How to Build an Outsourcing Niche: Selecting the Right Engagements Is the Key
When 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, page 49). A vendor criteria checklist helps clients, too (exhibit 2, page 50). 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. …