The Finance and Accounting Outsourcing (FAO) market, which is growing at a rate of 22 percent annually, registered a significant negative trend in 2007. According to a recently published study by Everest Research Institute, the average size of FAO contracts plunged from $86 in 2002 to $35 in 2007. Due to the increasing influence of the midmarket customer companies, the average value of contracts between 2002 and 2007 is about $54 million in Total Contract Value (TCV) with a term of five to seven years.

“This indicates that there is an increasing preference of a ‘phased’ approach over a ‘big-bang’ approach. It also indicates [an] increased adoption by the midmarket, made possible by increased standardization of the FAO value proposition. FTE-based [Full-Time Employee based] pricing remains the dominant model, but business-impact pricing is showing signs of increasing,” said Saurabh Gupta, Research Director, Everest Research Institute.

According to the study titled FAO Contract Characteristics, more new contracts for outsourced F&A services are including management reporting and analytics, but outsourcing customers continue to focus on transactional, “phase-in” approaches for accounts payable, accounts receivable and general accounting services. Interestingly, more than $5 billion in contracts are up for renewal over the next three years.

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

The study also found that nearly 80 percent of customers retain the core F&A technology, but adopt the “add-on” technology tools provided by the providers. Platform-based FAP concept is being pioneered but remains in the very early stages of development.

This research was based on only the multiprocess, third-party FAO contracts with over $1 million in Annualized Contract Value (ACV) and a minimum contract term of three years.