Average Size of FAO Contracts Steadily Declines From US$86mn in 2002 to US$35mn in 2007, Says Everest Research

NEW DELHI, July 15, 2008 – 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 US$54 million in total contract value (TCV) with a term of 5-7 years. More than US$5 billion in contracts are up for renewal over the next three years.

“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,” said Katrina Menzigian, Vice President, Everest Research Institute. “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.”

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 US$86mn in 2002 to US$35mn 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 utilizing 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.”

Says Saurabh Gupta. “Renewals of FAO contracts also present significant value opportunities for both buyers and suppliers. Where on one hands, renewals enable buyers to expand their FAO benefits, on the other, 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.”

To read more about the findings of the FAO Contract Characteristics, an extract of the report is available at www.everestresearchinstitute.com. To purchase the report or receive more information about other research services, please e-mail info {at} everestresearchinstitute(.)com or call +1-214-451-3110.

About Everest Research Institute

Everest Research Institute serves as a central source of independent and objective strategic intelligence, analysis, and actionable insight for leading corporations, suppliers, technology providers, and investors in the global outsourcing and offshoring marketplace.

The Institute addresses both business process and information technology sourcing topics, providing the global outsourcing and offshoring community with information that empowers highly productive, sustainable sourcing strategies and relationships. The Institute’s wealth of knowledge and experience provides unique perspectives into today’s marketplace and the competitive edge required to take advantage of emerging opportunities.

Everest Research Institute is the research arm of the Everest Group (www.everestgrp.com), a global consulting firm with offices in such leading business centers as Dallas, New York, Toronto, London, Amsterdam, New Delhi, Melbourne, and Sydney. Everest Group has earned a worldwide reputation for ongoing innovation as it helps clients achieve maximum value from their operations including sourcing strategy and implementation.

Please visit www.everestresearchinstitute.com for more information.

For more details, please contact:

R&PM:Edelman, New Delhi

Office: +91-11-2332-0116

Puneet Khunger
Mobile: +91-9717022726
puneet.khunger {at} edelman(.)com

Priyangshu Dutta
Mobile: +91-981804-4248
priyangshu.dutta {at} edelman(.)com