By Richard Gamble

Outsourcing finance and accounting functions still has not caught on with middle market ompanies in a big way. “Financial information has always been kept close to the vest,” observes Katherine Jones, managing director of enterprise business applications at Boston-based Aberdeen Group, a business technology research firm. “It’s one of the last things they will turn over to someone else.”

The most popular tasks to farm out are generally repetitive and prone to economies of scale when performed by one company, and rarely involve specialized tasks that require intervention by a knowledgeable individual.

Payroll has been the traditional example. The data changes very little from month to month. Compliance is with state and federal tax withholding rules—nothing specific to the company. Scale makes it cheaper for the service provider.

But, there are signs that middle-market companies are slowly becoming more willing to push beyond a few familiar services like payroll, tax advice, and collection of delinquent accounts, says John Hagerty, vice president for research at Boston-based AMR Research. “They’re willing to push the envelope but not shut down the internal finance and accounting operation.”

For example, the logic that drove many middle-market companies to outsource payroll now is being applied to accounts payable. Most large banks sell an integrated payables service to midsize companies. Their promise: Just send us your A/P file when you’re ready to pay, and we’ll initiate the ACH (automated clearinghouse) items, send out the wire transfers and cut and mail the checks. And since the bank probably already owns the disbursing account or accounts, funding can be part of the automated process.

In addition, middle-market companies with significant B2B collections long ago signed up for bank wholesale lockbox service to have banks receive and deposit incoming B2B payments as well as capture and transmit select remittance information. Now technology is making it attractive to expand that service and outsource more of the accounts receivable management process like cash application—matching payments to open receivables so they can be closed.

Expanding banks’ role in A/P and A/R processing is incremental outsourcing. Business staffs still do the work and make the decisions to prepare the files for action. Banks take the handoff and execute—i.e., print and send invoices (A/R) or print and mail checks and make electronic funds transfers (A/P).

A more radical approach involves trying to outsource basic accounting—all the bookkeeping entries and balancing and reconciling that create a company’s accounting books. However, this is still not very popular since companies must give up too much control.
What kinds of middle-market companies are most likely to outsource F&A?

1. High-tech start-ups that have grown. They always liked the idea of tapping into the best technology, and they are being told by investors to outsource F&A and focus exclusively on bringing their products to market.

2. Companies that have outgrown their legacy accounting systems and need to upgrade them.

3. Companies under pressure to streamline operating processes and cut costs by reducing headcount or to support rapid growth without increasing headcount.

4. Companies that are already outsourcing certain activities (e.g., having a bank lockbox to process collections) and chose to expand the service (e.g., having the bank send invoices as well as receive payments).

For example, CoEfficient Backoffice Solutions of Pasadena, Ca., does full accounting for 30 companies under $150 million in revenue with a staff of 40 “We can do everything that would fall under a controller,” explains Brian Regan, CEO. CoEfficient’s “complete back-office solution” includes A/P, A/R, fixed asset management, bank reconciliation and month-end close, as well as time and expense tracking, expense reimbursement and GL maintenance.

Most companies that buy the bundled solution let CoEfficient host their accounting records on its Microsoft Great Plains 7.0 high-end software, which gives them Internet access, usually 24x7, to a sophisticated system without having the hassles and expense of buying and installing it, Regan notes.

For payables, the invoices ideally come straight to CoEfficient, which images them, enters them into A/P and then uses its workflow system to route images to the client to be coded and approved for payment—all on-line. While service invoices routinely come straight to CoEfficient, the more complex purchase order invoices sometimes are handled by the company first and sent on to CoEfficient after they have been approved.

The receivables side is less predictable. Some companies early on hand off a billing file to CoEfficient and let it generate and mail the bills. Others do their own billing, then forward an A/R file to CoEfficient so it can do the cash application when payments come in and the follow-up collections work when they do not, Regan explains.

Herndon, Va.-based Exostar, a 2 1⁄2 year-old B2B electronic marketplace for the defense and aerospace industry, has outsourced most of its finance and accounting to CoEfficient since its inception. With $9 million in annual revenue and a workforce of more than 100, its internal finance and accounting team numbers just four, counting the CFO. CoEfficient keeps Exostar’s books on its Great Plains system. Most payments are received at a bank lockbox and reported to CoEfficient for posting.

The paying side is still a work in progress, reports John Hamilton, senior accountant. Exostar had been forwarding invoices as received to CoEfficient, which would put them on hold pending approval. But some suppliers were paid prematurely because the approval status was not clearly communicated. So now Exostar keeps the invoices until approvals have been completed, then forwards them to CoEfficient for entry into A/P and payment.

Will outsourcing these tasks ever catch on in a big way? Many finance pros remain skeptical. Kathy Gregg, a partner of Treasury Strategies Inc., a Chicago consulting firm, notes: “There will always be a CFO with a small staff to deal with capital structure, risk management, financial statements, investor relations and reporting to the board, but there might not be a treasurer or a controller and the staffs they normally would have.”