Articles and White Papers | W Squared

Excerpt from July 2000 issue of CFO Magazine.

By Kris Frieswick, CFO Magazine

Re'Nu Office Systems may seem an unlikely candidate for financial business process outsourcing (BPO). After all, the Santa Fe Springs, California-based firm generated only $10 million in sales last year and employed a finance staff of five - hardly the profile of a traditional outsourcing client, one that usually signs a large, multiyear, multimillion-dollar contract.

Still, the company, which refurbishes and manufactures office panel systems (the walls that make up office cubicles), needed finance support. Before Re'Nu was acquired in February 1999 by $125 million office-workstation and equipment-marketing firm Business Resource Group, President Leigh Cook says, "We just couldn't provide our new parent with all the types of information that it wanted as fast as it wanted with the staff we had. [Hiring] a controller probably could have whipped our finance department into shape, but the time the hiring would have taken would have been huge, and it would have been unfair to throw that at any one person."

In response, Re'Nu outsourced its finance department in November 1998 to LOR Management Services LLC, a former CPA firm based in Los Angeles. LOR now handles all of Re'Nu's finance functions, including monthly reports to its parent. The company also acts as Re'Nu's application service provider (ASP) for its finance software package, Great Plains. And although Re'Nu encountered some initial bumps with connectivity to the remotely hosted programs (due to problems with an unrelated installation of a high-speed line), Cook says he is very pleased with his new outsourcing arrangement. It currently costs a fixed fee of $15,000 a month and has allowed Re'Nu to reduce its finance staff from five to two, one of whom is a newly hired controller who oversees the outsourcing contract.

Until recently, however, a company like Re'Nu probably wouldn't have been able to secure a business process outsourcing contract at all. Such contracts are usually large and long term (10+ years), with the company's existing staff and relevant equipment assets absorbed by the outsourcer, and with the client billed on a cost-plus basis. In addition, the primary financial BPOs have been the Big Five accounting firms, which, until recently, wouldn't even look at a client unless it had sales of more than $1 billion.

But a convergence of several factors has made it easier for clients like Re'Nu to find a financial BPO on a small scale. The Internet and the availability of bandwidth, for example, have allowed a new genre of outsourcers to arrive on the scene. Called "growthsourcers" by some, these financial outsourcing boutiques are springing up all over the country and delivering their services via the Web, which allows them to target a smaller market by centralizing their operations into shared services centers that serve multiple clients.

For their part, companies have grown increasingly comfortable with handing off processing functions of all types. And a hot job market argues in favor of that trend. Although no size estimates are available for this new market area, today, start-ups, dot-coms, and small and midsize firms are just as capable of outsourcing their financial functions as the big corporations are. In fact, says Frank Casale, executive director of the Outsourcing Institute, an outsourcing research, consulting, and marketing firm, "in the last three years, we've been overwhelmed with requests for information and help from small companies that want to use outsourcing across the board."

One-Two Punch

One of the drivers of this growthsourcing trend is the combined BPO/ASP capability that companies such as LOR are offering. Some observers point to this one-two combination as particularly beneficial for companies that cringe at investing in large, powerful accounting programs as well as at the demands of staffing up and running a finance department. And nowhere is this paired offering more attractive than in the dot-com start-up world.

Randy Schwed, controller of Epoch Partners, a prerevenue dot-com financial-services start-up based in San Francisco, points to this as a key factor in his decision to outsource his financial processes. "We're developing a lot of proprietary applications that are core to our business model," Schwed says. "We'd rather have [IT personnel] doing that than working on financial systems, which are boring and don't make the company any money."

He feels the same way about creating a new finance staff. Epoch is an online investment bank created by Charles Schwab and financed by Schwab competitors Ameritrade Holding Corp., TD Waterhouse Group Inc., and venture capital firms Kleiner Perkins Caufield & Byers, Benchmark Capital, and Trident Capital. The company's Web site will allow online access to initial public offerings for the brokerages' combined client base of roughly 6 million.

Once launched (scheduled for June 9), Schwed expects a growth curve that looks like a hockey stick. Considering the tight job market in San Francisco, he believes he won't be able to staff up fast enough to keep pace with the company's growth. Then there is the issue of just where he would put the new finance staffers, given that it's still easier to get venture capital than office space in the hot Bay Area realty market. "We wanted to get up and running quickly, we needed to be able to scale quickly, and we didn't have the resources to build everything in house," says Schwed.

Whither the Big Five?

With all the new players in this smaller market, one may wonder where the Big Five fit in, especially since they started finance BPO. The difficulty in marketing to smaller businesses - the need for fixed monthly cost contracts, shorter contract terms, and lower fees - has, until now, kept the Big Five from aggressively entering this market, says Peter Bendor-Samuels, CEO of the Outsourcing Center, a consulting and information Web-site firm in Dallas.

"The restriction is the cost of sales," said Bendor-Samuels. "The big guys have been asking, 'How do I get to the small guys without bankrupting myself?' A small dot-com may be a $4,000-a-month deal. If I'm a Big Five firm, I can't even justify buying a ticket to come see you."

There are several things that observers predict will keep the Big Five from succeeding in the small and midsize space. One is their fee structure, which is still usually based on cost-plus contracts, whereas most small/mid/start-ups are looking for fixed or transaction-based pricing. "From an outsourcer's perspective, the lure of a transaction-based fee situation is interesting," says White. "However, there's not enough experience to price those contracts on a transaction basis. The business is too young. There's no history yet."

Caveat for Clients

Despite the need for speed, experts and CFOs alike advise extreme caution when setting up engagements with new, less-established outsourcing players. "The biggest drawback of these deals is trust," says Re'Nu's Cook. "You've got someone handling all your financial business. You're putting them in charge of collections, which affects cash flow, and it touches your customer base. You've got salespeople, and you're allowing someone they don't know to interface with their customers. They're dealing with your vendors, making sure they get paid. What if they don't get paid on time, and they put us on credit hold, and we can't make our deadlines? That's why we hired a controller."

© CFO Publishing Corporation 2000. All rights reserved.