Why do beauty salons need accounting outsourcing?

Although accounting and tax accounting have long been outsourced by many companies in Europe and the USA, Russian businesses have only a vague notion about this practice. The topic is poorly covered and little “insider” information is available, contributing to this state of affairs. To rectify this, we have gone into all the details of our successful experience in transferring accounting for a chain of Moscow beauty salons to an outsourcing-based model. We spoke with Elena Trishkina, Financial Director at MONE, on all the stages of project implementation and the details of the transition process, as well as the final results.

Elena, MONE outsourced bookkeeping to the UCMS Group at the end of 2010. Did the economic climate affect your decision?

Елена Тришкина - Зачем салонам красоты нужен аутсорсинг бухгалтерского учета? История успеха Моне

We started thinking about outsourcing back in 2009. MONE has a unique organizational structure: we have 18 beauty salons in Moscow, each acting as its own business with its own managers and accounting. Compensation is a combination of piecework and bonuses: salary is calculated based on the number of shifts worked and compensation is calculated as a percent of earnings. At the time, our accountants first counted everything in Excel, exported from the internal reporting software, rechecked the data, loaded it into 1C, and so on. There were a lot of tedious operations.

Business processes related to document management and accounting were not well developed, with suboptimal compliance with existing standards.

When the economic downturn hit in 2009, we had to take a closer look at the cost-effectiveness of our expenses and how to reduce costs without risking any lowering of the quality of service. There were fewer people at the company now and workloads had increased. If the head accountant is under constant stress and might leave at any time, it is a tall order to find a qualified professional who can quickly become part of the team and perform tasks quickly with good quality.

For a long time, we had paid attention to different risks related to the human factor and being dependent on staff: if our accountant falls sick, we can’t turn in financial reporting on time, which forces the company to a halt.

At the time, we had 11 in-house finance and accounting specialists for 450 employees. We thought about the efficient use of these resources and concluded that their salary, with the expenses and risks borne by the business, did not give sufficient payoff.

Because of all these factors, we eventually decided we had to improve the quality of accounting. But it is not an easy decision to go with outsourcing. Accounting is something like the family jewels for a company and even a company like ours that works completely by the books is going to be reluctant. But MONE has Western shareholders and management with Western degrees, so the risk reduction and increased efficiency of outsourcing ultimately won out over our fears and doubts.

Problems with outsourcing accounting are related not only to accounting being the “family jewels,” but also to the underdeveloped market for these services. How did you choose a provider?

We made our decisions based on the options on the market. MONE has a Western business model and we wanted for our provider also to have Western business processes, as well as a positive history on the market, good client recommendations, and a drive to be client-oriented.

In the end, we looked at three companies. After comparing the range of services, prices, risks and guarantees, we chose the UCMS Group.

What did you plan to outsource and what requirements did you have of the provider?

We wanted to outsource accounting, payroll, and HR administration entirely. But we concluded that HR for MONE is a core function and we want to be the ones communicating with employees on all HR issues. So even routine HR work has remained in-house.

All accounting, except for treasury functions for creating payment plans and management accounting, was outsourced to the provider. We also delegated all communications with tax authorities and different benefits funds to the UCMS Group. So the company retained cash flow planning, which allowed us to keep management’s “ears to the ground,” and preparation of management reporting.

Since all of our management reporting is based on individual earnings and expenses for each beauty salon, one of the key requirements of our provider was that accounting be separate for each business unit.

In addition, our management reporting system is based on 1C, so our provider also had to work in 1C for easier integration.

How was the handoff process organized?

We reached an agreement with the provider in October 2010 and in November all processes were handed off to the UCMS Group. We were in a rush due to the end of the fiscal period – because of this, frankly, there was no structured plan for transferring everything over and there were no detailed guidelines for how to collaborate. We sketched out in the agreement what would be given to the provider and how. All of the other no less important details and issues were hammered out during the collaboration process.

Naturally, the experts at the UCMS Group did not have the time to conduct a full-fledged audit. They got up to speed as much as they could, considering the tight deadlines: they looked at the condition of reporting, source documentation, and accounting database.

On our part, we thought we had handed over pristine accounting and expected to close the period right away and turn in the reporting. But that’s not what happened. And right after accounting was outsourced, we had to go through two field audits by the Social Insurance Fund and one by the Pension Fund.

We coped with the difficulties together, in close cooperation with constant dialog on all problem areas. I have to note how client-oriented the UCMS Group is – they have shown enormous loyalty to MONE as a client. On the provider end, Svetlana Makashina and her team worked with us. They were incredibly dedicated and determined to get outstanding results. Our employees saw the attitude they took, which inspired a lot of hard, painstaking work on the project by them to match. By working together, we passed the audits and successfully closed the books for the period.

I have to say that in the first months of outsourcing, we certainly got tripped up in a number of tricky spots – it was far from easy.

So you had to write out detailed instructions for how to communicate with the UCMS Group?

That’s right. About two months after outsourcing began we felt an acute need to get a document written down. In it we have tried to delineate the entire chain of interactions, including who is responsible for sending documents, as well as the procedure and deadlines for providing and delivering reporting both on our side and our theirs, and closing dates for financial periods.

Needless to say, outsourcing accounting required changes to our business processes and redistributing areas of responsibility within the company, which we codified in the instructions.

For instance, we changed the profile of salon managers by giving them the function of interfacing with accounting. Now the operations director is personally responsible for salon managers delivering properly completed source documentation, reporting, and reconciliation reports to the office every day. We also established that, after accepting source documentation, the office manager must give it that very same day to the provider.

These instructions were being written and revised all throughout 2011. We improved our collaboration with the UCMS Group and brought the instructions into line with our changing business conditions and needs.

Last year, for example, shareholders decided to set the goal of receiving monthly management reporting, for deeper analysis and quick decision-making. This reduces the time we have for closing the books on a period; the requirements as to speed and quality of information receipt from the provider increased. We also optimized purchasing and inventory processes at our salons and introduced e-documents with our vendors. All of this affected accounting, of course.

Was the provider able to keep pace with the changes at your company?

МОNЕ is a rapidly growing, rapidly changing company and last year we made a real leap forward. We were running ahead, with our provider right by our side. Outsourced accounting has been absolutely no obstacle to growth. We discussed all of our new requirements with the UCMS Group and we have always found a constructive solution.

So by early 2012, when you had reached a comfort zone in your provider relationship, the project was almost fully implemented. What are the results and have they met your expectations?

There is no clear-cut boundary today between MONE as client and UCMS Group as outsourcer. More of a dotted line, I’d say. MONE receives complete, high-quality, accurate accounting and we are confident that, no matter the circumstances, we will receive complete reporting. This allows us to quickly prepare detailed analysis and report to our shareholders.

The provider’s specialists communicate directly with our line staff, which means that our master stylists can get detailed payroll information at any time, for example. The UCMS Group is there for us all the way in our operations. Things are calm and calm is a precious commodity in business. So there is every reason to say that outsourcing has met all of our expectations.

Outsourcing was supposed to reduce expenses too – how are the economics of it?

We reduced financial personnel by almost 75%, from 11 employees to three. Taking into account total expenses for sick leave, vacation, staff rotation, office rent, workplace maintenance, and accounting expenses, overall we have come out ahead financially. Overall, the direct savings are small, since the provider’s services cost money too.

But our goal in outsourcing was to increase efficiency, not reduce expenses. And from this point of view our gains have been substantial. For example, we have freed our financial personnel from routine monotony, giving them more time for analysis and professional development.

We know that current and future changes in the tax code would demand serious investment by the company in training our staff and refining our accounting systems. All of this is handled by our provider now, which has saved us money going forward.

So the project has paid for itself and based on our experience in 2011, the board of directors has decided to continue using the services of the UCMS Group.

What tasks does MONE plan to tackle together with the UCMS Group this year?

Recently, for example, we were talking with our provider about implementing e-document handling and double-entry bookkeeping per Russian and IFRS standards.

This year we also intend to upgrade our business analytics and documentation-related processes. We plan to optimize our payroll system and automate all aspects of accounting in order to make our business processes more efficient.

Accounting is at the heart of any business and we will be working closely with our provider to get things perfect. Perfect accounting is our goal.

Thanks for talking with us, Elena. One last question: what are your thoughts on the main argument against the outsourcing of accounting, that of poor reporting creating the risk of criminal liability for CEOs?

You just have to be careful when selecting a service provider, understand and evaluate their level of professionalism, and always keep an eye on what they’re doing.

For example, we work with an auditing company, which conducts an annual audit of our provider. An interim audit last fall showed that our accounting not only meets the requirements of Russian law, but the high requirements of our shareholders. Foreign practices have caught on in Russia, and when a company uses serious accounting outsourcers, the providers help cover for risks and represent the client in case of tax disputes.

We have peace of mind about our accounting and can concentrate on what’s important: our business.

Interview by Kseniya Laktionova

A Provider’s View

Елена Тришкина - Зачем салонам красоты нужен аутсорсинг бухгалтерского учета? История успеха Моне

Svetlana Makashina, Accounting Group Director at the UCMS Group

Handling accounting and taxation for MONE beauty salons was an extremely interesting project for us, from a professional point of view. It is a large, complicated company with separate units, complicated processes, and a unique salary structure. The limited time for making the transition made the challenge too interesting to pass up.

As for the provider audit that we performed before taking on the client’s accounting tasks, it truly was on tight deadlines. We reviewed the reports from previous tax field audits and audit statements, analyzed their 1C database, and sampled documentation for one of the beauty salons. We participated in the inventory process for one salon to get a better understanding of how the business works.

Usually, when time allows, we compile detailed terms of reference to guide the outsourcing process – they set out all of the steps for making the transition. This includes analyzing software and the previous reports, sampling source documentation, and analyzing the operations, organizational structure, and management structures of the company. Analyzing the client’s existing 1C database allows determining how customized it is and finding out which changes and integrations have been made in all of the client’s databases. It is crucial to look at the internal software the client uses on a daily basis, which is separate from 1C but allows for data auto-exchange. We discourage making changes to standard system configurations and recommend using externally supported tools, in order to avoid any future problems with updates and the like. The terms of reference also designate the project coordinators and persons responsible on the client side and on the provider side. A step-by-step plan like this allows making the transition a painless one.

The outsourcing contract also specifies which areas of accounting are to be outsourced, which will remain in-house, and how the technical side will work. For example, the accounting system can be hosted by the client or by the provider; we can provide the client with our employees to run the system or just run it all on our side. There are many different outsourcing workflows to choose from.

Right after outsourcing is transitioned, or during the process, we always reach agreement on collaboration guidelines. Often they are written only at the company level (what the client should do and what the provider should do), but with MONE we went further and set out guidelines at the level of specific employees. Every last thing was included: the actions to take if this or that happens, the documents that must be used, and when (down to the hour and minute) information needs to be provided.