom, and professional services accounting for about 60 percent of all finance and accounting outsourcing contracts in 2011. The United States accounted for over half of total FAO contracts in 2011, while the Asia-Pacific region emerged as an aggressive adopter and Europe witnessed a slowdown.
Last year, 60 percent of new finance and accounting outsourcing contracts were signed by organizations with less than $5 billion in revenue, compared to less than 40 percent in 2008-2010. Adoption rates in 2011 for the small and midsize business segment, defined as organizations with less than $1 billion in revenues, doubled over the previous year.
Buyers continue to focus on an end-to-end process-driven approach to FAO, as opposed to a traditional functional and piecemeal approach. Nearly 50 percent of the new contracts in 2011 had elements of end-to-end scope (such as procure-to-pay, order-to-cash, record-to-report).
The market saw a shift from an offshore-centric to a balanced onshore-nearshore-offshore model. While nearly 90 percent of the FAO FTE mix continues to be offshore-/nearshore-centric, 2011 witnessed a significant increase in onshore delivery centers.
In 2010, technology augmentation emerged as the new “normal,” a trend that continued in 2011 as nearly 45 percent of the new contracts signed in 2010-2011 included service provider add-on tools such as workflows, interfaces, document management, business process management, business intelligence and user portals/dashboards.
Everest Group’s analysis includes multi-process FAO contracts with a minimum of two finance and accounting processes, over $1 million in annual contract value, and a minimum contract term of three years. The report includes more than 680 multi-process FAO contracts within this scope signed as of 2011.
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