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Handing Off Finance

Small and midsize companies finally benefit from finance process outsourcing.

Companies like Arthur Andersen may eventually miss this market if they fail to push the downsizing angle. Just ask Phil MacCutcheon, CFO of $215 million (in 1999 revenue) Sunburst Hospitality Corp., a hotel property developer and operator. MacCutcheon boasts that, thanks to outsourcing, he has trimmed his finance staff by 10 people. Today, his combined IT and finance staff number just 24. Outsourcing finance also helped MacCutcheon to slice the company’s overhead from $14 million in 1998 to $10.4 million in 1999. MacCutcheon has outsourced tax to PricewaterhouseCoopers, internal audit to a local accounting firm, payroll to ADP, and a variety of nonfinance functions to a host of other outsourcers. Isn’t it tough managing all the vendors?

“It’s a lot better than managing separate departments,” says MacCutcheon. “I don’t have the day-to-day personnel issues. I get to deal with high-level people. It’s a lot easier to deal with a vendor than a bunch of employees. But the real advantage is that it’s all at a fixed price.”

Caveat for Clients

Of course, there are caveats to using growthsourcers; nearly all of them are untried businesses to which companies are entrusting all their financial data. This is a huge marketing advantage for the Big Five outsourcers, and it was what attracted Manny Krakaris, chief financial officer of Command Audio Corp., in Redwood City, California, to choose Arthur Andersen as its financial BPO provider and finance software ASP in January.

Command Audio is one of Andersen’s first forays into the start-up marketplace, and one of its smallest clients. Command Audio, which has a total of four finance staffers, now outsources all A/P and accounting functions to Andersen, and may outsource Securities and Exchange Commission reporting and eventually A/R — as soon as it has some receivables.

“I wouldn’t have felt as comfortable with a smaller firm,” says Krakaris. “I was trying to achieve a couple of things. First, I needed to know if they could do what I want. Then, there’s the aesthetic aspect: How will this be perceived by various constituencies, Wall Street, and investors? That’s where there’s value in one of the Big Five. People take comfort in knowing that their accounting expertise is unparalleled. I didn’t want anyone to question our internal controls.”

Start-ups and dot-coms, however, are often willing to trade some of that establishment credibility for speed. Many outsourcing clients scream through the due-diligence process with their financial BPO provider, a task that used to take months. These days, some clients, like Epoch Partners, complete the deal in just a few weeks.

“There’s certainly a risk there,” says Epoch’s Schwed. “You need to build in an escape in the contract so if the organization that you’re working with doesn’t do well, you can go elsewhere or bring it in-house. But the greater risk is in not being able to execute our business plan quickly enough.”

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.”

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