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.

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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.)

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.

Consumer Product Companies Get It!

Last week I attended the Consumer Healthcare Products Association’s annual Market Exchange. Although it was the third time I have attended this event, I am always struck by the extent to which consumer product companies have embraced outsourcing and virtual business models. These companies, particularly those at an early- or emerging-growth stage, outsource product manufacturing; order fulfillment, invoicing and logistics; payroll; information technology; accounting and finance; public relations; and even some aspects of sales and marketing. Each year, the ecosystem of outsourced service providers at the event seems to expand.

Management guru Tom Peters said, “Do what you do best, and outsource the rest.” So what is it that consumer products companies do best? Develop, grow and manage their brands. Once a brand strategy is defined, outsourcing plays a prominent role in tactical execution within key functional areas. With a relatively small internal team, revenue-per-employee hits previously unheard-of levels.

Consumer products certainly isn’t the only industry that exemplifies the virtual business model. Technology and life sciences companies clearly “get it,” and businesses in every industry use outsourcing to some degree. But the power of virtual business becomes very clear as you hold in your hand a physical product that was neither manufactured nor shipped by the company whose name the product bears. Yet the brand occupies a place in the consumer’s mind, as a brand by definition must.

Managed Services vs. Interim Staffing

“Outsourcing” can take many forms. Interim staffing, or staff augmentation, has long been an option that companies have used to fill unanticipated vacancies or temporary needs for additional resources. Once used mainly to fill lower-level manufacturing and administrative/clerical jobs, interim staffing ultimately moved up-market to meet the demand for temporary accounting professionals and even interim controllers and CFOs (for positions at levels such as controller and CFO, interim staffing is generally referred to as “interim management”). Interim staffing generally involves a company temporarily filling one or more positions with people provided by an interim staffing firm, with the company’s managers supervising the temporary staff just as they would supervise internal employees. Managed services, in contrast, is a form of outsourcing whereby an entire function or process is managed and delivered by a third-party firm. Outsourcing payroll processing to a third-party payroll services provider is an example of managed services, whereas hiring a temporary payroll clerk reporting to an internal payroll supervisor would be an example of interim staffing.

Managed services has its origins in the shared services concept, which began in larger companies with multiple business units and/or facilities. The idea of shared services was to reduce the cost of a company-wide function, such as accounting and financial management, by taking it out of each individual division or location. By eliminating redundancies and creating one centralized hub, or shared service center, to fulfill that function for all units of the company, economies of scale were achieved and common costs were defrayed among multiple entities or sites. The next phase in the evolution of this concept was to outsource shared services to a third party; in some cases companies actually spun off their own shared service centers as independent entities. Even greater economies of scale were realized, as these third-party shared service centers now served multiple organizations, allowing costs to be further leveraged across numerous companies.

Although many such outsourcing firms are located offshore, bringing favorable labor rates into the mix, it should be noted that labor arbitrage is not the only benefit and is in fact becoming less important as labor rates increase in places like China and India. Outsourcing need not be, and is not, synonymous with offshoring. The benefits of outsourcing, even to US-based managed services firms, include cost sharing, turnkey infrastructure, best practices, continual process and system innovation, scalability, redeployment of internal resources away from non-core activities, and access to superior talent that has a career path at the outsourcing firm that they might not otherwise have in a non-core internal function. (Please see my earlier post, The Value Proposition of Finance and Accounting Outsourcing).

Outsourced shared services, or managed services, have been used by the Fortune 1000 for years, but the trend is still taking hold in middle market and emerging growth companies. While these smaller companies are familiar with outsourcing payroll, IT, and certain other areas, outsourcing entire functions such as accounting and financial management, or human resources, is still an emerging trend. Many middle-market and emerging growth companies have only one business unit or location, so setting up their own internal shared service centers is not a meaningful alternative. But outsourcing functions to a third-party managed services provider enables them to avail themselves of the same advantages as the Fortune 1000.

While both interim staffing and managed services can be viable alternatives depending upon what the client company’s management wants to accomplish, they are very different solutions:

  • Managed services provides a complete turnkey solution that is managed by the outsourcing firm, whereas interim staffing fills individual positions that are still supervised by the company’s internal managers.
  • Managed services are delivered with a cohesive infrastructure of people, systems and processes that represent best practices, whereas interim staffing relies on the company’s existing infrastructure and each temporary employee may have his or her own way of doing things.
  • A managed services provider is accountable for all deliverables and quality control, whereas interim staff are accountable only to follow the direction of the company’s internal management.
  • A managed services provider brings proprietary intellectual property to bear in its services, while an interim staffing firm is generally offering only resources to work within the company, without proprietary intellectual property.
  • A managed services relationship can be consultative and collaborative, and sets direction for continuous improvement in the particular functional area. Interim staffing simply fills a specific need as defined by the company, and generally lacks the consultative/collaborative aspect.
  • Managed services can reduce expense by the sharing of resources and costs across multiple client companies (economies of scale). In contrast, interim staffing will generally cost more for a given position than internal hiring, and is typically only of value when the need is short term and the company wants to avoid a full-time, permanent hire. Which leads to the next distinction…
  • Managed services can be a permanent solution that can supplant both part-time or full-time internal positions, whereas interim staffing generally makes sense only for temporary situations.
  • Managed services employees are already working together effectively as a team within the culture of the provider firm and have a pride in their “brand”. In contrast, interim staffing resources must fit into a client company’s corporate culture, be able to gel with the team they are placed on, have to navigate internal company politics, and generally do not even have much of a shared identity, collegiality or loyalty back to the interim staffing firm that employs them, let alone to the client company that is using them temporarily.
  • Managed services providers can attract superior talent, because they are part of what is “core” to the managed services firm and have a distinct career path that may not exist at a staff augmentation firm, where they may be doing interim work only as a stop-gap between full-time jobs or even winding down their careers.
  • Managed services firms have an internal commitment to continuing education in order to remain leaders in their functional realms. In some but not all cases, this may be lacking at interim staffing firms, as the necessary skills vary from project to project and their objective is simply to have a stable of people with a variety of skills. Client companies may have to train temporary staff themselves.

As the above points illustrate, there are many advantages to managed services. This does not mean, however, that there are no advantages to interim staffing. As Alsbridge, Inc. notes in a white paper, staff augmentation offers greater control, less risk, and less onerous contract requirements. Interim staffing can be a particularly good solution in certain situations, for example when very specialized individuals are needed to fulfill a defined short term role, or when unskilled labor is needed. Alsbridge further suggests that a hybrid approach, involving both managed services and interim staffing, might be the ideal approach for certain companies, especially as needs are addressed across multiple functions and processes.