FAO (Finally!) is Taking Off

Stan Lepeak, Global Research Director, KPMG LLP Advisory

Ten years back big ticket human resources outsourcing (HRO) was becoming the rage in sourcing circles.  Service providers and their clients were designing and chasing global “mega” HRO deals ($1+ billion TCV) designed to streamline processes, reduce costs, drive progress, get HR execs a “seat at the executive table,” introduce shiny new technologies, and even fold the laundry.  Research and equity analysts (and even some sourcing advisors) gladly tagged along and kept a tally of the big deals.

Ten years later we know how and where that market went.  Down.  Many mega deals ultimately flopped and while HRO still lives, it is much smaller and humbler and more often wrapped up in an organization’s larger global business services efforts.

When HRO was taking off many felt finance and accounting outsourcing (FAO) would follow close on its heels.  It did not, which retrospectively is a good thing.  FAO tended to plod along often with a focus on more mundane transactional processes such as accounts payable and receivables.  Mega deals never occurred, in part due to a typical CFO’s hesitancy (for good reason) to turn over large swaths of their organization to third parties, but also because many F&A groups are so lean there simply is not enough to outsource to make a mega deal.

Over the past one to two years, however, the FAO market has evolved and the pace of FAO has accelerated.  Mega deals are not on the horizon, but more deals are. And while reducing costs is a major driver there is also often a focus on strategic activities that may deliver the progress so many HRO (and ITO) deals have found elusive.

KPMG, in conjunction with HfS Research, recently released a broad market study on finance and accounting outsourcing and global business services market.  While the FAO market is small (see Figure 1)—even smaller than HRO—it is growing more rapidly than other outsourcing market segments (see Figure 2).  There are variety reasons for this growth and the growth itself is in a different form than a few years back.

The key focus and value organizations are seeking through FAO today has moved beyond the traditional emphasis on outsourcing transactional activities to including strategic value-added services such as analytics and middle- and front-office services.  Buyers are seeking greater automation, as opposed to just cheaper bodies, and more packaged and vertical industry recommendations.   This is changing the competitive dynamics of the FAO service provider market as well.   Check out the new HfS Research Blueprints for additional insights into competitive positioning in the outsourcing service provider market.

The research efforts found that while organizations were having success in reducing operating costs via FAO, they placed greater value on FAO as a means to force change into business operations and to gain access to analytics skills, tools, and capabilities. Given this focus, going forward FAO will become an increasingly important component of organization’s global business services strategy and operations.

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