The Virtual CFO Opportunity
CFO Central

The Virtual CFO Opportunity: Strategic Play for Forward-Thinking Finance Pros

By Art Wittmann, Industry Research

A virtual CFO — an accounting professional or firm offering high-value consultative and specialized services in addition to business essentials — can provide a competitive edge to customers without the means to bring on full-time CFOs. But it’s not just clients that benefit. The predictable monthly recurring revenue that comes with a vCFO service could be transformational for your firm.

Not sure the VCFO trend has legs? Here’s a question for you: When did services employment overtake manufacturing in the United States? Not sure? Don’t worry, it’s a trick question, because no one knows precisely. The Labor Department started tracking employment by sector in 1939, and at that time, non-farming service sector jobs outnumbered manufacturing jobs by two to one. Since then, the ratio has crept to 10 to one, with no sign of a reversal.

Many factors contribute to the growth of the service sector and the shrinking — at least in terms of employment — of other sectors. Most of them boil down to an increase in business complexity and improvements in automation technology. In 1960, a single farmer fed 26 people; today it’s 155. Presently, it takes about 33 employee hours to make a car. That’s down from over 92 hours in 1929, an impressive drop given the increase in complexity of automotive tech since the ’30s.

In both cases, automation has left these industries needing relatively few people to produce their products.

On the other hand, technology has spawned massive increases in complexity in almost everything we do. It may take less than a week of employee time to make a car, but good luck repairing it yourself. That service has to come from an expert these days — even turning off the “change oil” light takes technology you’re not likely to have. Everything ranging from personal taxes to travel arrangements and well beyond now require a computer.

Your Customer Needs More Than You Think

For smart, (typically) smaller, high-growth companies, the ability to use outsourcers rather than build non-core competencies in house is a huge value, and our goal here is to help you take a broad view of what your business can provide. Consultants tend to think that the service they offer is one of very few a business might need. This is increasingly not true. The diagram below provides a view of some of the services a company might outsource.

Some are mostly the domain of smaller businesses, but not all. HR functions like payroll, health benefits and 401k management are commonly outsourced even at the largest enterprises. The reasoning is straightforward: There are just too many local, state, federal and international laws in play for companies to get these employee-management issues right themselves, so these functions have become the domain of outside providers. These services aren’t cheap, but they’re less costly than building the expertise in-house. Providers also have a depth of expertise that any firm would be hard-pressed to replicate.

Business Process Outsourcing

We’re not talking offshoring here. That’s a related but different phenomenon. India was and is a hotbed of this activity, with companies like Wipro and Tata providing IT and other business process services to, typically, large enterprises. The practice is not quite as popular as it once was because of culture, language and time-zone differences, along with rising costs. But it’s still a very viable option for larger companies.

In the United States, one famous example of business process outsourcing is the 2002 megadeal in which American Express outsourced most of its IT functions to IBM at a cost of $4 billion. One morning, 2,000 Amex employees woke up to learn they now worked for Big Blue. At the time, Amex thought it would save “hundreds of millions,” and for its part, IBM had a marquis customer for its Global Services group just when it needed one.

Like most of the promise of the dot-com era, those big expectations didn’t quite materialize. Still, the deal had merit: At its core, American Express saw itself as an innovator in financial services, not an expert in data processing. Why not let IBM do what it does best and in the process free Amex to innovate in financial services?

The theory is exactly the same today: If a client’s core business is selling coffee, then it needs to focus on beans, roasts and brewing technology. But as sales grow, so does the complexity of doing business. Laws governing employee management, accounting, interstate and international taxes and tariffs, and environmental regulations are sources of complexity.

How Companies Decide to Outsource

But your value as vCFO can and should go beyond these issues. A new Brainyard survey of 166 CFOs across 23 industries shows 54 percent of them have between 11 and 15 major day-to-day responsibilities. Many require strategic thinking. For example, 82 percent of respondent CFOs say they are increasingly accountable for the strategic direction of the company, on top of more traditional financial responsibilities like budgeting and auditing and reporting. Thirty-four percent said maintaining steady cash flow is a top challenge in 2019; six in 10 say they do so by identifying new revenue streams.

Who stays on top of strategic direction and new, lucrative opportunities for that growing coffee shop?

It’s Who You Know

Another pain point is technology. A shop might start with a half-dozen point-of-sale systems, a networked printer and managed Wi-Fi for customers, but complexity and criticality grow quickly as technology-based automation hits every corner of the business from R&D to design, manufacturing, sales, facilities, legal, marketing and pretty much everything else you can think of. As a vCFO, you might provide recommendations for customers. At the very least, you should know the other players vying for that monthly spend.

Traditionally, managed service providers, or MSPs, fill the need for IT services at companies that don’t want to develop that capability in house. As you build a vCFO service, it’s important to get to know the MSPs active in your area and vertical. They keep the desktop hardware running, current and backed up. They manage the printers and wireless networks, and most offer security services. That coffee shop, if it takes credit cards, needs to be PCI compliant. As a vCFO, you could work with that MSP to make sure appropriate controls are in place.

MSPs don’t typically help with connectivity and phone systems. That’s a different set of resellers who have relationships with cable companies and telcos. Because these connectivity providers are notoriously difficult to deal with, it takes specialized expertise, and MSPs don’t see the service as lucrative enough. So, these agents are the next people you’ll want to get to know.

These two, along with facilities (which can also come as a service thanks to companies like WeWork) form the infrastructure base that most of your potential clients need. Once those are in place, it becomes easier to add on the vertical services shown in the diagram above. And it’s also the reason you need these resellers: The last thing you as a virtual CFO wants to worry about is end user system configuration and connectivity.

The good news is that there are lots of MSPs, agents and resellers. The bad news is that they are definitely not all created equal. As you speak with clients, ask who they use for IT and connectivity support. Carefully choose who you forge relationships with, focusing on firms schooled in providing services to the vertical industries you select. Here is a downloadable list of 501 top MSPs; you can dig into their specializations and regions (registration required). Some act as virtual CIOs.

One note: Analysts serving this community are sounding the alarm on specialists, including vCFOs, as potential competitors. So don’t be surprised if you get questions on whether you plan to start selling IT services.

Tips for the Would-be Service Provider

Specialize!

That brings us to our next point. Unless you’re Accenture (and if you are, why are you reading this?), you need to specialize. Depending on the geo you’re working in, specialization can be very narrow. If you’re in LA or New York, you can and should be highly specialized in the verticals you serve. In large metros, “healthcare” is too broad. Your five-to-20 person shop can do very well by homing in on the needs of dentists, dermatologists, estate law attorneys or plumbers. Dentists have needs ranging from certifications to staff licensing to point-of-sale and insurance collection systems. Plumbers must deal with logistics, collections, licensing, staff management and scheduling. Lawyers deal in billable hours, privacy and other issues.

Hopefully you see the point. If you’re the virtual CFO, then you need to understand the nuance of the businesses you serve. CFOs aren’t just about closing the books. As our survey shows, they also serve as reality checkers, strategists and risk mitigators for their clients.

In a rural area, you may need to cast your net more broadly, but in metros, fine-tuning wins.

Perhaps the best strategy is to identify a sector in your area where new businesses flourish. It could be technology, software, manufacturing, specialty foods, fair-trade coffee, healthcare products or virtually anything else. As a finance professional, getting involved with startups can be fun and profitable (and frustrating and weird). Opportunities to help a company grow from revenues of a few million a year to billions don’t come along too often, but it does happen. And, even more modest growth is great for your business. Getting connected with venture capitalists and private equity firms can be a tough nut to crack, but if you’ve got the expertise and can help one of their clients do well, you’ll have some pretty amazing repeat business.

In services, trust is everything.

Pick Your Automation Tools Carefully

There’s no service without software, and we aren’t talking about Excel. Your MSP partners have dozens of software vendors vying for their business, and success is often predicated on choosing the right remote management and monitoring, professional services automation, billing, security, business continuity, device management and unified communications services. Vendors have specialized offerings for MSPs to not only provide the service in question, but to do it for dozens to hundreds of clients with single-screen management.

You too have choices, and in some respects, they are more complex. When it comes to desktop management or unified communications, sure, the bells and whistles matter. But core features are somewhat similar from one vendor to the next. The tradeoff between price and features is pretty small, and competition is fierce.

For the virtual CFO, it’s a different matter. The choice will have a lot to do with your target customer.

If you’re a small business serving just slightly larger businesses with limited growth potential, then economy is the name of the game so that you can price your service to sell. To be certain, you’ll need a specific feature set, but once you find a few potential vendors, it becomes all about getting them to compete on price and discount. There are usually terms that come along with that deep discount; primarily, you must resell the SaaS offering at or near the price the provider requires. But if the numbers work, this can be a terrific business model that delivers to you monthly recurring revenue while allowing your clients to spend on an opex versus capex basis.

If you’re aiming to serve emerging businesses, it’s a different game. Let’s say your client is making specialized medical devices. They’ll likely have one of two strategies in mind: Perfect a new device, technology or treatment and then be bought by one of the big players, or avoid acquisition and aim for unicorn status.

In the former case, you’ll work with them as their revenue moves from a few million a year to perhaps $50 million and then as acquisition happens. If you’re convinced there’s “some there there,” you might even take a portion of your compensation as stock. Thinking that one through is beyond our scope here, but suffice it to say, it shouldn’t be dismissed.

The second strategy is trickier. As the name implies, a unicorn is a rare thing, but some founders hold that goal.

In the first case, you’ll want a SaaS offering you can resell and that fully meets the financial services needs of a midsize company. What that means can vary, but certainly the capability for interstate commerce, payables and receivables is a must. Proving the concept for acquisition mostly means the product works, but it also means that you’ve proven economic viability and the potential for growth, perhaps worldwide. You don’t necessarily need a highly integrated system, as any acquiring company will have its own chosen back-office setup.

In the second case, the last thing your client will want is a financials-only system. Rather, a full blown ERP suite is the ticket — preferably one that can scale, but without extracting undue cash from a revenue-constrained startup. Price is still important, but integration points and a proven ability to manage enterprises into eight figures of revenue is critical. Even if you don’t fully make this journey with your client, you’ll want to set them up with back-office systems that are easy for the $2 million revenue company to use and that will meet the needs of the $200 million company when the time comes.

This too is where those relationships will come into play. Knowing some solid connectivity resellers and MSPs is good. Knowing the HR specialist, sales automation consultant, e-commerce guru and legal expert is great and can make your vCFO business invaluable to customers.


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