March/April 2009 www.FAOToday.com

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Feature Mid-Market EMEA FAO in Mid-Market EMEA Companies AS THE EMEA MARKET FOR FAO SURPASSES EVEN THE AMERICAN APPETITE, THE MID-MARKET IN PARTICULAR IS COMING TO THE FORE. BY ARIS MAROULIS The Business Process Outsourcing (BPO) and Information Technology Outsourcing (ITO) markets continue to grow around the world, and the EMEA region has already surpassed the Americas in market size. In Europe, Finance and Accounting Outsourcing (FAO) is also growing, especially in Continental Europe, after its initial adoption in the UK. Whereas FAO has traditionally been undertaken by large corporations, market analysts and Archstone Consulting predict that several economic, FAO market, and technology drivers have emerged that allow for mid-market companies (€1.5-6 billion in revenues, or roughly $2 billion at press time) to benefit from FAO. Mid-market companies in Europe face an additional set of challenges, but we predict that FAO adoption will increase in mid-market Europe. The key questions are: 1. Why has there been low FAO adoption by mid-market European companies until recently? 2. What market developments have fueled an expected increase in FAO adoption by mid-market European companies? a. Economic, Financial and Competitive Drivers. b. Service Provider Industry Drivers. c. Technology Drivers. 3. What challenges do mid-market European companies face in FAO, and what are some possible mitigation strategies? 4. What benefits can mid-market European companies expect to derive from FAO? 5. Is there a minimum company size to consider FAO? GROWTH, FAO AND EUROPE By all indications, the global outsourcing industry continues to grow at a steady pace across all geographies and segments (Business Processing Outsourcing, or BPO, defined in this article as Finance-Human Resources-Procurement-Facilities Outsourcing, and Information Technology Outsourcing, or ITO). TPI reports that the Total Contract Value (TCV) of the global outsourcing industry in 2008 was nearly €72 billion (US$93 billion, a 5.6 percent increase over 2007) with an aggregate Annual Contract Value (ACV) of €14.1 Billion (US$18 billion, a 9.5 percent increase over 2007). Some readers will be surprised to read that, since 2007, EMEA has surpassed the Americas in both number of contracts awarded and in TCV. According to TPI, since 2006, EMEA’s share of global TCV has increased from 38 percent to 55 percent. While European growth has largely been fueled by ITO, Finance & Accounting Outsourcing (FAO) has emerged as a significant driver of growth. Importantly, whereas the UK has traditionally seen the highest FAO adoption in Europe, Continental Europe has recently emerged as a high growth FAO buyer region, with some market analysts estimating that Continental Europe accounts for almost 50 percent of the European FAO market. This growth, however, is not isolated among larger European corporations. In fact, most market analysts predict that 2009 will see a significant growth in FAO adoption by European mid-market companies, defined as those with €1.5-6.0 billion (US$2 billion) in revenues. While our estimates indicate that the European mid-market FAO annual growth rate is slightly lower than the global average of 40 percent, as reported by the Everest Research Institute, European mid-market companies are now facing several market developments that point towards an expected increase in mid-market FAO adoption. Let’s look at some questions this raises. Q: Why has there been low FAO adoption by mid-market European companies until recently? First, a more challenging business case is involved. The FAO value proposition was until recently primarily around cost reduction. Larger companies had the necessary scale to improve their outsourcing business case through offshoring. Mid-market companies often do not have the scale to support a near-shore (typically Eastern Europe) and offshore (typically India) service delivery model. At the same time, their language requirements and their low maturity often do not lend themselves to a 100 percent offshore solution (particularly for Continental European companies). Additionally, mid-market companies have a lower ability to absorb one-time costs, which, combined with a lower offshore component, often led to longer payback periods. In addition, lower FAO adoption in the mid-market created a lack of peer pressure to act. Many European mid-market companies focused more on growth than on cost efficiency. Viewed initially as only a cost-cutting initiative for larger players, outsourcing was seldom on the executive agenda for mid-market firms due to perceived lack of scale, low maturity, and different priorities. Until recently, FAO adoption was relatively low, especially in Continental Europe, even among larger companies. This low adoption combined with the small number of outsourcing examples 58 FAO Today March/April 2009 www.faotoday.com
Feature from comparable companies resulted in limited peer pressure for mid-market companies. Finally, fewer FAO service provider options existed. Large FAO providers in Europe (e.g., Accenture, Xansa) had traditionally focused on large corporates. Until recently, the service provider options for mid-market European companies were largely limited to country-specific or industry-specific FAO providers. Q: What market developments lead us to predict that FAO adoption by mid-market European companies will significantly increase? Economic, financial, and competitive drivers are behind this. The current economic environment has forced mid-market companies to consider cost-reduction levers that were previously not high on the priority list. Additionally, as larger European companies and the European businesses of larger U.S. corporations continue to use outsourcing and FAO to gain a cost advantage, mid-market companies find themselves at a greater relative cost disadvantage. Moreover, many mid-market companies seeking to lower their finance function costs lack the scale and resources to create internal shared services, thereby making FAO a more likely cost-reduction lever, at least for transactional processes. Finally, cultural resistance is decreasing as outsourcing and FAO become more prevalent in the economy. In addition, several drivers in the service provider market point to increased FAO adoption by mid-market companies in Europe. FAO solutions are maturing, and many providers’ value propositions are expanding beyond labor arbitrage to include quality and productivity improvement, access to a talented labor pool and commercial and operational flexibility. This bodes well for mid-market companies who cannot rely solely on labor arbitrage as an FAO driver. Additionally, we have seen the emergence of offshore FAO locations that can accommodate multiple European languages, which is especially relevant for European buyers due to multiple language requirements. For example, Archstone Consulting recently advised on a major multi-tower deal in which 100 percent of the European FAO scope (with six different languages) is to transition to a single delivery center in the Philippines. The emergence of such centers allows for delivery models with a high offshore component (which maximizes labor arbitrage) while also allowing for economies of scale that would not be available by the more typical near-shore (Eastern Europe) and offshore (mostly India) delivery model. A further driver is that many development costs for tooling have already been paid for by earlier large FAO deals. A similar driver is found in delivery centers that have already attracted major clients, allowing for mid-market clients to round out existing capacity. Finally, FAO supplier options have increased (more than 25 FAO providers) and Tier-Two and -Three providers have expanded their capabilities. While Accenture and Xansa continue to dominate the larger FAO market in Europe, no clear leader has emerged in the mid-market FAO market, with many FAO providers now increasingly focusing more on mid-market company challenges. We also are seeing an increasing number of mid-market companies implementing single ERP systems, which, while not a precondition for outsourcing, facilitates such an event. In addition, mid-market companies are less likely to require high process customization, which makes platform solutions (for example, Software as a Service plus BPO) even more attractive. At the same time, we are seeing more and more outsourcing service providers offer such SaaS platforms. Q: What challenges do European, and especially mid-market, companies face in FAO, and what are some potential mitigation strategies? A natural challenge for outsourcing in Europe is the complex language requirements in the region. In an outsourcing environment, high language requirements not only have high cost implications since some languages carry a cost premium, but may also make certain offshore locations less viable. For example, in an FAO environment, it is virtually impossible to find most European languages (other than www.faotoday.com March/April 2009 FAO Today 59
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