2008 FAO Forecast

The FAO market is in for a wild ride next year. Here is a list of changes that are occurring at mach speed:

The Suppliers:

1. FAO outsourcing will cleave in two. The Indian suppliers will dominate version A: transaction-based outsourcing. Version B: FAO with business insight. David Poole, Vice President and Deputy Chief Executive of Global Business Process Outsourcing, Capgemini, says this version focuses less on taking out cost and more about improving the value of the business through more efficient processes. He says the traditional providers and some of the Indian players will move up the value chain to participate in Version B.
   
   Rich deMoll, Global Managing Director, BPO, HP, sees a bigger separation between the Tier-1 suppliers and the other tiers. "2008 is going to distinguish the Tier-1 players from the rest of the pack," he says.
   
   
2. There will be more supplier consolidation. Poole, head of NA BPO, predicts large suppliers will acquire niche players who have the needed specialization skills or software as a service (SaaS) players who have the desired applications. "The goal is to broaden their scope of services," says the Capgemini executive. The Everest Research Institute says "captives, technology providers, and niche suppliers will be the prime acquisition targets in 2008."
   
   
3. Buyers want suppliers who specialize. Suppliers that can add value to a buyer's top line have to specialize in verticals since many of them have unique challenges. Financial services companies have different concerns than energy suppliers, for example. Martin Cook, GSO, Outsourcing, Capgemini, says vertical specialization "will emerge as a key differentiator for Tier-1 suppliers."
   
   The need for specialization will enforce the sector's continuing consolidation, continues Cook. "Suppliers will augment their solution portfolio through acquisitions," he says. He points to Capgemini's purchase of Kanbay as an example of this trend.
   
   
4. Suppliers will increasingly target the higher end of mid-market buyers, companies with annual revenue ranging US$2-5 billion points out Katrina Menzigian, Vice President for FAO, Everest Research Institute. "These buyers are actively exploring FAO options and present a large market potential," she says.
   
   
5. Suppliers will evolve their delivery models, especially in the area of platform-based technology solutions, in order to create viable business cases for serving this segment of the market. Menzigian predicts 2008 will see increased market discourse on the viability and appeal of platform-based FAO solutions. "The drive towards building FAO platforms will further fuel merger and acquisition activities as suppliers build out their capabilities," she says.
   
   Gianni Giacomelli, Head of BPO Strategy and Marketing at SAP, points out that many suppliers, irrespective of what segment they are in, are already starting to change the way they deliver services. He says they are increasing automation to reduce their dependency on "now often exhausted" labor arbitrage.
   
   

The Buyers:

6. CFOs will worry more about how outsourcing can grow their businesses. Poole says buyers now tell him they want to grow their businesses three percent a year instead of asking him to take out one percent of cost. He says the new focus will make outsourcing more valuable; however, suppliers still need to take out cost because the savings fund the business transformation.
   
   Giacomelli adds that innovation is the key for business growth, and labor arbitrage alone does not get buyers there. Reengineering processes and related systems will, and buyers are waking up to this.
   
   
7. Buyers are divesting themselves of brick-and-mortar assets like shared services centers. DeMoll says they are trying to sell them to outsourcing suppliers, especially in India, or private equity partners. Another option: keeping them but having them service government entities.
   
   
8. Buyers will focus on sustainability. DeMoll says next year labor arbitrage will just be the entry price. Buyers want more than just cost savings; the HP executive says buyers want to change their business model. Suppliers will have to demonstrate they can sustain the business case for outsourcing.
   
   Anoop Sagoo, Accenture, agrees. "We're seeing a distinct shift in focus to a more sophisticated value proposition focusing more on business outcomes," he reports.
   
   "Buyers definitely want to build on their initial cost-savings-centric engagements to drive additional savings and enhanced business performance," adds Menzigian. However, she says "it's not clear the extent to which buyers are willing to trade their customized solutions for platform-based solutions which could potentially deliver the additional functionality and performance they desire in a cost-effective manner." The buyers will start to work out this conundrum next year.
   
   Giacomelli says this shift will "emphasize seamless process integration across towers." Their focus will be on designing processes and systems to do so. However, the SAP exec points out "suppliers will still need economies of scale to be sustainable and will continue pushing some level of standardization around their own best practices."
   
   

The Deals:

9. Mature FAO buyers are beginning to seek out more integrated solutions for key process areas such as Order-to-Cash (O2C) and Procure-to-Pay (P2P), observes Menzigian. She says the goal is "to target a larger cost base, while also driving greater business performance through pre-integrated solutions designed to provide increased visibility and effectiveness across the end-to-end process."
   
   
10. Big-Bang deals will be fewer. Menzigian predicts the market will see a rise in the number of deals that surgically target opportunities to drive value in terms of both operational and strategic gains. O2C/P2P serve as an example.
    
    
11. Current FAO buyers will move up the value chain. "Buyers are asking us, 'What else can you do for me?'" DeMoll reports. New services that build sustainability include analytics for decision modeling and data mining. "Buyers who have gotten past the transactional savings now want an analytic platform with tools and brain power in a low-cost environment," DeMoll reports.
    
    Sagoo says FAO is becoming more complex. Buyers now want to outsource more complex aspects of the FAO process than in previous years. He points out Accenture is managing the information around BT's profitability data. "A few years ago people would have laughed at the possibility. Today, buyers want to outsource to get high-performance finance."
    
    Or they want to cover multiple geographies. For example, Accenture's FAO engagement with Microsoft includes 92 geographies. The Everest Research Institute predicts suppliers will diversify their location portfolio next year. Good choices: Tier-2 Indian cities, Eastern European locales, Mexico, China, and the Philippines. Next year the FAO market "moves towards a truly global sourcing model," says its 2008 Forecast report.
    
    
12. Buyers will want bundled solutions that include finance and accounting. Sagoo says buyers are realizing finance and accounting is really just the back end of a bigger process. "We're seeing buyers looking across processes," he says. The most obvious combos are procurement and HR.
    
    
13. To get more value from transaction services, suppliers are using more electronic flow through. Cook says buyers who have already realized significant savings through labor arbitrage now look to automation to achieve greater savings. DeMoll adds buyers and suppliers will share the gains as improved way of doing things provides more business value, like improving business metrics like day sales outstanding.
    
    

The Influencers:

14. Cook says process innovation and business insight will begin to replace labor arbitrage as the key drivers for FAO. They require a mix of onshore/offshore delivery to deliver higher level value, he explains.
    
    
15. Buyers will start to look at the integration of process change with technology change. DeMoll says in the past when buyers wanted to change a process from end-to-end, the suppliers bumped up against the internal IT department. HP solved the problem by bundling the two; "we deliver process change as a service," he explains.
    
    
16. The FAO value proposition will expand beyond outsourcing. Sagoo says some buyers want to partner with their FAO supplier "to create a go-to-market portion of the deal. Buyers are beginning to think out of the box," he says.
    
    
17. Buyers will create a number of internal shared services, which they will turn into captives or transition to BPO. "The momentum is building for hybrid service delivery, which will prompt a lot of rethinking of how to deliver such services. People who understand both the business and technology side of things will be in high demand," says Giacomelli. This will encourage BPO providers to look for help in the software vendors and will expose those software vendors who are not able to proactively help.
    
    

The Market:

18. FAO will continue to grow in 2008. DeMoll says HP is seeing "increased demand. This was the busiest summer I've had in my outsourcing career," he says.
    
    One reason: FAO has a proven track record. "This reinforces the model and encourages more companies to try it. Success is driving the increased demand," he adds. Fear of hard times in 2008 is helping, too; cost containment pressures are building. And many are trying to take advantage of the global business model, he continues. Another driver: The Everest Research Institute reports US$600 million of FAO contracts are up for renewal in 2008.
    
    
19. Human capital management is a key contributor to the continued growth of the FAO market. "As in-house departments continue to struggle to hire and retain qualified finance and accounting professionals and IT departments continue with similar challenges, the value proposition offered by experienced FAO suppliers gains in appeal," says Menzigian.