Robotic Automation Drives Value in FAO | Market Insights™
March 22, 2014
Robotic automation in FAO: – key value drivers:
- Productivity & efficiency
- Accuracy
- Cost saving
- Compliance
- Scalability & flexibility
Robotic automation in FAO: – key value drivers:
Offshoring continues to be the predominant delivery model for FAO, but service providers are investing in onshore locations to balance the delivery model
The definition of FAO is evolving to include an end-to-end approach, industry-specificity, and integration of contiguous processes/functions
Though US-based large market organizations continue to be principal adopters, the SMB* and Asia Pacific markets are driving growth
*Small or medium business: a company with annual revenue of US$500 million to US$1 billion
It’s a curious conundrum. Finance and Accounting Outsourcing (FAO) has proven its ability to deliver savings of 30-45 percent, and usually provides other non-financial benefits such as better transaction documentation/auditability, faster and richer reportability, and dynamic workflow.
So why are FAO transitions far more hesitant and spasmodic than those of Information Technology Outsourcing (ITO) or other Business Process Outsourcing (BPO) functions?
The answer may reside among enterprises’ subject matter experts (SMEs), who may unintentionally disrupt the FAO progression. Now, before CFOs, controllers, or accounting directors raise their arms in protest, let me explain.
Consider that F&A, with its inflexibly cyclical, month-end, quarter-end, and year-end closing peaks, regularly places a significant and critically important load on SMEs plates. Is it any wonder that they request breathing room – sometimes of several weeks, or even months – between outsourcing exploration and execution, so they can focus on top-down priority projects?
Consider that F&A has the potential to immediately impact stock price or create the possibility of legal proceedings, thus negatively affecting the business to a far greater extent than any other function. Is it any wonder that SMEs, often inadvertently, spawn enough fear, uncertainty, and doubt about missing internal and external reporting cycles, and thus raise the “real and present danger” flag about outsourcing unless certain components are de-scoped?
Following is Everest Group’s advice for avoiding or counteracting SMEs’ derailment of FAO plans:
Have your organization’s FAO plans been disrupted by internal forces, either unintentionally or purposefully? Do you firmly believe that outsourcing in all but the most basic activities is too risky for F&A? Please share your experiences and perspectives with other readers!
Finance and Accounting Outsourcing (FAO) continues to grow with a healthy rate of 11% and US$3.8 billion in annualized spend. Everest Group’s FAO Annual Report (2012) provides a comprehensive coverage of the FAO market and analyzes it across various dimensions. In this video, Abhishek Menon, Practice Director, reviews a couple of key findings from the FAO Annual Report.
In my blog earlier this year on Serco’s decision to purchase Intelenet, I posed the question if 2011 would be FAO’s year for significant acquisitions. After all, it was the fourth major deal of the year, following on the heels of iGATE-Patni, Genpact-Headstrong, and EXL-OPI. With Capgemini’s just-announced acquisition of Vengroff, Williams & Associates, Inc.’s order to cash (O2C) business, which operates under the name VWA, we certainly have our answer.
The increased competitive intensity (and thus the need for differentiation) in the global FAO market is in some ways reflected through the heightened M&A activity we’ve seen this year. However, unlike some of the other acquisitions that were driven by scale consolidation, Capgemini-VWA can be seen as driven by several other themes that are also relevant in today’s global FAO market:
With its strong capabilities in O2C, VWA has long been an attractive acquisition target. Kudos to Capgemini for not only seizing the opportunity but also for enhancing multiple aspects of its O2C value proposition in the process.
The BPO industry has long been heralded by McKinsey & Company and NASSCOM as the next growth engine of the global services industry. And for years, McKinsey has pointed to the theoretically huge, unaddressed services space that, in theory, could be open to labor arbitrage. But the reality is that the BPO industry itself is searching for the next big growth driver, as it continues to disappoint investors, providers, and customers as a source of additional value beyond labor arbitrage. This relentless, if misplaced, faith in the segment’s value prospects reminds me of the modern proverb attributed to Yogi Berra, “In theory there is no difference between theory and practice. In practice there is.”
However, the newly built BPaaS homes and those under construction may help spruce up the increasingly shabby BPO neighborhoods. BPaaS is attractive as it has the potential to substantially reduce a client’s TCO when compared to a traditional BPO model. It also promises a reduced capex and a utility-based opex. But perhaps the biggest benefit is the nirvana state of standardization and process harmonization that it can offer.
So, who’s building? And where?
Capgemini made a significant play in the procurement BPaaS space with its acquisition of IBX last year. And its on-demand platform already boasts several big tickets clients including Kraft, Novozymes, and Hilti.
TCS now has a dedicated platform-based BPO business division that offers clients several platforms across F&A, procurement, HR, and analytics. In fact, analytics could emerge as a major area for BPaaS solutions given the current low install base of legacy technologies in the space and organizations’ increasing yearning to utilize data for smarter decision making. And the exponential rise in unstructured data from social media, mobile users, and others is creating a space ripe for a BPaaS play.
BPaaS is also having a major impact on the HR function with platform-based HRO offerings from firms such as ADP. In fact, nearly 70 percent of all multi-process HRO contracts signed in 2010 had a platform-based solution, and propelled the adoption of HRO in the mid-market. BPaaS solutions catering exclusively to the mid-market, such as TCS’ iON, are also starting to emerge in other business areas.
On the other hand, BPaaS is not the be-all, end-all silver-bullet as most organizations are not looking for disruptive changes to their existing technology landscape. There is no big driver to a BPaaS model if the basic functionality already exists and if the installed base of such technologies is high. F&A BPO is one market in which BPaaS has not really taken off. Hence, the technology play in F&A BPO is largely around plugging gaps with point solutions or improving efficiencies with workflows.
Yes, swanky looking new BPaaS homes are being constructed in shabby BPO neighborhoods. But we still have to wait and watch how many people come and buy them.
Is it wrong to plagiarize yourself? In 2008, Everest Group published a report entitled “Understanding the Waking Giant: The Mid-Market and FAO” highlighting how mid-market companies had turned the corner from point solutions in finance and accounting outsourcing (FAO) to adoption of more robust and integrated multi-process FAO solutions. In turning to HR outsourcing (HRO), the mid-market has traditionally been a big consumer of various point solutions including payroll, 401K administration, contingent labor, etc. But today we see clear evidence that mid-market companies have brought the same approach to their HR function, noticeably increasing their adoption of robust and integrated multi-process HR outsourcing (MPHRO) and Benefits Administration Outsourcing (BAO.) In fact, this client segment is quickly becoming the growth platform for many of the market leading HR service providers.
In our ongoing research into both the HRO and BAO spaces, the share of new contracts signed by mid-market companies (3,000-15,000 employees) continues to grow. In fact, mid-market MPHRO deals represented roughly 61 percent of all the deals inked in 2010. We saw the same upward tick in the BAO market, with 71 percent of all BAO deals involving mid-market clients. As a result, service providers are really taking notice and making moves specifically to target this growing opportunity.
What’s driving the mid-market in this direction? Take your pick of factors:
Two important delivery model changes have also increased the appeal of MPHRO and BAO for mid-market companies. In both areas, use of global sourcing has gained traction. First, and not surprisingly, this has come at a time when mid-market companies continue to be under immense pressures to further reduce operating costs while simultaneously optimizing the overall effectiveness of their HR operations. Centralization and integration through offshore delivery centers align with such drivers.
Second, many service providers’ increasing focus around building leveraged and repeatable technology-driven components to their HR offerings, be it SaaS, Cloud, or platforms, is proving to be a justifiable investment. In 2010, about 70 percent of all new MPHRO deals signed involved some type of platform solution, and 71 percent of those involved mid-market buyers.
The strategy to focus on mid-market clients is paying off for some service providers. Three of Everest Group’s five MPHRO 2011 Star Performers – ADP, NorthgateArinso, and Infosys – drive significant portions of their MPHRO business from mid-market clients. Further, each of these providers grew their share of the overall MPHRO market in 2009-2010.
Both ADP and Mercer, major players in the MPHRO and BAO markets respectively, have successfully deployed mid-market strategies, although they are very different in nature. In fact, each firm, as we heard during their recent annual analyst events, continue to invest in sales programs, service offerings, and relationship models specifically targeting this growth opportunity. Mercer leveraged its acquisition of IPA to open doors with mid-market clients, and to align its delivery model with the specific needs of this segment. ADP, which has always had significant payroll offering success in the mid-market, has successfully expanded its footprint with some of these clients into the MPHRO space.
To successfully tap into this segment, HR service providers will need to be on top of the rapidly changing mid-market competitive landscape, delivery requirements, technology solutions, and sales engagement models. With all this going on, dare I say the mid-market will prove to be the “Waking Giant” for the evolving MPHRO and BAO markets?
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