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Outsourcing office work
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September 19, 2000: 11:40 a.m. ET
Service firms use the Net to take on companies' back-office functions
By Staff Writer Steve Bills
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NEW YORK (CNNfn) - Financial entrepreneurs figured out years ago they could make a profit by taking on some of the onerous tasks that burden businesses -- managing an employer's payroll, for instance, keeping up with tax payments, benefits deductions and the like.
Today, a new breed of outsourcing specialist is offering to take over the entire financial operation of its clients -- essentially everything below the level of the chief financial officer.
 "We're giving our customers much more valuable, much more timely information than they ever had access to before," asserts David Schnitt, founder and CEO of Ledgent Inc., one of the new breed of "business process outsourcing" services.
Perhaps more to the point, these BPOs say they can save their clients money -- as much as 25 to 40 percent annually in the back-office areas of financial administration and human resources, Schnitt said.
How the Net makes a difference
The Internet is also transforming the outsourcing game, in a couple of different ways. With the Web still representing a hothouse environment for business startups, "time to market is driving these decisions to a much greater extent than it used to," said Stephen Lane, an analyst at the market research firm Aberdeen Group.
Thus, to a growth-oriented dot.com that already is outsourcing its Web-hosting functions, its sales fulfillment and the like, outsourcing the accounting is likely to look like a natural move -- especially for a startup, where there is no existing operation to overhaul.
Existing companies as well may find it expedient to hire third parties, suggested Marc Pramuk of market researcher IDC, because "the small company is probably grossly inefficient in how it manages those functions."
 On issues such as payroll, the benefit is well recognized that an outside provider can handle the tax withholding, insurance and 401(k) deductions more effectively than an employer. But so far, Pramuk said, the idea of outsourcing broader financial functions remains the province of "early adopters."
The Net also is opening the market to smaller customers.
Until now, "the economies of scale weren't there for the suppliers to go out and serve the midsize and smaller market," Lane said. "By using technology, using the Internet as the delivery mechanism, you're touching a segment of the market that had not been served in the past."
Fast-moving marketplace
How quickly are things moving? Well, it was last November when General Motors (GM: Research, Estimates) struck an outsourcing deal with one of the Big Five accountants Arthur Andersen, selling the processes and systems it employed to handle about $250 billion annually in payroll, accounts receivable and other financial transactions.
In addition to performing those functions, Andersen got the right to offer some of GM's proprietary accounting systems to other companies. Andersen agreed to provide those services to GM for $250 million over the life a 10-year contract.
At that time, an Arizona company called LeapSource was just getting off the ground. Launched with $65 million in venture capital, the Phoenix-based firm targeted midsize to larger clients for its back-office services, companies with $200 million to $5 billion in annual revenues, according to spokeswoman Bonnie Leedy.
A year later, LeapSource has a stable of a half-dozen clients, including Xpedior Inc. (XPDR: Research, Estimates), a provider of e-business solutions; Epoch Partners, a San Francisco-based online investment bank; and Heritage Golf Group LLC, a course-management firm. Leedy said LeapSource hopes to be profitable by next February.
Not that it's easy. "It's a new area and you have to educate people first what it is," Leedy said. "So the sales cycle is relatively long."
When Ledgent officially launched this week, it did so with $12 million in "Series A" financing, five clients who had participated in the firm's beta testing, and a definition of a midsize company that runs from $150 million in annual sales down to as little as $2 million -- "but they plan on becoming much larger than that," Schnitt said.
Ledgent is targeting service businesses -- law firms, consultants, online B2B firms, etc. "That's where all the growth is in the economy," Schnitt said. "We're going after it strategically." 
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