Exclusive: F&A BPO deals continue to rocket…but they’re getting smaller

You heard it first here folks…. In 2006 we saw 89 new F&A BPO deals signed (contracts with at least 2 core accounting processes bundled). This compares to 66 deals in 2005 – an increase of 35%.  However, when we look at the Total Contract values, the 2006 deals averaged $30 million each, compared to $39 million for the 2005 deals - that's 30% smaller.

And we have already seen another 24 deals so far in 2007 (until 2 weeks’ ago) – but the deal values are averaging only $24m.

So what does this initially tell us?  Let’s get the debate going but my initial analysis is:

• The "upper" middle-market is opening up (the 5-10K employee orgs)
• Companies are taking the plunge, but scaling back the size of the commitment with fewer processes bundled
• The big global deals are getting fewer - and further - between
• Onshore/Nearshore services are becoming more critical as deals get smaller and the offshore component becomes less cost-effective in deals of this type. Offshore still plays a major role at the high-end, but to a lesser extent in the middle market

The Rocket goes on….but there’s less juice with the special deliveries

Comments

[Giles Brooks-Usher]

Thanks for response - insightful

[Phil Fersht]

Giles -

1) F&A BPO is still immature - buyers are looking at trimming obvious cost from administrative areas like accounts payable, receivable and general accounting;

2) The economy has been doing well and we are seeing a lot less of the "panic outsourcing" post 9/11 that was so synonymous of HRO. Companies are taking their time, taking less of a gung-ho approach and seeing how a smaller engagement works first before considering for more widespread approaches;

3) Service providers are getting much better at this and can start to compete effectively on smaller deals, whereas a couple of years ago they could only make the economics work on bigger deals;

4) The mid-market specialists are getting pretty good at this also, and are competitive aggressively on a number of fronts - and have much lower costs of sales than some of their illustrious global competitors. Look at OPI and VWA, for example, who have been able to go after deals with limited or no offshore elements and dig out cost savings for their clients;

5) The Indian vendors have stayed hard to their task and picked up a host of smaller deals - Wipro, WNS, Infosys and TCS are prime examples of offshore suppliers which gained a lot of traction in 2006.

Bottom line, finance leaders tend to have more control over their decisions than other functional heads, and tend to move more slowly and pragmatically when it comes to business change. They will adopt outsourcing services once they have seen success stories proven by their peers in other companies, and will want to conduct exhaustive due dilligence before making a move.

[Giles Brooks-Usher]

Interesting trend Phil - but my question is why? Are suppliers failing to convince the market of their abilities or is F&A following the wider outsourcing procurement trend? Glad to see you have finally found an outlet for all that high powered perception :) keep it coming.