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Financial outsourcing contracts see declination

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CIOL Bureau
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NEW DELHI, INDIA: Many new contracts for outsourced finance and accounting services are using management reporting and analytics, but outsourcing buyers continue to focus on transactional 'phase-in' approach for accounts payable, accounts receivable and general accounting services, says a study on Finance and Accounting Outsourcing (FAO) contracts from Everest Research Institute.

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The study identifies and documents the evolving FAO contract characteristics along with the following parameters—Contract profiles: size and terms of FAO contracts; Solution design: process scope, off shoring and technology trends and 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. The average value of contracts between 2002 and 2007 is about $54 million in total contract value with a term of five to seven years. More than $5 billion in contracts are up for renewal over the next three years.

"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," said Katrina Menzigian, VP, Everest Research Institute.

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According to Saurabh Gupta, Research Director, Everest Research Institute and co-author of the report, "Average size of FAO contracts has been declining steadily from $86 million in 2002 to $35 million 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."

"Interest in utilizing business-impact pricing along with a base fee is also rising. 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 change in tandem," Gupta noted.

He added, "Renewals of FAO contracts also present significant value opportunities for both buyers and suppliers. Where on one hand, renewals enable buyers expand their FAO benefits, on the other hand, they also help suppliers expand the scope of the current engagements. Some suppliers are looking for 'smart deals,' others for 'growth accounts,' while others are looking for 'anchor accounts.' In such a scenario, it is imperative that the buyers update themselves about the changing supplier landscape in order to understand the strategic objectives of the different suppliers. The buyer should also have a strong sense about how each supplier would perceive its relationship with the buyer's organization."

 

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