Apparel Company Seamlessly Outsources Its Back Office | Article

straight pinsWhen downsizing earlier this year closed The In7 Company’s back office — including the termination of six staffers who handled the books, company executives at the apparel importer feared its finances would fall into disarray.

So the company turned to itAccounts, an application service provider (ASP) to digitize and streamline its back office operations. Now, instead of losing control of its financial situation, In7, which has 155 employees and $25 million in revenues, was able to keep the operations running smoothly and get even more control of its systems and finances.

What’s more, the six positions eliminated had cost the company between $25,000 and $85,000 a year each, says In7 president Neil Kukreja. itAccounts costs about $125,000 a year to handle In7’s accounts payable and balance sheets, and issue management reports daily, weekly monthly and quarterly, he says.

The only accounting staffer remaining is a senior bookkeeper to coordinate the books and serve as a liaison between In7, itAccounts and the company’s accounting firm.

Do the math, he jokes.

“That person can do that job and others, and spend one man-day a week on the books,” Kukreja says. “In the old model, when you go from six to three or one, everybody complains of too much work.”

The only one handling the work, it seems, is itAccounts. The company is among the application service provider (ASP) market that targets small- to mid-sized companies with up to $25 million in revenues.

Serving a New Niche

itAccounts carved out a niche often vacated by accounting firms, says Kishore Mirchandani, president & CEO of itAccounts, a division of MSL Business Solutions Inc., in New York. It provides accounting and finance services to companies often considered too big for bookkeepers, but too small for larger accounting practices, many of whom are focusing on lucrative consulting services, Mirchandani says.

The average client might require five in-house accounting staff commanding a combined salary in excess of $200,000 — or more, Mirchandani says. itAccounts visits the client, evaluates the staffing and technology requirement, replaces the legacy systems with Web-enabled systems, and brings online such functions as accounts payable and receivable, activities management, general ledger, budgeting, and asset management.

Small to mid-sized companies have found a strong ally in ASPs, says Jessica Goepfert, senior analyst at research consultancy IDC in Framingham, Mass. In 2000, some 800 ASPs served 31,000 customers. By 2005, industry consolidation should collapse the number of ASPs to fewer than 400, but those companies will serve upward of 286,000 clients, Goepfert says.

The forces driving In7 to itAccounts typically are the same as other clients and users of ASPs and business solution providers (BSP) are facing, she says. Companies lose money staffing essential back-office operations, like accounting, human resources, payroll and other services — and the technology that supports it. That salary and equipment costs can be better spent on market development and serving existing clients, letting the ASP handle the back office functions.

“They want to focus on what’s core to their business, and it’s probably not this back-office function,” Goepfert says. “You don’t want to waste your valuable IT resources to manage that in-house. You should be able to steer that staff to more critical issues.”

Delivering Dramatic Results

The results can be dramatic. IDC reports that in a survey, 54 ASP clients realized an average 404 percent return on investment by outsourcing back-office functions to an ASP. Savings ranged from salary, infrastructure and technology costs as well as the ability to use staff more effectively and in new business acquisitions. Even business process enhancement saw improvements, including closing the company’s books faster and with fewer man-hours, she says.

In fact, itAccounts has found that the most pressing issue facing clients was closing the books each month and quarter, Merchandani says. Internal staff couldn’t close the books fast enough to then deliver the numbers to the accounting firm. Information delayed results in decisions postponed, which can lead to lost opportunities and profits, he says.

Labor Arbitrage in India

In the process, the back office becomes a relatively paperless place of business. itAccounts ships paperwork to its office in Bangalore, India, to be scanned and digitized at a lower cost than in the U.S. The company then uses the data to handle a wide variety of accounting functions, including invoicing and accounts receivable and payable, Merchandani says. Invoices for accounts payable are scanned and digitized, checks are produced and electronically signed or delivered to the client for signing, or electronic funds transfers can be authorized. Alliances with Paychex and ADP facilitates the payment and payroll process.

Bank accounts are reconciled, and financial statements can be reviewed online. Financial results can be tied into tax returns and other documents, which then are generated for client review and signed by a financial officer or outside tax advisor.

Having a company’s finances posted and password protected online provides client principals and authorized executives access to the documents from any Web-enabled computer. From back office to remote access, processes are streamlined, costs are cut and data is available.

“I can see the accounting and still have control of the money,” Kukreja says. “The new business model is driven by speed, and speed means more profit margin. They can do it better and faster than I can do it internally at half the cost.”

Lessons from the Outsourcing Primer:

  • Consider retaining one employee who will serve as a liaison between the company, the ASP and the accountant.
  • Find an ASP that uses simple Web-based programming so company principals can access key data from any computer with Internet access.

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