Outsourcing and automation increasingly integrated

Labor shortages began before the pandemic, and accelerated once it started, which has led firms to consider their options for meeting client demand. Generally, two common solutions had been automation and outsourcing, but changing economics has led to new models that demand integration between the two. As time has gone on, outsourcing and automation are less of an either/or proposition as firm leaders find new synergies between the two practices. 

Driving this synergy, at least in part, are the rising costs of outsourced labor. Enrico Palmerino, founder and CEO of Botkeeper, said overseas accounting professionals doing outsourced work for U.S. practices have been seeing double-digit raises on a biannual basis in countries like India, a favorite for firms looking to offshore routine work. Palmerino said this is happening for the same reasons it happens anywhere: Sustained demand for skilled professionals, no matter what the country, gradually increases the price of their services. As those skills increase, professionals are more willing to leverage them for additional pay, even if it means leaving the company. Therefore, the same challenges of recruitment and retention in the U.S. are being exported to foreign shores.

“You’re seeing just massive turnover because you’re finding people can, every time they switch jobs, get a 10% bump in wages and the market is heating up as a result. If you’re not giving at least 10, 12, 15, 16, 18% raises twice a year, you will start suffering from unhealthy attrition,” he said.

While this has been happening for years, he said the pandemic really accelerated the trend: between the Paycheck Protection Program and the extended tax deadlines, demand for tax professionals skyrocketed, which led firms to look offshore to meet client needs. This had the effect of putting even more money into regions traditionally favored by offshoring companies, which in turn led to wages getting even higher.

This is leading not so much to the decline of outsourcing but, rather, a change in the model from quantity to quality. L. Gary Boomer, visionary and strategist at Boomer Consulting, said the old model was hiring a whole lot of people cheaply to do simple jobs that didn’t need a lot of work. Over the last three to five years, though, he said offshore accountants have been increasing their skills, discouraging the labor arbitrage that generally motivates offshoring. Overall, he said, what we are seeing is a maturing of the traditional markets for outsourced labor.

“There’s more players coming into the market all the time, and the existing players have been there for 20 years. They tell me business has never been better,” he said.

Swami Venkat, who leads CohnReznick’s CFO advisory practice, has seen this firsthand. He estimated that, over the past 12 to 18 months, spending on outsourced professional services has gone up by about a third, which doesn’t even count the extra time off the firm has been granting as well lately. In response, he said, the firm has had to have conversations with clients about rates, reminding them it’s a buyer’s market, and how they can recoup the cost of some of the market adjustments.

The other thing it has been doing is looking into process improvements that can be automated, not as a replacement for its outsourcing services but an enhancement. This is part of evaluating the client’s whole needs and looking for solutions, which can include both technology and outsourcing.

“What I need to be able to do is automate simple workflows, like approval of invoices or journal entries and delegation of metrics. … If you want to go to a [robotic process automation] platform, you need repeatable and scalable processes. If you don’t have those going in, you won’t have a solution. It could even give more problems in the short term,” he said.

Nate Brown, the North America tax and accounting vice president of firm management for Wolters Kluwer — the company behind Xpitax, an outsourced tax processing service — noted that accountants overseas want to have efficient processes as much as anyone anywhere else, and so adding automation to the already existing outsourcing service has allowed his team to scale up significantly. He noted that the type of work offshore accountants tend to be hired for is routine, repeatable tasks, similar to what Venkat described. This has allowed strong synergy with technology in making its outsourcing services even more robust.

“Our team has really been able to scale in large part because of robotic process automation. We’ve been able to because of the volume we’ve seen in looking at highly repeatable tasks and pushing those into a robot so that it frees up our teams to really do the kind of tax work that matters. It elevates the preparers we have where they’re still doing some data input, but it turns them into a reviewer so they can make sure the return is accurate, which helps with the turnaround times,” he said.

Ernest Villany, president of Boulder Valley CPAs, said he too has seen recent pricing pressure for offshore services, though these increases have bolstered, not broken, the value proposition that the practice presents, not least of which because of rising wages here in the U.S. Today, he said, his firm is confronted with tax managers who used to be happy with $80,000 a year now demanding $125,000; on top of that, they don’t want to come into the office during tax season or even just three days a week.

“So, the ongoing availability to attract and recruit and retain people is a very, very challenging circumstance right now, and that’s where I would say outsourcing turned out to not be something we were reacting to because of inflation but because we were really desperate for staffing. Outsourcing came in like knights in shining armor,” he said.

Ray Barlow, lead product manager for Xpitax Tax Outsourcing and CAS Remote Staffing Services at Wolters Kluwer, said labor conditions in the U.S. mean stories like Villany’s will remain common for the foreseeable future.

“What we see is a shortage of people coming out of accounting programs and on top of that a difficult [period] with there just not being enough people. Baby boomers are retiring and there just aren’t enough people coming into the marketplace to replace them. … It’s a crazy time for everyone,” he said.

Like Venkat, though, Barlow does not see this as an either/or proposition, saying there can be great synergies between automation and outsourcing. In fact, he felt that given the changing economics of the industry, it will be difficult for people to outsource without thinking about technology. This is part of an overall holistic approach Wolters Kluwer takes with clients, he said, in that things are more about fitting the right solution to the right person, which may involve automation, outsourcing or a combination of both.

“Automation couldn’t have hit us at a better time. I’m talking about our ability to leverage RPA and bots to perform tax prep work for our firms. We’ve doubled our volumes this year, and we could have never done it without technology. For us, outsourcing with technology has allowed us to grow our business, help more firms, and increase the bottom line to the extent where firms come to us and say, ‘Can you do more for us?’” he said.