Outsourcing as a Path to Operational Excellence for Consumer Product Companies

My firm, Fesnak Outsourcing, is presenting an event entitled “Outsourcing as a Path to Operational Excellence for Consumer Product Companies” on the evening of April 2, 2014. This is the first in a series of Growth Summit events planned by parent firm Fesnak LLP. Click here for more information and to register.

Consumer products companies are progressive in their use of outsourcing and the deployment of virtual business models, so we felt that this industry would be an ideal audience to benefit from an event on outsourcing. Experts in functional areas such as finance/accounting, manufacturing/sourcing, logistics/fulfillment, and marketing will present best practices and emerging trends that consumer product companies should be aware of, whether they outsource or not. The event will also be a great opportunity to network with industry colleagues to make new connections and share ideas.

We hope to see you there!




Clarification by Division

Earlier this week my firm issued a press release announcing the formation of a separate subsidiary for its finance and accounting outsourcing practice.

While this does not change what we have been doing in an already-robust business process outsourcing (BPO) operation, the creation of Fesnak Outsourcing LLC clarifies for the marketplace that our work in this space contrasts with the traditional perception of CPA-firm services. It is not the after-the-fact “write-up work” of yesteryear, and it is far more than just an ancillary service among audit and tax.

We are excited about this latest milestone in the maturation of our outsourcing practice and the ability of our new division to continue capitalizing on the favorable growth trends in finance and accounting BPO.

Read the full press release here.

Fight the Firing at Start-ups

A recent article in Inc. notes that “start-ups fire nearly 25% of their employees during the company’s first year of existence,” compared with less than 7% “let go annually by larger, more-established companies.” The Inc. piece sites a Wall Street Journal article that provides four drivers of this trend:

“Startups’ needs change quickly. Often the skills sought in the beginning of the year aren’t needed six months later when the company’s strategic plan has changed.

First time founders lack hiring experience. When staffing a company for the first time, rookie founders might have no idea which qualities they should really be looking for in employees.

Employees from the corporate world can’t adjust. These hires don’t realize how quickly they’re expected to move on projects, since they might have been used to a slower pace at their corporate job.

Getting fired is viewed as not such a big deal. Since it’s well known that turnover at startups is high, getting fired from a startup is not perceived as a career-ruining moment. This might be how some startups morally justify letting lots of employees go.”

The first three are real challenges for start-ups, but each can be easily solved by outsourcing – while also avoiding the human, financial and societal cost associated with such rapid terminations:

Startups’ needs change quickly. Outsourcing provides scalable solutions that can keep pace with growth, and allows access to a breadth and depth of skills that can be added, deleted or substituted as the start-up’s needs evolve.

First time founders lack hiring experience. An outsourcing firm that provides a fully-managed outsourcing solution for a particular process or functional area – such as finance/accounting, human resources, logistics, or marketing – takes this issue off the table. The entrepreneur does not have to worry about hiring, managing, or firing for non-core functions, and does not have to endure the costs associated with recruiting or the lost productivity from bad hiring decisions.

Employees from the corporate world can’t adjust. Outsourcing providers that work with start-ups have professionals with the required skill sets and sense of urgency. Moreover, they can leverage additional resources when needed to accelerate projects.

These three factors are challenges to start-up entrepreneurs, and outsourcing can solve all of them. The fourth driver, “getting fired (from a start-up) is viewed as not such a big deal,” is not actually a challenge to the entrepreneur, and it is not a perception that outsourcing can eliminate. But it is most certainly a challenge to the people that are fired. I would venture to say that those terminated from start-ups do not agree that it is “not such a big deal,” especially if they are past a certain age… This is a case where outsourcing can help the workforce in addition to the start-up: Join an outsourcing firm, where you are a revenue-producing part of the provider’s core competency, and enjoy a career path that is more stable and progressive, not dependent upon the vagaries of one particular start-up.

Too Virtual?

It would not be possible to be a “virtual CFO,” or to provide outsourced accounting and financial management services, without technology. Today’s cloud-based and mobile applications have further enabled the development of new entrepreneurial ventures that are based entirely on virtual business models, which rely heavily on outsourcing non-core functions and/or hiring widely-dispersed employees that do not report to a physical office.

But none of this removes the need for face-to-face contact. Or does it?

I began thinking more about this question after hearing a couple of speakers at the recent AICPA Digital CPA Conference. Keynote speaker Simon Sinek spoke about the importance of the real human connections that can only be established and maintained through in-person contact, and this validated my belief that face-to-face contact is even more critical as we become more “virtual.”

But later in the day, I listened to a session on generational differences and their implications, facilitated by Jennifer Wilson of Convergence Coaching. Wilson noted that, in a survey on how various generations perceive each other, Millenials (those born from the early 1980s through the early 2000s) were described as over-relying on technology and being “too virtual.” My first reaction was that we Generation X’ers ought to be quite pleased with ourselves, for we have struck a perfect balance, haven’t we? After all, we embrace technology and leverage it fully, while still recognizing the value of face-to-face interaction and ensuring that it is part of our business relationships. Simon Sinek would be proud.

But then I began to wonder – are Generation X (and the Baby Boomers) blinded, by their own experiences and perceptions, to the generational forces of change? Are the Millenials, and the generations that follow, going to hold the same convictions about the importance of face-to-face meetings? After all, as I once read somewhere, they are “technology natives,” the equivalent of having grown up speaking the language of technology, whereas it is just a second language for Generation X. Perhaps the affection the older generations have for direct human interaction is driven by a pre-technology upbringing and nostalgia that the younger generations will simply not share?

I think Sinek would dispute this; he would say the desire for face-to-face contact is a fundamental human need. One of my clients astutely observed that the use of emoticons is an acknowledgement of the shortcomings of digital interaction – a feeble attempt to add some emotional, human context that is missing without body language, laughter, or facial expressions.

I hope Sinek and my client are right. Either way, I will continue to build my professional relationships the only way I know how, the only way that is truly enjoyable and rewarding: by balancing today’s technologies with a liberal dose of real, live interactions.

Thoughts on the 2013 Digital CPA Conference

Along with three of my Fesnak colleagues, I attended the second annual Digital CPA Conference in Washington, D.C. this past week.

As I wrote in a post recapping the conference for Fesnak’s blog, the first Digital CPA Conference was launched in 2012, in response to the proliferation and maturation of cloud-based technologies, which simultaneously challenge traditional modes of operating in the accounting profession while creating exciting and unprecedented new opportunities. While these challenges and opportunities run the gamut from social media to generational trends in virtual/mobile workforces to efficiencies in document management and workflow, chief among the new opportunities is what the AICPA calls “client accounting services” enabled by cloud-based accounting applications.

“Client accounting services” is the AICPA’s term for finance and accounting outsourcing (FAO), a type of business process outsourcing (BPO). I prefer the term FAO over “client accounting services,” not only because it is more widely known, but also because it more accurately captures the breadth of services provided. After all, it is not just accounting; it is financial management, inclusive of financial planning and analysis (FP&A) and virtual CFO services. And “client accounting services” could be anything; the term does little to distinguish a robust BPO offering from old-school bookkeeping or write-up services – ironic, given the AICPA’s aspirations for “client accounting services” to supplant these traditional services with a more value-added, “trusted adviser” role.

Also ironic is that FAO is not at all new; it has been performed for years, if not decades, by outsourcing service providers such as the Big Four accounting firms and, today, by industry leaders such as Accenture, Genpact and Capgemini. What is new, however, is the concept of FAO as a core service offered by small, mid-size and second-tier national CPA firms. Indeed, there is a vast market opportunity for these firms: While the largest multi-national enterprises outsource to the aforementioned leading providers, emerging growth and middle market companies lag far behind in their adoption of FAO (see HfS Research / KPMG study here, and ACCA / HfS Research study here). As these small to mid-sized enterprises (SMEs) enter the market to procure FAO services, who better to meet the demand than the CPA firms that are already entrenched in these market segments?

The 2013 Digital CPA Conference provided plenty of great content from thought leaders such as Simon Sinek, Geoffrey Moore, Jennifer Wilson and others, and I appreciate the AICPA’s efforts to help CPA firms leverage new technologies, optimize new service opportunities like FAO, and navigate change and complexity in general. However, I think the Digital CPA conference is already at a crossroads in its short life. Although the conference addresses a range of technology-related topics, the central theme in both 2012 and 2013 has been cloud-based accounting applications as an enabler for developing “client accounting services.” Many of the sessions were geared toward firms that are just now thinking about, or have only recently launched, such initiatives. This is all positive. But as FAO continues to become a more prevalent offering at CPA firms, there will need to be a conference devoted  exclusively to outsourcing, just as there are audit and tax related conferences.

An “FAO Conference” (I’ll leave it to the marketers and event planners at AICPA to come up with a catchy name) should definitely address technology. But as Digital CPA speaker Bill Reeb noted, technology is just a tool. There are so many other areas that could be, and would need to be, addressed in an AICPA outsourcing conference. These include, but are by no means limited to: pricing strategies and contract negotiations; competition from non-CPA firms; the clash between the new outsourcing services and existing professional standards (e.g., for compilations); best practices in various accounting and financial management processes; KPIs for an outsourcing practice; cultural challenges running a BPO operation within a traditional CPA firm; recruiting talent; organizational structure and management of an FAO practice; outsourcing engagement structure and management; etc. (Certain of these topics were in fact part of the 2012 Digital CPA Conference, but at an introductory level only and were understandably not repeated in 2013’s conference, which was again geared toward very early-stage “client accounting services” practices). The Digital CPA Conference could continue to exist separate and distinct from an FAO Conference, with an ongoing focus on emerging technologies across all CPA firm disciplines.

I am not advocating an FAO Conference for 2014; there is not enough time – or, more importantly, demand – to pull it off that soon. But as the next best thing, I would like to see the 2014 Digital CPA Conference evolve to include separate concurrent session tracks for firms that have more mature and robust outsourcing practices, perhaps addressing some of the areas suggested above.

(Disclosure – my Fesnak colleague Nicole Ksiazek serves on the Digital CPA conference advisory panel.)

Back to School!

Today is Labor Day, marking the transition from summer to fall. While the “newness of fall” is not exactly a familiar phrase like the “newness of spring,” this is a time of reinvigoration in the business world – “back to school for adults,” as I like to say.

In a business context, Labor Day is more of a new beginning than New Year’s Day. Summertime distractions and vacation delays are in the rearview mirror, making it easier to get the attention of customers eager to get things done before the upcoming year-end. A sense of urgency increases to make the numbers before the year comes to a close. Executive teams want key decisions made and in place before the New Year begins. Conferences and networking events will soon be in full swing, generating new ideas and new connections. The rapidly-approaching fourth quarter is a time for strategic and tactical planning, a time to think about the big picture and set goals and objectives for next year, and to develop a budget that aligns with those plans; now is the time to make sure these activities are properly planned and scheduled.

Like the school year, the new business year starts now. Think of it as a fresh start, for yourself and for your business. Approach it with the same enthusiasm you had when you were a kid, boarding the yellow bus on the first day with a knapsack full of brand new school supplies.

Happy Labor Day!

Outsourcing and Skeuomorphs

So I learned a new word today: skeuomorph. I figured a logical extension of the elementary school advice to try using a new word in a sentence would be to use it in a blog post. And it wasn’t as hard as I thought it would be. In fact, I was quickly inspired.

But first, what is a skeuomorph? According to Wiktionary.org, a skeuomorph is “a design feature copied from a similar feature in another object, even when not functionally necessary.Wikipedia explains that the term has been applied to material objects since 1890, but is now also used to describe computer interfaces. It was in this context that I first encountered the word – specifically, in a Fortune magazine article by Adam Lashinsky about Apple, which referenced Steve Jobs’ predilection for graphical user interfaces that emulate physical objects (e.g., envelope icons for email, folder icons for file directories, notebook paper background for Apple’s mobile “Notes” app, etc.). After Googling “skeuomorph,” I found a great explanation of the concept on the BBC News Magazine site.

So what, exactly, is the connection of skeuomorphism to finance and accounting outsourcing? As Wikipedia notes, “Even systems that do not employ literal images of some physical object frequently contain skeuomorphic elements… Skeuomorphs need not be visual.” When we explain how our financial management outsourcing solution works, we talk about fulfilling the roles of a bookkeeper, accounting manager, controller and CFO. Because most entrepreneurs and CEOs understand the financial function in terms of these internal positions that historically comprise an accounting and finance department, it has become natural to refer to these same roles when explaining how outsourcing works. But they are only metaphors. By describing and categorizing our services in the context of these roles, we are using skeuomorphs: making the new accessible and understandable by likening it to the old way of doing things. Why? Because what Wikipedia says about interactions with computer devices can be applied to the common view of the finance and accounting function: it is cultural and learned in society, and therefore difficult to remove.

The aforementioned Fortune article notes that, with iOS7, Apple is moving away from skeuomorphism. And perhaps we should start doing the same when we talk about finance and accounting outsourcing. We are not simply filling the old roles of bookkeeper, accounting manager, controller and CFO. We are offering a completely new and better way to meet the need for reliable accounting and disciplined financial management; we are redefining how the finance and accounting function is carried out. As in the very definition of a skeuomorph, a comparison to the old roles is not functionally necessary. The focus should be on activities and deliverables, the skill sets required, and the results sought, not the traditional roles. A recent new client, for example, initially saw a need to fill the position vacated by its part-time CFO – but now realizes that the problems they are trying to solve, and the solutions they really need, require several different people with different skill sets, unlikely to be found in one CFO. For this client, outsourcing is a solution that means more than just plugging the CFO hole; our solution is designed to deliver the necessary financial leadership, technical accounting, planning and analysis skills that are lacking at more than one level in the organization. Our outsourcing solution meets these needs, with fractional time from more than one professional; it does not simply plug one person into a pre-defined “CFO” position.

Apple and other technology designers can only move away from skeuomorphism because digital applications are becoming as familiar as the original physical objects that they emulated. But skeuomorphs provided the bridge from physical to digital that enabled the successful adoption of these modern technologies in the first place. Similarly, the metaphors of bookkeeper, accounting manager, controller and CFO provide a link from the old ways of staffing an accounting and finance function, to the new way of outsourcing it. As it becomes evident that the new way is superior, we, too, can abandon skeuomorphism.

Outsourcing as Brand Equalizer

A recent post by Grant McCracken on the Harvard Business Review Blog Network (“The Black Swans Circling P&G,” June 21, 2013) claims that “we are watching the death of the big brand” and related consumer preferences and marketing techniques. While this is debatable – and indeed disputed by a number of readers in the post’s comment section – what is not arguable is the rising power of small brands. As McCracken’s post notes, “…small players make all the things that once could only be made at scale: beer, soft drinks, watches, razors, clothing, make-up, laundry detergent. With a webpage as their store front and FedEx as their channel, they can reach consumers anywhere. And, yes, of course, these are tiny operations. But large always starts small.

While there are many factors driving this trend, outsourcing is certainly one of its key enablers. Outsourcing has leveled the playing field for transforming a product idea into a viable business. From design to prototyping to marketing, from manufacturing to fulfillment and distribution, outsourced service providers are available to cost-effectively provide the same economies of scale that were previously available only to the largest companies. When even such core functions are outsourced, it is no great leap to also outsource corporate support functions such as legal, IT and finance.

In my opinion, it is a bit of a stretch to sound the death knell for big brands – just as it was premature, in hindsight, to think that the ecommerce upstarts would kill off all the brick-and-mortar retailers. But there is no denying that there is more opportunity for small consumer product companies than ever before. David doesn’t have to kill Goliath to have a nice life for himself.

Redefining the Pennsylvania CPA Requirement

The Pennsylvania Institute of CPAs (PICPA) reported on June 19, 2013 that “(Pennsylvania) Governor Tom Corbett signed House Bill 40 (now Act 15) into law… amending the CPA Statute. This law redefines the experience requirement to become a CPA. Candidates no longer have an attest mandate, but they will still be required to complete the overall hours of experience. The law will be effective August 18, 2013. State Rep. Gordon Denlinger, CPA, introduced this legislation to allow the experience requirement to encompass service or advice in any of the areas of accounting, attest, compilation, management advisory, tax, or consulting… Experience hours will be acceptable if gained through employment in government, industry, academia, or public practice.” A snapshot of the “before and after” requirements is linked to here.

I have mixed feelings about the elimination of the attest experience requirement. Selfishly, it certainly makes life easier in the outsourcing practice at my firm. We no longer need to worry about giving our employees attest hours in our assurance group, and temporarily backfilling their roles while they are on audit engagements. I am sure our counterparts in the tax practice are equally happy about this. It should make it easier to recruit new accounting graduates into outsourcing, because they no longer have to worry about how they are going to get their attest hours to earn their CPA licenses.

But I also have some reservations about this new law. CPA means “Certified PUBLIC Accountant.” The key distinguishing characteristic of a CPA is the ability to perform an independent financial statement audit or review, and provide assurance as to the presentation of financial statements in conformity with generally accepted accounting principles. It therefore seems heretical to take the attest requirement out of becoming a CPA. Yes, there are many other aspects of accounting that have nothing to do with auditing. For example, management accounting is recognized as its own discipline – but there are already designations for that: the Certified Management Accountant (CMA) and the Chartered Global Management Accountant (CGMA).

I suppose the problem is that neither the CMA nor the relatively new CGMA are as well-known or understood, nor do they carry the same prestige as the CPA. In contrast, the CPA designation is much more familiar. In business, it is a litmus test of the capabilities of a candidate for an accounting position, whether in public practice or private industry. It is even familiar to the mainstream public, which sees it as an indication of general competency in accounting or tax without necessarily understanding the distinction of being qualified to audit financial statements. In the public’s perception, a CPA in the accounting profession is analogous to a licensed attorney in the law profession. As an attorney may specialize in any number of areas of law, the public sees a CPA as potentially specializing in any number of areas of accounting – not necessarily with any particular expertise in auditing. Truth be told, many of today’s CPAs who met the soon-to-be-obsolete attest requirement have not actually performed any audits for years or even decades. From that perpective, this new law may be viewed as simply catching up to what the CPA designation has already evolved into and what the public perceives it to be.

So what do you think of this new law? What impact, if any, will it have on alternative certifications such as the CMA? Please comment below.

Time to Get the M&A Party Started?

Is it time to get the M&A party started? Judging solely by the title of its recent article, the Wall Street Journal’s answer appears to be “no” (see It Still Isn’t Party Time for Buyouts, February 18, 2013). Yet the fact that the article was written at all indicates that there are enough favorable indicators out there to ask the question. With several large transactions having recently been announced, everyone wants to know if happy times are (finally) here again.

In the years since 2007’s peak deal volume, there have been many times in my firm’s transaction practice that the floodgates appeared to be opening. But in between those particular months when multiple transactions inexplicably converged, things would settle back down to the “new normal.” Do the recent headlines reflect a similarly random clustering of data points, or something more? Even if the recent spate of activity continues, how long will it take for the trend to percolate from the mega-deals down to the lower-middle market?

Any optimism ought to be tempered by 2012’s experience, when most M&A professionals, myself included, wrongly thought that impending year-end tax rate changes would motivate sellers and drive deal activity. In hindsight, there were several reasons that this did not happen in the lower-middle market:

  • Potential sellers felt that their valuations were still suppressed, and believed, rightly or wrongly, that if they delayed an exit they could raise their valuations enough to overcome an increase in tax rates
  • Potential sellers were leery of a liquidation event in such uncertain times. The thought process goes something like this: “I know what my business has been generating, even during these past few years of weak economic conditions. If I sell it, where do I invest the money in this economy? I feel more comfortable with the risk/return of my own business!”
  • Other potential sellers did want to exit, but simply underestimated the complexity and duration of the process and could not get a deal done in time
  • Still others were selling what nobody wanted – i.e., poor quality deals
  • Owners/investors chose to monetize a portion of their holdings prior to the tax rate changes through dividend recapitalizations or other transactions rather than outright sale

Empowered by hindsight, we develop narratives to explain previously unforeseen events, which only increases our false sense of confidence in yet another round of predictions. At a recent program hosted by the Philadelphia chapter of the Association for Corporate Growth, the consensus that emerged from a panel of M&A professionals was that 2013 would be a big year for transaction activity, although perhaps skewed toward the latter half of the year. Of course, for every positive factor supporting this optimism (lots of money on the sidelines, low cost of capital, improving economic conditions, higher valuations, etc.) there was a negative variable to temper the enthusiasm (continued slow economic growth, poor supply of quality deals, increasing competition from the IPO market, etc.).

My own predictions are as irrelevant to the ultimate course of economic history as anybody’s. But just to play along, my guess is that 2013 will not see an appreciable increase in lower-middle market deal activity. As the WSJ article notes, the favorable elements are not new; many of them have existed for two or three years. Even the additional tax-related variables in 2012 did not generate the activity we expected. So it is hard to be too optimistic about 2013 when that particular positive factor is gone, there are no noteworthy new ones, and there is arguably an uptick in certain negatives such as competition from IPOs. Meanwhile, the overall economy slogs on in the darkening shadows of Federal, state and municipal budget deficits and Congressional logjams. Maybe the passage of time is itself enough to generate some increase in M&A activity, as more sellers get tired of waiting for the perfect time to exit, more corporate buyers turn to acquisitions to drive growth, and private equity money comes under increasing pressure to be put to work. We shall see.

But regardless of what 2013 holds, I am bullish on the longer term, and quite certain we will see a boom in lower-middle market M&A activity sometime between now and the end of 2015. Demographics alone will help drive future deals in this segment of the market, as baby boomers need to exit their businesses to fund retirement. It may not be time to get the M&A party started just yet, and it may be impossible to predict exactly when it is time. But who doesn’t love a surprise party?