AP and AR Outsourcing: Not for the Faint of Heart

by Bob Meara, March 7, 2007

Abstract

New York, NY, USA March 7, 2007

Celent encourages banks to foray into accounts payable outsourcing and accounts receivable outsourcing, but with a targeted, incremental approach and third party help.

The move toward widespread finance and accounting outsourcing (FAO) is undeniable and unstoppable. Numerous large corporations have already outsourced significant transactional activities. Yet relatively few banks have accounts receivable outsourcing (ARO) or accounts payable outsourcing (APO) offerings beyond staple wholesale lockbox and disbursement products.

But banks are now hard pressed to defend inaction. According to a new report, , the timing is ripe for APO and ARO. Revenues from cash management have been disappointing, leaving banks looking for ways to stimulate growth. APO and ARO are means to cash management revenue growth. The market opportunity is modest from a fee equivalent income basis (Celent estimates US$300 million in the short term, growing to US$1.6 billion), but sustainable in the face of an otherwise disappointing cash management revenue picture. Banks that do not offer ARO and APO or are late to the game will likely find themselves marginalized.

Celent recommends banks take an incremental approach to FAO. Going it alone--except for a few banks--is not likely the best approach. Instead, banks should investigate partnering with third party solution providers. A bevy of third party providers are entering the space, and many are eager to partner with banks to gain access to their installed customer base. It can be a win-win. Most early mover banks have taken this approach (e.g., HSBC, Fifth Third, SunTrust, and Wells Fargo), while a few (e.g., Mellon and Key Bank) have made acquisitions to enter.

Most early mover banks provide selective outsourcing services, not full service FAO. These services are more than just outsourcing though, and no one sells them using the "O word." Instead, they are a delicate balance of technology, business process reengineering, and selective outsourcing.

"Banks that made the foray are glad they did, but it was hard work, not for the faint of heart," says Bob Meara, senior analyst at Celent and author of the report.

The report reviews the market dynamics that support financial institutions' entry into APO and ARO, along with factors driving and limiting adoption. The report explores APO and ARO solution opportunities, showing how they work and how financial institutions can create logical extensions of current cash management products up the financial supply chain. Celent also profiles six early mover banks and their adventures into APO and ARO and, in one case, human resource outsourcing (HRO).

The 51-page report contains 20 figures and 5 tables. A table of contents is available online.

Members of Celent's Wholesale Banking research services can download the report electronically by clicking on the icon to the left. Non-members should contact info@celent.com for more information.  

Celent is a research and advisory firm dedicated to helping financial institutions formulate comprehensive business and technology strategies. Celent publishes reports identifying trends and best practices in financial services technology and conducts consulting engagements for financial institutions looking to use technology to enhance existing business processes or launch new business strategies. With a team of internationally based analysts, Celent is uniquely positioned to offer strategic advice and market insights on a global basis. Celent is a member of the Oliver Wyman Group, which is a wholly-owned operating unit of Marsh & McLennan Companies [NYSE: MMC].

Media Contacts

North America
Michele Pace
mpace@celent.com
Tel: +1 212 345 1366

Europe (London)
Chris Williams
cwilliams@celent.com
Tel: +44 (0)782 448 3336

Asia (Tokyo)
Yumi Nagaoka
ynagaoka@celent.com
Tel.: +81 3 3500 3023

Table of Contents

New York, NY, USA March 7, 2007

Executive Summary 3
FAO: The Time Has Come 5
  Where to Participate 9
  How to Get Started 10
BPO: The Larger Picture 13
  Business Drivers and Challenges 15
  Solution Spectrum 17
Payables Outsourcing 20
  AP Automation 22
  The Case for AP Outsourcing 24
  Approaches to APO 25
Receivables Outsourcing 27
  Evolution of the Lockbox 28
  Toward a Common Platform 30
Early Mover Profiles 32
  Mellon SourceNet Solutions 32
  JPMorgan Chase Receivables Edge 36
  Fifth Third Payables Management 38
  HSBC API 41
  SunTrust Payment Outsourcing 44
  Key Total Workforce Solutions 47
Concluding Thoughts 49
Objectivity and Methodology 50

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