The bulk of most companies' operational costs are in manpower, says Ragu Bhargava, CEO of Global Upside, Inc., a finance and accounting (F&A) service provider. That's one of the reasons companies in all industries are increasingly bucking the long-held practice of retaining full-time F&A staff in house.
Mountain View, Calif,-based Global Upside, Inc. provides services with a U.S. team in California and Florida serving as the customer service contacts while highly educated U.S. GAAP-trained professionals in India perform the assigned tasks overnight with measurable accuracy and a cost savings of 40 percent or more. The one-year contracts are flexible, with monthly fixed fees based on a per-hour rate.
Global Upside's model is particularly beneficial and affordable for small companies and startups that have difficulty scaling their resources up and down to meet fluctuating needs as their business grows and for companies that are hesitant to outsource.
That was the situation online music subscription service Rhapsody International, Inc. faced when RealNetworks spun it out as an independent company in March 2010. Rhapsody is an online on-demand digital music service serving more than 750,000 subscribers in the United States. RealNetworks previously handled the accounting, and Rhapsody suddenly had a short time line – one month – for building an accounting organization from scratch.
But Michael McGinn, Rhapsody's VP of Finance, decided it made more sense to outsource to an expert with the resources to quickly ramp up for implementation and then scale back later, if necessary.
McGinn recalls, "If we had built the accounting organization ourselves instead of outsourcing, we would have over-hired or under-hired. We were guessing how much staff we would need. In retrospect, we underestimated and would have found ourselves in a tough situation – either stretching the folks to an extent of their not being reliable or having to hire additional staff. So Global Upside's ability to flex their workforce to meet our needs has been terrific."
The cost picture was also a strong draw for outsourcing, McGinn says, "The savings from the outsourcing funded an additional full-time person with analytical capabilities for our business, which was a nice win for us."
McGinn soon recognized two other benefits. "Because they are overseas, we interact largely through e-mail. It forces us to be much clearer and more disciplined in both our communications and our procedures. And it prevents a marketing person from walking down the hall with an invoice and asking somebody to put it in a drawer for a couple of weeks because they don't want to pay it yet. There's a much more systematic process that is very good for internal controls."
The 12-hour difference in time zones is also a benefit. During a financial audit, the auditor can request information by mid-afternoon and Global Upside in India has the information ready in Seattle the next morning. Rhapsody now has a controller and one accounting clerk on site; the resources doing all the transaction accounting are in India. Rhapsody retained responsibility for closing the books, financial reporting, and writing and mailing checks.
Customer service issues when outsourcing offshore
The RealNetworks controller recommended Global Upside, but McGinn was hesitant at first to outsource. "The idea of handing over the keys, so to speak, to a team of folks that are halfway around the world is something you have to think through to understand the operational implications," he says. Bhargava and McGinn talked through the issues until McGinn was comfortable.
When issues arise, communication is not a problem even though the people doing the work are 12 hours away. Global Upside's clients can call customer service – which is totally based in Florida and California – during the daytime, and they coordinate the issues with the resources in various geographies. This is a differentiation from many larger BPO providers that usually accommodate only a two-hour overlap for real-time communications.
Global Upside's customer service approach is one-on-one relationships rather than a call center, and the customer service contact person knows a client's business. "Honestly, I don't know if I would have been comfortable with going down the outsourcing path if not for that. Having a local U.S. presence as a bridge between here and India has been great," says McGinn.
Global Upside's customer service reps also went to RealNetworks to help with the procedures-gathering activities in the transition. The transition included the challenge of moving from the prior Oracle-based accounting system at RealNetworks to Rhapsody's new Microsoft Dynamics (Great Plains) system, which involved re-doing the account structures.
In addition to the approach to customer service, Bhargava points out another difference between Global Upside and larger BPO providers. He says his company is happy to accommodate the needs of smaller companies, startups and companies that are new to outsourcing and hesitant to outsource more than one function at first.
Industry complexities in F&A are a driver for outsourcing
The trend of shifting from in-house to outsourced F&A services is not entirely due to the need to reduce costs. F&A is becoming increasingly complex. Companies that decide to outsource their F&A work are looking for value – not just a company to do transactions but a service provider with a high level of expertise in all functions, regulatory compliance and across global operations.
Royalty complexities. In the music business, for instance, the process of managing the royalties due to rights holders is complex.
There are a number of different rights holders (to the sound recording, the musical composition, etc.), and Rhapsody has agreements with hundreds of rights holders. McGinn explains that at the end of each month Rhapsody must process the royalties to the rights holders for every piece of music Rhapsody played for its online customers. "We have a massive computer system that calculates the royalties we owe to the various rights holders and churns out reports that we need to provide to them and then make the appropriate payments," he says.
Revenue-recognition complexities. Bhargava cites another example of F&A complexities, this one centering on clients in the high-tech industry. "Revenue recognition is a really complex issue for software companies. With sales occurring through indirect channels, a software firm may lack control over the accuracy and timeliness of information. Also, revenue-recognition rules and when to record revenue differ among US GAAP and international accounting standards."
The Software-as-a-Service, on-demand, and cloud-computing models increase the complexities of revenue recognition. Stock compensation is another challenge that impacts software companies.
Investors, along with auditors and regulators, focus on revenue, as it's often the source of errors that leads to a need for revenue restatements. For public companies, this information is also important to their customers. Fiscal-year revenue restatements are a time-consuming, labor-intensive activity; and most companies lack the resources to handle this in house. For example, Global Upside recently conducted a revenue restatement for a company that required reviewing 8,000 contracts.
Globalization complexities. It's not unusual, even for small and midsize companies, to have operations in several geographies. For their payroll function alone, they need resources to convert compensation in U.S. dollars to local currencies – sometimes in more than 15 countries.
Bhargava says startups and smaller companies sometimes have only a nominal understanding of global business issues such as the differing requirements for licenses to operate in various geographies. Taxes and regulatory compliance are also complex in global operations.
Tips for F&A service provider selection criteria
Smaller U.S.-based F&A outsourcing providers such as Global Upside can bring the same level of resources and expertise as larger BPO providers. Beyond the expertise and global resources, buyers should include the following factors in their provider-selection criteria:
Proven track record of protecting data confidentiality. The provider should also conduct regular, ongoing training of employees regarding confidentiality.
Demonstration of responsiveness in customer service issues with the provider's other clients. Services should happen like clockwork; but where issues arise, the provider's customer service team must have a proven track record of quickly and effectively resolving issues.
The provider should not be a signer on the client's bank account; it should not be able to touch its clients' cash.
Although some smaller companies in various industries rely on their outsourcing partner to provide an individual who takes on the role of CFO, this practice could jeopardize the buyer's business or the provider's business. The best practice is for both parties to understand the level of trust necessary and to recruit someone external to the provider's company.
Measurable accuracy at a level of 99 percent or better.
The provider's staff should hire only degreed accountants, and they should also have several years of experience before joining the provider's firm. Even so, people make errors. Select a provider that ensures all of its work is reviewed on a daily basis by chartered accountants.