The Value Proposition of Finance and Accounting Outsourcing

The following post was originally published as an article I wrote for the DVIRC’s March 2011 newsletter.

How many companies do you know that still do their own payroll?  It is practically a foregone conclusion that payroll is processed by a third-party payroll services company.  Similarly, how many emerging growth or middle market companies have an in-house tax department to prepare their income tax returns?  The prevailing assumption is that an external accounting firm would be given this task.

Why should the rest of the accounting and finance function be any different?  While strong financial management is a critical success factor in any business, it is not necessarily a core competency to your company’s strategy or business model.  As management guru Tom Peters said, “Do what you do best, and outsource the rest.”

“Outsourcing” is often presumed to be synonymous with “offshoring” work to a foreign country, but outsourcing simply means having an external services provider manage specific business processes or functions.  Decades ago, information technology was one of the earliest business functions to be outsourced.  Finance and accounting outsourcing, or “FAO”, had its roots at Fortune 500 companies that established “shared services centers”, which allowed individual business units to share the cost of one centralized finance and accounting function.  In many cases these shared services centers were ultimately spun off as, or replaced by, independent FAO businesses.

The value proposition of outsourcing all or part of the accounting and finance function in an emerging growth or middle market company is particularly compelling, even more so than in a Fortune 500 organization:

• A wide spectrum of skill sets is required for accounting and finance, which is why there are different positions such as CFOs, controllers, staff accountants, bookkeepers and clerical staff.  Hiring for all of these individual positions may be unaffordable, and regardless not all of them may even be necessary on a full-time basis.  But neither does it work to have one or two people try to handle all of these responsibilities.  Again, they are different skill sets, and any one professional is likely to be over-qualified for some functions yet under-qualified for others.   Outsourcing allows a company’s budget to be applied to an appropriate mix of resources and skill levels, with the flexibility to change the mix as business conditions warrant.
• High-growth companies often find that they outgrow the skills of their accounting and finance professionals or processes.  As size and complexity increase, management and external constituencies such as banks, investors and a board of directors demand better, quicker information and strategic financial leadership.  Internal processes need to become more robust.  FAO lets you avoid adding or replacing internal positions, and provides a robust infrastructure of people, processes and systems that you will not outgrow.  There is built-in scalability, allowing adaptation to growth and change without adding headcount or upgrading positions.  If there is a CFO in place, he or she often finds value in outsourcing certain routine functions to allow greater focus on strategic issues.  Further, finance is complex and includes many specialized areas.  Outsourcing allows a company to leverage the depth and breadth of the outsourcing provider’s team and intellectual capital, rather than be limited to the skills and knowledge of particular individuals.  This is particularly valuable for infrequent or periodic requirements, such as capital raising, annual budgeting, quarterly financial reporting or board reporting, application of new accounting pronouncements, etc.
• FAO providers typically have access to higher-level talent because they have access to career paths within the outsourcing firm that they might not have within the accounting and finance department at a particular company.
• The cost of internal hiring is not limited to gross salary.  There are, at a minimum, employer payroll taxes and benefit costs.  The accounting and finance employees likely will be provided with computers and office space.  At certain levels, there may be equity compensation and/or recruiting costs.  There is a cost to having to manage the hiring process and onboard the employees.  There is a further cost to turnover, whether from bad hiring decisions or employees willfully leaving.  These costs are avoided through outsourcing.  And on a related note to turnover, you do not even need to worry about employees being sick or on vacation – with outsourcing, you are always covered with backup.
• FAO allows you to achieve segregation of duties without multiple hires.  An outsourcing firm can designate different employees to do different tasks that should be segregated for control purposes, whereas a company would need to have two separate internal positions to accomplish the same segregation of duties.

FAO allows emerging growth and middle market companies to achieve the same cost sharing arrangements, economies of scale and other benefits that Fortune 500 companies have long enjoyed.  The virtual business model is now commonplace for companies of all sizes.  In the not too distant future, outsourcing will be the default way that accounting and finance needs are met, just like payroll processing and tax return preparation today.