The Argument Against Outsourcing

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Sending your hotel’s accounting services to a third party could cost much more than it saves.

by DAVID LUND

Stupid sounds like a harsh word. Webster’s dictionary defines stupid as, “Given to unintelligent decisions or acts,” along with a few other more colorful options.

When I refer to outsourcing, I am talking about a third-party provider, not a centralized function. Outsourcing your hotel accounting is a stupid move. Here’s why.

I often work with clients on difficult decisions, and we make pro and con lists. We write good things that can come from a decision and how we can amplify them on one side, and then we write the bad things that could and would happen and how we can minimize them on the other.

One good thing that comes from outsourcing is being trendy. Many brands are doing it, and it is the thing to do. I spoke with a CFO recently, and he explained that his board had recently decided to outsource.

“Why would they do that?” I asked. He smiled a little and said, “We need to keep up with our competition; other brands are outsourcing, so we are going to as well.”

Behind his smile, I detected a slight amount of political discouragement. My take on this exchange: It is a political thing and the CFO was going to pick his battles. This was not going to be one of them. Why should he care? His company does not own the hotels; they simply manage them for someone else. He knows ultimately that if there is a service problem, it falls on the hotel’s lap, not the management company’s.

In business, especially one that has multiple stakeholders, the pressure and competition to keep up with the Jones’s is stiff. Companies feel compelled to move and to innovate, and sometimes these changes are not in their best interest.

There is a quote from Earl Nightingale that speaks nicely to this: “Watch what everyone else is doing, and then do the opposite. The majority is almost always wrong.”

A negative aspect of outsourcing is the reduced level of service. Good service in a hotel is everything, not only for external guests, but also for internal guests. In a full-service hotel, the accounting department provides a long list of services: receivables, payables, payroll, revenue control, cash management, systems oversight, audit, food and beverage controls, purchasing, receiving, general accounting and budget/forecasting, to name but a few. When a hotel outsources, they typically outsource payables, some parts of purchasing, general accounting, sometimes accounts receivable, and almost always the daily audit and revenue functions.

Where do you lose the service? Hotels are a high-volume transaction retail business. Every day a hotel sells hundreds or thousands of rooms to many different customer segments. In addition, it services thousands of food and beverage customers. At the heart of all of this is understanding the sales and segments, pricing and the corresponding settlements. The service a good accounting department provides is to keep it all together, find the errors, correct them and, most importantly, work with the operating departments to get it right.

These functions in a hotel are like filters, collecting all the errors and working with operations to get them back on track. A good accounts payable clerk is worth their weight in gold. A revenue auditor is equally as valuable. What these functions ultimately provide is a service well worth having. If it is outsourced, it is hidden with the volume turned way down. The onsite, in-your-face service provided by an accounting clerk is an extremely valuable business process that ensures a smoother and more profitable outcome.

I said I was going to alternate between the pros and cons. The second pro, if you can call it that, is cost savings. Typically, when outsourcing, a few colleagues with lots of tenure are gathered up and, depending on the jurisdiction and whether union or not, they are bought out. Usually the hotel will lose the assistant controller or accountant as well. From this point on their functions are performed in large part by the outsourced vendor for a monthly fee. From the numbers I have seen, the costs savings in the short run are completely upside down; in other words, no savings. To get the outsourcing going, there is usually an upfront one-time fee. In the longer-term, the savings are forecast, but they are extremely slim. We all know what happens with cost creep. Before we know it, we have added something that looks almost exactly like what we used to have. Water will always find the lowest point.

I spoke with an experienced controller recently who had her accounts payable outsourced. She said there were several negative aspects of the change. Department heads and managers hate the additional paperwork they are given, namely scanning documents. The hotel loses track of so many invoices that they started logging the scans and cross referencing these with the outsourced company. Cost creep. Vendors are up in arms. Payments are not timely and several vendors had demanded payment or no delivery. A hotel without vendor credit is not in a good position.

She also expressed concerns about user tax being improperly assessed. There was also confusion on her part with the paper. The hotel still must maintain the paper for the state and municipal audits, and with the outsourced company it is a paperless system. What will happen when the auditors show up and ask for documents? The last thing she said was the most damning. The hotel had been late paying its retail taxes and had been assessed a fine.

Another negative result of outsourcing the accounting function is brain drain and the resulting challenge it creates in succession planning. If much of the internal accounting process is carved out and sent to a third party, the hotel loses the people development that propels careers in hospitality finance and accounting. If there are no entry level positions, no revenue auditor and no middle management, then how does a hotel grow controllers and directors of finance? I have asked this question many times, and I still do not have an answer. This will bite our industry hard in the future.

If hotel accounting departments are going to take an ax to the development pipeline, they are not going to have financial leaders who understand the hotel business and all its insane nuances. I have seen several attempts to bring in financial leaders from other industries to lead hotel accounting functions, and the rate of failure is high. They simply do not get the culture, the work ethic and the spirit of the hotel business.

Hotels are grinders. It is not a 9-5 white collar accounting gig. It is a full-on heavy metal jacket, boogie until you puke, get back up again and start-all-over love affair with the biz. If not properly trained, super conditioned, a little bit crazy and slightly brainwashed with the Kool Aid, an accountant is not going to make it. He or she will not make it through those crazy month ends, a four-month budget season, never-ending meetings, surprise audits from friends at corporate, the GM who needs a financial babysitter, the revolving door of department managers and assistants to straighten out, not to mention the relatively small size of the paycheck. Hospitality already has a huge challenge finding, developing and retaining financial professionals, and now the already wobbly legs have been taken right out from underneath it.

An old general manager of mine had a saying that he would fire at us from time to time: “I can tell you people have a lot of common sense, because you’re not using any!” I think that would apply here.

On the positive side, another idea about outsourcing accounting is the creation of a different kind of finance and accounting leader – one who is not focused on the accounting but who is a business manager, thought leader and people developer. Having a leader with knowledge of the financial mechanics at work under the deck of the ship, who can help to steer the other non-financial managers toward greater levels of their own business understanding and success, is a good thing. This in theory is exactly what I think hotels should be doing: developing the business skills of the non-financial managers. The challenge with this idea in the outsourcing scenario follows: Modern day hotel accounting is a huge bunch of systems, numbers, transactions and entries. Every time an employee sells something, schedules someone, buys something, cooks something, turns on the lights, takes a payment, collects sales tax, gives credit, checks in a room, receives goods, takes vacation, serves someone, cleans a room, checks out a room, takes a reservation, makes coffee, pours a drink, fixes a sink – I could fill the page. These “things” I just listed result in transactions that need to be captured, kept, managed, budgeted, forecast, measured and, ultimately, reported. That is the mega city-sized mess that lies under the deck of the ship, tucked away from sight. If that mess is not managed extremely well, then your financial manager is dead on arrival. They will have less time to be the leader you want.

It is a given that the recoding and management of all the processes and systems used in the hotel need to be right. The data that comes from these processes is what must be captured, measured and reported. The reporting of this information drives the business and decision-making. The fact is these systems and processes are always in need of constant and diligent attention. There is always someone new to train.

There is a never-ending lineup of systems to upgrade to replace the old ones. Hotels are always playing catch up. The staff and positions that no longer exist really handicap efforts to keep it all organized and working properly. In hospitality, the hotel prospers on service propelled by good information and communication. This means training, and the training, along with important follow up, needs to be provided by people. Colleagues in the operating departments need constant oversight, and this boils down to finding out what is wrong with the data and communicating back to these areas. When there is no one to attend the next front office communication meeting to explain the proper way to do a rebate, no one to follow up on the invoices that do not match the purchase orders, and no one to chase down the waiter who did not balance his remittance properly, the hotel is sunk.

I know what you are thinking. You have outsourced all the mundane stuff so now the financial leader and their downsized team can handle all the training and follow-up communication.

No, they can’t.

They cannot do this because they now spend just as much time in meetings, more time corresponding with a revolving door of associates of the third party, and usually this means it is already tomorrow where they are. Not to mention a large portion of the remaining staff now spend most of their time on the mindless task of scanning documents.

Documents that someone used to read, check and make sure they were right before they were paid or entered in the books.

I said I would list the pros and cons. In this case the pros are light and the cons are a big deal, but only if you have your attention on the details. It is easy to overlook the mess if you are not below deck.

If you are thinking of outsourcing your accounting, think again. It is not a good decision. It will cost you dearly and your investment will suffer. If you have already outsourced and you have seen or heard some of what I have written about, then you need to believe it. Change the course today.     ■

David Lund, CHAE, “The Financial Hotel Coach,” is an international hospitality financial leadership expert who has held positions as a regional financial controller, corporate director and hotel manager with an international brand for 30 years. He authored an award-winning workshop and two books on hospitality financial leadership, coaches hospitality executives and delivers his financial leadership training worldwide. To learn more, visit www.hotelcoachdavid.com.

Photo credit: Rawpixel/Shutterstock.com

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