Ned Madden

Outsourcing corporate money management and accounting activities — commonly known as financial and accounting outsourcing or FAO — continues to grow as an engine of business process outsourcing vitality. Along with human resources and procurement, FAO is considered one of the three main BPO “towers.”

Traditionally, “finance” involves managing money, funds, financial assets or other liquid resources of the business, provisioning banking facilities, obtaining loans or credit, corporate finance (funds or capital), tax management and investment finance.  But it can also include debt collection, mortgages, insurance actuaries, securities and more.  “Accounting” involves recording, reconciling and summarizing business and financial transactions, analyzing, verifying, and reporting the results, and then furnishing a justifying analysis or explanation. 

Melded together for commercial purposes, finance and accounting become “F&A,” an aggregate of associated cross-organizational functions supporting corporate finance and dealing with the financial decisions corporations make and the tools and analysis used to make these decisions. The primary goal of corporate finance is to enhance corporate value without taking excessive financial risks.  And to do this management requires a sound F&A policy. It’s all about the money.  

As a result of the merger of once distinct finance and accounting functions into F&A, FAO suppliers reaching into buyer F&A processes to offer outsourcing solutions often find a distinct lack of simplicity and clarity. In addition to general finance and accounting, this vast BPO sub-segment can include areas like compliance management, procurement, investment management, banking, mortgage services, insurance, and more. 

As a result of this layered complexity, for now, the “A” in F&A dominates outsourcing of this function.  As more companies discover the benefits of FAO, two of the most immediate functions they are likely to outsource are AR and AP. That’s because processing these functions is resource-intensive, mandates the constant attention of management, and is key to a company’s operations. Outsourced AR and AP service providers say their business is growing quickly because clients are realizing that the market offers suitable solutions that help reduce the cost of receivables and payables without significant capital or human resource investments. And for those using vendors with a global footprint, they benefit on a worldwide basis.

A study from Framingham, Mass.-based International Data Corp. —”U.S. Finance and Accounting Outsourcing Market Forecast and Analysis: 2003-2008” — states that the United States remains by far the largest FAO market, while Europe, the Middle East and Africa will be the fastest growing region in terms of FAO spending in the short to mid-term.  While cost cutting remains the primary reason for outsourcing F&A, IDC said the need to solve strategic business issues is increasingly driving FAO spending globally.  The heart of mid-market FAO, however, remains basic accounting transaction processing.

According to Rick Telberg, president and chief executive of Bay Street Group, 71 percent of U.S. middle-market companies with fewer than 5,000 employees are now outsourcing at least some of their F&A functions. (In fact, any company sending tax work to a CPA firm or payroll to a service means is already outsourcing.) 

But will they go offshore?  Labor arbitrage just might make doing so unavoidable.

A study by FAO Research found that middle-market companies are apprehensive about outsourcing, particularly about sending the work overseas. Forty-seven percent of the survey respondents said they are concerned about losing control of the outsourced process and 37 percent are not especially confident about the security at outsource service providers’ facilities.

Despite the misgivings, FAO Research chief executive Lisa Ross said that a current staffing shortage in the middle market is forcing companies to increase their outsourcing of “highly transactional” accounting work like payroll, AR/AP and SOX compliance, but predicts: “As the labor shortage gets tighter, this list will likely grow, including more ‘knowledge work’ functions.”

Since the early days of the BPO industry, providers have raced to capture the business of the largest employers, those with at least 10,000 employees.  Those big companies had the advantage of scale and significant cost savings to be realized.

But with the growth in FAO at the top end of the market, the universe of available big buyers has gotten decidedly finite. Just in time, smaller mid-market companies are starting to discover BPO and FAO.

Mid-market FAO received a good deal of media attention in 2006 with the news that Accenture, the $16 billion ex-Arthur Andersen outsourcing arm, acquired key assets of Savista Corp.  Savista provides human resources and finance outsourcing solutions for the hospitality industry, and is moving quickly to capture opportunities in the financial services and high tech sectors. 

Accenture is expanding the range of bundled, back office BPO capabilities that Savista offers to include those designed specifically for mid-market organizations with as many as 12,000 employees.  Savista, which has been designated by FAO Today as a top-tier service provider, sells point-of-sale and restaurant operating systems technology for the world’s largest restaurant chains like McDonald’s, Burger King, KFC, Taco Bell, Pizza Hut and other major brands.  If Accenture-Savista deals in the mid-market, it does so at the very high end.  This suits research firms like Everest Research, IDC and Gartner Group, which generally describe the mid-market as firms with 2,000 to 12,000 employees and between $150 million and $5 billion in revenues.  Oracle will say $1 billion or less, Microsoft might say it is $800 million.  But these high-end plays obscure the action taking place in the mid-to-low end of the mid-market: tens of thousands of firms with 100 to 1,000 employees.  The problem facing FAO suppliers using the end-to-end, “Source-to-Settle” approach is that these companies understand F&A through popular accounting application packages like Sage MAS 90/200 or Microsoft Dynamics GP, and even QuickBooks Enterprise (up to 120 employees).  At this level, direct sales forces give way to value-added resellers, companies that augment the basic application with professional services such as integration, customization, consulting, training and implementation.

More than 85 percent of the FAO workforce is distributed across labor-intensive transactional processes, though suppliers have also started to hire experts for core F&A processes like AP/AR, general accounting, risk management, financial reporting, financial management and shareholder services.

When it comes to finance and accounting, many mid-market firms emulate the corporate giants in seeking services that enable them to reduce labor costs, optimize payables and improve cash flow and productivity. Again, it’s all about the money. 

Ned Madden is chief executive officer of Real Time Global Services Inc., a Newport Beach, Calif.-based specialist in outsourcing U.S. accounting work to India.