Finance & Accounting Outsourcing (FAO): Overview and Related Outsourced Services

Banks and financial institutions have outsourced non-core activities like payroll and customer support for years. Even before the year 2000, 39 percent of U.S. banks outsourced at least some processing or transactional service. Recently, however, banks have included higher-value functions like internal audits, budgets, financial planning, and investment management in their outsourcing campaigns.

Worldwide, banks and lending companies are increasingly working with third parties locally and offshore to reduce costs, improve process efficiency, re-engineer core business activities, and achieve strategic goals. The pressure to remain competitive in a global market is higher than ever, and offshoring is seen as a powerful tool to expand and grow while keeping costs at a minimum.

Initially, banks were wary of farming out regulated activities because offshoring transfers management and risk. Today, clearer regulations, sophisticated service delivery models, and improved risk management frameworks are encouraging banks to outsource both regulated and unregulated functions in increasingly complex outsourcing arrangements.

The impact of banking BPO offshoring extends to multiple areas of business, from traditional back office processing to contract services to information technology. Outsourcing contracts or arrangements differ in various ways. There are contractor relationships that are relatively short-term and ideal for commodity services like customer acquisition and mortgage servicing.

There are also fully-integrated, long-term partnerships or joint ventures where both the financial institution and service provider share risk and revenues. These arrangements typically support large and complex information technology initiatives. Banks may assign certain functions to a specialized industry provider locally, and let unrelated service providers perform other tasks.

Market Size

According to a 2013 study by consultancy firm HfS, the banking and finance services BPO industry will grow at a rate of about 5 percent every year until 2016, with global spending on finance and accounting (BPO) services expecting to grow at a rate of 8 percent until 2017. The market size is expected to reach $200 billion in 2016 based on a 5.2 percent compound annual growth rate (CAGR).

NelsonHall forecasts that North America will remain the biggest market for banking BPO services in the next five years, in spite of having the lowest growth rate among major markets. Capital markets BPO (trade processing) will be the fastest growing vertical, followed by portfolio services and retail banking BPO.

Banking BPO Services

Banking and financial services BPO is the largest and most mature sector of the Banking, Financial Services and Insurance (BFSI) BPO industry. The other two industry segments are investments/capital markets and insurance. Due to its large market size, banking and financial services BPO has always been ahead of other industries in terms of adopting BPO and offshoring.

Retail Banking and Commercial Finance Services

Retail banking BPO services support individual consumers (B2C) while commercial BPO services support merchants and other businesses (B2B). Banking and finance services cover origination, customer acquisition, account servicing, collections, customer care, consumer lending, mortgages, brokerage, verification and processing, underwriting, research, monitoring, and analytics. Service providers improve process efficiency and cost competitiveness through standardization, automation, and end-to-end service delivery models.

Investment Management and Capital Markets

Capital markets BPO services support the management of wealth or assets. Service providers offer management of securities, derivatives, equities, fixed income, structured products and pitchbook creation in the capital market segment. Wealth management services include portfolio management, consulting and advisory services, compliance, risk management, reconciliation, and trade operations.


Insurance BPO services cover collections and disbursements, pensions, property and casualty claims, property and casualty policy, and life and annuity policy. As insurance companies deal with a shrinking market, rising costs, legacy IT systems, and customer volatility, service providers are offering these services to help streamline operations, reduce costs, and grow their business.

Finance and Accounting Outsourcing (FAO) Market & Services

The finance and accounting (F&A) business process outsourcing (BPO) market provides services such as payroll processing, bookkeeping, auditing, and tax return preparation to small, medium and large enterprises. Finance and accounting BPO belong under the wide umbrella of enterprise BPO services, and are sometimes included among shared services in the Banking, Financial Services and Insurance (BFSI) industry.

“Shared services” refer to an operating model that consolidates transactional activities within an organization, with the goal to reduce costs. Finance and accounting BPO is part of the shared services operating model. For example, many internal finance and accounting departments that used to serve departments and international branches grew to become businesses in their own right and went on to provide F&A services to other companies.

Typical FAO shared services include accounts payables and receivables, general ledger, company reporting, tax returns, and fixed assets. Services have since expanded to include end-to-end processes like financial reporting, order to cash, HR, and compensation and benefits.

FAO Market Highlights and Trends

Finance and accounting were the first functions to be outsourced by organizations, but the FAO market is far from mature. In fact, HfS said that it has a long way to go to reach saturation because majority of companies still prefer to manage all F&A functions in-house. 

According to the 2013 HfS Blueprint Report for Finance and Accounting BPO, the FAO market has grown 13 percent in deals, with multi-scope engagements stabilizing at $25 million annual contract value (ACV). At a growth rate of 8 percent, the finance and accounting BPO market was expected to surpass $25 billion in 2013, with four out of ten enterprises planning to expand their FAO BPO operations.

Currently, the finance and accounting Outsourcing (FAO) market is rapidly evolving due to increasing buyer demand for more value and permanent administrative cost reduction. The HfS Blueprint Report showed that demand for high-quality, low-cost FAO services is highest among four key industries: telecommunications, software/high technology, media/publishing, and retail/hospitality. Demand for FAO from the BFSI industry covers a third of the market, although growth has slowed.

Buyers continue to demand lower costs and standardization from F&A BPO providers. Although buyers want the value of innovation and analytics, they demand execution and delivery first. Innovation is the ability of service providers to improve services (like integrating BPO with IT), while execution is the ability of service providers to deliver real world solutions, provide high-quality customer relationships, and improve market share.

FAO and Other Outsourced Services

In a survey of more than 399 enterprise buyers, HfS identified three tiers of FAO services according to strategic importance: transactional (low-level) processes, analytical services, and consultancy products and services (services that have the potential to transform the business for the long-term).

Transactional Services

Low-level FAO processes include accounts payable, cash and accounts receivable, travel, entertainment and expense, credit, and billing and invoicing.

Analytical Services

Higher-level FAO activities include internal audits, risk management, treasury, inter-company accounting, regulatory reporting, management reporting, financial planning and analysis, and business intelligence.

Consultancy Services

FAO Products and services that are considered strategic include financial process consulting, change management, communications support, and innovation roadmaps.

FAO Services Value Chain

The finance and accounting outsourcing value chain is the range of value-creation activities (from design to support) that service providers deliver to buyers. At the lower end of the chain are procure-to-pay services (accounts payable, credit and travel & expense), followed by these groups: order to cash services (accounts receivables, collections, billing, revenue accounting), record to report services (fixed asset accounting, tax filing, payroll), and controllership services (inter-company accounting, regulatory reporting, management reporting, risk management, treasury, internal audits). The top end of the value chain belongs to transformational services (financial process consulting, supporting innovation roadmap, change management support).

IT or ITO Systems and Software Outsourcing

Information technology (IT) outsourcing is the practice of sourcing or subcontracting technology services (software, hardware, systems, infrastructure, maintenance, and support) outside the organization. In the banking and financial services (BFS) industry, organizations work with service providers or third parties that offer IT functions ranging from software development to automation to cloud migration. Most large enterprises outsource only a portion of any given IT function.

The banking industry has always carried the torch for information technology and business process outsourcing (IT-BPO) because of its very large market size (estimated to reach $200 billion in 2016) and the crucial role technology plays in service delivery. Mobile consumers and digitization have been sweeping the industry, impacting multiple market segments.

Banking ITO Spending and Market Forecast

According to Accenture’s Technology that Matters: Harnessing the Technology Wave in Banking report, up to two thirds (about 67 percent) of the uplift required to be a high-performing financial organization in the future may come from technology-led initiatives. 

It’s not surprising then that the banking industry’s overall IT spending and IT spending as a percentage of revenue (8.1 percent for BFS compared to 3.5 percent cross-industry average) are way ahead of the average in all other industries. Celent projected that IT spending in the BFS industry alone would surpass $180 billion in 2014. 

HfS analyzed 75 top service providers of banking and IT services and found that the IT and business services market was approaching $170 billion in 2011 (2013 HfS Market Report). Banking BPO services accounted for about half of the total, while the rest belonged to banking IT services, including application and IT infrastructure management and project-based IT-related professional services.

The banking IT and business services outsourcing market is projected to hit $200 billion by 2016, based on a compound annual growth rate of 5.2 percent. Compared to both emerging (procurement and analytics) and established banking BPO markets (payment processing and core bank administration), the banking IT outsourcing market is way ahead in terms of growth because of increasing commoditization. 

HfS reported that buyers in the banking and financial services industry will focus on IT outsourcing and line vertical processes in the coming years. The survey participants said that they will retain CRM (customer relationship management), procurement, and marketing in-house to restore customer confidence.

Importance of IT Outsourcing

To optimize consumer relationships and experience, banks will need to provide their products and services through new channels and devices, automate many processes, and upgrade core, legacy systems. Technology is also reducing transaction and distribution costs of financial services, giving banks the opportunity to reach consumers that are currently excluded from the financial system, but whose income is increasing.

Accenture’s Technology that Matters report also advised banks to think about re-engineering their legacy model to fit an information-led model of the future. Today, banking ITO is not only about cost reduction and improving the bottom line, but about keeping pace with technology and adapting to change. Banks will leverage the four main technologies (big data, cloud, social media and mobility) to become fully digital and connected.

Banking ITO Service Providers

Technology will have the biggest impact on these key areas of the business: customer experience, data and information (social media). Much of IT investment will be centered on creating a more customer-centric experience. As buyers continue to expect cost savings, service delivery models will feature innovation and flexibility and solutions that combat regulatory risk.

Service providers can help banks and financial institutions deploy the right technology architecture and policies that allow banks to operate synchronized processes, increase productivity, and improve real-time processing. Service providers also allow banks to obtain new capabilities, gain scalability and flexibility, and focus on strategic priorities. 

Human Resources Outsourcing

Human resources outsourcing (HRO) is the transfer of responsibility and risk for HR functions to an agency outside the organization. The agency or HRO service provider performs a part of all HR services for the organization. Some companies prefer to outsource their entire HR department, while others outsource only non-core administrative tasks. 

Human resources outsourcing in the BFS industry belong under enterprise BPO services and shared services. Common HRO services that are outsourced include payroll, compensation and benefits administration, recruitment administration, workforce administration, employee helpdesk, and learning management.


Market research covers both multi-process human resource outsourcing (MPHRO) and single-process human resource outsourcing (SPHRO). Everest Group defines MPHRO as the practice of outsourcing multiple HR services to one provider in an integrated way, while SPHRO is practice of outsourcing a single, standalone HR activity.

Integrated MPHRO include transactional and analytics-level services: payroll, benefits, employee data management, compensation, recruitment, learning, performance and succession, global mobility, regulatory and compliance, and employee relations. SPHRO covers transactional and lower-level analytics services: payroll, recruitment, learning services, and benefits administration.

HRO Value Chain and Core Processes

In its 2014 Blueprint Report for multi-tower HRO, research firm HfS identified core processes in the HRO value chain. The value chain refers to services, programs and departments that support an organization’s workforce. The HRO value chain ranges from low-level transactional processes, mid-level judgment/analytics processes, and high-level strategic services.

Data management, benefits, payroll are transactional, while compensation, recruitment, learning services, global mobility, regulatory and compliance, and employee relations are judgment-intensive. Strategic HRO services include HR strategy.

HRO Market Forecast

In its Global HR Outsourcing Market Forecast: 2014-2018 report, NelsonHall analysts predict that the global HRO market will grow at a compound annual growth rate (CAGR) of 12.34 percent from 2013 to 2018. The HRO market remains strong across payroll, benefits administration, recruitment process outsourcing, learning BPO, and multi-process HR outsourcing (MPHRO). 

The need to cut operational costs, standardize processes, and support globalization of operations remain key overall market growth drivers, while the biggest main market challenge is the disconnection of organizations from their workforce. The key market trend is the increasing use of social media to recruit potential candidates.

Due to a slower global economic growth, organizations are facing the pressure to maximize productivity while reducing hiring and recruitment costs. Organizations are also facing disconnection from their employees due to the lack of direct access to an HR department. This leads to reduced efficiency and delays in addressing problems.

HRO in the Banking and Financial Services Industry

HRO in the banking and finance services (BFS) industry is mainly driven by the pressure to reduce costs, improve process efficiency and focus on more strategic activities. Major HRO service providers understand that large companies outsource human resources not only to be cost competitive, but to improve employee experience and build a strong support system as the organization grows.

Deloitte Consulting’s Human Resources Benchmark for Banks report stressed that HRO buyers and providers in the banking sector have realized the need to gain insight from client organizations to achieve better performance. Banks are starting to look for providers that can help them select top performers, improve retention of key performers, and speed up time to competency. 

According to Deloitte, the primary driver of cost efficiency for banks and lending institutions is the development of an effective service delivery model. To be cost-competitive in an uncertain market, banks need to work with service providers that forecast and fulfill talent gaps and align workforce plans, capabilities, and worker performance with business strategy. 

As HRO buyers continue to prize industry-specific domain expertise and deep process knowledge, key service providers will offer sophisticated analytics to gain insights and drive better decision-making among human resource managers and executives.

Training or Procurement Outsourcing

Procurement is the process of acquiring and managing raw materials or services needed to create a product or service. Procurement outsourcing is the practice of hiring a third party to handle an organization’s procurement activities and related functions. In the banking and financial services (BFS) industry, procurement outsourcing is the transfer of key procurement activities like sourcing, supplier management, and transaction management to a third party.

According to the HfS Procurement Outsourcing Blueprint for 2013, the procurement outsourcing (PO) market will grow at an annual rate of 12 percent over the next 5 years. HfS reported that procurement contracts are piggybacking on the established finance and accounting outsourcing (FAO) market, driving the growth of the PO segment. Across all industries, CFOs and procurement officers outsource procurement activities not only to reduce labor costs, but to take advantage of core values like provider expertise, effective spend management, and the latest technology.

From low-level procure-to-pay (P2P) processes like invoicing and accounts payable, companies are now outsourcing high-value procurement services like spend analytics and vendor governance. Leading procurement providers are those that offer specialized vertical expertise and geographic market sourcing presence.

Procurement BPO Services

Banks, lending institutions and other finance organizations do business with thousands of vendors that provide a wide range of goods and services. Common purchases include supplies (office supplies, paper), facilities/building services (housekeeping, construction), equipment (information technology (or IT infrastructure, servers, automobiles) and professional/technical services (consulting, software, marketing). 

Procurement activities generally fall into two categories: direct and indirect. Direct procurement is the purchase of goods and services that enter directly into the company’s production process, while indirect procurement is the purchase of goods and services that support the company’s activities. Direct categories are typically proprietary or sourced internally by a financial institution. Indirect categories are wider in scope, covering everything from IT (software, hardware) to human resources (recruitment and training) to facilities (construction, cafeteria/foodservice, cleaning).

Everest Group further classifies direct procurement activities under core or non-core spending. 

Core Spending

Under direct procurement, core spending refer to raw materials or ingredients that are proprietary or specific to the organization, while non-core spending refer to commodities required to deliver the service. 

Non-Core Spending

Non-core direct spending and indirect procurement activities are generally more commonly outsourced than direct procurement. Depending on the contract, the procurement service provider may ask for fixed fee against realized savings or a performance-related fee (a percentage of savings).

Everest Group also classifies procurement processes into procure to pay (P2P) and source to contract (S2C). P2P activities like requisition and invoicing are transactional or low level, and S2C activities like spend data management and strategic sourcing are judgment intensive or mid-level. In-house processes like mission and business strategy are considered strategic or high-level activities.

Procurement BPO Benefits

Indirect spend can account for 15 to 40 percent of a company’s total revenues. According to research by Accenture, most companies achieve only a fraction of potential savings in the real world. Companies with efficient procurement processes realized 30 percent more savings than low performers. These “procurement masters” also leveraged outsourcing more than their competitors. 

Financial institutions that outsource procurement expect to reduce overall costs, increase focus on core competencies, and achieve bottom line savings. Procurement outsourcing providers allow companies to benefit from specialized support and domain expertise, avoiding the expense of setting up, managing and supporting an internal procurement team. 

It is difficult to match the enormous functional, industry and category expertise that procurement service providers bring, even with a dedicated in-house team. With savvy market intelligence, advanced sourcing tools, and deep best practices gained from managing the procurement activities of several banks and lending institutions, procurement service providers are well-positioned to help CFOs realize maximum potential savings. 

Finance and Accounting outsourcing (FAO) Services

Finance and accounting outsourcing (FAO) is the transfer of an organization’s bookkeeping activities to a third party, whether in whole or in part. Third parties provide services like payroll processing, tax preparation, audits, budget, and consulting services. In the banking, financial services and insurance (BFSI) industry, finance and accounting outsourcing belongs under enterprise or shared services.

According to the HfS Finance and Accounting BPO Blueprint Report for 2013, a third of the demand for FAO services comes from the banking and financial services industry, with demand gradually slowing down. Most banks and lending institutions outsource finance and accounting processes to realize cost savings and access service provider category expertise. Finance organizations increasingly value execution or the ability of service providers to deliver real-world solutions and drive business growth, followed by innovation.

FAO Services Value Chain

The finance and accounting outsourcing value chain is the range of activities or processes that support a bank or financial institutions product or service. At the lower end of the chain are procure-to-pay services (accounts payable, credit, and travel and expense). Mid-level FAO services include order to cash services (accounts receivables, collections, billing, revenue accounting), record to report services (fixed asset accounting, tax filing, payroll), and controllership services (inter-company accounting, regulatory reporting, management reporting, risk management, treasury, internal audits). At the top end of the FAO value chain are transformational services (financial process consulting, supporting innovation roadmap, and change management support).

FAO Services

HfS identified three tiers of FAO services according to strategic importance: transactional (low-level) processes, analytical services, and consultancy products and services (services that have the potential to transform the business for the long-term).

Transactional Services

Low-level FAO processes include accounts payable, cash and accounts receivable, travel, entertainment and expense, credit, billing and invoicing, and payroll processing.

Accounts Payable

Accounts payable is money owed by the organization to creditors. Service providers handle invoice scanning, coding, matching to P.O., scheduling, account reconciliations, and related activities. Providers also offer software to streamline these processes.

Accounts Receivable

Accounts receivable is the money owed by clients or customers to the organization in exchange for the sale of products or services on credit. Service providers handle drafting, sending, and monitoring of outstanding bills and offer virtual account reconciliation services.

Payroll Processing

Service providers handle employee payroll processing (employee benefits and compensation, tracking vacation and leaves, W-2 forms processing) and manage IRS regulations, ensuring that correct taxes are paid on time. 

Analytical Services

Mid-level FAO activities include internal audits, risk management, treasury, inter-company accounting, regulatory reporting, management reporting, financial planning and analysis, and business intelligence.

Internal Audit

Providers handle financial and operational internal auditing, IT internal audits, fraud analytics, risk assessment, finance and supply chain management to improve or augment a financial institutions current internal audit initiatives.

Risk Management

To meet complex risk and compliance challenges that banks face, service providers offer enterprise risk management solutions, consulting, and assurance services that cover risk management areas like market, credit, and Basel, Dodd-Frank, CRD, and EMIR.

Treasury Services

Outsourced treasury services are activities that manage a bank’s enterprise’s holdings and operational and reputational risk. Service providers help banks establish more efficient systems for reporting cash flow and reserves and allow CFOs to make informed business decisions. Treasury services include disbursements, investment and funding, trading (bonds, currencies, financial derivatives) and financial risk management.

Regulatory reporting

In a market with unprecedented reporting and compliance standards, third parties help banks review books to identify and resolve potential tax issues in advance. Service providers help banks meet both compliance and cost efficiency goals with services like record-keeping, transaction reporting, and reconciliation.

Consultancy Services

FAO services that are considered high-level and strategic are financial process consulting, change management, communications support, and innovation roadmaps.

Financial Process Consulting

Outsourced financial process consulting services in the banking industry include income statement analysis, balance sheet or cash flow analysis, group consolidation, planning, and budgeting. Service providers have in-depth knowledge of business intelligence tools and enterprise resource planning (ERP) systems to drive efficiency and reduce errors.

Change Management

A bank may hire a third party to head or manage the organization’s change management activities during transition periods, market changes, or in response to new and stricter regulations. 

Innovation Roadmaps

Third parties can provide innovation roadmaps to identify key capabilities that will improve an organization’s innovation performance.


Some Reasons Managers May Choose to Outsource offers more helpful insights. To learn more about the opportunities and possibilities of building your own team of professionals in the Philippines, contact Sourcefit today and talk to an expert.