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Offshore Outsourcing: For Smaller Companies, Too

Why sending work overseas is starting to make sense for smaller finance departments.

When music-subscription service Rhapsody spun out of former joint-venture parents RealNetworks and MTV Networks early last year, vice president of finance Michael McGinn faced a major challenge: building a finance team from scratch to support a business that was well under way. “Things needed to work right, and right away, because we already had hundreds of thousands of retail customers, and 100 employees who were used to getting a regular paycheck,” McGinn recalls.

To make the effort go more smoothly, McGinn made a leap that sounds almost too good to be true for finance executives at smaller companies: he outsourced most of his finance and accounting (F&A) work.

McGinn was initially skeptical of outsourcing, assuming that it was “most viable for huge multinational firms with high transaction volumes.” But making it work at Rhapsody “has been easier than expected,” he says. While he hired a controller and an accounts payable clerk into the company’s Seattle headquarters, all of Rhapsody’s transaction processing — including payroll, receivables, payables, and account reconciliations — is now done in India, courtesy of outsourcing firm Global Upside. What’s more, McGinn was able to get additional resources for the first six months, then scale back as things settled down, with no penalties.

All in, McGinn estimates that he gets about five full-time employees in India for the price of two U.S.-based employees, plus the option of scaling up or down as necessary.  

Striking an outsourcing arrangement to cover fewer than 10 employees used to be nearly impossible. For one thing, “it’s not very profitable for [outsourcers] to serve smaller firms,” says Phil Fersht, CEO and head of research at HfS Research, a firm that advises companies on outsourcing strategies. For another, the energy required stateside to manage the relationship with an outsourcer might overwhelm any savings. “The rule of outsourcing is that if you’re not saving 30% or more, it’s not worth doing,” Fersht says.

Michael McGinn

Now, however, thanks to the maturity of the industry and more-easily deployed technology, it’s becoming increasingly viable for firms with smaller staffs to send all or part of their F&A work offshore, at rates much lower than they would pay domestically.

Declining Cost
In general, the price of F&A outsourcing has decreased between 6% and 8% a year for the past two years, according to a recent study by Alsbridge, an outsourcing advisory firm. Market competition is the major driver of the decline, with outsourcing providers taking smaller profit margins in order to win business (and becoming more efficient themselves in the process). “It used to be that there were only a few companies in this space — Cap Gemini, Accenture, Genpact — but now there are 15 to 20 real players,” says Dennis Winkler, director at Alsbridge and co-author of the study.

The movement toward the middle market is already happening, though much of that market is untapped, according to a recent report by HfS Research. The average value of an outsourcing contract fell from $30 million in 2004 to $18 million in 2010, a decrease the report attributes not only to “increased competitiveness and falling price points, but also [to] the increased number of engagements being signed with organizations in the $750 million to $3 billion revenue category.”

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