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.

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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?

Virtual Reality

On Tuesday, February 12, 2013 I had the privilege of moderating a panel discussion on outsourcing at an event held by the Entrepreneurs Forum of Greater Philadelphia (EFGP). The program was entitled “Virtual Reality: Using Outsourcing & Virtual Business Models to Achieve Peak Performance.” The objective of the panel discussion was to give potential buyers and providers of outsourcing services an overview of trends, opportunities and challenges in outsourcing. Particularly for the growth companies that the EFGP serves, we hoped to provide an overview of the resources available through outsourcing as a company grows and evolves, and to provide guidance in navigating the decision of whether to outsource and how to outsource.

Key discussion points included:

  • The value proposition of outsourcing: While there are many benefits, the overarching value proposition is to be able to focus on your core competency. As Tom Peters said, “Do what you do best, and outsource the rest.” This might have been expanded to say, “Do what you do best, and outsource the rest TO WHOEVER DOES THOSE THINGS BEST.” Patrick Gibbons, co-founding partner of The Emerson Group, eloquently described Emerson’s wildly successful business model that provides outsourced services while itself relying upon outsourcing for non-core functions.
  • Outsourcing levels the playing field and enables smaller, earlier-stage businesses to successfully compete with larger encumbents. Joel Cardis, Inhouse-Counsel.net, described several examples he has seen in his role as outsourced general counsel, while explaining how his proactive role with his clients is a modern twist on contracting out for traditional legal services.
  • Outsourcing is continually evolving, and within each functional area (finance, IT, marketing, logistics, etc.) outsourcing is at a different stage of maturity. Outsourcing services are moving up the ladder from handling routine or transactional tasks to more value-added, knowledge-based and strategic activities. Staffing, a form of outsourcing, has progressed from temporary factory workers, to temporary office workers, to interim executives, and now to “fractional” executives, or “executives as a service,” evangelized by panelist Sue Cyliax of Chief Outsiders. Similarly, staffing solutions have evolved into managed services, whereby the management of an entire business process or functional area is outsourced, such as recruiting process outsourcing, represented by panelist Emily Biscardi, founder of Xelerate.
  • Advances in information technology – namely, cloud-based and mobile applications – have made outsourcing more practical and pervasive. As Anthony Mongeluzo, President of ProComputer Services (and EFGP President) noted, the “cloud” is really just a new name for something that has been around for a long time, but broadband technology has made it possible to move vast amounts of data digitally and wirelessly to and from the cloud. Sam Vinovich, a colleague of mine at Fesnak and Associates LLP, described Fesnak’s use of cloud accounting technologies Intacct and Bill.com to remotely provide a robust accounting and financial management solution.
  • Outsourcing is not a job-killing practice and should not be confused with offshoring. It is creating whole new career paths for professionals. For example, a controller in a middle-market company may have no upward mobility if the CFO she reports to stays in her job for a long period of time. But at a firm that provides outsourced accounting services – where her area of expertise lies within the firm’s own core competency and reason for being – she has unlimited opportunities for advancement. And outsourcing provides a wide spectrum of experiences to the professionals delivering the services, which in turn adds to the value proposition for buyers of those services. To use Mongeluzo’s metaphor, an IT professional at an IT outsourcing firm is an “alley cat” that has been exposed to all sorts of ever-changing experiences in the outside world. An in-house IT professional, in contrast, is a “house cat”: limited to the experiences seen inside his or her company, confined by that one company’s vision, resources, budget and existing technologies.

It was a dynamic panel discussion that I was pleased to be a part of. Judging from the audience questions and feedback surveys, it was well-received. Being in the outsourcing field, it is easy to forget that outsourcing is still not necessarily mainstream, at least not in all functional areas, and business professionals still have a number of questions about how it all works and can best be leveraged in their organizations. The panel discussion was a great opportunity to continue to educate the marketplace and evangelize the benefits of outsourcing. Thanks to EFGP, the panelists, and all who attended the event!

The Dawning of the Age of the Digital CPA

I recently attended the 2012 inaugural DigitalCPA CPA2Biz Cloud User Conference in Washington DC. The theme of the conference was how cloud technologies are transforming the CPA profession. While the impact on traditional audit and tax services was covered, the main thrust was on outsourced accounting (also referred to as client accounting services), which is enabled by cloud technologies such as Intacct and Bill.com. The American Institute of Certified Public Accountants sees outsourced accounting as a very significant growth area for the profession, and the software vendors are doing their part to drive growth through CPA firms, which they see as a primary distribution channel.

Unlike audit and tax, for which there is a huge body of knowledge on best practices and professional standards, the outsourced accounting realm is just now receiving the collective attention of the profession. Sure, standards exist for predecessor services to outsourced accounting, such as bookkeeping and “write-up” work, but those services are rapidly morphing and expanding as cloud technologies enable firms to become virtual accounting and finance departments for their clients.

Outside of the general and keynote speaker sessions, there were a wide array of concurrent sessions to choose from, along tracks categorized as practice management, technology strategy, or hands-on technology training. As partner-in-charge of my firm’s outsourcing practice, I spent most of my time in the practice management sessions, which included topics such as value pricing, staffing, client needs analysis and knowledge management.

A common theme throughout many of the general and concurrent sessions was that cloud technologies are a critical path to offering clients a total solution, as opposed to just selling labor and time to do the same things that clients could do themselves; this favors a value pricing model rather than hourly rates. Another theme was the ability to standardize processes in the cloud so that they can be efficiently replicated. Specialization within industry verticals was also a recurring theme, converging with the broader trend of the market increasingly favoring specialists over generalists. There are many reasons to specialize within industry segments, including being able to offer deep, industry-specific intellectual and social capital. Within the context of cloud technologies, specialization allows for further industry-specific standardization and replication of processes and reports. Another consistent theme was how an outsourcing practice is culturally different than traditional CPA firm practices like audit and tax, such as with respect to staffing, position titles, compensation, pricing arrangements, and management of client relationships.

My firm has provided outsourcing services since its inception eight years ago, and it was refreshing to be able to join with other professionals and thought leaders to share ideas and our collective passion for the value proposition of outsourcing.  Our firm was represented by Nicole Ksiazek on two different panels. There are relatively few firms doing what we do, and that was apparent by the attendance at the conference. There were about 400 attendees, and while one would expect the audience to be the early adopters of cloud technologies, nearly half were only exploring, not using, cloud applications. Even many of the firms held up as examples of leaders in cloud-based outsourced accounting have nascent practices, are in the process of evolving traditional write-up work to the new model, or are serving very small businesses that do not have much complexity.

There is an irony to the automation and related efficiencies that CPA firms can realize through cloud technologies, and it was highlighted by keynote speaker Geoffrey Moore’s own presentation: Automation leads to commoditization. Clients will be able to achieve the same benefits of cloud applications on their own, which will commoditize the outsourced accounting solutions that firms offer. While the cloud is indeed a game-changing enabler that supports the economics and logistics of outsourcing, a company’s decision to outsource its finance and accounting is ultimately going to have to make sense for reasons other than technology alone – which, of course, I believe it does, as articulated in this prior post among others.

As Moore further explained, this tendency toward commoditization challenges firms to differentiate themselves – which, again, is going to be more and more difficult as other CPA firms, and clients themselves, adopt similar cloud technologies. Continuing the cycle, Moore’s answer for the need to differentiate is to specialize; only then can you optimize your offering, before the next disruptive technology comes along and the cycle repeats. So once again, the ability to specialize – in terms of industry depth or other subject matter expertise – is front-and-center. Cloud technology enables a firm to efficiently leverage and apply this knowledge within industry sectors and specialized areas, but the cloud is not an end in itself. While it may seem like a mixed metaphor for a term that calls to mind something floating in the sky, the cloud is only a platform.

Transforming How Accounting Gets Done

Last week was our firm’s annual meeting, when our managing partner provides all employees with a recap of the past year and a look ahead at the next year’s goals. Each service line partner presents a similar perspective on his or her own practice area. Because we are adding new employees all the time, this also gives our most recent hires an opportunity to understand the firm’s capabilities outside of his or her own group.

As I prepared my talking points, I reviewed the first bullet on my PowerPoint, showing the mission of our Financial Management Outsourcing group: “To provide financial insight and leadership to help entrepreneurs, executive teams and investors take their organizations to the next level.” In years past, I have started my presentation by reciting this mission statement. While we certainly remain true to this longstanding customer-centric mission, I was suddenly struck by the following thought that seemed more appropriate as the kick-off of my presentation:

“We are doing nothing less than transforming the way accounting gets done in emerging growth and middle market companies!”

I have posted previously on the value proposition of finance and accounting outsourcing, so I won’t get down into the details again here. Doing so was not on the agenda for the annual firm meeting. But what I did say was this:

“Imagine you are talking to an entrepreneur about her great new product. And then she says she plans to build a factory to manufacture it. You would say, ‘You’re crazy! Find someone else to make it! Outsource it!’ You would give her similar advice if she wanted to hire several employees to form an IT department, or someone to process payroll. Yet with accounting, the default choice still seems to be to hire people internally. And THAT is what we want to change – to make outsourcing the default choice for accounting and finance, like it is for manufacturing, IT and payroll.”

Seems pretty self-evident to me. I am more enthusiastic than ever about the accelerating trend, and I look forward to being with others that share this passion at the CPA2Biz DigitalCPA Cloud User Conference later this week. Stay tuned for insights gained from this three-day event.

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.