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Gone are the days when finance and accounting (F&A) outsourcing buyers asked whether offshoring was meant for them too. In the current multi-process FAO market, global sourcing is a value proposition that everyone takes as a given.

Consider this: Since 2004, almost all third-party outsourcing contracts have included an offshore component. This adoption of global sourcing in FAO contracts is equally high across industry verticals and geographies. So now, the question is not whether offshoring should be an element in an F&A sourcing model, but rather how to maximize the rewards and minimize the risks.

The evolution of global sourcing has been different across geographical segments of the FAO market. North American buyers initially led the global sourcing wave, capitalizing on the vast English-speaking labor pool in countries like India, the Philippines, etc. Although language constraints limited the penetration of global sourcing by European buyers initially, suppliers have now demonstrated that a combination of near-shore (Eastern Europe and Spain) and offshore (traditional offshore destinations) works well, even though the cost savings are less than a purely offshore model.

What Makes Global Sourcing So Popular?

Labor arbitrage continues to be the primary driver of global sourcing. The impact that labor arbitrage offers is far greater than that offered by other drivers of F&A outsourcing (such as economies of scale and access to new technology). For many organizations, centralization and investment in technology have become phenomena of the past, leaving little room for further improvements on these fronts. In such scenarios, global sourcing becomes all the more important as the only remaining avenue for further reduction in process costs.

Although some fear that labor arbitrage may vanish in the future due to the rapid development of the traditional offshore locations, we believe it will remain significant for the next 15-20 years. In fact, the cost savings opportunity arising out of labor arbitrage will drive the global sourcing market to grow well beyond today's levels. Eventually, other, more sustainable drivers (such as productivity/quality improvement, scalability, concentration of expertise, availability of resources, etc.) will keep these offshore markets alive. These factors have already started showing signs of emergence.

Is It Really Possible to Offshore All Processes?

So far, the most common targets of global sourcing have been the F&A transaction processing components. These include accounts payable, payroll, accounts receivable, fixed asset accounting, management reporting, and transactional portions of the general accounting process. There are several reasons for this:

1. Remote delivery of these transactional processes is easier to implement than other, more complex, processes
2. The risk that decision makers attach to offshoring these transactional processes is lower than more complex processes
3. These processes produce the biggest savings due to the large numbers of staff associated with transaction processing

However, as the value proposition of global sourcing moves from cost savings to quality improvements, and automation drives many transactional processes to decline in importance, the drive to offshore key processes will increase. The extension of global sourcing into key processes, such as project accounting, tax, and business analysis, has already started showing signs of emergence.

How Mature Is the Supply Side?

The FAO supplier landscape at offshore locations is maturing rapidly. Early adopters of F&A offshoring (General Electric, Proctor & Gamble, and British Airways) had to resort to the captive route because there were no mature offshore F&A suppliers. Today, the success of captive F&A centers has resulted in an increasing maturity of the supplier landscape.

Broadly , three types of offshore FAO suppliers are growing in the market today:

• The captive centers, which have a proven record of offshore success and have established a large scale, are getting rolled out into independent profit centers as third-party suppliers. Examples include GECIS becoming Genpact and the British Airways captive turning into WNS.
• Suppliers with existing FAO capabilities are building offshore capabilities. Examples include IBM, Accenture, and EDS.
• Pure-play offshore IT players (such as Infosys, Wipro, TCS) are seeing FAO as an attractive new business for expansion.

The increasing maturity and growth of the offshore F&A suppliers has led to significant growth in FAO delivery locations. Currently, we're tracking close to 50 offshore supplier delivery locations, up from 20 a couple of years ago. This growth is expected to continue in the future, as suppliers continue to enhance their offshore scale by complementing their established presence at traditional delivery centers (such as Bangalore, Mumbai, Prague) with emerging locations (such as Kochi, Chandigarh, Brno).

This on-going evolution and development of the supply side means that FAO buyers need to take some important steps up front in order to safeguard their interests and maximize returns in the future. Buyers need to:

• Choose appropriately across suppliers and locations
• Build flexibility into their contracts to take advantage of any future positive developments
• Keep contract durations short enough to ensure they can make major adjustments periodically

Lessons from the Outsourcing Journal:

• The question around global sourcing today is how to maximize the rewards and minimize the risks associated with this inevitable component. Since 2004, almost all third-party outsourcing contracts have included an offshore component, and this trend is very likely to continue.
• Labor arbitrage opportunity continues to be the primary driver of global sourcing. Although some fear that labor arbitrage may vanish in the future, we believe it will remain significant for the next 15-20 years.
• Although transactional processes are the most common targets of global sourcing today, the drive to offshore key processes will increase in future. The extension of global sourcing into key processes, such as project accounting, tax, and business analysis, has already started showing signs of emergence.
• The dynamics of global sourcing in FAO are likely to continue to evolve. FAO buyers need to take some important steps up front in order to safeguard their interests and maximize returns in the future.

Publish Date: April 2006

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