Outsourced Accounting: The Good, the Bad, and the Ugly

Overview

Have you ever thought about outsourcing the accounting function of your business?  You might think that’s just something a start-up or a small business would do.  And you might also think that it’s just about bookkeeping.  But there are many firms that specialize in outsourced accounting, supporting clients well into the mid-market space.  Their focus areas can support different industries, geographies, systems, processes, company stages, or a mix of them.

There are many potential benefits to outsourcing your accounting function, but also plenty of potential challenges.  In this article, we’ll look at the key pros and cons that are worth considering.  If it’s something you want to entertain – whether for accounting or other functions – make sure to grab a copy of the free outsourcing checklist using the box below that covers a variety of questions that are worth asking of the service providers you evaluate.

Why firms choose to outsource

There are a variety of reasons why companies tend to outsource their accounting, but most of them are related to these five:

1. Scalability – they need the ability to scale their teams up or down without the need to hire or fire staff.
2. Technology – they need access to the best tech stack but without breaking the bank
3. Expertise – they need expertise they likely couldn’t afford otherwise (at least not full-time)
4. Control – they need the ability to meet and keep up with ever-changing compliance requirements
5. Process – they want to standardize and instill best practices across their accounting processes

Sounds great – why wouldn’t someone want all of that?  Great question!  In my experience, it’s easier said than done.  The best outsourcing firms are not going to come cheap, and others will make you wonder if it’s worth it.  Read on for some specific pros and cons related to outsourcing accounting.

Pros of outsourcing accounting

Keeping in mind the reasons above, here are the top potential pros you can expect:

1. Focus on high-value activities – for a lot of companies, accounting isn’t their most strategic work, which can make it a distraction.  Outsourcing can free up time and energy for the most impactful and strategic work possible.
2. Less people to manage – recruiting, hiring, training, managing, and retaining people can be a lot of work.  Outsourcing lets you shift a lot of that to the external team, which can reduce stress and allow you to focus on other tasks.
3. Leverage advanced technology – accounting is generally seen as a cost center and among the last to get budget for the best technology.  At outsourced companies, their teams are a revenue center, so they are incentivized to invest in the best technology to maximize their productivity.  The remaining internal team can often leverage that technology at a lower price due to the economies of scale.  Plus, maintaining the technology is often handled by the outsourced provider.
4. Optimized processes – outsourced accounting teams collectively support a lot of businesses whereas internal teams just support one.  That’s a lot of valuable knowledge that can be leveraged to build and refine best practices.
5. Best-in-class talent – attracting talent in accounting can be tough, especially today.  Outsourced accounting firms can offer unique benefits and allow people to specialize, cross-train them, keep them engaged, and grow their careers.

Cons of outsourcing accounting

While there are some great benefits that usually come with outsourcing accounting, there are also some potential downsides.  Here are some of the most common ones:

1. Loss of control – any time you delegate, you’re letting go of some control.  While there are mitigating controls you can use, confidentiality and data breach concerns are control-related risks worth considering.
2. Loss of tribal knowledge – we live in a world where data and knowledge are extremely valuable.  When you outsource, much of that knowledge shifts to the outsourced firm.
3. Communication challenges – even when the outsourced team is domestic, it can be a challenge to get them all the information they need to do their jobs.  Other languages, cultures, time zones, and experiences only make those challenges tougher.
4. Lack of business understanding – without working with others in the business every day, it might be tough to know exactly what to do.  It takes extra effort to keep an external party in the loop.
5. Technology limitations – your outsourced provider may require you to use certain technology solutions when you prefer others.  There could be integration, adoption, or other issues that you wouldn’t otherwise have.

Tips for success

You probably saw some similarities in the pros and cons, so what gives?  Well, your success often depends on the firm you pick to outsource to, the technology they use, and the specific services they provide.  The tips below are based on best practices and my own experiences (and challenges) in overseeing and working with outsourced accounting firms.

• Do your due diligence – vet out potential partners thoroughly.  Carefully evaluate the scope of services they provide to determine what is in scope and what is not.  Seek out feedback from similar clients.
• Do an ROI analysis – often outsourced accounting groups charge based on the unit count, transaction count, employee count, or some other volume-based metric.  While this is easy to plan around, it might be more cost-effective to use an in-house team where you can leverage fixed costs.  It might make sense to outsource just certain accounting processes.
• Look at the tech stack – do they use your applications or provide their own?  Who maintains them?  Are they compatible with your in-house apps?  How adaptable are they to changes in the marketplace and regulatory environment?
• Set clear expectations – when you have a specific process to follow, make sure it’s communicated upfront and you hold everyone accountable (external and internal).  Create a culture of continuous feedback and align your goals to ensure everyone is on the same page.  As Stephen Covey would say, “Think win-win!”
• Collaborate continuously – treat your external team as an extension of your internal team the best you can.  Include them on distribution lists, notifications, and key controls.  Use a workflow-driven collaboration tool so that everyone is on the same page as to the status of crucial tasks, with a clear documentation audit trail.
• Assess performance continuously – review your partnership every few months to make sure you’re 1) using the right provider and 2) still in a place where outsourcing makes sense.  There’s often a tipping point at which it makes sense to have your accounting in-house.
• Network with peers – your outsourced provider likely services many similar clients.  Network with them!  Share best practices and collaborate on continuous improvement within your internal teams and the outsourced provider.  Encourage them to host meet-ups, conferences, webinars, and other engagement events.  We learn best when we learn together.

Summary

There’s a lot to consider when it comes to outsourcing your accounting.  You know your business best – where you’ve been, where you are, and where you’re going.  As you can see above, there are a lot of potential benefits of outsourced accounting, but there are additional challenges introduced as well.  With the right planning and oversight, most of those can be overcome.

Have you ever worked with an outsourced accounting provider before?  What was your experience?  Let us know in the comments below!