The market research firm Dataquest recently issued a report that said the market for outsourcing of finance and accounting software should more than triple from $12 billion in 1999 to $37.7 billion by 2004.
By itself a bullish forecast about yet another corner of the high-tech market from a market research firm is nothing to write home about, but this report cuts close to the bone. After all, what is a CFO if not the keeper of the company’s books? What’s more, if the books are no longer kept in house — but in some data center miles from the corporate headquarters — what does that mean for the job security of financial executives?
Dataquest’s answer is that this is good news for financial officers. Instead of keeping one eye peeled on a network server in the back room crunching out spreadsheets on payables, receivables, and the general ledger, the CFO can devote her time to financial planning and strategic thinking.
Rebecca Scholl, a senior analyst with Dataquest, says there’s been a sea change in the traditional point of view that everything pertaining to the finance and accounting function is a strategic asset. The San Jose, Calif., market research firm polled 53 CFOs, and 53 percent of them were outsourcing their tax compliance work. Some 25 percent of the total were outsourcing risk management, and 9 percent were outsourcing payables and receivables.
What’s more, 41 percent of the survey respondents expect the demand for accounting services to continue growing.
The trend is hardly limited to small and midsize firms, which are the traditional market for outsourcing. For example, Scholl notes that in November 1999, BP Amoco signed a $1.1 billion, 10-year deal with PricewaterhouseCoopers for most of its financial systems, and a second $200 million deal with Andersen Consulting, now Accenture, for the remainder of its financial reporting.
This past November, Bank of America signed a $1 billion, 10-year deal to outsource its human resources to Exult, an Irvine, Calif., outsourcer founded in 1998.
Scholl says the shift in perceptions can be traced to several changes in the marketplace. One is the cost of accounting systems, which now must use data warehouses that are beyond the means of many firms. Some companies have tried to upgrade their own accounting systems, built data warehouses themselves, and been disappointed in the results. That’s led them to try outsourcing.
The trend is also being fed by firms in industries, particularly financial services and manufacturing, where outsourcing has already become widespread for non-accounting functions. Finally, high-tech start-ups have found it more important to focus on their core business and leave the books to someone else.
“In each industry, it’s a different reason,” Scholl says. “When companies are going through changes with mergers, deregulation and strong competition, they seek alternatives to traditional ways of doing business.”
Some of the companies making the change to outsourcing say they are reducing their system costs by 10 percent.
That may be all well and good, but there’s still a price. For as long as outsourcing has been around, it’s often been found to be a double-edged sword.
If you talk to enough chief information officers, you can get an earful of outsourcing horror stories. Either the service provider offered low-quality service at a high cost, took an eternity to add new features, or it split so many hairs in adhering to the letter of the contract that it violated its spirit.
Granted, the worst outsourcing nightmares took place years ago, but the practices of the outsourcing business didn’t improve until clients began assigning their own employees to monitor the service providers.
Since the outsourcing business is now covering the very heart of the CFO’s job, it’s important to get it right the first time. Firms that don’t may not get a second chance.