We're going to release our 2011 Finance and Accounting Outsourcing (FAO) industry landscape next week, and one dynamic that has really stood-out over the last three years, is the different competitive strategies going on at the high-end of the market versus the smaller engagements.
Most striking, are the divergent strategies of the market leaders, Accenture and IBM. While Accenture has consolidated its commanding presence with the large-scale enterprise customers, IBM has determinedly gone after the mid-market.
You may recall we highlighted, back in January, that the average FAO engagement fell below $20m TCV for the first time last year, we also pointed out that those providers with scale and flexibility of delivery resources are those best-positioned to pick up the smaller engagements:
Scaling a global BPO business based on multiple small client engagements is wearing on resources – and profit margins, and the providers scrapping for their share of the smaller business, are faced with a simple choice: Either stick with it and view this as a 10-year journey, or if you simply don’t have the patience or appetite to put in the investment, then get out and refocus your services on other activities. For those who stay the course (and we expect most will), they need to keep putting in the grind to win small engagements, and attempt to scale their BPO delivery resources, while trying to turn some sort of profit.
Our deeper-dive analysis shows that exactly this scenario is happening with several providers over the last three years. Let's contrast both the enterprise-level market performances (engagements over $25m in TCV) and the mid-market (engagements below $25m TCV).
Accenture has developed a commanding position with enterprise engagements, while IBM has gained a lot of ground winning smaller-scale and mid-market clients. As these market share graphs illustrate, all the FAO engagements signed since the beginning of 2008 that have a Total Contract Value (TCV) of more than $25 million, dominate 80% of the total market, with a total expenditure of close to $8 billion. Accenture has been dominant in retaining and developing its client base of enterprise-level engagements, with Capgemini, IBM and Genpact providing the main competition with enterprise-level engagements.
The FAO newcomers, over recent years, have struggled to win many (or, in some cases, any) enterprise-level deals, and have sought to grow their respective market footprints by taking on smaller-sized engagements – many of which fall into the sub-$5m TCV category. The following graphic illustrates the service provider shares of the smaller-scale FAO engagements signed since the beginning of 2008, where the one notable market-mover in the mid-market segment has been IBM, winning the lion’s share of business with a commanding 25% market share.
The onshore order-to-cash specialist, Vengroff Williams and Associates (VWA), also performs strongly in this segment, while there has been a relatively even-spread of business across all the major service providers, such as TCS, WNS, InfosysBPO and Cognizant, in addition to the FAO pure-plays, WNS and EXL. Genpact has proven the most consistent at developing a balanced portfolio of enterprise and mid-market clients over the last three years.
So what do these competitive dynamics mean for the future of the FAO industry?
Essentially, the FAO industry is readying itself for life beyond the simple "lift and shift" deal, where margins were made off labor-scale being shifted offshore. Labor-arbitrage doesn't amount to nearly as much, when you're dealing with, for example, a 30 employee transition. What's more, most of these providers need to start scaling their resources across multiple clients, or face a depressing race to the bottom, where their only real differentiator is their ability to provide low-cost labor. Having scale and flex from ingesting several large-scale clients is extremely valuable for providers, but only if they can leverage those resources to new clients as they take them on, in order to optimize their margins on the new business and remain cost-competitive.
Our take is that providers need a good balance of both large and mid-scale engagements, whereby they can allocate delivery resources and process acumen across their customers in order to develop repeatable process flows with application wrappers to enable them. While small-scale engagements can struggle to be profitable, they do force the provider to develop a utility model that keeps then in the black. Clearly, we're in a highly-competitive market situation, and this isn't a market for the faint-hearted.