deliveringhighervalueinfinanceandaccounting outsourcing(fao) · 2010-05-20 · transformation and...

Impact of FAO Technology Innovation Phil Fersht, Vice President

Saurabh Gupta, Research Director

© 2007 Everest Research Institute. All Rights Reserved.

R E S E A R C H I N S T I T U T E

E v e r e s t R e s e a r c h I n s t i t u t e | w ww. e v e r e s t r e s e a r c h i n s t i t u t e . c om

2007 AN EVEREST RESEARCH INSTITUTE WHITEPAPER

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Delivering Higher Value in Finance and AccountingOutsourcing (FAO)

E v e r e s t R e s e a r c h I n s t i t u t e | w ww. e v e r e s t r e s e a r c h i n s t i t u t e . c om 2

IMPACT OF FAO TECHNOLOGY INNOVATION

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Executive Summary

After more than a decade in incubation, the Finance and AccountingOutsourcing (FAO) industry is recently experiencing unprecedented growth,doubling in size in the last two years and forecasted to continue at a 30%growth rate for the near-term.

Key factors driving CFOs toward FAO transformation are the intense pressureto reduce transactional costs from within their own departments and reap thebenefits of low-cost global talent, dovetailed with visibility into the plethora ofprofitable and operationally successful FAO engagements by peers andcompetitors.

With today’s FAO suppliers all demonstrating proven capability to deliver costsavings, the onus is quickly moving toward the innovation and processexcellence buyers can achieve when evolving into an outsourced F&Aenvironment. Technology is recognized as a lever to deliver continuousinnovation and improvement in FAO. These technology requirements becomesignificantly more complex as companies add higher business-impact F&Afunctions to the outsourcing mix.

In Q3 and Q4 2006, the Everest Research Institute conducted a major studythat investigated the impact technology innovation can and will play in drivingincremental value from FAO. The study was based on the Institute’s unrivalleddatabase of all FAO contract data, detailed profiles of the key FAO suppliers,and a selection of intimate FAO buyer interviews that comprise the basis of therecommendations at the end of this whitepaper.

This paper discusses:� OOwwnneerrsshhiipp ooff FF&&AA tteecchhnnoollooggyy wwhheenn ttrraannssiittiioonniinngg ttoowwaarrdd aann FFAAOO eenndd--

ssttaattee:: To date, buyers were reluctant to relinquish IT control of core F&Asystems to suppliers. However, increasing confidence in suppliercapabilities, availability of technology tools, financial constraints to keepup with technology advancements, emergence of Service-OrientedArchitecture (SOA), and willingness to standardize are key factors that arecontributing to buyers revisiting the rationale for retaining these systems.



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� TThhee eevvoollvviinngg FFAAOO tteecchhnnoollooggyy vvaalluuee pprrooppoossiittiioonn:: A review of FAOtransactions over time reveals three stages of market development. The“pioneer phase” was charaterized by cost arbitrage; the current“emerging rapid-growth” phase is driven by offshoring andstandardization. And, as the market begins to “reach maturity,” technologywill play an even more invasive role. Suppliers’ solution design is movingtoward implementing more complete platforms instead of piecemeal tools.

� TThhee FFAAOO tteecchhnnoollooggyy llaannddssccaappee aanndd ssuupppplliieerr ooffffeerriinnggss:: The growingrepository of “add-on” tools and platform-based technologies developedinternally or through acquisitions or partnerships is enabling suppliers tobroaden their process, industry, and geographic footprint. Accenture,Capgemini, Genpact, HP, IBM and Perot BPS are leading the market withthe strongest FAO technology capability.

� CChhaannggiinngg eeccoonnoommiiccss –– IITT aass tthhee kkeeyy pprroodduuccttiivviittyy eennaabblleerr iinn FFAAOO:: Whilethere is continued value in the labor arbitrage equation, the potentialimpact that could also be achieved by allowing the FAO supplier toleverage through IT-base automation is significant.



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Table of Contents

Executive Summary

Introduction to the Study� Study hypothesis� Study objective and methodology

Ownership of F&A Technology When Transitioning Toward an FAO End-State� Buyers’ resistance to relinquish control over their F&A technology� Revisiting the rationale for retaining F&A systems

The Evolving FAO Technology Value Proposition� Phase 1 (pioneer: pre-2003)� Phase 2 (emerging growth: 2004 to 2006)� Phase 3 (maturing: post-2006)

The FAO Technology Landscape and Supplier Offerings� Strategy and approach to technology solution sourcing and development� Technology capability enabling buyers to achieve greater process, industry, and

geographic footprint� Current FAO technology capability of suppliers� The evolving supplier playing field

Changing Economics – IT as Key Productivity Enabler in FAO

Summary� Recommendations to buyers� Recommendations to suppliers

Glossary of Key Terms

About the Everest Research Institute

2

667

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14141517

1818

232832

34

373840

42

44



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Table of Exhibits

Exhibit 1: Share of FAO contracts by various levels of technology usage

Exhibit 2: Technologies deployed in FAO

Exhibit 3: Evolution of FAO Industry toward Technology Innovation

Exhibit 4: Buyers are looking at their entire F&A function when evaluating outsourcingthe FAO Technology Landscape and Supplier Offerings

Exhibit 5: Planned and future development of technology differs by F&A process

Exhibit 6: Most suppliers are developing generic solutions

Exhibit 7: Europe has been the recent growth engine for FAO contracts

Exhibit 8: Assessment of suppliers’ FAO technology capability

Exhibit 9: Converging FAO supplier landscape

Exhibit 10: Technology-led transformation is expected to drive higher value in FAO

9

11

14

24

25

26

27

28

33

35



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Introduction to the Study

Study hypothesis

Technology transformation will be the significant enabler ofachieving value in an FAO relationship as the value proposition ofFAO evolves and the market begins to reach maturity. Thus,organizations currently considering FAO options must focus ontechnology when evaluating their sourcing options.

FAO to date was largely driven by process enablement where buyerstraditionally retained their respective technologies and suppliers contributedselected transactional-oriented F&A processes. Recent research by EverestResearch Institute finds the majority of buyers do not invest a great deal ofresources in transforming their existing finance and accounting systems orsoftware when they enter into an outsourced F&A environment.

The onus is on the supplier to deliver any “tie and run” capabilities andassociated “wrap-around” technologies that enable the buyer’s ERP systems tobe quickly optimized in an outsourced environment. Buyer system optimizationis delivered in the form of non-intrusive “add-ons” of client-specific wrappers,workflows, interfaces, and document digitalization, none of which representsexciting new technology. Furthermore, most of this technology could havebeen implemented in-house.

However, over the mid- to long-term (four to five years or more), Everestpredicts a trend toward suppliers designing broader offerings comprised ofprocess and technology capability, based on technology platforms reusableacross customers in a virtual (i.e., same process blueprint, different technicalinstallations) or real one-to-many mode.

In contrast to the add-ons for invoice cleansing or document digitization usedtoday for process-step optimization, such a platform might host the completepayables subledger for a customer receiving an accounts payable service,which will be reconciled periodically with the general ledger technicallyretained at the customer. In this way, the platform enables a new end-to-endoptimization of the complete process chain.



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The prediction of suppliers designing broader offerings was supported by 70%of surveyed suppliers who confirmed technology would have a greater impactin the future as an FAO enabler that provides benefit beyond just costreduction, particularly as labor arbitrage becomes more of a hygiene factor.Technology is viewed as a key enabler for suppliers to leverage scale withinand across customers as well as an agent for achieving process optimizationand automation within a F&A transformation most effectively. Technologyinvestments (e.g., document digitalization) are delivering their optimum valuein high-volume transaction environments that FAO providers typically cangenerate.

We foresee the bundling of F&A systems and processes becoming moreprevalent in future outsourcing transactions due to a number of factors:� Suppliers are differentiating their offerings to provide a more

comprehensive outsourced solution by pre-designing their optimized best-practice process blueprint and the accompanying IT. The technologycomponents of such a solution might be acquired by proprietarydevelopment (potentially on the back of an acquisition) or by partneringwith a standard software supplier.

� Technologies emerged that support selective outsourcing of F&A processeswhile benefiting from the specific economic proposition of the businessvolume suppliers can aggregate.

� FAO buyers are increasingly more willing to evaluate and deploystandardized solutions, thus increasing the returns on technologyinvestments, when providers deliver these solutions to multiple buyers.

Study objective and methodology

This whitepaper discussion is based on three sources of data:1. Proprietary Everest data on over 160 multi-process FAO transactions.2. Numerous executive interviews with buyers of FAO services.3. Detailed informational interviews with key suppliers of FAO services:

Accenture, ACS, Capgemini, Convergys, EDS, EXL, Genpact, HP, IBM,Infosys BPO (Progeon), Intelenet, Perot Systems, Wipro, WNS, and VWA.

The objective of the study was to investigate the provision, development anddeployment of technology solutions that augment an ideal end-state foradopters of outsourced F&A offerings. Specific attention was given toidentifying, quantifying, and analyzing the impact that technologytransformation had on the industry and where suppliers and buyers wereprioritizing their investments.

The study profiles service

provider offerings that enable

FAO technology transformation

and case studies of buyers that

are enabling fully-outsourced

F&A processes by transforming

their F&A technology



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The study profiles service provider offerings that enable FAO technologytransformation and case studies of buyers that are enabling fully-outsourcedF&A processes by transforming their F&A technology.

This whitepaper discusses a number of themes or characteristics that areevolving within FAO, specifically:� Buyers continue to be cautious� Technical solutions are evolving� Supplier playing field is evolving� F&A economics support IT-driven solutions



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Ownership of F&A Technology When TransitioningToward an FAO End-State

A review of FAO contracts over the past three years indicates buyers arereluctant to relinquish IT control to suppliers (see EExxhhiibbiitt 11). Buyers chooseinstead to retain system ownership and control in nearly 85% of FAOtransactions.

Buyers’ resistance to relinquish control over their F&Atechnology

The low 13-16% rate of supplier adoption of IT solutions is attributed to anumber of reasons:

SSuunnkk ccoosstt iinnvveessttmmeenntt:: Buyers, particularly large-cap firms, made significantinvestments in i) F&A systems for Y2K, SOX and other regulatory concerns andii) ERP systems. Buyers expect to achieve major process and cost-efficiencygains so they are reluctant to give up on these major investments prematurely.

SSuupppplliieerr ccoonnttrrooll aassssuurraannccee:: Buyers do not have confidence in suppliers’regulatory control compliance. Completion of SAS 70 and SysTrust audits areconsidered inadequate. Full assurance can only be achieved by i) having thefirm’s external auditors attest to the supplier’s controls or ii) accommodatingthe requirement via SLAs such that vendors are legally bound to comply orface the risk of contract termination.

Share of FAO contracts by

various levels of technology

usage

E X H I B I T 1

Source: Everest Research Institute

Share of FAO contracts by various level of technology usageNumber of contacts

Buyer converts to supplier-ownedand supported F&A systems

Buyer retains ownership andoutsources support of F&A systems

Buyer retains ownership andsupport of F&A systems

100% = 92 124 135

2004 2005 2006

13% 15% 16%

24% 19% 18%

63% 66% 67%



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IInn--hhoouussee mmaannaaggeemmeenntt ppoossiittiioonniinngg:: The 1990s experienced a dramaticincrease in the number of Fortune 500 companies adopting a shared-servicesmodel in order to reduce costs. With a shared-services model, all of acompany’s financial data is stored in one application. This data originatesfrom one source, eliminating consolidation errors and greatly reducing thetime it takes to close the books. Companies want to complete thismanagement positioning before entertaining an outsourced managementmodel.

HHiigghh ddeeggrreeee ooff ddiiffffiiccuullttyy:: Finance systems are tied to every other system andprocess within a company and are extremely difficult to replace.

RRiisskk:: The cost of errors in financial data and financial systems is significant,tangible, and highly visible.

Revisiting the rationale for retaining F&A systems

Five factors contribute to buyers revisiting the rationale for retaining thesesystems and considering acquiring IT capability from a third-party:11.. CCoonnffiiddeennccee: Suppliers’ capabilities are more robust than when first

introduced ten years ago. Suppliers are demonstrating strong capability inrefining both process and technology following the completion of 160+FAO transactions and the broadening of their own internal capability. Forinstance, as recently as December 2006, EDS extended its SAP-platformcapability by acquiring Global Enterprise Management Solutions, LP(GEMS). GEMS will provide SAP enterprise management and customerrelationship management solutions to the EDS offering.

22.. AAvvaaiillaabbiilliittyy:: Some suppliers have developed technology tools (e.g.,analysis tools) that complement internal processes. Some have acquiredtheir own enterprise-wide applications, which they have bundled withmigrated transactional and key management processes. In addition,innovative standard software providers are devising partnering approachesfor BPO specifically catering to the characteristics of this service model. Bybeing based on commercially available solutions with a wide generalmarket penetration, such an approach can be seen as a further element ofrisk mitigation by the customer. For instance, in recent years, SAP has verysuccessfully established such a BPO-partnering model, which caters to theparticular needs of BPO-providers and customers (e.g., for tight back-to-back support relationships, specific help in optimizing the systemdeployment and operations in a BPO-setting or BPO-adapted commercialconditions).



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Up to now, the focus of SAP’s BPO partnerships include HR, payroll,procurement, and F&A.

“Add-On” technology tools offered by FAO suppliers are emerging as atrend in the outsourcing marketplace and represent an importantinvestment area (see EExxhhiibbiitt 22). Suppliers demonstrated through suchtechnology tools that they can provide significant value to their clients inaddition to simply reducing process costs. The next goal will be totranscend single tools and form complete technology platforms to supportend-to-end services in FAO areas outside of payroll. This will be the basisfor providers to truly leverage their scale advantages in a sustainablefashion.

33.. IInntteerrnnaall ccoossttss:: Companies are financially constrained to keep up withtechnology advancements. While IT investments are viewed as a cost ofdoing business, costs are increasing at an average rate of ~ 5% perannum as companies struggle with complying with new regulations whileconcurrently trying to position themselves strategically with majorinvestments in architecture and enterprise applications.

44.. TThhee eemmeerrggeennccee ooff SSeerrvviiccee--OOrriieenntteedd AArrcchhiitteeccttuurree:: The arrival of Service-Oriented Architecture (SOA) is finally delivering a whole new level oftechnology support for process modularization at the clients’ fingertips.Relevant sub-processes in order-to-cash and procure-to-pay delivery (e.g.,document digitalization or invoice verification) can be flexibly operated in-house or outsourced to the supplier. Providers are in a favorable positionto leverage the new technologies due to the economies of scale andprovider-free investments.

Technologies deployed in FAO

E X H I B I T 2


Technology BenefitsApplication Wrappers Improves operating efficiency of another program

Workflow Helps to define, execute, and monitor business processes

Interfaces Helps integrate disparate systems that need to communicatewith one another

Document Digitization OCR technology helps digitize invoices, bills, etc. to gainefficiencies in processes such as A/P

Project-Management Tools Helps enable project scheduling, resource allocation, tracking,communication, documentation, and version control of projects

Business-Intelligence Tools Provides analytics, data warehousing, data mining andartificial intelligence to improve the analysis of operationaldata

User Portals and Dashboards

Consolidates, organizes, and presents information

Interaction Centers Customer-care technologies improve service agent productivity



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Many companies found that their current legacy application portfolio,often self-built over the past two or three decades, is typically designedand implemented within organizational silos and not oriented towardproviding the enterprise viewpoint required by finance, marketing, risk, andoperations.

The result is laborious manual work, which results in excessive costs andresource-utilization, poor quality, and poor transaction efficiency. This is aproblem, given today’s competitive environment that requires real-timeanswers enterprise-wide and the ability to service any customer in anychannel in any geography.

Consequently, companies have started the long and expensive journey toreplacing legacy systems with new strategic applications such as:� Business Process Management (BPM)� Corporate Performance Management (CPM)� Customer Relationship Management (CRM)� Enterprise Content Management (ECM)� Enterprise Performance Management (EPM)� Enterprise Risk Management (ERM)� Enterprise Resource Planning (ERP)...and re-architecting all these application platforms with CBM/SOA(Component Business Models and Service-Oriented Architectures).

The core issue that constantly hindered the development of integratedapplications across fragmented business processes was common languageand architecture. The use of the Web magnified this issue when enterprisesattempted to interface with their suppliers, customers, and businesspartners outside the enterprise (for example e-payments and e-invoicingprocesses).

The concept behind a SOA environment is to ensure applications can sendinstructions and information to each other with no adaptor or translator,which is proving extremely beneficial when information flows are deployedbetween an FAO buyer and its provider. The crucial issue is to ensure thedata break points are effectively monitored and managed when anoutsourcing service provider is introduced into an organization’s SOAenvironment. Decoupling applications into individual business serviceswithin the enterprise architecture – for example, “create customer” or“process invoice” – is the optimal way to break down the integrationboundaries.



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The common standards introduced by SOA are enabling capitalinvestments to continue after their initial implementation. One suppliermentioned that one of its clients was able to avoid a US$8 million upgradeto Oracle 11 from Oracle 8 by leveraging and developing their providedplatform.

Buyers welcome supplier-provided add-ons because they help fill in gapsin their existing ERP platforms. Gaps in systems arise because of themethod by which the ERP platform was implemented, or perhaps the buyeronly purchased selected modules in the overall suite or a third-partyapplication solution was not available at the time of purchase.

Companies need to make investment decisions by comparing thefollowing:� Internal approach and the high human and capital cost of deploying

these technologies� External approach and using an outsourcer that made these

investments, has the skills in-house and offers a turnkey operation55.. IInnccrreeaassiinngg wwiilllliinnggnneessss ttoo ssttaannddaarrddiizzee: Buyers are increasingly recognizing

the communalities of F&A processes while defining in-house shared-services centers. Consequently, a client’s willingness to benefit from itssupplier’s best practices increasingly puts the supplier in a even betterposition to provide the same or better service at lower cost to its clients.



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The Evolving FAO Technology Value Proposition

Early FAO engagements focused primarily on removing F&A transactionalprocesses from a buyer’s organization to capture the cost benefits of lower-cost services from the outset. These cost savings were primarily driven throughcentralization of F&A processes and labor arbitrage through near or ruralsourcing. Offshoring did not become a major aspect of FAO until the laterwave of contracts after Y2K.

A review of FAO transactions reveals technical maturity is evolving over time(see EExxhhiibbiitt 33). This is a result of suppliers building process capability whileconcurrently enhancing their IT platforms to achieve efficiencies and lowercost of delivery. The abiliy of providers to manage financial applications,tools, and processes under the same contract is increasingly compelling asbuyers discover the synergistic business benefits of having applications andtheir relevant business processes closely entwined.

Phase 1 (pioneer: pre-2003)

The typical solution design of FAO transactions during this timeframeconsisted of the buyer retaining the IT solution in-house while the supplierprovided the selected business processes.

The ability of providers to

manage financial applications,

tools, and processes under the

same contract is increasingly

compelling

Evolution of FAO industry

toward technology innovation

E X H I B I T 3


Adoption:� Market has grown by over 45% since beginning of 2005� Offshore value proposition well-developedStandards/suppliers� Standards still being refined but within bounds� More than 20 legitimate suppliers exist

� WNS structures relationship with NA client � Cargill creates equity relationship with OPI� IBM acquires Equitant� General Atlantic takes stake in Genpact� Genpact acquires Creditek� Infosys acquires Progeon to form Infosys BPO

Cost arbitrageFAO today

BP adoptsFAO

GE invests inGECIS (Genpact)

Market value creation

Standardization& offshoring

Technologyinnovation

1990

Phase 1Pioneer

Phase 1Rapid growth

Phase 1Reaching maturity

1997

Evolution of FAO market

2006 2010

� Genpact wins succession of contracts, plans IPO for 2007 � HP and Xansa make impact with major deals� EXL becomes a public company� Savista, Advantium and Meridian become part of Accenture



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Deals were largely oriented around transactional processes. For instance, F&Aoutsourcing deals from Delphi, GE, Citigroup, TXU Energy and Lloyds TSBwere oriented around invoice processing, accounts payable, accountsreceivable, financial reporting, finance accounting, account and bankreconcilement, error reporting, and inquiries. This orientation is due to readyseverability of these F&A functions and for the labor arbitrage opportunity.

Businesses with centralized shared-services operations tended to enjoy atransition over to a full outsourcing model with relative ease. Other pioneeringclients, for example BP, went with a “big bang” approach and transitionedfrom an in-house to a fully outsourced model without moving through ashared-services transition state.

The introduction of greater compliance regulation heightened the need fortechnical solutions given the i) focus on repeatable controls and ii) generalweaknesses identified previously on how well companies implemented theirown internal solutions.

Large-cap firms made significant investments in F&A systems due to theseconcerns (compliance, Y2K, and SOX) and were reluctant to give up thetechnical solution. In comparison, mid-cap and small-cap firms typicallyreverted to manual solutions due to the high cost of automated solutions.

This situation prompted suppliers to commence rounding out their offeringswith enabling technologies when automating F&A process utilities such asreceivables and collection management software oriented around the order-to-cash processes.

Phase 2 (emerging growth: 2004 to 2006)

In recent years, gaps in the buyers’ existing functionality were exposed, namelymultiple instances of accounts operating in silos with major integration issues.However, buyers were financially constrained to keep up with technologyadvancements oriented around closing these gaps. Many buyers were facedwith the dilemma of either streamlining their F&A systems prior to theiroutsourcing deal or working with their supplier to do this in concurrence withthe transition phases.

81% of all suppliers interviewed

have provided some form of

technical augmentation to a

buyer’s core financial systems



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In response, FAO suppliers provided “plug-and-play” tools to fill thesefunctional holes without the need for the buyer to make a correspondinginvestment. These functional gaps are common. In our study, 81% of allsuppliers interviewed provided some form of technical augmentation to theirbuyers’ core financial systems. Supplier-provided augmentation consisted ofproprietary wrappers, workflows, interfaces, and document digitalization;however, the primary technical platforms remained that of the buyer.

The following case study illustrates how VWA (Vengroff, Williams andAssociates) provided “plug-and-play” technologies to augment YamahaCorporation’s cash applications, collections, and reconcilement processes inan outsourced environment. Significant results were achieved in FTE’s,processing, and delinquencies.

Case study 1: Yamaha Corporation (Buyer) and VWA (Supplier)

PPrroobblleemm:: In 2003, Yamaha decided to review its cash applications,collections, and reconcilements processes to obtain efficiencies and reduceoverall costs while maintaining superior customer service.

SSttrraatteeggyy:: Yamaha’s customer financial services strategy was to automatereceivables, accelerate adjustments, minimize manual processing of disputes,and increase exception-matching via a workflow technology to ensureuninterrupted operational processing.

SSoolluuttiioonn:: Yamaha IT had a long list of projects and due to competingdemands, could not provide the support the operating divisions required.Customer Financial Services decided they needed an onshore partner in VWA.

VWA brought in document management, workflow, user portal and analyticaltools. Electronic invoicing (EIPP) and outbound collections solutions soonfollowed. All integration work to the Oracle platform (retained by Yamaha)was provided by VWA.



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RReessuullttss:: The VWA RFA (Request for Adjustment) application scaled well andprovided significant results:� 36% reduction in FTE’s while accommodating increased volumes� 57% reduction of manual processes for adjustments and cash� 66% reduction in unapplied cash and credits� Reduction in the resolution of deductions & adjustments from 150 days on

average to 30 days� Reduction in 60-day delinquencies from 4.3% to 1.2% over 2 ½ years� The adjustment process became more seamless and rework reduced all

without any degradation in performance

Karen Salter, General Manager of Customer Financial Services was the projectsponsor. “Fine-tuning our AR processes enabled my team to find creative waysto maximize both credit lines and order releases. With the help of VWA, myteam is no longer chasing down second and third request adjustments, butrather, finding ways to say ‘yes’ and helping the company achieve its overallgoals.”

Phase 3 (maturing: post-2006)

Recent interviews indicate the typical supplier’s solution design is movingtoward a more complete platform instead of piecemeal tools.

Our research revealed one-third of FAO transactions use tactical, proprietary,and highly customized technologies. Suppliers need to broaden the solutionsand extend their client-specific tailored solutions to gain leverage across anindustry. This will require capability augmentation by partnering ordevelopment to i) standardize solutions; and ii) apply SOA principles with theend objective of achieving strongly architected solutions more readilyintegratable and leveraged across multiple clients.

Other benefits of SOA include shorter development time, greater codeefficiency, improved controls, lower costs, and contribution to componentstandardization andreusability. Eighty percent of suppliers indicated they areeither in the process of or planning to adopt SOA in future development work.

The larger suppliers have had to contend with corporate malfeasance,terrorism, and solvency regulation. As such, they have also selected toleverage these newfound capabilities in their solution offerings.

One-third of FAO transactions

use tactical, proprietary, and

highly customized technologies



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The FAO Technology Landscape and Supplier Offerings

The FAO supplier industry took 16 years to get to its current high-growth state,which has resulted in ambitious suppliers investing hurriedly in their deliveryinfrastructures to cope with the upswing in demand. As with the otherdeveloping BPO delivery models, the suppliers first needed to develop globalservice-delivery infrastructures to take on new business. Next, they looked totackle the need to deploy the right application management andaugmentation solutions to enable their new clients to run F&A effectively fromtheir new delivery model.

Strategy and approach to technology solution sourcing anddevelopment

We looked at suppliers’ technology solution strategies and approach and howtechnology is enabling the suppliers to develop greater process, industry andgeographic footprint.

The one-to-one versus one-to-many technology solution strategy

With large complex organizations, suppliers have faced highly customizedtransitions to get them to an ideal FAO end-state. In many cases, the buyersmay have an existing customized F&A platform that they wish to maintainwithin their FAO environment. Suppliers have to decide whether it iseconomically viable for them to focus on customized F&A platforms forindividual clients or look to develop F&A platforms based on commonstandards that can be deployed repeatedly across multiple clients.

With clear synergies being demonstrated where the same provider managesboth the application and business process, most of today’s FAO providers arelooking to standardize on common F&A platforms – namely SAP and Oracle –at the high-end that can enable them to train and develop their IT andprocess experts with common standards so they can work across clients whenrequired. With an increasing number of consumption-based pricing modelsdeployed in recent FAO contracts, suppliers need increased flexibility to rotatetheir delivery staff when they are needed in labor-intensive situations (namelytransition and transformation phases with new clients).

The leading suppliers are aggressively pushing standardized (one-to-many)platform models in most recent FAO contracts, and we are witnessing an

Suppliers have to decide

whether it is economically viable

for them to focus on customized

F&A platforms for individual

clients or look to develop F&A

platforms based on common

standards that can be deployed

repeatedly across multiple

clients



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increasing acceptance from buyers to move onto a more standardized FAOarchitecture. The one-to-one approach proved to be less successful for bothbuyer and supplier in the long-term, as the buyer does not benefit from lowercosts of standardization and the supplier does not gain from rationalized staffprovision, training, and leveragability across other clients.

Technology solution approach

AApppprrooaacchh 11:: Using “Add-On” Technologies to Augment Buyer’s Core F&ASystem. Almost 80% of the suppliers are developing and deploying “add-on”technology solutions that help their customers plug functionality gaps inexisting systems and develop more holistic F&A solutions. These are non-intrusive to the buyer’s core F&A system and are “add-ons” around theperiphery of the existing system’s landscape.

Such an augmentative approach is proving to be particularly popular withlarge FAO buyers preferring incremental transition toward their ideal FAOend-state. The key “add-ons” used can be categorized into the following fourgroups:11.. PPrroodduuccttiivviittyy--iimmpprroovveemmeenntt ttoooollss.. This set of technology tools includes a

combination of document-management technology (Optical CharacterRecognition, Intelligent Character Recognition), wrappers for mainstreamF&A processes like accounts payable, accounts receivable,reconciliation/general ledger, etc., and workflow engines that define,execute and monitor business processes.

22.. BBuussiinneessss--iinntteelllliiggeennccee ssoolluuttiioonnss.. These include analytics, data-warehousing,data-mining, and artificial intelligence technologies to enable enhancedanalysis and mining of financial data to facilitate faster and more efficientaccess to data and better decision-making.

33.. UUsseerr--iinntteerrffaaccee ssoolluuttiioonnss.. These are user interfaces that consolidate,integrate, organize, and present information that is easy to read and helpsin usability, tracking, and decision-making. Suppliers are building executivedashboards that provide high visibility into financial metrics with queryingcapabilities that can act as real enhancers to overlay the outsourced F&Adataflow.

44.. SSyysstteemm--iinntteeggrraattiioonn ssoolluuttiioonnss.. These are software solutions that help twoindependent systems communicate with each other. Suppliers are buildingsystem-integration capabilities to interface with a buyer’s disparateapplication landscape, largely developed using SOA standards to enableseamless automation of data across the buyer’s F&A data chain.



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Most of the suppliers thus far attacked the “lower-hanging fruit,” that is, labor-intensive (often manual) processes (namely accounts payable, accountsreceivable, and general accounting). The adoption of such tools will continueto gain momentum in the coming few years as the existing solutions becomeincreasingly sophisticated, scalable, and flexible and new tools are developedfor core higher-value F&A processes (namely budgeting and forecasting).

AApppprrooaacchh 22:: Using a Platform-Based Approach to Replace Buyer’s Core F&ASystem. Moving onto a provider’s F&A platform will standardize a customer’senterprise-wide systems, applications, and data. However, given thereluctance of larger buyers that are already heavily invested in F&A systems,this approach is targeted more toward mid-size buyer organizations whoseF&A systems and applications are often in greater need of upgrading/replacing. The different platform-based offerings can be categorized into thefollowing three groups:11.. IInndduussttrryy--ffooccuusseedd ssoolluuttiioonnss.. A few suppliers are focusing on providing

industry-focused FAO solutions that are underpinned by a robusttechnology layer. For example, Peradigm is Perot BPS’ healthcare specificplatform/claims-processing engine focused on improving the operational,financial, and overall economic viability of the revenue-cycle process on asustainable basis. Similarly, Lifesys is Perot BPS’ life-insurance-specificplatform that enables insurance claims processing and administration.Jade is WNS’ proprietary passenger accounting revenue system developedfor the travel industry, coined as “Airline in a Box” – three major airlinesare running on it. Jade is an ASP solution that manages cargo, crewscheduling, etc. that runs on Oracle Database and written in C++.Accenture also has deployed a SAP-hosted ERP solution for a number ofenergy companies operating out of the North Sea.

22.. FF&&AA pprroocceessss--ffooccuusseedd ssoolluuttiioonnss.. A number of suppliers aredeploying/developing process-focused solutions aimed at automating theend-to-end processes like order-to-cash, procure-to-pay, or record-to-report. IBM acquired Equitant in 2005, an order-to-cash solutions providerthat enabled IBM to expand its F&A operations. Genpact acquiredCreditek Corp in 2005, which provided Genpact with a mature one-to-many, invoice-to-cash technology platform and ERP wrapper. IBM andAccenture go to market with a multi-client hosted solution for Source-to-Pay (S2P) using Emptoris and SAP. In the future, Infosys BPO and Wiproalso plan to offer platform-based solutions in Procure-to-Pay (P2P).



ERI.2007.1.W.0127

33.. SSeerrvviiccee--ddeelliivveerryy ffooccuusseedd ssoolluuttiioonnss.. BPOpen is a Capgemini-developed (inpartnership with Microsoft), proprietary-built BPO platform developed withSOA standards. It provides a connectivity backbone for Capgemini’sglobal Rightshore™ delivery network. It allows connectivity to a client’s ERPsystem in an outsourced environment, a framework to manage andsupport the delivery of business processes, and integration of key deliveryelements such as scanning, workflow, issue-tracking, audit andauthentication services, and service-level reporting in an end-to-endsolution, starting with the source document and processing through to theexisting ERP.

Technology sourcing strategies

We see two platform-sourcing strategies that suppliers are adopting in orderto compete in the industry. Both strategies are used to build process andtechnical capability, which in turn is shaping FAO transactions going forward.

Strategy 1: Internal development potentially enabled by third-partyacquisition

Suppliers are adding augmentation solutions consisting of proprietarywrappers, workflows, interfaces, and document digitalization.

IBM has developed strong technology components in order-to-cash (throughacquisition of Equitant), AP, general accounting and travel & expense that helpbuyers overcome functionality gaps in existing systems. In addition, IBM’s toolsuite extends across the FAO business providing scanning-imaging-workflowtools, SLA monitoring and reporting tools, client-service connection portal,quality assurance and compliance tools, transition tools, and many other toolsthat aim to deliver consistent, repeatable, timely outcomes across clients.

Infosys BPO (formerly Progeon) developed a fully integrated workflow suitedesigned to automate the procure-to-pay process flow.



ERI.2007.1.W.0127

Suppliers are also engaging in a myriad of mergers, acquisitions, andpartnerships to deepen their IT capabilities. Most acquisitions are occurringbetween outsourcers and IT companies. For example:� In 2005, IBM acquired Equitant, an order-to-cash solutions provider. This

enables IBM to expand its F&A operations.� In 2006, Accenture enhanced its F&A capabilities by acquiring Advantum

and Meridian Informed Purchasing that help clients prevent, detect andrecover "lost profits" through analysis of payables data and processes.

Strategy 2: Partnering with standard solutions provider

PPaarrttnneerrsshhiipp::

Innovative software providers are devising partnering approaches for BPOspecifically catering to the characteristics of this service model. Both SAP andOracle are pusuing strategies at varying degrees of maturity. For instance,SAP is pursuing a strategy to enable FAO providers to receive the support theyneed to deliver F&A process on their ERP platforms. By being based oncommercially available solutions with a wide general market penetration, suchan approach can be seen as a further element of risk mitigation by thecustomer. SAP has successfully established such a BPO partnering model inrecent years, which caters to the particular needs of BPO providers andcustomers (e.g. for tight back-to-back support relationships, specific help inoptimizing the system deployment and operations in a BPO-setting or BPO-adapted commercial conditions). In addition, SAP has successfully aligned itsBPO partnering with the other SAP customer-facing stakeholders in sales,consulting and support. Up to now the focus of SAP’s BPO-partnershipsinclude HR, payroll, procurement and F&A.

For example, SAP is partnering with several suppliers in the FAO space todeliver specific processes such as the following:� Payroll: 14 including Accenture, ACS, ADP, Arinso, Convergys, EDS, IBM,

etc.� Procure-to-pay (including accounts payable): Accenture, IBM� Billing and receivables management (including accounts receivable): T-

Systems

Oracle has recently been making efforts to define the program elementsneeded to develop a BPO-centric offering and partner-program. Whilespecifics are not yet publicly available, Oracle is reportedly working on the



ERI.2007.1.W.0127

various components of an overall BPO business framework with the goal tomake it easier for both BPO providers and existing customers to work withOracle Software in BPO deals. Oracle has still to release information on thescope of its activities and any concrete BPO-focused partnerships with serviceproviders outside of its role as contributor to the EDS agility allianceframework.

Furthermore, we noted during the interview process that suppliers arepartnering with technology providers. For example, Infosys BPO (formerlyProgeon) offers a receivablesmanagement solution to its clients. Instead ofdeveloping a solution, Infosys leverages Aceva’s automated solutions withinthe receivables process chain.

It took more than six years for Aceva to develop this end-to-end solution. Eachyear of its development, they introduced new functionality, performance orindustry capability. Specific functional capabilities now include creditfacilitation, pre-billing and e-invoicing, remittance processing, collectionsmanagement, dispute management and reporting and analysis.

Incidentally, several technology companies offer similar RCM (Receivables &Collection Management) platforms, some of whom emerged in the past fewyears.

Technology capability enabling buyers to achieve greaterprocess, industry, and geographic footprint

By way of the strategy and approach to technology capability development,suppliers achieved:1. Broader end-to-end F&A solutions2. Greater industry penetration3. Global positioning

Broader end-to-end F&A solutions

Service providers are becoming increasingly adept at developing anddelivering across numerous integration points, particularly in receivables,payables and accounting. The end result is an environment whereby suppliersadd to their technology offerings by extending their solution footprint beyondbasic transaction-processing capability and will in the near future seek to addthe higher-value services such as budgeting, financial reporting, performanceanalytics, analysis and compliance capability, and advanced tools.



ERI.2007.1.W.0127

It is easier for the supplier to offer these higher-value services once thesupplier has proven capability in transacting processes. As a consequence ofthis evolution, we are finding a broader range of both transactional processes(represented in the green bars) and key accounting processes (blue bars)represented in FAO deals (see EExxhhiibbiitt 44).

If we look at a representative sample of major suppliers, we find awellrounded solution emerging, which consists of both process andtechnology-enabling capabilities. Most Tier 1 suppliers’ F&A offerings are nowextending beyond the transactional processes to some of the key processes, allanchored by supporting technology.

Technology is increasingly becoming more of a solution lynchpin behind theseFAO deals (see EExxhhiibbiitt 55). For example, 30% of the suppliers claim to haveprocure-to-pay capability, while 27% claim that they will have it in the nearfuture (1-2 years).

Technology is increasingly

becoming more of a solution

lynchpin behind these FAO

deals. For example, 30% of the

suppliers claim to have procure-

to-pay capability; while 27%

claim that they will have it in the

near future (1-2 years)

Buyers are looking at their entire

F&A function when evaluating

outsourcing

E X H I B I T 4


Frequency of inclusion of F&A processes in FAO contractsPercentage

Typical technologies used

Capital budgeting

Internal audit

Treasury &risk management

Budgeting/forecasting

Management reportingand analysis

Tax

Payroll

Fixed assets

General accounting

Accounts receivable

Accounts payable

3

25

32

38

71

40

46

60

85

86

91

Keyprocesses

Transactional

processes

� Project management tools

� Application wrappers� Workflow engines� Document digitization

� Interfaces � Application wrappers� Document digitization

� Analytics, data-warehousing, data-mining� User portals/dashboards



ERI.2007.1.W.0127

Suppliers provided point solutions by automating the transactional aspect ofthe processes highlighted in blue (see EExxhhiibbiitt 55). Order-to-cash and procure-to-pay represent strategic development targets for many suppliers, as theprocesses are well suited for automation. However, more work is required toextend these solutions so an integrated end-toend process is implemented.Until these gaps are completed, buyers will continue to have fragmentationand deficiencies in their F&A platforms.

Greater industry penetration

A majority of market-leading service providers are developing multiclient,multi-industry process solutions to gain scale, drive down costs, and improveperformance. This has permitted them to compete for larger deals, multi-country and multi-tower.

Today, only 14% of deals are multi-tower; however, we predict continuedmulti-tower bundling in 2007 as buyers try to coordinate their outsourcingacross all of SG&A. For example, expect increased synergies developingacross HR and F&A towers within BPO engagements. The majority of buyerswill continue to pursue multi-vendor strategies but become more prepared toconsider single-vendor multi-tower options where vendors demonstrateincreased cost savings, operational synergies, and efficiencies acrossprocesses.

Today, only 14% of deals are

multi-tower; however, we predict

continued multi-tower bundling

in 2007 as buyers try to

coordinate their outsourcing

across all of SG&A

Planned and future

development of technology

differs by F&A process

E X H I B I T 5


Forecasting

Current capability

Future capability

Impact on direct costs

Strategic impact

Impact on business (beyonddirect cost reduction)

Management reportingand analysis

General accounting

Procure-to-Pay

Payroll

Order-to-Cash

11%

55%

28%

30%

33%

54%

22%

25%

28%

27%

33%

9%

33%

80%

56%

57%

63%

Use of technology within F&A processesPercentage suppliers Impact of technology

Strategic and business impact� Process transparency toimprove visibility, compliance,and control

� Real-time SLA monitoring toimprove governance

� Reduced process downtimeand improved issue-resolution

Direct and indirect cost impact� Increased automation toincrease productivity and costsavings

� Reduced cycle time tosignificantly improveprocessing efficiency

� End-to-end solutions to fillgaps in existing systems

� “Plug-and-play” functionality torealize benefits much faster



ERI.2007.1.W.0127

Some suppliers’ (e.g., Perot BPS and WNS) current strategy is to follow anarrower industry focus (see EExxhhiibbiitt 66). WNS, for example, has developed aproprietary passenger revenue-accounting system called Jade for the travelindustry. Coined as “Airline in a Box,” it represents the underlying applicationplatform for three airlines for cargo management and crew scheduling.Genpact, in comparison, is leveraging its order-to-cash solution acrossmultiple industries including consumer products, industrial manufacturing,technology, energy, transportation, financial services, infrastructure, andautomotive.

With the increasing importance of financial processes at the heart of anoutsourced end-state, the major outsourcers are realizing they need F&Acompetencies to compete for major global deals with multi-tower elements.

We expect continued development in FAO delivery competency from IBM,Accenture, Capgemini, ACS and EDS. We have already seen IBM andGenpact complete their successful integration of the Equitant and Creditekacquisitions. In 2007, we expect to witness more capability build-out (e.g.,Accenture with Savista and Meridian; EDS with MPhasis) and more supplierexpansion into services like financial analysis and management reporting.

Most suppliers are developing

generic solutions

E X H I B I T 6


Generic vs. industry-focused solutionsResponse frequency

Industry-focused

Genric

Both

13%

63%

25%

Mainly for O2C processes(i.e., healthcare andinsurance)



ERI.2007.1.W.0127

Global positioning

Based on a review of recent FAO deals over the past two years, we are seeinga trend toward global deals (see EExxhhiibbiitt 77).

We believe there are several factors contributing to this trend toward globaldeals:11.. SSuupppplliieerr ssccaalliinngg: As suppliers build process capability and technical

scaling, they are positioning themselves for global transactions in line withemerging requirements. We predict the major suppliers will shortlyestablish a meaningful local presence in each of the continents. Indiansuppliers are bolstering their South American capability while Westernsuppliers are emphasizing Central Europe, India, China, and thePhilippines.

22.. TTrraannssaaccttiioonn rreeaacchh:: Buyers are more inclined to consider multi-tower andmulti-country deals. Buyers are also subject to global complianceregulations, the effective dates of which vary by regulation and geography.For example, SOX was introduced in 2002 with Phase II requirementsextended to November 2004. Full compliance was occurring as late as2005 and 2006. Basel II (pertinent to the financial services industry) islikely to stretch into 2007 (2008 in the U.S.). As these regulations becomeglobal, there will be a greater economic model for vendors to providetechnical solutions.

Europe has been the recent

growth engine for FAO contracts

E X H I B I T 7


FAO market by geographic scopeAnnualized contract value in US$ million

FAO market over time by geographic scopeAnnualized contract value in US$ million

100% = US$1,566 million

OthersOthers

12615%

34%

61%

5%

40%55%

4%

57%

39%

359

Europe

Europe

NorthAmerica

North America

Cumulative untilDecember 2004

2005-April 2006

100% =

Current FAO Technology Capability of Suppliers

Everest Research Institute, as part of its ongoing tracking and analytical workin the global FAO industry, assessed in detail, 15 leading FAO suppliersacross four dimensions of FAO technology capability (see EExxhhiibbiitt 88):11.. TTeecchhnnoollooggyy ssttrraatteeggyy:: Importance of technology in overall FAO strategy,

technology investments.22.. PPrroopprriieettaarryy ssoolluuttiioonnss ccaappaabbiilliittyy:: Current client base for proprietary

solutions, process and technology landscape of proprietary tools,underlying architecture, platform-based solutions.

33.. EERRPP ccaappaabbiilliittyy:: Incidence of outsourcing maintenance/ownership of coreF&A systems, experience in major ERP platforms, SI and technologyconsulting capability.

44.. FFAAOO eexxppeerriieennccee:: Number of FAO contracts, cumulative ACV of multi-process contracts, FAO FTEs, FAO service centers, penetration in F&Aprocesses, footprint of buyer operations served.



ERI.2007.1.W.0127

Assessment of suppliers’ FAO

technology capability

E X H I B I T 8


SupplierTechnologystrategy

Proprietarysolutionscapability

ERPcapability

FAOexperience

OverallFAOtechnologycapability Comments on FAO experience

Accenture Experience in varying buyer situations and its expandingrepository of tools will ensure it continues to be a leader inthe space

Capgemini A standardized yet flexible platform like BPOpen could proveto be the differentiator in the near future

Genpact Strong technology base, process rigor in Lean Six Sigmaand robust order-to-cash capabilities have established aleadership position in FAO

HP Currently has a ‘tie and run’ approach to FAO. Futureroadmap to bring about operational transformation throughSOA

IBM A componentized approach towards FAO technology. Theasset-outcome approach proving to be the differentiator

Perot BPS Providing market differentiation through unique industryspecific and business process domain expertise, supportingtechnologies and best practice business processes

ACS Proven capability in processing large volumes oftransactions through its proprietary workflow. Flexibility tocollaborate with clients to create tailored solutions

Convergys Capability to offer a range of solutions: from “tie and run” toa complete accounting and workflow solution

EDS The current go to market strategy is to utilize client’s existingsystems while streamlining processes and offshoring thework in partnership with MphasiS

EXL Pure play BPO provider that would adapt its technologyoffering based on how the market evolves

InfosysBPO

Focus on end-to-end processing, technology, and a strongprocess and quality lineage from Infosys has enabledInfosys BPO to be counted as a major contender in the FAOmarket

60Intelenet Capability to deploy offshore enabling technology andseveral process-enabling middleware. Building technologycapabilities across platforms and partnering with arecognized IT company

VWA A small sized niche FAO supplier currently focused on O2C,it is amongst the few FAO suppliers that is delivering costimpact through technology without significant labor arbitrage

Wipro Capability in-house to tie in all these point solutions into end-to-end platform based solution for P2P and O2C

WNS Technology roadmap is focused around verticals andproviding in-depth business and technical expertise



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As illustrated in EExxhhiibbiitt 88, the following suppliers emerge with the strongestFAO technology capability:

AAcccceennttuurree� FAO market leader with nearly 20% market share (based on ACV) and

experience in varying buyer situations� Wrapper tools classified into four layers: user layer, analytics layer,

process optimization layer, and document management layer� Third-party or acquired specialist technologies used to provide enhanced

value-led functionality; Developed/acquired proprietary technologywhere there is no suitable solution available in the market or for high-value analytics areas

� Strong team of technology professionals and long alliance partnershipswith major ERP vendors

� Experience in varying buyer situations and expanding repository of toolswill ensure that Accenture continues to be a leader in the FAO space

CCaappggeemmiinnii� Strong IT player with nearly 60% of revenues accounted for by IT

development and integration� Recently completed the development of its SOA-based platform BPOpen

to provide a flexible platform from which process wrappers can bequickly developed to provide the user with a self-contained and efficientinterface

� Currently in the process of implementing BPOpen with several clients,expected increased adoption in 2007

� Technology being used to ensure flexible resource deployment, such thatnot only are the benefits from cost arbitrage maximized, but processimprovement benefits are derived in both quantitative and qualitativeterms

� Could gain significant traction in the market once the technology deliverswhat it promises

Among the 15 suppliers

assessed, Accenture,

Capgemini, Genpact, HP, IBM,

and Perot BPS emerge with the

strongest FAO technology

capabilities



ERI.2007.1.W.0127

GGeennppaacctt� Significant traction in FAO to become one of the leaders in the market� Utilized a mixture of its own tool sets and best-in-breed technologies and

works with the client’s appetite for interfaces to back-end systems� Add-on tools categorized into enablement tools (e.g., standard AP),

productivity enhancer (e.g., ICR/OCR), and error-reduction tools(Accuracy Enhancer). These tools are combined with Lean Six Sigmamethodologies to provide transformation services to many clients

� Significant information-technology capabilities in implementing,managing, and supporting the major ERP systems such as Oracle, SAP,JD Edwards and others

� Developed robust order-to-cash capabilities through the acquisition ofCreditek in 2005

� Revenue cycle management technology has evolved over time and cannow handle practically any Business-to-Business (B2B) receivable processincluding interface to lockbox processing and automated cashapplication

HHPP� FAO forms the core of BPO strategy� ‘Tie and run’ approach to FAO recognizing technology automation as a

key driver� In-house solutions leveraged, which may involve a combination of

partner-specific solutions and/or applications� Rich captive IT environment helps leverage internal technology

capabilities for external customers� Technology enablers built upon Service–Oriented-Architecture (SOA)

engine, a forward-thinking architecture to provide services in a seamlessmanner to customers

� Future roadmap to make solutions flexible and scalable to bring aboutoperational transformation through SOA and enable transformationsolutions for business controls, automation, and effective remotetransaction-processing

� SOA-based technology could be a differentiator in a market wherebuyers are looking at FAO suppliers to provide transformative technologysolutions to transform their IT environments and as a result – theirbusiness processes



ERI.2007.1.W.0127

IIBBMM� FAO market leader with nearly 30% market share (based on ACV)� Enterprise Operating Model comprised of three elements: Shared

Application, Shared Infrastructure, and Shared Business Process;Strengths are the first two elements while the third element (i.e., SharedBusiness Process) is typically supported by buyer’s existing F&A system

� Componentized services are used in its implementation design thatincorporates technology enabled components that “wrap-around”clients’ existing systems (e.g., components such as order-to-cash, andGlobal Expense Reporting)

� Assets being built using SOA tools and methodology – clients benefitfrom robust solutions built on reusable components using proven toolsand methods

� Acquisition of Equitant helped further strengthen its technology capability� Asset-outcome approach could prove to be the differentiator in the

market where labor arbitrage is becoming largely a one-time benefit.The approach is helping to deliver real value to clients, enabling them totransform their F&A function

PPeerroott BBPPSS� Industry-focused, IP-driven business process solutions� Primary industries served include healthcare, life insurance and annuities� Capabilities include proprietary platform solutions such as Lifesys and

Peradigm and business processing services on over 40+ clientproprietary, industry-specific and Tier 1 ERP applications

� Deployed a number of enabling technologies, such as: imaging,workflow, knowledge management, productivity management and webportals that are non-industry specific solutions that can be deployed toaugment most business processes

� Capability to provide system integration, customization, infrastructureservices and application development and maintenance services asrequired

� Strategy and offerings focused on providing market differentiationthrough unique industry specific and business process domain expertise,supporting technologies, and best practice business processes that clientscould not achieve on their own



ERI.2007.1.W.0127

The evolving supplier playing field

In the evolution of F&A transactions (Phase 1 – Pioneer Pre-2003), thesupplier’s historical beginnings could be traced back to one of two basisclassifications.11.. PPrroocceessss ppllaayyeerrss:: This classification is represented by accounting firms that

have strong process expertise (e.g., accounts receivable). The playersevolved by building deep process skills typically in an offshore location todrive labor savings. The next step was building proprietary software for in-house automation in support of acquired processes (e.g., workflow,wrappers, interfaces, etc.) Process players then extended their client-specific solutions to an industry so they could obtain leverage. The last stepof evolution was to implement a dedicated ERP platform then put multipleclients on them (e.g., Accenture and SAP). Our review of FAO transactionsfound 75% involved a packaged ERP platform with SAP representing thedominant platform in 40% of all FAO engagements to date. So, supplierswith SAP process and system capability are well positioned to promotethese attributes in the bid and negotiation phases of a transaction.

22.. IITT ssuupppplliieerrss:: This classification is represented by technology companies thatpossess either strong integration or industry software expertise:� IInntteeggrraattiioonn eexxppeerrttiissee:: These are companies such as EDS and IBM that

have strong automation expertise around technology enablement, integration, etc. These IT integration players added consulting services to attract the business process aspect of FAO deals. Offshore locations were added to leverage labor arbitrage. Acquisitions are included in their strategic approach in order to acquire software expertise.

� IInndduussttrryy ssooffttwwaarree eexxppeerrttiissee:: These are companies such as the major ERP players such as SAP and Oracle that have F&A-specific enterprise-wide solutions of order-to-cash, procure-to-pay, and management reporting and analysis. The software players start with automating smallniche-like processes such as accounts receivable, accounts payable, and bill payment. These solutions are then componentized so that they can be integrated into broader ERP solution modules such as order-to-cash and procure-to-pay. The next step is to make them more geographically universal. For instance, software is first introduced in theUS (which is single language, single currency, etc.); then it is extended for use in Europe.

Eighty percent of the suppliers are using or planning to use flexiblearchitectures (components, SOA, etc.) to reduce development costs andfacilitate reusability.

Our review of FAO transactions

found 75% involved a packaged

ERP platform and SAP

represented 40% of those.



ERI.2007.1.W.0127

Although the suppliers may have had different historical beginnings, we see aconvergence in the industry (see EExxhhiibbiitt 99).

The FAO industry is witnessing a very dynamic playing field across theestablished global outsourcers, the rapidly-developing Indian vendors, and theniche FAO specialists. The door is firmly open for service providers such asTata Consultancy Services, Wipro, WNS, Infosys BPO (Progeon), SourceNet(Mellon), and EXL to compete for global deals over the course of the next fewmonths as the industry rapidly reaches maturity (see EExxhhiibbiitt 33).

We are even seeing aggressive suppliers like Karvy Global Services and OfficeTiger (RR Donnelly) getting a seat at the table with some buyers. The IndianBPO providers are quickly entering the market with a greenfield situation anda strong IT-heritage. They show a particularly strong appetite for thetechnology-enabled-transformation play in FAO and are willing to investupfront into multi-client platforms, etc. There could also be some investmentsby Indian providers in North American or European services firms to augmenttheir onshore client-management, operational, and transformationalcapabilities.

We predict continued industry consolidation in 2007. Some suppliers maycompete by increasing their capability across the General and Administrativetowers, while others may question the need for developing capabilities fromscratch when there may be an opportunity to acquire or partner. The windowfor market entry is likely to close by the end of Q2 2007 with the leadingsuppliers taking a stranglehold over this market.

Converging FAO Supplier

Landscape

E X H I B I T 9




ERI.2007.1.W.0127

Changing Economics – IT as the Key Productivity Enablerin FAO

While there is continued value in the labor arbitrage equation of FAO deals,significant impact could also be achieved by allowing the FAO supplier toleverage its process excellence and scale through IT-based automation.

Suppliers are highly motivated to drive down unit costs and improve deliveryquality. IT, while being a comparatively small part in the overall process coststructure (IT-related expenses amount to 15-20% overall process cost share onaverage), represents the mechanism to deliver on these key objectives. Wehave seen marked improvement in suppliers’ technical capabilities and we seethis continuing as suppliers use IT as an agent for transformation, helpingthem unlock factory-type quality and economics for the overall process stackacross multiple customers.

From a buyer perspective, several factors contribute to IT playing anincreasing role:� IInnccrreeaassiinngg iimmppoorrttaannccee ooff IITT: IT costs, on average, are increasing 5% per

annum, reflecting a rapid pace of capability-evolution that buyers want totranslate into continuous process optimization and improvements. Trackingthis technological progress and staying best in class with regard to overallprocess performance and cost, tends to consume an increasing amount ofspecialist and management resources. This shortcoming could potentiallybe well addressed via outsourcing. At the same time, technology costscould be offset through a properly structured FAO deal where the supplierprovides this capability.

� MMaarrggiinnaall bbeenneeffiitt rreeaalliizzeedd,, ddiissaappppooiinnttiinngg RROOII:: Many buyers achieve lower-than-expected benefits despite a large investment in process improvements(e.g., financial, human effort, and lead time). This is because many buyersare losing in the effective implementation of process innovation and thenecessary change management in corporate real life. Outsourcingproviders have expertise in this type of change management – one of theirkey factors of success – can often deliver the planned results morestringently, completely and with sustainability.

� EEmmeerrggeennccee ooff tthhee mmiiddddllee--mmaarrkkeett:: A scarcity of accounting talent,combined with intense competition for deals and lower delivery costs fromthe major providers, will open up the FAO market to buyers with smallerfinance departments. FAO success in the mid-market will be driven by theability to deliver services at low cost to multiple buyers.



ERI.2007.1.W.0127

Given the increasing scarcity of qualified personnel and associated wage-raises, increased automation through technology seems to be the bestroute for suppliers to drive cost down while providing improved service tolarge numbers of buyers. Mid-market buyers are adopting best-practiceprocesses more willingly than enterprise-size companies, thus enablingproviders to gain maximum leverage from technology investments.

The result is a change in the economics of FAO deals as IT drives increasingoverall value (see EExxhhiibbiitt 1100).

Case study 2: Lucent Technologies (Buyer) and IBM (Supplier)

PPrroobblleemm:: In 2002, Lucent Technologies faced several challenges. The industrywas in a downturn. Its accounts receivable processes were fragmented,inconsistent, and inefficient. In-country back-office processes weredecentralized making visibility and management difficult. A further hurdle wasa lack of dedicated resources that could help Lucent in any transition.

Technology-led transformation is

expected to drive higher value in

FAO

E X H I B I T 1 0


Impact on direct costs

Strategic impact

Impact on business (beyonddirect cost reduction)

Nature/degree of impact

Difficulty to create impact Focus of mostearly FAOcontracts

High

High

Low

� Better control in emerging markets

� Language-agnostic tools� Industry-agnostic tools� EDI� Workflow

� Platform-agnostictools (Integrated viewof company data)

� Data warehousing

� O2C engine

� User interface or portal

� Workflow� P2P analytics

� Business transformation

� Better decision-making

� Reduced operational risk(improved SOX compliance)

� Working capital reduction

� Process excellence (improved performance)

� Productivity improvements

� Labor cost reduction



ERI.2007.1.W.0127

SSttrraatteeggyy:: Lucent decided to spin off non-core businesses to raise cash,restructure, and realign its strategy. Many F&A activities were centralized to ashared-services center to improve back-office processes, specifically:� Harmonization of invoice-to-cash processes, which required support in

nine languages over 47 countries� Integration of 17 ERP systems into a centralized platform� Improvement in business control and key performance metrics� Strategic focus on ‘top 50’ global customers� Improvement of customer satisfaction levels

SSoolluuttiioonn:: Lucent selected IBM’s Order-to-Cash (O2C™) solution toimmediately change the A/R processes and technologies. The turnkey solutionresulted in best-in-class capabilities for cash-collection, dispute-management,and executive oversight, all implemented within a four-month period.

RReessuullttss:: IBM O2C facilitated US$100+ million in working capitalimprovements through a reduction in past-due receivables.

AR Collect™, Collaborative Dispute Resolution (CDR™), and the ExecutiveDashboard significantlyreduced time to solve disputes and dramaticallyincreased management control and pan-European visibility of its A/R.

The administrative burden on Lucent’s sales teams was dramatically reducedand increased visibility was provided into the I2C process, freeing them tofocus on core competencies and maintain customer retention.

Significant improvements in customer satisfaction was achieved among itsprimary (Top 50) accounts as evidenced by their Customer Loyalty Indexjumping from a rating of 5.5 to 7.1 in the first year of IBM’s service.

One year after the original signing, Lucent extended its multi-year agreementwith IBM O2C™ to 6+ years.

Len R. Rinaldi, the CFO & Vice President of Europe, Middle East, and Africawas executive sponsor. “IBM O2C improved our operation by pinpointingwhere disputes are occurring, and who’s responsible for resolving them . . .overall, they’ve helped us shed 10% of our finance resources while improvingour asset management perspective by 40%. That’s freed up tens of millions ofdollars in working capital.”



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Summary

This study indicates the industry is positioned for a major technicaltransformation, which is expected to deliver high value in FAO transactions.Technology is seen as the enabler to the FAO marketplace to permitexpansion beyond the traditional drivers of cost reduction.

Suppliers are adapting to provide more than “tie and run” and associated“wrap-around” technologies. While these are solid integration and enablingsolutions to help quicken the transition from buyer to supplier, the moreholistic technology leverage of providers in the form of virtual or real multi-client platforms can open up a new dimension of value impact for theprovider by allowing it to fully leverage its scale and process excellence.Several factors are contributing to why suppliers might be able to add farmore value by integrated process/technology offerings optimizing F&Afunctions in the future. These include:� BBuuyyeerr ddeemmaanndd ffoorr ggrreeaatteerr ssoolluuttiioonn iinnnnoovvaattiioonn.. Increasing demand around

the higher business impact F&A functions and on the supplier’s ability todeliver on those requirements. Key processes such as budgeting, treasury,risk management, forecasting, management reporting and analysis allrequire robust BDW (Business Data Warehousing), reporting engines,analytic engines, and related technologies that reach across an entireenterprise.

� SSuupppplliieerrss’’ eexxppeerriieennccee iinn ggeettttiinngg iitt rriigghhtt.. By virtue of executing against160+ transactions, collecting experiences over many years on top of theirown pre-existing internal capability, many suppliers have developed intobest-practice business process experts for their offering domains, thusoptimizing their core business. Suppliers graduated from the school ofhard knocks and now are getting ready to leverage these skills andaccompanying assets on a broad scale to achieve sustained processimprovements (if their customers become more ready to accept best-practice standards from the suppliers).

� LLoowweerriinngg bbuuyyeerr rreessiissttaannccee.. Buyers increasingly recognized thecommunalities of F&A processes and started to appreciate the extrasophistication suppliers can achieve in delivery by leveraging theireconomies of scale. Unlike an HRO deal, FAO has a narrow and focusedresource impact, which reduces the transition impact on the buyer.Suppliers can also point to increasing evidence of their process expertiseand associated performance.



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� DDeetteerriioorraattiinngg eeccoonnoommiicc ccoonnddiittiioonnss.. As CFO optimism wanes in light of theweakening economy, increasing costs, declining margins, increasinginterest rates, and a higher likelihood of a recession, CFOs will find lesscapability for their respective organizations to work themselves out of anyproblem and will reach out to third-party suppliers.

� LLoooommiinngg ccoonnttrraacctt rreenneewwaallss.. As historical FAO transactions come up forrenewal, the onus is on the supplier to demonstrate why the transactionshould continue. Suppliers will need to demonstrate further improvementpotential after the “low-hanging fruits” of labor arbitrage and simpleprocess-streamlining had been harvested.

� GGrreeaatteerr ccoommppeettiittiioonn aammoonnggsstt ssuupppplliieerrss.. This competition will prompt thedevelopment of IT-enabled process best-practices as aa supplierdifferentiator.

� CChhaannggeess iinn tteecchhnnoollooggyy ooppttiioonnss through spreading of Service-OrientedArchitecture (SOA), enabling easier and more granular process andtechnology decomposition.

� MMaarrkkeett eexxppaannssiioonn ttoo mmiidd aanndd ssmmaallll ccaapp ffiirrmmss.. The mid-market presents anexceptionally attractive opportunity, due to both size (number of mid-market companies) and the attractive one-to-many economics achievablewith smaller customers (who are less prone to require customization).

Recommendations to Buyers

BBee pprreeppaarreedd ttoo eemmbbrraaccee bbeesstt--pprraaccttiiccee ssttaannddaarrddss pprrooppoosseedd bbyy yyoouurr pprroovviiddeerr..Remember, the provider you choose is the expert in what you are outsourcing– it is the supplier’s core business. Also for a mutually beneficial, sustainablerelationship, it will be crucial for you to help the provider leverage its bestscale.

CCoonnssiiddeerr tteecchhnnoollooggyy aass ssttrraatteeggiicc iinn FFAAOO ddeecciissiioonn--mmaakkiinngg.. The technologydelivery model a provider uses to deploy FAO services significantly impacts thecomplexity of governing the relationship with the provider. It also brings intoquestion the governance benefits of having the technology platform and theF&A services both managed by the same provider. Moreover, the strategy theprovider adopts with regards to proprietary versus open-market technologyand the sustainability of its key partner relations will contribute to the costevolution and the future exit barriers, you could face at the end of thecontract.



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BBuuiilldd iinnnnoovvaattiioonn iinnttoo tthhee ccoonnttrraacctt ffrroomm tthhee bbeeggiinnnniinngg.. Among others, specificquality assurance measures, stipulated technology qualities/refresh cycles onthe basis of standards, amongst others will help the provider to deliver on yourprocess innovation expectations in a sustainable fashion.

IInniittiiaattee tthhee tteecchhnnoollooggyy ddiissccuussssiioonn eeaarrllyy iinn tthhee FFAAOO pprroocceessss.. The parties mustdiscuss the benefits and cost of transforming technology to underpin asuccessful FAO engagement. They need to research this early in the sourcingdiscussion.

AApppprrooaacchh FFAAOO aass aann ooppppoorrttuunniittyy ttoo iimmpprroovvee aacccceessss ttoo iinnffoorrmmaattiioonn.. FAO’scost savings can help the buyer take advantage of improved technologysolutions and the experience of today’s FAO providers that have a strong ITheritage in F&A systems and processes. With competition among FAOproviders intensifying, buyers should be able to negotiate a powerful offeringthat bundles processes with technology.

EEnnggaaggee tthhee CCIIOO aanndd ootthheerr ssttaakkeehhoollddeerrss eeaarrllyy iinn tthhee pprroocceessss wwhheenn mmaakkiinnggFFAAOO ddeecciissiioonnss.. The CIO needs to understand the business benefits the buyerseeks to attain from FAO as well as how the provider is going to deliver themfrom a technology perspective. Based on this understanding, the CIO needs tohelp evaluate the hidden costs that will be generated through outsourcing inthe retained organization and its IT (e.g., by interfacing on process andtechnology levels). It is imperative that the buyer’s business users and processowners are also actively engaged in evaluating the technology choicesthroughout the sourcing process.

KKeeeepp tthhee ffuuttuurree ppoossssiibbiilliittiieess fflleexxiibbllee.. In deciding on a technology platform-based service offering, the buyer should be aware of conditions for a futureexit in case of the necessity for re-insourcing or a change in provider. There isno reason why a buyer organization cannot experiment with different options.For example, engage an FAO provider for a trial period to manage thetechnology services to determine what is optimal for the organization.



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DDeetteerrmmiinnee wwhhiicchh pprroovviiddeerrss ccaann ddeeppllooyy tthhee tteecchhnnoollooggyy ssoolluuttiioonnss yyoouurroorrggaanniizzaattiioonn nneeeeddss.. The key providers in today’s FAO marketplace come fromvarying backgrounds. There are pure-play FAO providers, global outsourcers,and global ITO/BPO providers. Ultimately, a buyer needs to engage aprovider that can deliver the optimal balance of F&A domain expertise andoperational business process delivery with access to the technology solutionsand services necessary for a successful FAO engagement. Don’t just evaluatethe provider’s capabilities, but also its approach to partnering with keycapability contributors.

AAsssseessss tthhee iimmppaacctt ooff tthhee ppllaannnneedd FFAAOO ssttrraatteeggyy oonn rreettaaiinneedd ffuunnccttiioonnss aanndd ootthheerrBBPPOO iinniittiiaattiivveess.. Depending on how the buyer organization is structured, thereare several areas an FAO engagement will touch other business functions(e.g., payroll with HR, temporary staff recruitment with operations, or accountspayable with procurement). Explore any synergies with parallel processes andfunctions. It is vital to integrate the ultimately deployed technology with otherfunctions where the business can benefit from better data integration.

Recommendations to suppliers

TTeecchhnnoollooggyy--lleedd aauuttoommaattiioonn hhaass bbeeccoommee aa ddeeffaauulltt eexxppeeccttaattiioonn oonn FF&&AA sseerrvviicceeddeelliivveerryy.. The optimization potentials of labor arbitrage and processoptimization alone are deemed mostly exhausted.

BBee pprreeppaarreedd ttoo qquuaannttiiffyy tthhee aaddvvaannttaaggee ooff aaddooppttiinngg yyoouurr pprroocceessss--ccuumm--tteecchhnnoollooggyy--ssttaannddaarrdd oovveerr aanndd aabboovvee tthhee ttrraaddiittiioonnaall FFAAOO aapppprrooaacchh bbaasseedd oonnllaabboorr aarrbbiittrraaggee.. This will be crucial in supporting the buyer’s seniormanagement to push internally for the adoption of your best-practicestandards and making the organization accepting of the necessary change.

PPrree--iinnvveesstt iinnttoo yyoouurr bbeesstt--pprraaccttiiccee pprroocceessss ssoolluuttiioonn ppllaattffoorrmm iinnddeeppeennddeenntt ooffssppeecciiffiicc ccuussttoommeerr ccaasseess.. Experience shows that you can not evolve a best-practice standard based on the implementation of one particular lighthousecustomer.



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CCaarreeffuullllyy ddeecciiddee oonn wwhheetthheerr aanndd wwhhaatt ppaarrtt ooff tthhee nneecceessssaarryy tteecchhnnoollooggyy ttooaaccqquuiirree bbyy pprroopprriieettaarryy ddeevveellooppmmeenntt//aaccqquuiissiittiioonn vveerrssuuss ppaarrttnneerriinngg.. Innovativesoftware vendors like SAP can provide you with a good basis in the form of awell-entrenched sustainable product complemented with a BPO-tailoredpartnering approach. Be mindful of the challenge to be a service and atechnology product provider in one. Also think of how the customer willperceive your choices in terms of future exit risk mitigation.

IInn cchhoooossiinngg tthhee aapppprroopprriiaattee tteecchhnnoollooggyy ssoolluuttiioonnss,, tthhiinnkk aahheeaadd ooff tthheeiinntteeggrraattiioonn eeffffoorrttss.. Integration to the typical buyer’s retained systems andhidden costs you might generate in the buyer’s organization are importantadditional considerations from a buyer perspective.



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Glossary of Key Terms

AACCVV:: Annualized Contract Value (ACV) is calculated by dividing the TotalContract Value (TCV) by the term of the contract.

AAdddd--oonn--ttoooollss:: Technology solutions that help FAO customers plug functionalitygaps in existing systems and develop more holistic F&A solutions.

BBPPOO:: Business process outsourcing (BPO) refers to the purchase of one ormore processes or functions from a company in the business of providing suchservices at large or as a third-party provider.

BBuuyyeerr:: The company/entity that purchases outsourcing services from a supplierof such services.

EERRPP:: An Enterprise Resource Planning (ERP) software package integrates thefunctions of an enterprise to enable optimal operations. These packages havefunctions for human resources, finance and accounting, purchasing,production planning and scheduling, etc.

FFAAOO:: Finance and Accounting Outsourcing (FAO) is the transfer of ownershipof some or all finance and accounting processes or functions to a supplier.This could include administrative, delivery, or management-related processesor functions. Everest analyses include FAO contracts with a minimum of twoF&A processes, over US$1 million in annualized contract value (ACV), and aminimum contract term of three years.

FFTTEE:: Full-Time Employees on the rolls of the company.

HHRROO:: Human resources outsourcing (HRO) is the transfer of ownership ofsome or all human resources processes or functions to a supplier. This couldinclude administrative, delivery or management-related processes or functions.HRO transactions include a minimum of three HR functions (e.g., payroll,benefits, HRIS).

MMuullttii--ttoowweerr BBPPOO:: Multi-tower BPO contracts include more than one BPOfunction (HR, F&A, Procurement, customer care) in the outsourcing scope.

PPrroopprriieettaarryy tteecchhnnoollooggyy:: Technology solution(s) deployed by supplier that aredeveloped in-house or are acquired.



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SSGG&&AA:: Sales, General and Administrative.

SSuupppplliieerr:: A company/entity that supplies outsourcing services to anothercompany/entity.

TTCCVV:: Total Contract Value (TCV) is the potential revenue associated with thecontract and estimated at the commencement of the contract (e.g., sum totalof revenues accrued to the supplier from the contract over the entire contractterm, usually measured in millions of dollars).

WWrraappppeerrss:: Application add-on tools that pull together or “wrap” specificbusiness processes in a standard fashion.

About the Everest Research Institute

EEvveerreesstt RReesseeaarrcchh IInnssttiittuuttee (www.everestresearchinstitute.com) serves as acentral source of independent and objective strategic intelligence, analysis,and actionable insight for leading corporations, service providers, andinvestors in the global outsourcing and offshoring marketplace. The Instituteaddresses both business process and information technology sourcing topics,providing the global outsourcing and offshoring community with informationthat empowers highly productive, sustainable sourcing strategies andrelationships. The Institute’s distinguished Board of Advisors, senior executivesand thought leaders oversee the Institute’s research agenda to ensure that itfully supports the business needs of corporations, service providers andinvestors.

Everest Research Institute members receive access to unparalleled analyticaland advisory services, including access to Everest analysts, in-depth reports onmajor outsourcing and offshoring topics, white papers on market-shapingevents, and webinars designed to provide insight and information aboutimportant market trends. The Institute’s wealth of knowledge and experienceprovides members with unique perspectives into today’s marketplace and thecompetitive 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 that assists corporations indeveloping and implementing leading-edge sourcing strategies. Since 1991,Everest Group has served as the trusted business advisor for hundreds of ITand business process outsourcing transactions worldwide.



ERI.2007.1.W.0127

FFoorr mmoorree iinnffoorrmmaattiioonn aabboouutt EEvveerreesstt RReesseeaarrcchh IInnssttiittuuttee,, pplleeaassee ccoonnttaacctt::Everest Research [email protected]

FFoorr mmoorree iinnffoorrmmaattiioonn aabboouutt tthhiiss ttooppiicc pplleeaassee ccoonnttaacctt tthhee aauutthhoorr((ss))::

Phil Fersht, Vice [email protected]

Saurabh Gupta, Research [email protected]

http://www.everestgrp.com/

http://www.everestresearchinstitute.com/

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