A call for help: daring to outsource the financial functions.

• Position: Cover Story

Daring to Outsource the Financial Functions

Should you outsource your financial functions, asking someone to provide the very skills you spent your whole career polishing? After several years of persuasion by outsourcing vendors toting loads of data that say outsourcing is the way to go, some companies still resist.

But the idea of handing over the business processes surrounding the corporate finance department is taking hold: In 1997, the finance function has been the most outsourced business function, according to a study by the Outsourcing Institute and Dun & Bradstreet. Accounting for 22 percent of all new outsourcing activity, the finance function finally overtakes the perennial outsourcing favorite, information technology, which checks in at 12.8 percent of new activity.

Read the tales of two companies - both of which needed help with their finance functions fast - that are convinced outsourcing is the answer.

The California Earthquake Authority Tim Richison, CFO

Outsourced:

* Pension fund management

Tax Payroll

* Short-term investment management

* Accounts payable/recievable

Asset appraisals/valuations Internal audit Leasing Real estate management

* Accounting

* Treasury management

The California Earthquake Authority is unique because it s the state's first effort to privatize government and its first attempt to issue insurance. Created two years ago by a legislative act, the Authority's purpose was to resolve the homeowners' insurance crisis after the North Ridge earthquake, because California residents were having trouble obtaining insurance. We were operational December 1, 1996, just 60 days after the legislation passed, which was part of our mandate. Our current sales premiums are between $600 million and $700 million, and we have a financial capacity to pay claims through traditional re-insurance, nontraditional re-insurance and financial markets of about $7.5 billion.

Because we had to become a national operating insurance company so quickly, we outsourced all of our major functions. In our first month, we sold more than $75 million of insurance with a staff of five and our outsourcers. Our 21 employees now serve in a control capacity, making sure projects get done on time.

Why outsource? I didn't want to worry about accounting principals or the regulatory financials. I wanted professionals who had done this kind of work whom I could rely on to set up the infrastructure and work as a team, so I could manage our finances and be prepared to pay claims quickly and efficiently when an earthquake occurs in California. We never envisioned bringing any of this in-house, but we didn't want a master/slave relationship with a vendor. We wanted a partnership.

I also wanted to produce our financials quickly. Most insurance companies take more than 30 days after the close of the month to complete their financials. We now send them to our board of directors 20 days after the close of the month. Our outsourcers put the financials together and we review them. I don't worry about the computer going down or whether the accounts are paid. Those are the outsourcer's problems.

On cost savings ... Because we are publicly managed, we had to look especially hard at the potential cost savings of outsourcing. Could we hire and train our own people ? What would that cost? How would that compare to the cost of an outsourcer? Believe it or not, we don't think there's much difference in development costs - that is, bringing in the outsourcers versus hiring our own employees and buying the right equipment. The big cost savings are in the day-to-day operations, where we estimate we're saving $100,000 to $200,000 a year by having our outsourcer do all of our financial accounting.

On the contract ... We issued a request for proposals to about 40 U.S. finns we knew could provide the outsourcing service, from a local CPA firm to the largest accounting firms. Within the RFP we created a grading matrix so each vendor knew the areas on which we would be evaluating it. Then we asked a panel to review the bids and called in the finalists for their last pitches.

Within three days of choosing our outsourcer, we had set up a master...