Outsourcing: Hot or Cold?

Numerous factors, both internal and external, affect a firm's decison to outsource.

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During the next tax season, Robert Goodman does not plan to outsource the preparation of any of his clients' tax returns. It will be the first time within the past three years that his firm has not sent any 1040 forms to a vendor for processing in India. "I am not crazy about outsourcing," says Goodman, a sole proprietor who has been in business for 25 years. "I use outsourcing as a safety valve."

Since 2002, Goodman has sent at least 10 percent of his firm's returns to Xpitax, a Braintree, Mass.-based outsourcing company.

The first year, Goodman relied heavily on outsourcing to help expedite the preparation of an estimated 400 individual tax returns the firm handles annually.

Partner Insights

Over the past few years, Goodman's dependence on outsourcing has waned as his ability to secure experienced tax preparers has improved. This has allowed him to keep all tax return preparation within his Chestnut Hill, Mass.-based firm.

Many expected outsourcing would be a big hit. The benefits are supposed to include cost savings, with returns being prepared by chartered accountants in India with billable rates substantially below those of professionals in the United States. Another appeal is supposed to be the ability to have returns prepared overseas during the night in this country and have them ready for review when accountants return in the morning.

But the concern over privacy and data security dampened the enthusiasm this year. SurePrep, which outsourced approximately 45,000 tax returns during each of the last two tax seasons, projects a sharp decline this upcoming tax season.

"We anticipate 30,000 returns being outsourced to us next tax season," says SurePrep's founder David Wyle.

The publicity and increased media attention fueling the debate over the jettisoning of jobs and security issues surrounding outsourcing has contributed to the decline in the number of outsourced returns handled by the Newport Beach, Calif.-based vendor.

Legislaton adopted in California put a severe crimp in SurePrep's business plans, says Wyle, by requiring that firms notify clients in writing if their data is sent outside the firm. "In California, anyone who is not an employee of your firm is considered an outsider. So if you have per diem contractors work in your office during tax season technically you need your clients' written permission," says Wyle. Coupled with the general concern, that stance did a lot of damage.

"Between last tax season and this year, we lost over 130 customers," says Wyle. "It's not that they went to other outsourcers, they just stopped outsourcing."

However, not everyone foresees the same low-growth or no-growth market reported by SurePrep. Mark Albrecht, CEO of Xpitax, says last year was a busy season; and this tax season is on track to best the 2005 filing season.

Albrecht estimates that this upcoming tax season, his company will process between 20,000 and 30,000 returns from more than 200 clients. That is double the volume in 2004 from 150 clients, and a 50 percent increase over the 10,000 returns handled in 2003 from 100 customers.

"In the past couple of months I've seen a tremendous up tick," Albrecht says. "We have 20 referrals so far this year, at this same time in previous years, we had only one or two."

Meanwhile, the number of returns processed through CCH's ProSystem fx Outsource showed no growth between the 2003 and 2004 tax years. So far this year, it has outsourced 26,500 returns and expects that number will rise for the upcoming 2005 tax season.

Some of the increase is expected to come from the addition of 1120, 1120S, 1065, 1041, and 990s, in addition to 1040s that can be outsourced. Additionally, the Torrance, Calif.-based company has increased the size of the sales staff that focuses on outsourcing, and is beefing up its marketing efforts.

New York-based Outsource Partners International is bullish on the business, anticipating that it will handle 50,000 returns during the upcoming tax season, compared to 30,000 during the last season.

OPI's president and CEO, Kishore Mirchandani, bases his optimism on his clients' growing confidence in outsourcing, which involves a lot more than tax preparation. Seventy-percent of OPI's customers use its services year round. This includes outsourced write-up.

"There is more confidence with our clients that we can deliver within the standards they expect," says Mirchandani. "As a result, we are in the process of hiring another 160 people."

Mirchandani doubts that the projected rise in the number of accounting graduates will have a positive effect on firms' abilities to attract workers, or that it will result in a decline in the outsourcing market.

"Firms will continue to struggle to find accounting graduates and of those who do pursue accounting, tax is the least preferred function they want to perform because it is not as challenging," says Mirchandani.

He cited recent discussions with instructors at the U.S. university where his son recently graduated with a degree in accounting. Mirchandani says enrollment is high in business schools, but students are more focused on economics and finance, not accounting. Recent graduates, he continues, are more interested in disciplines such as consulting and mergers and acquisitions.

However, Mirchandani acknowledged outsourcing has not been as widely received by the top-tier CPA firms yet, citing concern with the quality of the work and the security of the data provided.

"Security risks are everywhere. It is the perception that the U.S. is a more secure environment," says Mirchandani. But he continues, "What can be provided in India is better than hiring a temp in the United States."

Short Staffed

Goodman's decision not to outsource next season is based on staffing.

"This year, I have more staff," he says. "They've been around longer and know the clients, so it makes more sense to do it in-house. I had outsourcing there just in case I needed it."

That's the position taken by many U.S. accounting firms when it comes to deciding whether to engage in the hotly contested practice.

Similarly, Creative Solutions views outsourcing as a temporary fix.

At a panel discussion in June during the American Institute of CPA's Tech conference in Las Vegas, CEO Jon Baron told a packed room that the issue is making software more efficient.

"I believe outsourcing of tax returns is the wrong solution to the problem," Baron said. "Our job as technology companies is to get to the point where data resides and eliminate data entry."

The Dexter, Mich.-based vendor does not promote outsourcing, but does work with SurePrep and Xpitax to provide its customers with the option.

Data entry, Baron continues, is the real issue. Being able to access the original data and electronically bring it into an application would eliminate the need for manual data entry, Baron argues. That would increase productivity and temper the need for firms to have to resort to outsourcing.

However, Kevin Robert, president of CCH Tax & Accounting, says outsourcing should eventually increase the number of professionals available by addressing the worries of accounting graduates who are concerned with the issue of burnout.

"Outsourcing allows firms to move the more routine tasks, such as data entry, off the plates of graduates and allow them to focus on higher-value tasks, projects, and challenges," says Robert. "With the integration of outsourcing, firms are realizing increased productivity and meeting the technology expectations of new hires."

It's precisely that change in expectations, accounting industry leaders agree, that the profession needs to leverage in order to grow the number of college students pursuing a degree in accounting. The pipeline is already filling.

According to the AICPA, the number of enrolled college students pursuing a degree in accounting rose 16 percent to 168,000 in 2003-the most recent year available-from 144,000 in 2000. That may be one reason some firms say that outsourcing fills a fleeting need.

"It has its place," says Laura Barooshian, tax manager at Woburn, Mass.-based DiCicco, Gulman & Co. "We would do it to balance the bubble during the busy season."

Last year, the $10 million firm, which also has offices in Boston and Denver, outsourced one percent of the 2,000 individual tax forms it prepared.

Reluctant to discuss the firm's exact practices, Barooshian says it was necessary to employ such a service last year in order to maintain the work/life balance of its 65 employees. "It returns some of the quality of life," Barooshian says. "We don't ask our staff to work 80 hours per week."

Albrecht agrees that outsourcing is probably not a replacement for U.S.-based staffs.

"In the future, I see a firm's outsourcing staff complementing its in-house staff, not as an alternative work force," says Albrecht. "So, the impact of an increased domestic labor pool will have a positive effect on outsourcing."

However, SurePrep's Wyle says the CPA shortage isn't going away any time soon. "Staffing will remain a challenge," says Wyle. "The amount of work is increasing as a result of Sarbanes-Oxley."

Safe Data?

Concerns over privacy and security have caused many firms to hesitate taking the outsourcing plunge. Opponents cite the potential for client data to be seized by workers overseas.

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