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!

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.

The Persistent Myth of The Social Media Generation Gap

Last week I attended a meeting of a non-profit board I am on. In discussing membership initiatives, the role of social media came up, as is inevitable these days in any conversation related to marketing, communications or public relations. Predictably, one of my fellow board members said that we should get some of the “younger” folks to focus on our social media efforts.

Otherwise reasonably tech-savvy “older” professionals referring to social media as some sort of self-imposed line of generational demarcation is one of my pet peeves. These same 40+ executives, who have had no problem integrating other evolving web technologies into their personal and professional lives, and are adopting mobile applications at a blistering pace, for some reason have become Luddites with respect to social media. This attitude has the danger of becoming a self-fulfilling prophecy: If social media is cast aside as a younger person’s game, then the older generation will indeed put itself on the bench.

Why does this mindset exist with respect to social media, while other new technologies are perceived as age-neutral? I believe it is because of a failure to understand what social media is: “Social” implies a trivial, non-business purpose, and “Media” suggests that non-marketers need not bother.

Neither is true. Social media builds networks and communities – of friends, yes, but also of professionals and their businesses’ customers, prospects, referral sources, suppliers, employees and contractors. Twitter, in particular, is more of a tool to find and discover important links, news and information, curated by trusted sources that you may not have any personal relationship with, which you can draw value from whether or not you tweet yourself, as discussed in this blog post by Benchmark Capital’s Bill Gurley. Social media has opened new pathways of communication and collaboration, facilitates connections that would have been unthinkable just a few years ago, and is a key enabler of the virtual business model. Social media destroys the hierarchical, command-and-control organizational structures of yesterday, where information had to be sent upstream to be aggregated, distilled and sent back downstream. Instead, we now have a spider web of interrelationships that can be leveraged to share knowledge, generate business, and get work done. Point-to-point, rather than hub-and-spoke. As Nilofer Merchant writes in a Harvard Business Review blog post, these seismic shifts render the very term “social media” a misnomer. Ms. Merchant, who also has written an ebook on the topic, writes, “Social can be – and already is – more than media.” She advances the theory that traditional business models and strategies have been rendered obsolete by social media’s ability to create value through the distribution of power and innovation.

The irony is that the facts do not even support the notion that social media is only for the young. Regardless, as another board member observed, whether you are older than the typical social media user or not, if you’ve got another 10 or 20 years left in your career, you’d better figure it out.

Virtual Number Two

I recently read an interesting article by Jack Welch in Fortune magazine, in which Mr. Welch used Mitt Romney’s selection of a running mate as a springboard to discuss the essential criteria for a vice president. The piece was written before Governor Romney selected Paul Ryan, but the article remains relevant in its identification of the attributes of a solid “number two,” whether in politics or business.

As they say, it’s lonely at the top, and Mr. Welch notes that some CEOs feel isolated in their decision-making. This is particularly true for entrepreneurs in early-stage companies that may lack an experienced management team. The concept of a “number two” often implies a clear second-in-command and successor to the CEO. But aside from the succession planning that good corporate governance requires, not every CEO is ready, willing or able to explicitly identify his or her “number two” to the rest of the company or the outside world. Still, the CEO should be able to draw the necessary support from each member of his or her executive team.

Two of the criteria Mr. Welch identifies for a “number two” are having “guts” and being a “partner” to the president or CEO, and I believe every one of the CEO’s direct reports should have these attributes. “Guts” means having the courage and confidence to carry out the difficult responsibility of sharing with the CEO bad news, negative messages percolating among management or employees, or even constructive criticism. In short, it means not being a “yes-man,” and being willing to express disagreement. On the flip side, though, being a “partner” means expressing that disagreement only in private, while always standing as one with the CEO in public. As Mr. Welch notes, it also means that none of the CEO’s direct reports should allow their offices to become places to “slip initiatives through.”

The CFO may or may not be the explicit or implicit “number two” that is ready and able to step in as CEO if needed. Regardless, the CFO – like all members of the executive team – must have “guts” and be a “partner” to the CEO. It falls to the CFO to communicate the hard financial realities of decisions, particularly in a high-growth (and high burn rate!) environment.

Can a Virtual CFO fill this role? Yes! In fact, a Virtual CFO is uniquely positioned to deliver hard messages to the CEO. While a member of the executive team, a Virtual CFO also brings the outside perspective of a consultant and is free from the concerns of internal political dynamics. In early-stage, emerging growth and lower middle market companies, engaging a Virtual CFO enables access to a level of talent and experience that generally is not affordable or necessary on a full-time basis. With this level of knowledge and experience, a Virtual CFO can be an all-around counselor and coach to the entrepreneur/CEO.

Of course, both Virtual CFOs and full-time hire candidates must be evaluated for the necessary attributes. CEOs should encourage their existing CFOs to be candid, and should foster an environment where the CFO feels comfortable sharing conflicting points of view and expressing disagreement in private.

CEOs and CFOs, please share insights about your relationships, and your perspective on the balance between “guts” and “partnership”.

Don’t Allow the Credibility of Your Financial Information to be Questioned

Arleen Thomas yesterday posted “CPAs: The Startup Community Needs You” on the AICPA Insights blog. The post discusses the value a CPA can bring to startup companies. To illustrate her point, Ms. Thomas points to the accounting troubles encountered by Groupon when it tried to file for its IPO, noting that it wasn’t until recently that Groupon finally added accounting and finance expertise to the audit committee of its board of directors. If accounting issues could escape unnoticed at Groupon with, presumably, significant financial expertise both inside the company and among its advisors, as well as some corporate heavy-hitters on its board, then how much more at risk is the start-up or early-stage company that has NO accounting or finance resources whatsoever?

A start-up’s financial information – both historical and projected – is, by default, viewed with skepticism by the venture capitalists or angel investors that are being asked to fund the start-up. Having a CPA firm involved is invaluable in countering this perception and establishing credibility. This does not mean that the historical or prospective financial statements have to be audited, or even reviewed; it is a significant advantage just having a CPA firm involved in preparing the information and providing financial decision support to management. It also makes a good impression on potential lenders and investors to see that the start-up’s founders and management team have surrounded themselves with solid advisors, including accounting and financial professionals. A CPA firm with a financial management outsourcing practice – bringing CFO-type operational and transactional skills – is of even more value to a start-up than traditional CPA firms that are entirely audit and tax focused.

Ms. Thomas writes:

“Andrew Mason, CEO of Groupon, could have saved a lot of time and money though if he brought a CPA into his circle of advisers a lot earlier. The truth is that startups are focused on developing and launching their service or product, and rightly so. It’s not until someone, whether an investor or bank or stock exchange, requires a CPA to be involved that most startups pay attention to their financials. But that doesn’t have to be the case.”

I couldn’t agree more! Many startups fail to see the value of accounting and finance, and resist putting scarce resources toward the necessary expertise. Like going to a doctor only when sick, they wait until the pain of NOT having solid financial statements or projections becomes unbearable, typically due to some external impetus. By then, it may be too late to take advantage of an opportunity to raise capital, or to avoid a liquidity crisis. The ultimate cost – not only in real dollars to fix the accounting problems, but also in lost opportunities and lost credibility – is likely to be far greater than the earlier savings on accounting and financial expertise.

Why Blog? Why Now?

“Start a blog” has been on my to-do list for quite some time, but the desire to blog has finally overwhelmed the intertia of procrastination.

Why blog? The first reason – listed first not because it is necessarily the biggest driver but because it is a prerequisite – is that I like writing. I find great satisfaction in communicating by the written word. I take pride in the simplest email composition, and enjoy the clarity of thought and understanding that results. Instead of only writing about pre-determined topics for client deliverables, email recipients, or the occasional journal article, why not write about any topics of interest for an audience that is defined by niche yet theoretically global?

Most importantly, though, I feel compelled to contribute to the universe of knowledge in a way that helps others. I am by no means unique in this regard; the reason the web is so rich is that people have a universal desire to make such contributions. The proliferation of reviews on Apple’s iTunes or Amazon.com are but two examples of this phenomenon, which has given these companies a huge, free workforce of prolific writers. Like everyone, I have searched the web countless times for some obscure piece of information or answer to a question, or for inspiration, and to my surprise found exactly what I was looking for – and usually much more. Sometimes the information obtained is not really “new,” but it is framed in a particularly useful way, given timely new context, or simply provides needed confirmation that at least one other person on the planet agrees with me. These benefits exist only because others took the time to share their knowledge, ideas, thoughts or feelings. Do we not all at some point have an obligation to also contribute, as opposed to just being net consumers of information and knowledge produced by others?

I have always enjoyed reading and listening to intellectual, insightful analysis by thought leaders on various topics, both within and outside of my field. But it is far more satisfying to actually play the game on the field than to be in the stands. As noted above, writing clarifies thought; it promotes a new and deeper understanding of the subject matter. Passing new information along in a blog post requires first that the information be fully processed and understood before insights can be distilled and written about. As a proponent of lifelong learning, what better vehicle than a blog to express my passion for new knowledge, ideas or information, and my equal enthusiasm for the process by which they are created?

One challenge to overcome between the earliest desire to blog and today’s first post was to define my audience and what I would blog about. My work as a partner in a CPA firm serves numerous types of clients, in various industries and stages of life, and I am passionate about all of them. But I am also interested in the issues of the accounting and consulting business itself, and the changes and innovations occurring in our industry. It took awhile to synthesize my various interests and passions into a cohesive theme with a defined audience, which I hope I have achieved. Please see my “About” page to learn about the intent behind the Virtual Lucidity blog.

One question I am sure to get is, why not include this blog on your firm’s website? There are several reasons, including the convenience of using and accessing my own blogging platform, but I have always noticed that many (though not all) accountants and attorneys similarly set up blogs separate from their firm’s websites. For an attorney’s perspective, here is an interesting blog post on the topic by Sam Glover at lawyerist.com.

I hope you will follow and enjoy this new blog!