Hospitality Financial Leadership - Outsourcing Your Accounting and Why this is a Stupid Idea
July 25, 2017 2:05pm
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.
Outsourcing your hotel accounting is an unintelligent move, that is my opinion and I am going to make my case right here. When I refer to outsourcing, I am talking about a third party provider, not a centralized function.
Any good decision comes down to more pros than cons
I often work with clients on decisions and we often make two lists. Good things that can come from a decision and how we can amplify them, then the bad things that could and would happen and how we can minimize them. Here goes my list on outsourcing your hotel accounting. Rather than two lists I will alternate between pro and con.
One good thing that comes from outsourcing is being trendy. Many brands are doing it and it is the trendy thing to do. I spoke with a CFO recently and he explained that the board had decided on outsourcing.
"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.”
Inside 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 if there is a service problem it falls on the hotel’s lap, not the management company’s problem really.
In business, especially one that has multiple stakeholders, the pressure to keep up with the Jones’s is stiff. Companies feel compelled to move, to innovate, and sometimes these changes are not in their best interest.
There is a quote that speaks very nicely to this, “If you enter a market and don't know what to do, watch what everyone else is doing, and then do the opposite. The majority is almost always wrong. " ~ Earl Nightingale
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 AP 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 over there – the volume turned way down. This in-your-face service provided by a whining 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 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 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 picture, the savings are forecast yet 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 a very experienced controller recently that had her AP outsourced as part of their project. She said there were several very negative aspects. Department heads and managers hate the additional paperwork they are given, namely scanning documents. The hotel loses track of so many invoices so they start 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 pretty.
She also expressed concerns about USE 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 very 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 it to a third party, the hotel loses the development people/positron aspects that propel 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.
If hotel accounting departments are going to take an ax to the development pipeline, they are not going to have financial leaders that 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 extremely 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 bit little 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. What are people thinking?
An old GM 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 this 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 that is not focused on the “accounting” but one that is a business manager, thought leader and people developer. Having a leader with a strong knowledge of the financial mechanics that goes on under the deck of the ship, helping to steer the other non-financial managers toward greater levels of their own business understanding and success, is a good idea. 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, uses something, 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 on. 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. He or she will have less time to be the leader you want.
It is a given that the re-coding 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 process. 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, and most importantly the 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 really sunk.
I know what you are thinking. You have outsourced all the mundane stuff so now the financial leader and his or her 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 very 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.
It is never too late to say uncle! What are you waiting for?
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hospitality financial leadership
David Lund is The Hotel Financial Coach, an international hospitality financial leadership pioneer. He has held positions as a Regional Financial Controller, Corporate Director and Hotel Manager with Fairmont Hotels for over 30 years.
He authored an award-winning workshop on Hospitality Financial Leadership and has delivered it to hundreds of hotel managers and leaders. David coach’s hospitality executives and delivers his Financial Leadership Workshops throughout the world, helping hotels, owners and brands increase profits and build financially engaged leadership teams.
David speaks at hospitality company meetings, associations and he has had several financial leadership articles published in hotel trade magazines and he is the author of two books on Hospitality Financial Leadership. David is a Certified Hotel Accounting Executive through HFTP and a Certified Professional Coach with CTI.
Contact: David Lund
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