Outsourcing is increasingly touted by Corporate America as the golden ticket to increased profitability. The first to be ousted were many company's IT departments, but with CPA vendor fees often about $150,000 less than the cost of an in-house department, more and more finance and accounting departments are being downsized. According to the Outsourcing Institute's Sixth Annual Index, 23% of companies with fewer than 500 employees are currently outsourcing some element of their accounting department, and another 24% of small businesses are considering farming out their accounting.

Tailoring the request

Departmental outsourcing is not a one-size-fits-all proposition. Larger real estate development or management firms — those with 10 or more property managers — have different needs and capabilities than smaller firms. The goal of every outsourcing agreement should be to free up cash and maximize human capital.

In many instances, larger firms enjoy higher revenues and a more stable work flow, allowing them to absorb the cost of keeping high-level accounting professionals in-house without squeezing cash flow. For these firms, outsourcing lower-level accounting functions such as accounts payable, accounts receivable and payroll becomes an easy way to reduce fixed costs and increase accounting efficiency. An outside accounting partner can also serve both as a safety net for in-house staff in the event of a spike in workload and as an effective way to manage the cost of breaking into new markets.

In order to compete with larger firms, smaller real estate development and property management firms often feel a great deal of pressure to offer their clients a more complete management solution. However, maintaining a modest size in house accounting department generally costs a minimum of $357,750.

Rather than invest capital in fixed costs such as additional space, infrastructure and employee benefits, smaller firms are better served by partnering with an outside accounting firm and using their resources to attain as much human capital as they can. Accounting vendors can also serve as a sounding board for their clients because they have widespread industry knowledge attained through working with several clients in the same industry.

One benefit of outsourcing for firms of all sizes is greater liability protection. Real estate is a capital-intensive industry; an accounting snafu can push a firm to the brink of extinction. John Rickert, president of Cincinnati-based Ricore Investment Management Co., uses outsourcing to minimize the risk exposure of his firm's assets. “Due to the nature of the industry, a single mistake can cost Ricore a year's profitability,” says Rickert. “Through outsourcing, the burden of costly mistakes falls to my partners, not to my bottom line.”

Choosing the right vendor

Don't shy away from asking a potential accounting partner about its qualifications, ongoing training and the level of direct communication it has with clients. When interviewing a potential partner, feel free to play devil's advocate. Ask tough questions and propose hypothetical obstacles. If the partner does not respond with an appropriate answer, it's time to move on to the next vendor.

Regardless of firm size or the extent to which a particular function is going to be outsourced, vendor-client partnerships almost always become problematic for the same reasons. There are three rules that should never be broken during the development of a new partnership.

First, choose an accounting partner who is not only experienced in a specific industry but also will take time to understand its client's business model. Second, spend time defining the exact parameters of the project's scope prior to implementing any changes or handing over any responsibility. It is the burden of the service provider to blend into the client's company, not the other way around.

Lastly, when designing project implementation, be sure to include all employees whose jobs will be affected by the new relationship. Obtaining buy-in from employees at the start of the relationship will foster better communication in the trenches and minimize project inertia.

A successful outsourcing relationship should do more for the client than just improve the bottom line. A truly valuable accounting vendor will offer clients a deeper understanding of their financial situation, provide information about industry trends and financial options, allow the workload to increase without increasing expenses, and make work preformed by the client's staff more efficient and enjoyable.

Robert Seibel is the president of Seibel & Katz CPAs in Cincinnati. He also serves as the chief executive of MyEFileTax.com.