Outsourcing has been steadily becoming main-stream even in mid-size companies over last five years driven by the successful case studies in large organization, greater awareness, the explosion of cloud computing and falling costs of communication. This article aims to be a comprehensive quick start guide for any company looking at outsourcing finance and accounting functions.
Key Outsourcing Benefits
Cost Savings: Outsourcing helps in reducing the cost by 40-60% as compared with in-house employment. Ideally a Junior Accountant with 3-4 years of experience is available at $1300-$1400 per month
Grow without overheads: Scale up and down based on your needs. You can easily have your outsourced accounting service provider deal with resource management and adjust the staffing needs as per demand patterns such as off-season dips and peak-season highs
Focus on core business: Once the burden of accounting and other back office responsibilities are transferred to external vendors, the management can then focus on core business activities and help business grow. This also enables the key finance and accounting personnel such as finance controllers and CFOs to focus on financial strategies, capital raising activities, drive operational performance and investor relations
Expertise: The outsourced vendors have access to skilled employees with various levels of accounting experience to perform your accounting activities. This is especially critical for real estate companies operating in geographies with low access to quality accounting talent.
Good Processes: Often mid-market companies have poor process and/or limited process documentation. This creates inefficiencies, reworks, and also increases the learning curve for new persons. For instance, an inefficient or absent accounts payable process leads to arbitrary processing of invoices, built up of invoices locally at regional offices/sites.
Tips for choosing the right service provider
Once you have decided to outsource the accounting functions of your company, the next step will be to choose the right service provider.
A few pointers to consider for choosing the right accounting outsourcing service provider:
- Search for vendor names through a Google/Yahoo/Bing search. The results will display a number of vendors with vastly varying capabilities. Prepare an initial list of 12-15 names
- Study the service provider’s website for quality and a clear explanation of services and capabilities. Study their client profiles, case-studies and client testimonials
- Shortlist about 8 names from the list for further questioning. Questions to ask can be
How long the service provider has been in business?
The success of an outsourcing accounting decision and transaction involves effort and time; therefore make sure that the service provider is in business atleast five years. Reliability of operations is important. Even if the firm is new, review the credentials of the senior management team and investor backing of the business and then decide. It’s also good to know more about the client profiles of the provider. This includes average client size (annual revenues and # of employees), locations, industry and processes outsourced.
How will the work-flow be managed in an outsourced scenario?
Workflow is defined as the steps required between the receipt of source or input documents and instructions by the outsourced staff from your staff to when the outsourced staff delivers the finished output to you. It will also cover the communication flow between both ends. To develop a sound and effective work flow is an important consideration in outsourcing.
What measures will be used to monitor process performance?
To keep a track of the service provider’s performance in the job, establish KPI’s (Key Performance Indicators) or parameters. In an accounting process, KPI will depend on the process being outsourced. So if its just accounts payable processing, then the parameters could be processing volume, turnaround time and error rate. If its bank reconciliation, then the parameters would be accuracy and time to clear unreconciled transactions
What are the steps involved in process migration from your location to the outsourced location?
The success or failure of the process will depend on the process migration- transfer of procedures, practices and duties from your location to the providers location. A well-planned and executed process migration will minimize the hassles related to transition. It should include
The migration phase involves detailing of existing processes, establishing time-lines and formulating a standard operating procedure. For a simple small business accounting process, the migration will be much simpler and primarily focus on setting guidelines for data transfer, monthly reporting formats and establishing communication.
Check data security measures adopted by the service provider at their end and ensure that your data is kept safe. Insist the vendor in signing a Nondisclosure Agreement which is punishable under the law if broken.
What will be the total cost of outsourcing (apart from the service provider charge out rate)?
Get a sense of the total cost associated when you decide to outsource. In addition to paying the service provider, you have to determine the cost and time spent by the staff at your end to manage the outsourcing process. Add costs of IT, remote license and any other charges arising due to the outsourced process. Also make sure of any hidden charges and non-transparent pricing structure.
Decide on the right pricing structure
Most service providers have multiple pricing structures to accommodate the need of the client. Hourly rate, transaction based pricing, a fixed slab package or a dedicated accountant fee. Though transaction based pricing seems to be the most suitable, it may be a difficult pricing structure to monitor. It may also be difficult to determine what constitutes a transaction like in case of bank reconciliation. If the volume of work is consistent, then taking a flat fee package or a dedicated option works well. If there is a high variability or short-term assignments, then hourly rates works better.
Based on the above information, make a final shortlist of three-four service providers. Research and do a good due diligence on the service providers credentials.
- Ask for references, at-least two, preferably three
- Before you make the reference call, have a set of questions that you plan to cover. Good questions to ask- reliability of services, length of the engagement, quality and timeliness of services
- Also, ask the references for any challenges or issues that they may faced while outsourcing and how they were resolved.
Once you have selected the final service provider, ask the vendor for a small pilot phase to test and check the services. The pilot project is important to establish a working relationship and to test and check the capabilities of the service provider. It also provides an opportunity for you to understand the procedural activities involved in outsourcing
There are two basic data items needed in an outsourced process:
- Source documents like invoices, bills, check stubs, bank statement etc
- Accounting file or software such as QuickBooks, Xero, NetSuite
Access of source documents
Source documents or the input files can be accesses in the following ways
- Source documents can be electronically faxed or sent by email. Usually feasible for small businesses that do not have a high volume of data to be sent
- The scanned data can also be accessed through a Google drive/DropBox account
- Client can provide online “View Only” access of bank accounts, credit card accounts and other online data
- For processes involving a high volume of data, using a document management software’s like File Cabinet is recommended to better manage files and time
Access of accounting file
There are four ways by which an accounting file can be accessed- Offline, Remote, Online and Hosted software based method.
Offline Accounting File option- Under this method the accountant works on the backup copy of the accounting file, updates the file and sends it back to the client who in turn replaces the updated file with his current accounting file.
Remote Access option- Under this method the accountant connects to the client’s computer using a remote desktop access service like GoToMyPC.com, LogMeIn or Windows Remote Desktop connection to work on the accounting software installed at client’s computer.
Online Software option- In this method, the accounting software is a web-based file. So the accountant logs in to the online accounting software (e.g. QuickBooks online) and performs the work.
Hosted Software option- This method is similar to the remote access based option. The hosting of the accounting software can be in client office LANs or in third party hosting service providers such as Personable.com.
The most popular among the methods is the online software option as the method reduces upfront software costs and also ensures hassle free maintenance of software.
Finalizing and Contract Negotiation
Based on the above, once you have chosen and selected the right accounting outsourcing service provider for your accounting needs the next step would be to draft the service agreement and lay down the essential terms.
Scope of Work
Any successful engagement in outsourcing will start with a clear statement of what needs to be done and accomplished. Have a defined scope and schedule of your project. Try setting up priorities upfront, inform the service provider of your requirements and the way in which the work need to be done. This also includes a clear list of services to be performed, the staffing level required and the turnaround time.
Level of Quality
The level of quality should not be compromised at any cost. Outsourcing aims at reducing the cost however it should be noted that it is by no means to reduce the quality of work. The accuracy level, turnaround time, reporting formats are a few parameters which could be used to define and measure the quality of service level from the service provider.
The normal payment terms are within 7-15 Days of invoices. For large engagements, Net 30 Days are also given
The pricing structure, variables, slabs and staffing level should be clearly specified. Things to cover for a full-time employee include how many man hours in a month, dedicated or changing staffing, how are staff holidays handled.
Similarly for transaction based pricing, a transaction has be clearly defined and should be easily measurable.
The termination clause should be clearly defined in the contract. The termination clause is essential if you are not satisfied with the level of services provided by the vendor. Follow the standard industry practice of a 30/60 day notice of your intention to terminate the contract. Insist that your vendor agrees to transfer all files back to you and provide reasonable assistance to a new vendor.
Following is an elaborated summary of the dos and don’ts while one looks at engaging with an outsourcing service provider. The decision to outsource can be an easy one. If there is a company that can do the work better, faster, and cheaper than you, give it a TRY.