How to Build an Outsourcing Niche

hen BP Amoco recently transferred a substantial part of its accounting operations to PricewaterhouseCoopers LLP under a $1.1 billion, 10-year contract, the partner-in-charge of business-process outsourcing at the firm described the deal as “relatively new” for its sheer size and scope, not for its principle. In the past, a company hired outside expertise such as legal services for a specialized purpose, but did not shift wholesale responsibility for its accounting needs—as well as much of its accounting staff—to another entity, as BP Amoco did. What that deal dramatically highlights is the wider recognition of outsourcing as a day-to-day management tool when a company’s staff is overloaded or lacks direction, the increased range of activities that are now outsourced and a greater understanding of how it can benefit both clients and firms.

For CPA firms planning to establish or expand outsourcing services, this article offers guidance based on what has worked for our firm, the Washington, D.C.-based Lang Group, a 110-person CPA firm. Its 28-member outsource division—now called LangSource—was bootstrapped from a team of three underused audit department staff in 1998. The realization rate for LangSource is around 93%. The accounts receivable turnover ratio is approximately 22 days, and the division bills 100% of the monthly department work-in-process. It generated more than $1 million in revenue in its first full year of operation.

GET IT RIGHT FROM THE START

We can’t overemphasize this: Successful long-term outsourcing requires a close relationship between firm and client. Determining if clients are the right cultural match for us and establishing a clear understanding of the engagement specifications at the outset are the key to making it work. A failed engagement is costly and difficult to unravel, so before we take an outsourcing job, we visit the client—sometimes more than once—to obtain as much information as possible. Not all situations are suitable for outsourcing—highly specialized activities, for example. It is better to forgo an opportunity than pursue the wrong one.

For a successful engagement, an outsource provider has to carefully evaluate a job from inception all the way through the actual performance. Our firm’s checklist for helping clients analyze the degree to which functions are core or noncore also provides a service goal for us ( exhibit 1 ). A vendor criteria checklist helps clients, too ( exhibit 2 ).

After ensuring that a client has clearly identified and described the services needed, we ascertain whether we can do a better job than it can. In deciding this for your firm ask: Is our firm more focused? Can we do the work faster than our client’s staff? Will efficiencies result from delegating tasks? Will our services lower the client’s operating costs?

One early engagement ran aground because a client that was outsourcing a controller position expected our presence in the office five days a week and we knew we could do the work in three. We didn’t specify this, however, and consequently negotiated a poor contract: The client thought it was buying time when what we had intended to sell was service . In that situation the client paid about $8,000 per month for services it cost us about $12,000 per month to furnish. Every time we created an efficiency that pared a task down, say from three days to one, the client loaded on more stuff to do. We hung on to the engagement for about 18 months before throwing in the towel. Although the client was very happy with the work, our human resources division found them another controller.

Now we’re careful to meet with the client to talk over these issues as well as technical systems, cultural compatibility, staff capacity (ours and theirs), independence liability and even cross-selling opportunity. Because there are many system configurations and types of accounting software we have to know if our firm has the right systems expertise. If clients wish to use their own systems, can our staff work with them? Must the work be done in our office or in theirs? What are the alternatives? We gather as much data about the engagement as possible. Then we compare the information with our staff resources and make a proposal. After our firm and the client agree on the details, we incorporate the terms in an engagement letter. It avoids misunderstandings if we make these highly specific.

When we go in, we prepare an action plan with the client. We specify due dates and identify who on our staff will be responsible for what (such as accounts payable twice a month and monthly statements by a certain day). Similarly, we identify who from their staff will be responsible for what. Our designated employees meet with their staff liaison for a formal monthly management conference to go over the financials. In these meetings, we review the financial picture of the previous month as well as how it relates to their business plan and their budget.

Sensitive human resource management is an important aspect of outsourcing, too. Client staff may fear the loss of their jobs—a legitimate concern if the client already has let employees go or is considering disbanding an in-house accounting department. To try to ease any potentially adversarial situation, we find out who will be laid off and who will be retained. We alert the client to this morale issue and possible source of problems, and we assign an engagement leader, who meets with a client’s staff liaison to smooth the way.

Sometimes we hire the client’s laid-off staff members for the outsourcing team. Many times they know the field and have excellent skills—and are better utilized under our management performing a narrower range of tasks for a few different entities. At other times, we find them new employment through our human resources division.

We avoid predictable triggers for dissatisfaction, which include

A firm’s promise to deliver more than it can. If the job will involve more than the client thinks, say so—and charge accordingly or decline the engagement. Be clear and consistent about what responsibilities are going to be covered under the agreement.

Firm employees who don’t understand the client’s needs. To avoid scope creep—taking more responsibility than the terms of the job warrant—your staff members need to be familiar with the engagement contract. Have them read it.

A client’s feeling of loss of control. This may be remedied by something as simple as posting the outsource staff’s hours or giving the client an option for having an emergency check cut. Often what seems to be an emergency is not.

Poor quality and/or cost overruns. Evaluating the situation honestly helps our bottom line. Our firm takes on what it can handle but not more. If you don’t take the client’s best interests sufficiently into account, and the client determines outsourcing hasn’t been the best plan for the organization, you’ll lose the client and hurt the firm’s reputation.

THE RIGHT STAFF

We appointed a champion to develop and lead the new niche. Do this at the start. The job requires talent at deploying staff and the ability to deal with other partners on an equal footing. It helps your firm’s strategic decision making if you choose someone with the authority to negotiate effectively when the firm has to allocate resources.

When assembling staff we identify the needs of specific engagements and gear the niche staff recruiting to industry, private sector and public sector experience that dovetails with client needs. If an ongoing outsource engagement requires specific skills just a few days a month, we use part-time employees.

Ongoing engagements requiring less than 40 hours a week may be just right for an employee or independent contractor who prefers to handle three 10-hour-a-week jobs, for example. A roster of part-timers provides a variety of expertise as well as scheduling flexibility. Our firm employs several at-home parents who wanted to return to work yet have more time with their families than full employment allows. We’ve had great success building outsource staff with highly qualified people who want time to get another degree as well as for family responsibilities.

Efficiencies depend on getting the work done by staff whose skills meet—but don’t necessarily exceed—the requirements of the tasks at hand. Because a total outsource job is, in effect, broken down into many components, different people can do the parts that they do best, achieving greater overall effectiveness. Attention to logistics is a huge part of making it work well. If someone is assigned to two different locations in the same workday, we develop work schedules that minimize travel time between them.

ADMINISTERING THE ENGAGEMENT

When all the preliminaries have been negotiated, we set out the terms of the job in the engagement letter. Unlike an audit or tax engagement letter, which doesn’t detail how the audit or tax work will be performed, an outsourcing contract does. Successful outsourcing is as much about the process as it is about presenting a completed product. We prepare a formal, legally enforceable contract. Our basic agreement is 20 pages long. It

Identifies and communicates tasks and deliverables, explicitly describing the scope of the engagement. We’ve found it is prudent to stipulate milestones to review the engagement’s progress.

Details the retainer/fee structure, payment terms and the basis for dealing with cost overruns. Our contract stipulates payment twice a month and, to avoid friction, even sets out what expenses—such as parking—will be reimbursable.

Gives a time frame for the agreement, which is usually twelve months.

Contains a termination clause, usually stipulating a 30-day notice period, a renegotiation clause to provide for a fee adjustment (either up or down) if necessary, an arbitration clause and a penalty clause to deter the client from hiring the firm’s outsource staff. This penalty may be as much as 100% of the staff person’s annual salary, since it’s a deterrent and not a revenue stream.

Our engagements begin only after the parties have agreed on standard operating procedures, project management and quality control guidelines, such as variance reports. This is the time to establish who will be the primary contacts for both sides. These people form a vital communication link, and they will talk or meet on a regular basis.

FIND YOUR MARKET

Firms can identify potential outsourcing clients and engagements in a number of ways—through contacts, advertising, referrals or cross-selling. For example, a client mentioning that something in its accounting department is not working well for them prompts our firm to develop and offer a solution that becomes the basis of an outsourcing engagement.

One of our strategies for getting new business is to read newspaper want ads. They offer many good leads, and someone on our staff checks them every week. If an advertiser’s needs suggest an outsource service that Lang can offer, we pitch the idea.

Much of our work is for not-for-profits, for which the American Society of Association Executives (ASAE) is an important organization. We attend ASAE finance and administration roundtables to hear what problems are being aired, and the solutions our firm suggests generate new engagements, too.

WIN-WIN

One major advantage, we point out to potential clients, is that when they outsource to CPA firms their finances are in order all the time, which gives them control of an important facet of their business. Another is that outsourcing services, which are not historical (as are tax and audit), are immediate and visible to the client who pays the bill. In addition, if the relationship succeeds, clients may even save money.

Because the year-round nature of the business spreads the provider’s workload more evenly, a firm benefits from smoothing the cash flow peaks and valleys typical of conventional audit and tax practice. Besides improving revenue, a successful CPA outsourcing department helps to draw diverse branches of a firm together, provides an opportunity to attract scarce skills through part-time employment, gives staff a welcome break from routine and repetitive work and increases a firm’s contacts—all while making the challenges of the practice a little more interesting.