It is now clear that Finance and Accounting (F&A) outsourcing has passed the tipping point where the challenge changes from "I don't think this will work, who else has done it?" to "It seems to work for others, how can it work for me?" But it has certainly taken significantly more time than was expected in the heady days when the first deals were done and there have been many false dawns. So how is it that outsourcing has finally established itself as a credible and practicable sourcing option for F&A services? What can clients now reasonably expect of a BPO supplier? And what does the future hold?

There are now probably 45 to 50 cross border F&A outsourcing deals in Europe, which may appear high or low depending on your point of view. However, it is easily validated by considering that there are seven or so significant suppliers in Europe who have numbers of deals ranging from three or four up to 12 or more. Of course, this is a snapshot which does not show the huge upturn in the market over the past two or three years. This can be demonstrated by the fact that in 2003 there were only four serious suppliers in Europe (and only three with operations in Eastern Europe) and the number of deals was probably around 12. Alsbridge's own experience also reflects this growth; over the past three years we have advised on around 15 deals in Europe and at present we are advising on 5 deals, including several major global companies that have no previous record of F&A outsourcing.

There are three main reasons why F&A outsourcing has been able to establish itself as a genuine alternative to in-house solutions.

The first is that the service offering that BPO suppliers present has become much more credible and sophisticated. Until relatively recently, the main offering (despite what the suppliers said) was a straightforward lift and shift and the main benefit was cost reduction through labour arbitrage. For many organisations this was (and still is) a perfectly valid reason for outsourcing, especially where the client felt they had little or no experience or expertise in the low cost delivery location. In addition, some clients used outsourcing as a lower risk route to gain benefits from consolidation where there was no existing shared service centre, and again this is still a fairly common motivation today. Through experience gained on these deals BPO suppliers developed repeatable processes to reduce risk on transition and to understand exactly how to define and deliver an effective service.

As a result, once the basics were firmly in place it was possible to move to the next stage and offer a more sophisticated service which now involves a systems infrastructure for (for example) workflow and service management. In addition, suppliers have become more willing to share risk with clients, for example around future pricing or productivity improvements. This is because they have a wide body of experience which tells them what they can and cannot achieve.

Another key element that suppliers have learned how to cope with is Sarbanes-Oxley compliance. Most suppliers can now provide assurance that compliance can be achieved, for example through SAS70 certification.

The result is that potential clients feel much less like pioneers and accept the concept of F&A outsourcing as a realistic alternative with a risk profile that is no higher than alternative approaches, such as in-house development of shared services.

The second reason why F&A outsourcing has matured is that clients are becoming more ambitious and demanding, which in turn drives benefits for other clients. They recognise that achieving and maintaining high performance in an in-house shared services centre can be a time consuming exercise which can distract senior finance management from the core business, and they are looking for an alternative which leverages the skills and experience of a company that runs shared service centres for a living. The most sophisticated deal we are working on at the moment involves the supplier committing to achieving and maintaining world class standards of performance, as defined by external benchmarks. This is a real sign of progress in the market-even one year ago it is unlikely that a BPO supplier would have committed to this.

Having said that, we are also aware that clients are becoming more realistic about what suppliers can deliver and are more prepared to recognise that if it looks too good to be true, it probably is. For example, we always stress the need for clients to understand exactly how suppliers are going to reduce headcount and hence cost through (for example) greater efficiency. If the supplier can't explain it clearly or the client just doesn't get it, the chances are it isn't going to happen. In addition, we are finding that more and more clients recognise the effort that they will need to put in to make the deal work; they can't just sit back and let the supplier do everything.

And the third reason, linked to the first two is that there is now a critical mass of knowledge available in the market about what works and what doesn't, that has been built up by trial and (sometimes) error. Although this does not mean that there is no risk of over promise and under delivery it does mean that, if care is taken and all the necessary bases are covered off, deals should work. And this is borne out by the facts; there have been no real disasters in F&A outsourcing in Europe for some time (the last one of any significance didn't even transition) and no significant examples of deals being brought back in house. A recent survey in CFO Europe showed that 8% of companies who had outsourced F&A were dissatisfied or very dissatisfied, whilst nearly 57% were satisfied or very satisfied. Having said that, there are a number of deals coming to their term over the next three years so it will be interesting to see what happens to them and whether clients stick with the original supplier or whether they opt to move.

So what does the future hold for F&A outsourcing? Firstly, there are certainly conflicting views as to its popularity and whether there is going to be a continuing upswing. Recent surveys of CFOs have suggested not, but on the other hand suppliers and advisers are busier than ever. Funnily enough, many of the reasons currently cited for not outsourcing were cited at the beginning for not implementing shared services (loss of control, loss of know how, lower service.) but many of these have been overcome for that approach. And as I indicated earlier, some corporates don't know that there are around 50 pan-European deals already so don't realise that they won't exactly be pioneers any more.

However, to the extent that more and more corporates do decide to outsource F&A, there are two points worth noting that we believe will help inform future trends.

The first is that there will at some point be a breakthrough with regard to "on demand" systems. These don't exist at present; despite what you might think, suppliers deliver the service using your systems and your processes, apart from some enabling technology such as workflow and service management tools. SAP for example is very interested in a standard platform for delivering F&A BPO and in principle such a tool would be really beneficial in enabling suppliers to really leverage their scale and global presence, which they can't really do at present.

The second is that suppliers will become more flexible with regard to the kinds of deals they will take on, both in terms of size and in terms of the deal itself. For example, there are a lot of companies who believe that they could run a shared service centre in a low cost location but don't want to invest in in-house expertise to build it. As a result, suppliers could exploit their core competencies in being able to build a centre, recruit staff and transition work by setting up a facility and then letting the client run it, whilst retaining the staff themselves. This arrangement could also go some way to overcoming the fear of loss of control, because the centre would be run by the client even though the staff is employed by the supplier. Clearly, not all suppliers would want to do this but a market exists for those that do.

I haven't mentioned so called transformational deals as a trend on purpose. These deals are where the supplier takes on responsibility for a significant amount of change, be it process or ERP, and for delivering the associated business benefits. This is because the jury seems to be well and truly out on these arrangements. Do they deliver value? Can they be contracted for properly? What happens if they go wrong? Are they just too complex? We'll see.

There is no doubt that F&A outsourcing has come a very long way even in the past three years. Clients are more demanding, suppliers are more responsive and there is a growing number of cross border deals. There are no magic solutions or shortcuts to success and the companies that have benefited the most have probably invested the most in their deal. Only time will tell whether we are at the start of a long term trend or whether the market will plateau and stagnate.