Send it out: cost savings, efficiency lead reasons to outsource.

Good help is hard to find. The old adage rings painfully true for California businesses. In fact, a December 2005 CalCPA survey found attracting and retaining qualified staff to be the top business concern among California CPAs. As they struggle to overcome the shortage of qualified accounting staff, many professionals have turned to outsourcing to help them accomplish their short- and long-term goals.

This, despite the uproar outsourcing created among CPAs in California and across the nation just a few short years ago. But, for many, once the ethical debates subsided and disclosure requirements were clarified, the push and pull of economic realities, along with increasingly complex responsibilities, caused them to venture forth, sometimes head first and sometimes testing the waters with a toedip.

[ILLUSTRATION OMITTED]

In 2004, CFO Magazine found that 18 percent of the 275 finance executives surveyed outsourced jobs overseas, and that 21 percent of those who did or planned to outsource overseas would outsource finance and accounting functions.

And 56 percent of company leaders surveyed by Pricewaterhouse-Coopers in 2005 said they outsource tax services or plan to by 2007. Advisory compliance services and internal audits were outsourced by 37 percent and 26 percent of those companies, respectively.

California CPA recently approached CPAs across the state to learn how they have ventured into outsourcing--and with what results.

OUTSOURCING IN PUBLIC PRACTICE

For Tonya Casimiro, principal at Sacramento-based Fitzpatrick and Casimiro CPAs, Inc., the problem lies in attracting qualified personnel. F & C began outsourcing through the tax preparation software company it uses to process tax returns.

"They've been our tax processing software company for 20 years," she says. "I trust them."

The five-person firm outsourced 261 returns in 2005--nearly 50 percent of its total returns.

Lack of qualified staff also drove San Jose-based Petrinovich, Pugh & Company, LLP to begin outsourcing tax preparation during the 2003 tax season.

"The employment pool was really shallow," says partner John Kawamoto. "We were looking for new ways to get our work done, and it seemed like a perfect opportunity."

Kawamoto compares outsourcing individual returns to using a release valve. "There was a huge crunch during tax season and we outsourced the overflow."

Marc Parkinson, managing partner at Petrinovich, Pugh & Company and CalCPA chair, adds, "We do a lot of tax work, so the January to April timeframe is really busy, and we hire anywhere from three to five interns every year. Still, there's a buildup of work, and we didn't want people working until midnight, so outsourcing was the perfect solution. It just takes the pressure off of the staff to get all these returns out the door."

OUTSOURCING IN INDUSTRY

Payroll processing is the primary outsourced function for John Paul Mitchell Systems for simple reasons: "It's more efficient and cheaper," says Karen Hermanson, corporate controller.

The Santa Clarita-based company also outsources special projects for the same reasons. "We're implementing a new enterprise resource planning system, so we've hired an IT consulting group." she says. "It may take six to eight months to implement, but when it's done, we will have a professional to call if problems arise."

Though Hermanson says the cost savings of hiring a consultant for a special project hasn't been analyzed, she says, "It's just common sense in that it's not a full-time job, and there's so many odd requirements, it's easier just to trust the expert and pay the bills. It is expensive to have it outsourced, but it's cheaper than salary and benefits."

For Patricia Cochran, CFO at Vision Service Plan, this cost savings adds up to about 20 percent. The $8 billion a year Rancho Cordova-based company partially outsources auditing, accounting and payroll functions, as well as travel services, onsite security, mail service, recruiting, IT, the non-English language option of its call center and recruiting.

"If (outsourcing a function) doesn't give us at least 20 percent, it may not be worth pursuing," Cochran says.

MONEY ISN'T EVERYTHING

Still, there are other reasons besides saving money that makes outsourcing attractive. For many businesses, outsourcing means a better, more smoothly run company.

"For example," says Hermanson, "if we hire a new employee in Alabama, we call (the payroll processing provider) and give them the name, address and Social Security number and they set us up in Alabama. This saves us hours that would normally have been spent researching what's necessary in that state, and then we wouldn't even be confident that we've covered everything."

For Petrinovich, Pugh & Company, outsourcing part of its tax practice has resulted in quicker turnaround for its clients.

"We can submit a return in the morning one day and, during the peak times, we might have it back within two days, and if we're reviewing it, and it's fairly clean, we can have a return back to the client within no more than three to four days," says Kawamoto. "Generally, within a week you can have those returns done, so it's decreased our turnaround time from as much as four weeks, sometimes more, down to around a week."

QUALITY CONTROL

For Steve Mayer, managing partner at Burr, Pilger & Mayer, even with the cost savings and time savings, outsourcing didn't always mean increased efficiency. During tax season crunch time in March 2002, the San Francisco-based firm conducted a trial run, outsourcing about 250 individual returns. The results?

"A third of them were perfect; a third were kind of a big hassle; a third were somewhere in between," Mayer says. "We decided that the quality was very good, and that the people we were interacting with were very professional, but it also became obvious that given the type of clients we have, and the type of business that our firm does, it wasn't really a great model for outsourcing."

Mayer adds that, to build an organization, "you need to hire people, train them, and enable them to grow and develop."

Mayer also believes that much of the work firms outsource is "exactly the same work that your younger staff needs to do to learn how to be a CPA. If they don't get to do a lot of that type of work, they can't grow themselves," he says.

While outsourcing can help lighten the load of over-burdened employees, striking a balance can be a challenge. BPM became concerned that outsourcing might have been underutilizing its existing staff.

"Our staff resented it because they felt the work we were outsourcing was work that the younger people should be doing, and if they didn't do it, how would they ever learn?" says Mayer.

Petrinovich, Pugh & Company, however, had a different experience. Workdays and workloads decreased because of the firm's outsourcing of data entry, and enabled full-time staff and interns to focus on more complex transactions. In terms of the staff, "They're CPAs," Kawamoto says. "They went to college, they don't need to do key punching. We'd rather train our accountants to understand tax law and be better accountants than be better data processors."

"Outsourcing is not a replacement for staff, it's really a benefit," says Parkinson.

[ILLUSTRATION OMITTED]

And in terms of training new staff or new potential staff, Petrinovich, Pugh & Company found that during the 2005 tax season, interns were being trained in entity returns, trust returns and accounting--experiences they never would have gotten before. "We hire those interns with the intent of making them full-time employees the very next year when they get out of school, so when they came in, they had all the experience," Kawamoto says.

A MATTER OF SURVIVAL

For Rusty Roy, shareholder at Roy & O'Connor CPAs Inc. in Paso Robles, outsourcing was simply a matter of survival that resulted in some unexpected payoff.

When two staff members--a quarter of the total--left in 2004 and 2005, respectively, Roy says, "We had no choice." Faced with having to cover the payroll function of the firm, the firm chose a third-party source, and, according to Roy, accomplished in six weeks what normally took 10, which justified the decision to outsource in the future.

"I think I'm going to do more work in 10 weeks with two staff than I've been able to do in 10 with three," he says. Roy's partners are also jumping on board this year. "We significantly increased our commitment to process individual tax returns with our vendor for this 2006 file. So we're not turning away--we're going deeper," Roy says.

PLAY IT SAFE

But just how airtight is the outsourcing process? Several factors, including client privacy and security, have been raised from the beginning.

The AICPA released new ethics rules for its members in 2005 referring specifically to client privacy issues for entities that outsource.

The AICPA expanded the definition of third-party service providers to mean more than simply an outside tax service bureau. The term now includes "any third-party service provider used by AICPA members, including independent contractors used by a CPA firm."

The requirements state that "AICPA members must inform their clients--preferably in writing and before providing confidential client information to the third-party service provider--that the firm will use a third-party service provider."

Perhaps common sense for some, the guidelines emphasize the fact that AICPA members are responsible for all work performed by the service provider. A contractor's mistake is to be regarded as the outsourcing entity's mistake.

Maintaining client confidentiality is not to be a matter of taking the contractor's word for it. AICPA members are required to obtain contractual guarantees that the third-party service provider will maintain the confidentiality of the client's information.

The rules are effective for all professional services performed on or after July 1, 2005, except for professional services performed pursuant to agreements in existence on June 30, 2005, that were completed by Dec. 31, 2005.

Playing it safe can be more complex than it seems on the surface.

"Sometimes people think, 'we can wash our hands of it and the vendor will take care of it,' but there has to be oversight accountability management," says VSP's Cochran. "You have to make sure that while those employees may not be your employees, you still have oversight and that you know what's going on and you can evaluate the quality of the output that you're getting back.

"And there may be some hidden costs that could surface if you don't get good results from the outsourcing relationship. You could be damaging your relationship with your clients or your business as a whole."

The AICPA also advises its members who are thinking about outsourcing to ask potential vendors specific questions about encryption techniques, whether the vendor has had an engagement performed on its security systems, and whether the vendor has independent validation of its security systems.

NOT A NEW CONCEPT

Though the high-profile concern over outsourcing is relatively new, the concept actually has quite a history.

"I've had one or two clients who've expressed concerns, so I go back to when we did returns 20-25 years ago," Parkinson says. "The process involved sending tax returns, or having them be picked up by a third-party service bureau, who would then complete the returns and send them back, prepared and ready for review, to the firm."

Roy, who's worked in the profession for about 30 years, adds, "the business model that outsourcing is based on is nothing new. But as technology moved forward, as software grew more sophisticated, and as service bureau costs increased, there was a movement to bring return processing in house.

"And it was extremely controversial. Everybody said, 'You're crazy. Why do something that you don't have any particular skills to do, that the service bureau has all the skills. You're not data entry people, you're not systems people, you're not computer people, you can't collate returns.'"

Roy eventually made the shift to in-house processing in 1992 with his former practice, but now, "we're really back where we started. It's interesting how old things become new, and new things become old."

THE BIGGER QUESTIONS

Still, the bigger questions surrounding outsourcing--in whatever trappings they may appear--remain. They are questions that make some willing to put to the test their faith in the practice, and cause others to continue searching for ways to enhance their firm from the inside.

"One of the things that makes outsourcing really work well for the companies doing it is that they're very, very efficient in how they process the work," says BPM's Mayer. "Why don't we (BPM) learn from them and change some of our systems so that we're working in a similar fashion? So we've begun to do that."

BPM already has begun implementing aspects of the outsourcing vendors they've seen, taking steps toward becoming a paperless environment, bringing in dual screens and scanning all tax returns.

Modeling vendors' practices has "made us more efficient, so what's happened is the cost isn't all that big anymore, and our efficiency has picked up, so the delta with outsourcing is less," Mayer says. "And I think that's going to happen with a lot of firms."

Indeed, larger firms like BPM and smaller ones like Roy & O'Connor already have begun doing just that, including experimenting with optical character recognition technology to complete returns, for example.

Ultimately, the voices of concern and the varied solutions to those concerns point to its members' attempt to uphold the integrity, efficiency and trust of the profession.

Amberly Rumrill is CalCPA's editorial intern.