FAO contracts show a steady decline

NEW DELHI, INDIA: More new contracts for outsourced finance and accounting services are including management reporting and analytics, but outsourcing buyers continue to focus on transactional, ‘phase-in’ approaches for accounts payable, accounts receivable and general accounting services, according to the Everest Research Institute’s study of Finance and Accounting Outsourcing (FAO) contracts.

The Institute’s study, FAO Contract Characteristics, identifies and documents the evolving FAO contract characteristics along the following parameters:

Contract profiles: size and terms of FAO contracts

Solution design: process scope, offshoring, and technology trends

Contract agreement: pricing structures, service levels, and people transition 

The increased preference for a ‘phased approach’ of F&A services and the rising influence of the middle market buyer group has resulted in a steady decline of contract and engagement sizes in FAO contracts, according to the Institute.

The average value of contracts between 2002 and 2007 is about $54 million in total contract value (TCV) with a term of 5-7 years. More than $5 billion in contracts are up for renewal over the next three years.

Katrina Menzigian, vice president, Everest Research Institute, said, "Buyers of outsourced finance and accounting services have a broader range of solutions in a maturing market offering a diversity of suppliers, delivery locations, technology solutions, geographic coverage and industry-focused solutions. Stabilized FTE-based contracting models present buyers with engagement approaches that are well established and understood. However, transaction-based contract models are evolving and best suited for engagements for which inputs, outputs and dependencies are already understood.”

Saurabh Gupta, research director, Everest Research Institute and co-author of the report, “Average size of FAO contracts has been declining steadily from $86 mn in 2002 to $35 mn in 2007. This indicates that there is an increasing preference of a “phased” approach over a “big-bang” approach. It also indicates increasing adoption by the mid-market, made possible by increased standardization of the FAO value proposition.”

FTE-based pricing remains the dominant model, but business-impact pricing is showing signs of increasing, he adds.

“Interest in utilising business-impact pricing along with a base fee is also rising,” he noted. “FAO metrics generally tend to focus on timeliness and accuracy, however, the focus of service levels is shifting from diagnostic metrics to business-oriented metrics. As the FAO market continues to evolve, contracts will evolve and change in tandem; therefore, it’s important that buyers understand the opportunities and associated risks of the differing contract models in order to make an informed decision.”

“With different pricing models gaining some traction in the marketplace, FAO buyers should educate themselves on the benefits and challenges associated with each type,” pointed out Menzigian. “In some cases, a single deal may warrant more than one pricing model.”