Danny Bradbury:
Welcome to our podcast series Advisors’ Edge with Baker Tilly. We'll be talking about the role of outsourced accounting in the private equity space. Now, current support for companies doesn't end up if they complete their private equity transaction. The PE firm has expectations of those companies, which form part of a broader portfolio. Standardization in reporting and underlying technology are top of mind, as is the availability of detailed financial insight. When portfolio companies need help meeting these expectations, they turn to outsourced accounting services, and that's where Baker Tilly comes in. Joining us today are John Heyde, a principal leading Baker Tilly's fund administration group, and Alex Missildinen, a principal in Client Accounting Services. So welcome to both of you.
John, maybe let's start by learning a bit more about you. Could you tell the audience about yourself and your role in the company?
John Heyde:
Yeah, absolutely. I've been in the financial services space for about 20 years now, specifically within the fund administration space for about 15 years. And for the uninitiated fund administration is basically an outsource service where private equity firms will outsource the accounting of the funds that they manage. So not the underlying portfolio companies, which we'll get into later. That's Alex's specialty. But at the fund level, when you're looking to outsource accounting services, you would work with a fund administrator. I lead the practice here at Baker Tilly. I was at Goldman Sachs for a period of time, then JP Morgan, and then most recently a boutique fund administration firm before joining Baker Tilly.
Danny Bradbury:
Excellent. Obviously a veteran in a business, so pleased to have you aboard John. And Alex maybe a bit about your background.
Alexandra Missildine:
Yes, thank you. I'm a principal in the Client Accounting Services practice, which is our outsourced accounting practice. And we do accounting for high growth startups all the way up to mid-market size companies that are looking to really make sure that their accounting functions are sound and giving them the financial reporting that they're needing on a monthly basis. I've been doing this for about 16 years now and have been in the Dallas area the whole time. So I've worked with many different industries, many companies in different stages of their business life cycle. So I oversee a team of accountants that perform this service for companies on a monthly basis.
Danny Bradbury:
Wonderful. Welcome, Alex. Good to have you on the podcast too. And let's dive straight into some questions. So John, maybe this is one for you first, when should companies begin looking at outsourced accounting options or what signs are there that they might need those services?
John Heyde:
Yeah, it's a great question. In the context of a private equity transaction, I think that evaluation really needs to be made at the onset where there's an assessment of the existing accounting solution, the team that's in place, do they have the expertise, the skillset to continue carrying out the accounting function, or are there shortfalls that could potentially be remediated? Or alternatively, are you just better off outsourcing? And so I think that type of high level assessment first needs to be made. And then with that assessment, there's several considerations that they should think through. One is, do you have the bandwidth to manage an accounting department? It can be very time consuming. There can be turnover, there's cost of training, there's managing staff.
It can be time intensive. So do you have the bandwidth to account for that within your management team? The other thing to take into account is what's the technology solution? Are they using some outdated system that just can't really help with producing accurate and timely financials as quickly as you need them? I mean, technology has advanced at such a rapid rate now, especially with the advent of AI and how that's being implemented in a lot of technology solutions. if it's an outdated technology solution, it's probably prehistoric just with how fast technology has changed. One thing that they would consider in outsourcing is when you outsource it, I can speak to Baker Tilly, I mean here at BT we are on the bleeding edge of technology. So we're always looking for what's out in the market, what are the latest and greatest tools and technology solutions that we can utilize to best service our clients?
And really just to drive our cost down so that we can pass that value off to the client as well as augment our overall service delivery. So continue to produce accurate and timely financials when management needs them and when third parties need that data.
Danny Bradbury:
Yeah, I once heard there was a story of a retailer in America somewhere that was still using a Commodore 64 gaming machine from the eighties as their point of sale system. So it's kind of amazing how antiquated some, especially smaller businesses’, systems can get. Right? It's a good thing to consider. So Alex, maybe one for you. John had talked about some of the potential shortfalls in terms of tech in particular. Are there any other potential weaknesses that companies might identify during this evaluation process that they should really consider as a potential trigger for outsourcing their accounting?
Alexandra Missildine:
Yes, I agree wholly with John on the technology. That's such a big, big piece of it. It really allows clients to optimism their day-to-day accounting and bringing in transactions in an automated way and also an accurate way by using things like rules for their categorization of transactions in addition to technology. The other things that we're seeing are lack of control and risks around that lack of control. Oftentimes businesses do not have sound processes on how they're doing things such as cash management and movement vendor payables. We implement and help clients select technology that's going to really build out those processes and those controls for them, and so that they have those as they're performing their accounting functions. And then also what we're seeing, and John touched on this, is as a result of lack of technology and the lack of controls around their accounting processes, we're also seeing business owners not have quality financial reporting that are timely, that are accurate, and that are meaningful. We really advise our clients that you should have financial statements that you're able to review consistently after the month closes and feel as though you can really use those to understand the business's performance and so that you can make sound decisions on how to improve in your business processes and operations. That's the last area that we see clients struggling with
Danny Bradbury:
Useful stuff. So time for some introspection from companies that are maybe considering outsourcing their accounts. And maybe Alex as someone that focuses heavily on client services, I'm going to direct this next one to you. What does that whole process look like? So let's say I'm a client that realizes that maybe I need to start thinking about having someone taken on my accounting. Maybe I've just gone through a PE transaction and the buyer company saying, look, we'd really like to standardize these things. What does the process look like? Can you take us through the onboarding process and maybe a little bit beyond that as well?
Alexandra Missildine:
So we start out with performing an assessment on any new client that we're engaging with. This assessment really allows us to go through all of those areas that we talked about that we see clients are struggling with. So technology controls, financial reporting. So we go through each of those three areas in depth. We're really asking detailed questions about what they're currently using, what they're currently doing in their accounting roles and responsibilities, so that we can uncover where are the areas that they can really improve upon, what are the results of some of these things that they haven't implemented so that when we meet with the client, we can really advise them on this is what we advise that you change in your accounting processes, in your accounting technology as far as the people that are performing these tasks. These are the reasons why we think that you could really benefit from these changes. And we come up with a plan.
This is a collaborative plan with our clients talking about, yes, these are our recommendations, but what is meaningful to the client today? What is meaningful to PE today in terms of like what are the priorities? Sometimes that's a budget discussion on what they're able to do today versus what they can do maybe in a year's time. We implement some other technology that might aid them, but this is a very collaborative discussion that we have with clients. In the end, we're looking to produce a project plan to make those changes and so that our team can execute on that plan and that the client also knows exactly what they're going to be getting in terms of what's going to be changing, what's the timeline, what are the time requirements on their side to adopt these new processes or learn this new technology?
And then when are they going to be getting their first set of financials that are produced by our team with that enhancement. On the reporting side, sometimes we're really helping clients make some big changes on the financial reporting side, such as moving from more cash basis accounting to accrual basis accounting. So getting that first set of accrual basis accounting where we're meeting with business owners as well as potentially members from PE to review those financial statements is a big meeting. And it's a big part of what we do because we recognize that's kind of the end goal is that we're getting accurate monthly reporting. And so all of the things that we're implementing are really moving us to be able to deliver on that.
Danny Bradbury:
John, Alex mentioned that this is a collaborative process between the accountant and the portfolio companies. To what extent is there input here from the buy side? I imagine that PE companies have their own standardization requirements and ways they like things to be done. So is there much of an input on that side?
John Heyde:
Absolutely. Particularly post-transaction, but it could be during diligence as well as the transaction becomes clear that it will move forward. But yeah, certainly, I mean most fund managers, they require data in a certain template so that they can look at everything on a standardized way and make sure that they're measuring apples against apples when they're looking across all their portfolio companies. In some cases, I know fund managers where they just have an Excel template and they send it down to the portfolio companies every month and they ask them to fill out that template. And that's how they're standardizing the data, which obviously is not very sophisticated at all there's other fund managers out there that are on the complete opposite end of the spectrum where every single one of their Port cos is using the same GL system, it's following a similar process and procedure around the financial reporting processes and there's some type of automated output that is going to the fund manager on a recurring basis. So they don't even have to send an email asking, Hey, where's the report? Right? We can set that up to where reports go out on an automated day. So I think if you're the fund manager, that's definitely, a high value add, when you think about outsourcing, and certainly that should be a consideration and they should use their influences in making that determination on whether or not to outsource.
Danny Bradbury:
It's really interesting the level of variance that you'll find in between different buyers I suppose, and then therefore, the kind of hoops you might have to jump through to help the portfolio company jump through to get to a basic level of acceptability here. On that note, Alex, I'm sure you have portfolio companies with lots of different capabilities when you first engage them. I mean, what's the worst case scenario? How much may they be lacking when they obviously then decide, no, we need someone to outsource?
Alexandra Missildine:
Through the process that PE is going through doing due diligence on these companies, a lot of times they're uncovering potentially being a couple years behind on being able to have really good accurate financial statements, and so a lot of that's uncovered before we even really get involved on our side of the post-transaction side. But that's a great example a lot of times the real challenge is these companies are potentially years behind on having really great monthly financial statements that they can share with people that might need to be looking at the financial statements and other areas it could be just really not having any automation behind their technology at all. So really they're cutting manual checks for vendors. They are manually entering in banking, credit card transactions. They are scanning receipts manually and delivering those for their corporate credit card expenditures. So it could be that they haven't adopted any accounting technology that's really aiding in the day-to-day.
Danny Bradbury:
Okay. So sometimes a lot of heavy lifting to be done. And obviously this can transform a company. I mean, especially companies that are in that kind of position. Could you, John, talk about some of the top line benefits then of accounting outsourcing to a third party?
John Heyde:
Right off the top, I would say maybe the number one benefit is that the management team gets their time back. People talk about money being the number one resource. Time is the number one resource, not money, not anything else. It's a finite amount that we all have, and we need to be making sure that we're maximizing it and we're spending our time to its highest and best use. So I think that is a huge top line benefit where the management team of the portfolio company can focus on executing the business strategy and doing what they do best and leave the back office and the financial reporting to an outsource provider – to Baker Tilly. Another top line benefit with outsourcing is when you outsource to a firm like Baker Tilly, you're gaining access to the entire ecosystem of Baker Tilly. Let's say you’re just outsourcing the accounting work and you have a team that's working on your behalf, but maybe they come across a transaction that they haven't seen before.
Well, they can leverage other subject matter experts within their team or even more broadly within the firm to make sure that we're accounting for that transaction correctly. Right? Or another example could be the client has a unique accounting question that comes up that may not be within the scope of outsourced accounting, but it could be a quick five, 10 minute question where they want to get a gut check on something related to the accounting industry. Could be tax related, could be consulting related. Right? We have that network inside Baker Tilly, which you have access to. Whereas if you just have an internal team, you're limited to the knowledge and resources of those individuals that you're employing, and you don't have the power of a firm like Baker Tilly behind you. So I think that's a huge top line benefit. We've talked a lot about technology. I mean that's a no-brainer, top line benefit.
One example that I give to a lot of our prospects, we use investran as our general ledger system for the fund accounting, and that's viewed as the gold standard within fund accounting. And we're always adding new automations that Investran has to offer within our platform. Within our instance of that software. If a client were to get Investran on their own, they would just get the out of the box version, and they would not have all the extra bells and whistles and all the automation that we've gotten through our instance. So another way to say it is when we go through and we add enhancements to our technology stack, that is a benefit that all of our clients get to enjoy, not just one client particularly.
I think Alex may have a view on that as well as it relates to the portfolio company specifically. I should also add, how could I forget this? It bolsters your control environment. So you have an independent third party who's essentially serving as the referee of your financial health. We're opining on, Hey, this is the accounting data for this company. Here's the profit and loss statement, here's the balance sheet. And we're independent of the client. We operate as an extension of them, but we are independent. And so a lot of investors particularly view that as really bolstering the control environment because you have that wall, that segregation of duties.
Danny Bradbury:
I was going to ask actually about the strategic implications of this because it strikes me that whereas before companies may have been on the back foot with accounts just doing the books to, get them done and get onto the next thing, now they may actually be able to make better strategic decisions about the way forward based on better financial data. Alex, could you maybe weigh in here? To what extent does this activate the company's ability to think strategically?
Alexandra Missildine:
I really think that these challenges that we're seeing companies face and these recommendations that we make really help them make different decisions with how they're operating their business. One example that I can give is spend management. So anytime that we're talking with clients, we're asking them what are their spend management processes and policies, and how are they tracking their expenses by whether it be revenue streams, departments, cost centers. And we advise them on implementing technology that will allow them to track those expenses and have policies and procedures around those. And it's sometimes crazy how much a spend management policy can really impact overall bottom line expenses when companies can really understand how it's impacting each of their segments and how their spend policies are affecting their bottom line. So that's one example of how we can really help clients make changes on a monthly basis by evaluating and really getting down to the detail of that.
Danny Bradbury:
Brilliant. Okay. Now I'm interested as a potential company that's looking at this. I guess one of my questions would be, is this an all or nothing deal? How movable is this? How flexible is it? Can I outsource just a little part of what I need for accounting, or do I have to outsource everything? And what are the options around that?
Alexandra Missildine:
Yeah, so we really like to meet our clients where they're at. As I mentioned before, we work with high growth startups, so pre-revenue companies that have a plan to have a high growth business lifecycle all the way up to mid-market companies. With that being said, we understand that companies in these different stages of their business lifecycle are going to have different needs in terms of what they need to outsource. Sometimes companies have a pretty solid office manager or bookkeeper that can handle day-to-day accounting and they're able to leverage that individual to perform certain tasks. And then we are there from a month-end close, general ledger, making sure financial statements are on accrual basis and also kind of making sure that they have good controls over that office manager and bookkeeper. And so with that being said, we really like to have those discussions with the client and figure out exactly how we can best support them.
So it is not an all or nothing. We basically like to kind of break up the services that we provide into three different buckets. One of them being back office support, which we describe as day-to-day accounting. And that would be invoicing customers, vendor bill pay, payroll processing, recording bank and credit card transactions. The second area would be month end close. So performing the monthly reconciliations and review process that allows you to get the balance sheet is in a great place and balances are accurate and ready to be reviewed. And the third would be financial reporting, forecasting and business insights. We call that kind of the CFO reporting that a lot of companies can really get a lot of value out of. And so we are able to meet clients where they're at in terms of which parts of those that they're needing.
Danny Bradbury:
John. I've actually heard about something called lift and shift, which seems to pertain to this. Could you explain what that is and how it works?
John Heyde:
Yeah, absolutely. Lift and shift, that's a form of where the employees of a portfolio company, the accounting team members, they would become employees of the service provider. So in this case Baker Tilly, but they would continue to do the role that they're operating in. You see that fairly often. I've seen it a lot with real estate companies recently, and I think a lot of that is because people in real estate, they're not in the accounting business, they're not in the business to do accounting. They need to manage real estate, they need to manage assets. It's been a choppy market, to say the least in the real estate space since dating back to Covid. So you've seen that gain a lot of popularity with lift and shifts. And, again, the advantage here is you have continuity of the staff, the folks that have that institutional knowledge of that company are still working on your accounts. It's just now the service provider, they're working for them and it's on the service provider to manage that team and ensure that they're optimizing their performance. And of course if you have any issues with turnover, things of that nature, that's something the service provider will then own. And so that would be a benefit for the portfolio company in a lift and shift scenario.
Danny Bradbury:
Would they stay working at the portfolio company's offices? Would they go to your offices to work? Would they work at the PEs offices?
John Heyde:
So that is something that could be worked through in the arrangement. I've heard of Lift and shifts where the employee's still office at that space. That's not necessarily the norm, or I would say common. I mean part of the benefit in a lift and shift is you can downsize your office space. So the plans would be to do that pretty shortly thereafter making that decision. But all those details can be worked through with the service provider, with Baker Tilly. But make no mistake, the people who are being lifted out and shifted, they are now Baker Tilly employees in this example. They would have all the benefits that Baker Tilly offers, all the HR benefits, they would have access to all the same technology that we provide other clients. They would get training, internal training by Baker Tilly, and so they would really adhere to the employee handbook of Baker Tilly.
Danny Bradbury:
Good stuff. Okay. And one last question I'm going to actually throw out to both of you. Maybe John, starting with you, what are the best practices for portfolio companies considering outsourcing part or all of their accounting services?
John Heyde:
Best practices? I mean, I think you have to really take a strong evaluation of the health of your accounting department. Do you feel confident that you can get data on a timely basis to manage the business? Data is everything. We've lived in the information age for a while now, and it's paramount. I think we touched on this earlier in the podcast. If you're spending time with your accounting team, and you're spending time remediating things and getting data out later than you wanted to, you're living in the past. You're losing time and you're living in the past, you're not able to proactively manage the business. It's really critical that you're getting good data, timely, so that you can really take control of the business and think forward. And one of the things that I tell all of our clients and prospects you have to look at it as an investment.
It's not a cost, it's an investment. Because what happens is, I've seen this happen before. Prospects try to cut corners with budget, they'll try to go to the lowest cost provider, and a year or two later, they'll come call 'em back and their books and records have been butchered and they can't even figure out how to untangle it. They need help. We come in and help 'em. But I mean, it costs them almost twice as much now, right? Because we have to spend a considerable amount of time and effort untangling this mess that the low cost provider had left in their wake. You got to think about it in terms of an investment. Don't be pennywise pound foolish, it'll pay dividends down the road.
I think accountants do a bad job oftentimes of selling our value proposition to clients. It's easy to take for granted the accounting profession, but it's even more easy to butcher the records. I really, really would just advocate that when people think about outsourcing, be very thoughtful of it. Think about what your must haves are. But service providers like Baker Tilly, we can tailor our services to what each individual portfolio company's needs are.
Alex talked about this earlier, just going through the assessment that they do. I mean, during that assessment phase, that's when we really build out our scope of work and we're very detailed in that scope of services with the client and saying, okay, this is what Baker Tilly is responsible for doing, and this is your role in helping us meet these objectives because there is some level of shared responsibility. We can only do our job to the extent that we're receiving good data from our clients. And so just having that open communication, that open dialogue, really coming to a good understanding as to, okay, this is what we need you to do. This is the roles and responsibilities for Baker Tilly, and then let's move forward. And that scope can constantly be edited, modified, we can add things in later.
The other thing that I would say too, I think oftentimes prospects or clients, they kind of just want to solve for everything right off the bat, but it could be a huge undertaking. And so if there's 30, 40 entities that you're looking to outsource and the records are a mess in those situations, I always advise we got to crawl, walk, run. So let's start with like one entity and let's get that remediated and let's develop a good scope of services for that entity and make sure that we're on the same page, and then let's roll this out universally across the other entities. But it takes time to get there. And I think setting those clear expectations upfront and continuously communicating throughout the process, I mean, that's critical. Communication is always paramount.
Danny Bradbury:
Excellent. Good data management, treat as an investment, make sure you've prioritized, your must haves, and then communication is always key, isn't it? Maybe just in the last couple of minutes, Alex, you can add anything else that you think portfolio companies should bring to the table?
Alexandra Missildine:
Yeah, so I agree with John. I think first is really valuing outsourced accounting and seeing all the benefits of it so that we have that buy-in from the PE company to really work with us and collaborate with us. Second to that is being open to our recommendations on changes of technology. And again, seeing that as an investment, the long-term benefits that you're going to be getting from our recommendations, the short term might feel like, gosh, that's going to be a lot of time or money, and we can't take that on right now, but we will help you prioritize what are maybe the critical things to do now versus in one to two years. And then lastly would be patience around that implementation stage. There's a lot of things that we're working on. There's a lot of key people that we're probably going to be meeting with from the portfolio company side, from the PE side, and team members on our side. So just understanding that there's timelines. Sometimes people miss their own deadlines as part of the process, and that we should all be working together towards the end goal of completing the onboarding and ultimately getting you to a space where you're getting that great monthly financial reporting that PE companies are looking for.
Danny Bradbury:
Excellent. Well, thank you John Heyde and Alexandra Missildine for joining us today. Your insights have been invaluable, and thank you audience for listening to this our final podcast in the series on supporting private equity firms and their portfolio companies through the complex and often challenging transaction process and beyond. We hope you've enjoyed these valuable insights from our professionals at Baker Tilly. John and Alex. Have a great day.
