Clearly, accounting is very important to every company. No business can operate without accurate or timely information. However, few companies differentiate themselves in the marketplace based on their accounting proficiency.
Accounting is an example of an important but non-core process. Established companies and start-ups are turning over their non-core financial processes to suppliers with superior software and manpower who can do the job at a lower cost.
Why is financial outsourcing exploding? Why are companies who in the past were reluctant to let go of the purse strings eager to begin an Application Service Provider (ASP) relationship? The competitive pressures of the Internet are compressing cycle times from months to hours. They need better accounting services and they need to know their numbers ASAP. But they have neither the time nor the dollars to invest in state-of-the-art accounting software or the finest talent that would enable them to do that since they must continually invest in their core competencies. The Internet is forcing companies to consider outsourcing their accounting.
If time is money, outsourcing accounting flows to the bottom line. One story in this issue talks about Rosen Seymour Shapss Martin & Company LLP, a CPA firm in New York City that specializes in accounting outsourcing. An in- house accounting department can sometimes take as long as 90 days to prepare a simple quarterly report. If the firm has all the information on line, it can prepare a report with footnotes in two to three weeks after the quarter is over.
Cost Reductions Show Up On The Bottom Line
Another major driver is the cost reductions that occur through outsourcing. Cost reduction remains the number one reason buyers want to outsource, according to a new book by Mary Lacity and Leslie Willcocks. Price reductions occur because outsourcers use economies of scale to produce savings. For example, PricewaterhouseCoopers is building Centres of Excellence across the globe to serve multiple accounting clients at a lower cost to each while still enjoying profitability. LeapSource is doing the same in Phoenix.
Financial outsourcing also provides process expertise. Because these providers focus on nothing but accounting, they are inherently better at it.
Outsourcing providers also have access to experts in arcane areas of accounting. James Berry of The Berry Group, for example, specializes in helping companies who are summoned to an audit with the IRS. Few companies need to have an IRS expert on staff. But when an audit arrives, they need to have someone to represent them who understands the 15 allowable exceptions to the rule in question. Outsourcing allows companies to benefit from their knowledge while keeping these specialized, high cost resources on their payroll, not yours.
Outsourcing Accountant From The Outset
On the other end of the scale, the outsourcing provider is also able to attract cheaper labor. PricewaterhouseCoopers built its Centres of Excellence in Tulsa, Oklahoma, Bangalore, India and Krakow, Poland. Labor in these locations may be just as professional and well trained as a New York accountant, but their labor rates are far lower. The supplier can then pass on these savings to its customers.
Many of the new dot.com companies are outsourcing their accounting functions from the outset. They are able to enjoy world class accounting processes virtually overnight. Fine Art Lease, a dot.com start up, needed a Chief Financial Officer to represent it at investor meetings. But there wasn’t enough work or enough cash to hire a full time CFO. So the dot.com received CFO services on an as needed basis from its outsourcing accounting firm.
Scale is also important to a growing company like Fine Art Lease. Outsourcing allows companies to grow exponentially because the supplier has the additional capacity available. Companies burning investment capital now can have revenue of $100 million a year later and experience little or no disruption in accounting services or quality. Of course, the same applies when a company needs to shrink in size.
In today’s compressed world, companies worried about remaining in the black need to consider outsourcing their accounting function. In my opinion, the decision is black and white. Outsource!
Lessons from the Outsourcing Primer:
- With increased competition on the Internet, companies must focus on their core competencies. Outsourcing accounting makes sense since it’s rarely a core competency.
- Outsourcing allows companies to have access to specialized accounting services like IRS audits or SEC “edgarizing” at a reasonable cost. It also allows companies to have access to world class software if the supplier is an ASP.
- Outsourcing reduces the cost of accounting services through the supplier’s economies of scale.
- Outsourcing allows a new company to grow and established companies to shrink.