Epoch now outsources the finance department to LeapSource, a Tempe, Arizona-based financial BP outsourcer that was founded by former Arthur Andersen partner Christine Kirk. Epoch signed on the firm in April to handle an assortment of functions, including A/P and A/R, T&E reimbursements, fixed assets, document imaging and record keeping, bank and balance sheet reconciliation, transactional accounting, and financial statements. Epoch's financial applications are hosted through a separately negotiated deal with Corio Inc., an ASP based in San Carlos, California, which is a strategic partner of LeapSource. Both LeapSource and Epoch will have access to all financial data via a Web-enabled interface.
The contract will be billed on a fixed monthly cost (Epoch would not reveal the fee amount), a factor that was crucial to Schwed. "Because we're a start-up, I wanted to keep our costs predictable for the next six months or so," he adds. "At some point, we'll renegotiate so we have a metric-based fee that's appropriate for our business."
Not surprisingly, even financial software firms are getting into the BPO/ASP game. Longtime financial software maker FlexiInternational Software Inc., based in Shelton, Connecticut, is now providing both ASP (using its financial software) and financial BPO services to small and midsize businesses through its Financial Management Services Inc. division, according to Stefan R. Bothe, chairman and CEO of FlexiInternational. "A company's ability to turn on a dime and take advantage of opportunities can mean the difference between success and failure," says Bothe. "To be competitive, businesses need instantaneous, reliable access to financial information. In accounting and financial documentation, forward-looking small and midsize companies now see that BPO is the wave of the future."
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."
This is changing as well, albeit slowly. "If you look at the Fortune 1,000, there's only 1,000 of them," says Bendor-Samuels. "But there are thousands of mid-caps." Arthur Andersen recently unveiled a new midmarket financial BPO offering, although the company still defines "mid" as less than $1 billion in sales, according to Tom White, Andersen' s global managing partner for BPO finance operations in Chicago. They are also going after fast-growth start-ups with high revenue predictions, says White.
However, 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."
Another impediment to Big Five domination of this space is outsourcing contract length: smaller companies want shorter contracts of two to three years, and the Big Five are uncomfortable with anything less than five. "From a contract length, if there is an investment up front, the outsourcer is going to want to realize its investment," says White. "The client company is going to want a long enough contract to feel that the outsourcer will be around. Neither one wants a contract that is too long, so the current thinking right now is that five years is a reasonable time frame."
Another potential roadblock is the Big Five's shyness about admitting that outsourcing leads to downsized finance staffs — a marketing point embraced by the smaller outsourcers. The larger financial BP outsourcers have gone to great lengths to convince clients and their employees that outsourcing contracts don't necessarily mean mass layoffs, and, they claim, often create new career "opportunities." "We don't like to call it downsizing," says White. "But our dot-com and midmarket business is run through a shared services center, which means there will be fewer people on site, because the technology is doing most of the work."
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?
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