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”.

The More The Merrier

Cloud-based accounting and financial management software maker Intacct, through its alliance with the AICPA and CPA2Biz, has been hard at work developing its CPA firm channel by teaching firms how to start outsourced accounting practices. As part of this initiative, Intacct is running workshops to help CPA firms develop business plans for what Intacct calls “client accounting services.” As a result of my firm’s BPO partnership with Intacct, I had the privilege of attending one such workshop a couple of weeks ago in New York City.

At first, I must admit that I was not thrilled with the idea that Intacct is encouraging new competitors to enter the finance and accounting outsourcing arena. But I soon realized that Intacct is helping further my vision of a day when outsourcing the finance function is the automatic, default choice for early-stage, emerging growth and middle market businesses – much the same as outsourcing payroll is now standard practice.

So I welcome all of my potential new competitors, and am happy to consider them allies in educating and developing the market for finance and accounting outsourcing, which is still in the nascent stages of adoption among small-to-medium size enterprises. And I appreciate Intacct’s role in creating a critical mass of outsourcing firms catering to these companies, as it can only help validate the concept!

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.

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.

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.