The Difference Between Outsourcing and Bookkeeping Services
When I talk to people in Houston and across Texas about what AcctTwo’s Outsourcing practice does, I often find that people immediately put us in the familiar category of bookkeeping services companies, or compare our services to the “write-up” services generally performed by CPA firms for small and medium-sized businesses (SMBs). When I talk to prospective clients, I’m often told things like, “I already have an accountant,” or, “I’ve been with my CPA for 20 years and I’m happy with him.” I sometimes even hear, “I already have someone who does my taxes.” These types of responses let me know that the person I’m talking to doesn’t understand what AcctTwo does, which of course tells me we need to do a better job of explaining our value proposition and how it’s different from the traditional bookkeeping or write-up model.
We all do this, of course: we like to put people or service providers into “buckets” so we can quickly understand what they do by comparing them to other, similar, businesses. This approach generally works well, until someone comes along who breaks the mold and defies comparison to the well-known models. I like to think we broke the mold.
A Paradigm-Shift Analogy: AcctTwo and Apple
Before I get into details about what we do and how it’s different from the traditional CPA or bookkeeping services approach, let’s look at an analogy involving a recent and well-known mold-breaker: Apple Computer. When Apple first came out with the iPod, it was unlike anything anyone had seen before. If after hearing a description of it, you quickly said, “Oh, it’s a Walkman,” you’d have completely missed the point. When the iPhone came out, if you’d said, “I see, it’s basically a cell phone,” again, you’d have been off by about a mile. Finally, if after hearing a description of the iPad, you’d said, “It’s a tablet computer,” people would have assumed you don’t make it out of the retirement home too often and would have started speaking more loudly so you can hear them better.
Now, please don’t think that I would put AcctTwo in the same category as Apple in terms of the level of innovation we bring to the area of accounting and back office processing. What Steve Jobs and his team accomplished is truly revolutionary; that type of change only comes around a few times a century. But, I think the analogy is useful in illustrating that one shouldn’t always categorize companies into the familiar, comfortable pigeon holes. Every now and then, something unique comes along.
The Traditional Bookkeeping Services or Write-Up Model
SMBs have used bookkeepers or “write-up” firms to help them keep their books for decades. Although terminology is not consistent in the industry, bookkeepers are generally people who provide basic accounting-related services who are not CPAs. CPAs and accounting firms provide similar services under the category of “write-up” or, the more technical term in the industry, compilations. These types of accounting service arrangements typically share the same qualities:
- The client company usually has an internal employee or employees, ranging anywhere from an administrative assistant or receptionist all the way up to the owner / entrepreneur, who handle(s) the day-to-day administrative tasks such as writing checks to vendors, sending invoices to and depositing payments from customers, paying employees their payroll and expense reports, and other back office tasks.
- The bookkeeper or CPA comes in after the fact, typically at the end of the week, month, or quarter, and either records for the first time the true accounting entries into the general ledger that reflect the historical business activity since the last time they were there, or makes the necessary adjustments to the general ledger activity already recorded by the company to “correct” or “true-up” the accounting and make it presentable to the bank or other external stakeholders.
In the most extreme form of this after-the-fact accounting exercise, I’ve seen businesses go for an entire year without any accounting records other than a check book, and then eight-and-a-half months after year-end, at the last deadline for business taxes with extensions, have an external accountant “write-up” the prior year’s accounting so that the business tax return could be filed.
Regardless of the specific arrangement or the frequency of the accounting updates, there are generally two things that always characterize this model:
- The financial reports are not fully prepared or finalized until long after the close of the accounting period in question, resulting in old, out-dated information that is not useful for running the business.
- Responsibility for real-time, accurate financial statements and management reports is split between the internal administrative personnel or company management, whose main objective is to get vendors and employees paid and customers billed today (the “real-time” part), and the external bookkeeper or CPA, whose main objective is generally making sure they follow all the rules required by their industry to enable them to put their name on the final product or, in the extreme case, making sure they have adequate information to sign a tax return eight-and-a-half months later (the “accurate” part).
The end result of this time-honored and accepted model is out-dated and stale financial reports that are completed well after they might be relevant to the business, primarily because they are prepared in order to satisfy accounting professional standards or after-the-fact tax returns, not because they are being used to run the company. External bookkeepers or CPAs tend to view the incremental value they add to the business as “correcting” the books prepared internally by the company, acting as a “learned profession” to bring their highly technical knowledge and experience to bear in helping their less-schooled and uncertified clients produce reports that meet a higher standard.
This disconnect between the real-time business transactions processed every day and the after-the-fact historical financial statements received 30 days to 6 months later is the primary problem with the bookkeeping services industry today. It’s a fundamental flaw that prevents business owners and management from getting what they should be able to take for granted: timely and accurate financial and operational data at their fingertips that enables them to run their business real-time.
Accounting and Back Office: There’s Got to Be a Better Way
If, after reading the above description of how the accounting and bookkeeping services industry serves its clients, you’re left wondering why this situation continues to exist, and why someone hasn’t come along and solved this problem, you’re like us. That’s the question we asked ourselves two years ago before we took on our first outsourcing client. There had to be a better way.
Capturing Data Once, at the Source
When talking to a banker the other day about our services, he asked me, “How do your clients get you their stuff?”, clearly thinking along the lines of the outdated bookkeeping model, where clients provide a “shoe box” of invoices and receipts to their bookkeeper or CPA for them to input into the accounting system. When I told him, “We have their stuff, and we convert it to useful information for them to run their business”, I think I blew his mind.
That is the fundamental way AcctTwo breaks the mold: we capture our client’s business transaction data once, at the source, when the transaction occurs. We do this because we actually process our clients’ business transactions, in our office, on our accounting system. This allows us to provide our clients true, real-time information. This is what business process outsourcers (BPOs) do: they actually outsource the business transaction processing on a day-to-day basis.
As an example, instead of receiving our clients’ vendor invoices in a shoe box from the clients, their vendors actually send the invoices to AcctTwo’s Financial Operations Center in Houston, TX. There, invoices are received in the mail every day, scanned into an electronic queue, and processed for client approval within no more than 48 hours (current average is actually 18.6 hours). So their accounts payable and expense information is up-to-date within no more than a day or two. Another example is cash accounts, which are reconciled daily and always up-to-date within one business banking day. And so on.
A Completely Different Business Model
This type of service requires a completely different business model, one that accounting firms or single-shingle bookkeepers are not well-equipped to handle. Our clients depend on the AcctTwo team to be able to process their business transactions on a real-time basis. This requires us to have a full compliment of back office personnel, fully dedicated to moving those transactions through our operations center quickly. They can’t wait until their CPA firm has available staff to focus on “catching up” the accounting, or until Sally the bookkeeper is back in the office on Friday to do the data entry.
It also requires the use of fairly sophisticated technology to enable electronic workflow for approvals and collaboration between our clients and the AcctTwo team. We utilize an ERP accounting system specially designed for business process outsourcing firms. Some firms attempt to offer this service using software like Quickbooks, which wasn’t designed for this purpose and doesn’t work very well in this environment.
Additional Business Benefits of Outsourcing
In addition to the obvious benefits of providing real-time financial and management reports because we capture business transactions at their source, there are several other benefits our clients receive by outsourcing their back office processes to AcctTwo. Here is a list of some of the benefits:
- Increased business insight through real-time management reports and dashboards
- Timely, accurate reporting to external stakeholders (bankers, shareholders, etc.)
- Rapid deployment of a fully functioning accounting department and technology. AcctTwo can provide a full compliment of the people, processes and technology to run a complex company in as little as 30-60 days.
- A highly scalable platform for future growth. AcctTwo provides on-demand support for an unlimited number of legal entities, locations, currencies, departments, and employees.
- Support for businesses with complex process and technology needs. AcctTwo can support complex purchasing workflows, advanced revenue recognition automation, project accounting and professional services automation, electronic time and expense submission, global financial consolidation, and a myriad of other complexities.
- Workforce mobility. Due to our use of a leading cloud-based accounting system, our clients can access their information and approvals from anywhere, any time, including on mobile and tablet devices.
- Reduced distractions and headaches caused by managing back office functions and systems
Pay Only for What You Need, When You Need It
An additional benefit is our clients’ ability to “pay by the drink”, buying only the business processes, software, and transaction volumes they actually use, instead of investing a huge amount of capital into an accounting platform that may be more than they initially need, or is later outgrown and needs to be replaced.
Business Process Outsourcing Isn’t New
As I said earlier, I can’t claim to be as innovative as Apple in our industry. Fortune 500 companies have been outsourcing their business processes for decades. There are literally hundreds of multi-billion dollar, publicly-traded companies that partially or fully outsourced a myriad of different business processes. Many of them actually outsource their entire finance and accounting (F&A) function. These are companies who already have bought and installed SAP, paid consultants to do “business process re-engineering”, and hired or trained numerous Six Sigma Black Belts (process improvement experts) as employees. And they’ve all come to the same simple realization: stick to your core competencies, which generally don’t include running the accounting department and systems.
So if companies with $1 billion, $25 billion, or even $50 billion in annual revenues have decided they are better off outsourcing their finance and accounting functions, doesn’t it make even more sense for SMBs, who have less money to throw at fancy accounting systems and teams of accountants? It seems these are the businesses who would benefit the most from business process outsourcing, yet they actually lag behind the larger companies in taking advantage of these benefits.
One exception to this statement is the payroll and human resources outsourcing industry. Even smaller companies understand the value of outsourcing the payroll process. Companies like Paychex and ADP do a much better job processing the complexities of payroll, withholding, deductions, garnishments, hourly vs. salaried employees, payroll tax deposits and returns, and all the other headaches. They do it better, faster and cheaper than most companies can do it themselves. Which is why I ask SMBs so often, “Why stop at outsourcing your payroll? Why not outsource the other non-core back office functions that are non-value added and cause you so much pain?”
The Future of Business Process Outsourcing for SMBs
It’s only a matter of time before SMBs begin to see what’s broken in the traditional bookkeeping model, and the tremendous benefits of business process outsourcing. Cloud software technology today, combined with companies like AcctTwo, put these benefits within reach of smaller companies. Over the next 5 years, the adoption rates of finance and accounting outsourcing (FAO) among SMBs are going to skyrocket. Are you ready to jump on board? Or are you one of those people who jealously watches others as they use their new iPad to read books, play games, watch movies, or do just about anything else they want to do?
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Marcus is the founder and CEO of AcctTwo, a services and technology company delivering the Future of Finance and Accounting to nearly 1,000 organizations throughout the country. Marcus and his team have firsthand experience implementing the processes, controls, and technology needed to optimize financial resources, no...
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