F&A Offshoring - Huge Opportunity!

Wednesday, 12 September 2007

Estimates suggest that the global demand for F&A services is projected to grow at a CAGR of nearly 15% over the next five years and reach $25 billion by 2009. The offshore component of F&A services is expected to increase significantly and India is likely to witness continued demand for services in this segment.

Royal Philips Electronics awarded a deal to Infosys BPO to provide finance and accounting services and the processing of purchasing orders.
Fidelity National Information Services Inc. (NYSE:FIS) bagged a transaction processing deal from Wachovia.
BT signed Accenture for a five-and-a-half-year contract. Under the contract, Accenture will provide management reporting, financial planning and analysis, month-end close activities, and budgeting/forecasting.

Finance & accounting (F&A) is one the more prominent services that is offshored to India. The F&A segment approximately accounts for 40% of the Indian ITES-BPO industry, according to Nasscom.

The Fortune 500 companies have been the first to realize the benefits of offshoring. Companies have either set up their captive back offices in the offshore destinations or have tied up with third-party vendors offering F&A services. All the large BPOs such as Genpact, Wipro BPO, Infosys BPO and TCS BPO are present in F&A.

Services Offshored

F&A services offered by the vendors typically support aspects of the F&A functions of businesses. The services in this space include book-keeping, transaction processing and compliance management and statutory reporting.

Services in the F&A space

Function	Processes
Book-keeping	General Ledger accounting, Account reconciliation & consolidation, Management reporting, Inter-company transactions, Interim/annual financial statements, Project/product accounting, Fixed asset accounting
Payroll & Benefits	Payroll processing, Benefits administration, Employee records handling, Pensions/ retirement, Stock option accounting, Benefits related compliance
Compliance management & Statutory Reporting	Financial statements preparation as per US GAAP, Financial budgeting, SOX compliance advisory, MIS reporting, Tax Returns preparation services
Corporate Finance	Cash / Treasury management, Budgeting & forecasting, Risk management, Performance analysis
Receivables	Order management, Billing & invoicing, Accounts receivable, Cash receipts & collection management, Bank reconciliation, Credit management & analysis
Payables	Purchase order management, Vendor management, Accounts payable, Payment authorization, Cash payments, Contracts management, Cost accounting, Bank reconciliation

Source: ValueNotes Research

While functions like payroll processing, accounts receivable and payable and book-keeping have been more easily outsourced/offshored, functions like risk management and strategy that require domain knowledge are gradually catching up.

Offshoring Drivers

While cost attractiveness is a major offshoring driver, manpower shortage and increasing compliance burden is driving large and mid-sized corporates to explore the offshore option.

Lack of Qualified People: Not only the services such as accounts receivables and payable but also the high end services like compliance management and risk management are increasingly being sent to India, driven by manpower shortage. Though enrollments have been increasing for all accounting-related courses post-2000, graduates are quickly absorbed by the large accounting firms.

Rising Labor Costs: Regulations like Sarbanes Oxley have flooded the CPAs with higher value work opportunities, both in the industry and audit practice. This has led to severe competition for CPAs and other accountants, with the result being skyrocketing compensation levels, even at starting levels. Further, there is a great deal of difference between the wages for accounting graduates in India and the US.

Wage Comparison between US and India

Occupation	Yearly wage (US)	Yearly wage (India)
Junior Accountant (1 yr exp)	$28,000 - $45,000	$3,000-6,000
Accountant (1-3 yr exp)	$33,000 - $52,000	$6,000-9,000
CAs/ CPAs (Managerial levels)	$40,000 - $70,000	$9,000-$20,000

Source: ValueNotes Research

Financial firms are able to tap the vast talent pool of India at cheap rates. Offshoring enables these firms to achieve cost savings in the range of 40% to 50%.

Increasing Compliance Burdens: F&A offshoring is being driven not only by the eternal search for even lower costs, but equally the onerous compliance burdens. Regulatory compliance such as SOX, Spitzer's Settlement ruling and Basel II norms are adding to the workload of banks and financial institutions, which in turn result in increase in outsourcing/offshoring.

The Opportunity

Estimates suggest that the global demand for F&A services is projected to grow at a CAGR of nearly 15% over the next five years and reach $25 billion by 2009. The offshore component of F&A services is expected to increase significantly and India is likely to witness continued demand for services in this segment. The talent crunch in the US is affecting the entire F&A market, especially small and medium businesses. Going forward, F&A offshoring will gain significant traction and not only large corporates but also the mid-sized businesses in the US will increase their offshoring activities.

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