April 24, 2024
Functional Service Providers

The Rise of Functional Service Providers in Industries

What are Functional Service Providers?
In recent years, there has been a notable rise in the prevalence and popularity of functional service providers or Functional Service Providers across various industries. A functional service provider refers to an external company that offers specialized business functions and services to other organizations on an outsourced basis. Some of the common functions that Functional Service Providers provide include human resources, finance and accounting, marketing, procurement, facilities management and customer support among others.

Growth of the FSP Model
There are several factors that have contributed to the strong growth of the FSP model. Firstly, many companies now want to focus on their core competencies and outsource non-core activities. This allows them to optimize costs and improve efficiencies. Secondly, advances in technology have made it easier for functions to be delivered remotely. Functional Service Providers also leverage economies of scale by serving multiple clients simultaneously. This translates to lower costs per client. The always-on nature of business has also increased demand for flexible, scalable services that Functional Service Providers can easily provide.

Benefits to Clients
For client organizations, engaging Functional Service Providers delivers significant strategic and operational benefits. Outsourcing non-core functions frees up capital and management attention for core priorities. It also reduces fixed operating costs and transforms them into variable costs. Leveraging specialized expertise of Functional Service Providers ensures functions are handled more professionally. Clients get access to advanced tools, methods and best practices. Outsourcing also provides more flexibility to scale activities up or down as business needs change. Overall, FSP relationships help lower costs and boost efficiencies for clients.

Rise of Regional and Global FSP Players
To meet the growing demand, many regional and global FSP players have emerged in the last decade. Some of the larger Functional Service Providers deliver a wide array of integrated solutions while others focus on specific functions or industry verticals. The competitive FSP landscape has driven improvements in service quality, delivery models and technology enablement. Several Functional Service Providers have also made strategic acquisitions to expand their functional and geographic footprints. This consolidation within the industry has further accelerated the professionalization of outsourced business services.

Choosing the Right FSP Partner
With numerous FSP options available today, selecting the right partner is an important decision for companies. Some factors to consider include expertise and experience handling the relevant functions, ability to tailor solutions based on business needs, ownership and governance structure, financial stability, global delivery infrastructure, technology platforms, security practices, client testimonials and contract terms. Due diligence on these criteria helps identify Functional Service Providers that are capable of delivering value over the long-term in a compliant and responsible manner. Ongoing performance management also ensures the relationship meets key service level agreements.

Impact of COVID-19
The current pandemic has created widespread disruptions and accelerated changes across industries. It has also significantly boosted the importance as well as adoption of the FSP model. Amid difficult conditions, many companies leaned more heavily on specialized external partners to ensure business continuity of important functions. This included enabling remote working environments, redesigning processes for social distancing, implementing new technologies and supporting other pandemic response efforts. Going forward, FSP engagement is expected to remain integral to enhancing operational resilience against future uncertainties. It will also support new work trends like hybrid working arrangements even in a post-COVID world.

Growing Relevance of Functional Service Providers
The outsourcing of specialized business functions through FSP partners is increasingly essential to organizational competitiveness and success. It optimizes costs, improves agility and transforms fixed expenditures to variable ones. Leveraging global expertise available through a responsible FSP helps companies operate strategically while mitigating non-core risks and distractions. With business needs continually evolving amid complex market conditions, the relevance and capabilities of functional service providers will keep expanding across functions, geographies and industries. Their importance in enhancing resilience and performance makes engaging the right FSP partners a key priority for management today and beyond.

1. Source: Coherent Market Insights, Public sources, Desk research
2. We have leveraged AI tools to mine information and compile it