Offshoring Done Right

Today, our guest is Justin Korth. Justin is a tax director at Lutz out of Omaha, Nebraska. He’s working in the tax department and in addition, he oversees their International Workforce Initiative. That’s a mouthful. I’d rather just say outsourcing or offshoring, so… but we’ll go with International Workforce Initiative. Justin, welcome to The Unique CPA.

Thanks, Randy. And good morning.

Yeah, good morning. We are morning, right? You might not be morning anymore. 

A couple minutes after, but that’s okay.

Alright. I’m west coast, you’re central timezone. So I know you work in the tax department. And actually you and I talked months ago, you actually were overseeing the ERC program for the firm as well, dealing with a lot of different things tax wise, but the thing we want to talk about today, oh, we can go any direction we want really but But what I wanted to talk about today was the the outsourcing the offshoring of services. And and so from a firm standpoint, is this a new initiative? Or how long have you been, has this been implemented, the offshoring?

Yeah. So let’s—we really came to the realization of the labor shortage and everything happening right in that COVID timeframe. So the wheels really started going on our outsource to county or our outsource package over in India, starting in the summer of 2021. And then we officially onboarded our team in the fall of 2021. So we’re about 15 months, and now going into our second busy season with our team in India.

Okay, so that’s that was fairly new. It’s kind of interesting. We might want to talk about, you know, following this up a year from now, and just seeing how the second tech season went, because I think this is an important topic. I’ve been wanting to talk to a firm specifically, I’ve I’ve interviewed companies that do this on the podcast, but I have never talked to somebody who is implementing it in the firm. And I like the fact that were at the beginning of this. 

So you mentioned it was COVID time where you started analyzing this. What caused it obviously? Employee shortages, I’m sure, was it talked about for years? Or was it just kind of, hey, ’21, let’s talk about it, boom, let’s implement that. How did that whole process go?

So we’ve always kind of known about offshoring. However, it was a foreign topic to a lot of people. And I think that’s similar in the public accounting industry, where we always thought that everybody has to be physically in the office. But with COVID, I think everybody got a little bit more comfortable with logging on to Teams or Zoom and having those remote conversations. So COVID definitely sped up the process. But COVID was also a huge component to the need that we saw. 

Public accounting, obviously, there’s a lot of peaks, there’s valleys, also in the summertime, where we get some time off. But the peaks are the issue. And it not only is a decrease in accounting graduates coming out of college, but also retention. People that we bring in, that we get in front of clients and stuff, we need to keep them around for the longevity of the process. And that’s the ultimate goal of what’s in this offshoring initiative is to lessen the load on our people, retain people. It’s not primarily a cost saving initiative, even though a lot of people think that you can outsource and you can save a lot of money. That’s a component of it. But our primary focus is how do we make people’s lives easier here in the office as well as serving our clients effectively.

So when we’re looking at that from a making it easier [standpoint], and I love that, you know, to digress for a second, I think we’re in a crisis mode in public accounting right now with the lack of people going in. You mentioned it from you know, going into accounting degrees in college and then the retention you also mentioned. And so I think that’s important the way you’re looking at this.

When, then, we are looking at the—I’m going to use outsourcing, offshoring probably interchangeable—I probably will end up using both. And so when we’re looking at the outsourcing, are there specific services do we break it down to hey, here’s the you know, maybe the lower level tasks that you know, data entry and this kind of stuff or the services start to finish, are they taking one 1040 and going from start to stop? How do they determine what services do go to the offshoring / outsourcing?

Yeah, great question. I’m going to back up just a little bit and first talk about the two different models out there for offshoring or outsourcing. And one is, you send work over to, call it India, on a per return basis. So you contract them simply for busy season, they get the returns done, they send it back to you, great. And then there’s a dedicated service model. And that’s what we use. 

Okay.

I view the dedicated service model as a better long term solution. You’re not just putting a bandaid on things, but you’re kind of going all in and saying, This is an extension of our team, we’re going to dedicate the time and resources to training and developing and giving feedback so that we keep these people for an extended period of time. 

So to your question of, how do we use these folks? Or how do we use them out of the gate? We also wanted to see them as an extension of our team in Omaha, Nebraska. So they are preparers on jobs. And we essentially rank all of our tax returns on a level of difficulty. So obviously, we’re going to start them out on the easier ones and build them up. But they’re clearly preparing to return from start to finish,

Start to finish. So then from that standpoint, I mean, the benefit isn’t just supporting the Omaha Lutz employee, or I know you have multiple offices, but let’s go with Omaha Lutz employee on a specific project. It’s just that they’re freed up now to do other things as well. Do you try to, and I’m just curious, do you try to have the more you know, maybe higher end advisory type work stay with your Omaha employees? Or is there just a, it’s just this one based on reading it, we can offshore and let’s do it?

Yeah, so how we started off was on our core tax tasks. So in busy season number one, they were doing 1065s, 1120-Ses, 1040 returns primarily. And then in the summer months, we started to cross train them in our audit practice. Because at least in our firm, we see a high peak in the number of hours and tasks happening during tax season in our tax department, but as we flip the script to the summertime, our audit practice gets really busy with benefit plans. 

So we actually saw some synergies of cross training and being able to use them for an extended period of time. Again, going back to why we chose the dedicated service model. But we have been very, very clear with our relationship, people and our clients, that that advisory and client service aspect will always reside in our US offices and with our US people. None of our Indian employees can actually email or call any of our clients.

Okay, that was a question I had, so that from a communication standpoint. So then they’re still communicating through whoever probably is in charge of that client or supporting that client, I assume. So if there is a question on the tax preparation that still goes through the, the office in the US? 

That’s correct, yep. 

Okay, now sometimes, do firms actually allow the outsource company to directly contact the client? And if so, why did you guys choose not to?

Yes. So when we were onboarding or starting this process, we spoke to several different firms, and every firm does it a little bit different. So I would say there are firms out there that have their offshore / outsource team call their clients for them. We wanted to take the approach that notifying our clients early and often that this, again, is is an extension of our firm, that the whole reason that we’re going offshore is to find the resources available to do it. But we are still client service providers, and the most important thing to that client is client service. And that needs to reside with the people that they’re comfortable communicating with. So it was very clear early on that we were not going to have those folks communicating directly with our clients.

Okay. And then from that standpoint, as well, I mean, just timing issues would be an issue, if they were communicating with clients, unless they’re working overnight. How about the communication with the US-based lead of that client? How does that communication work?

Yeah. So early on, we obviously had to get our partners, directors, of our firm onboard with this initiative. So we came out and sold them on the facts of over a five year run, we’re gonna see a reduction in hours, of our working hours. We’re going to see an increase or more efficiency and faster turn time on projects so that we can get it to the clients faster. Now, your job as a relationship person is one, to get the consent or disclosure signed from the client, but two, it’s just to, to treat this as you would a normal us employee. So if you’re getting a question from them, you’re responding to them timely within 24 hours, so we can keep that process moving.

Now, a little bit more on the communication side of things. A lot of folks are probably wondering, can you understand people overseas? What’s the barrier there? And in India, they have a huge British influence going back hundreds of years. So in their schools, they are taught British English. So written English, I would say is very, very good. And as you talk to them more, you’re going to get comfortable with their accents, dialects, etc., where I don’t have an issue anymore. Some new folks to the game probably do, but it just takes time.

Yeah, I’m laughing because anytime my wife and I are overseas or somewhere, anywhere with an accent, even watching TV, she has to have the subtitles on. So I’m usually, if we’re overseas somewhere I’m I’m interpreting and even though we’re all speaking English, so I can understand that.

When we first went over there for first trip in December of ’21, they started saying, I have a doubt I have a doubt. And Taylor on our team was like, Are they doubting me? Like, I don’t know what’s happening here? I’m like, no, no, I think it’s just a different word for questioning.

They didn’t have confidence in you, huh? Alright, nice. 

There’s terminology that comes up from time to time where we’re not British, so we don’t know all their terms. 

Right? That’s true. Let’s go to two things that you said so far that I want to back up to a little bit. One, you have this dedicated team meaning that I mean, I assume they’re not Lutz employees? And if so, what is that relationship, then?

You’re correct. So they are not Lutz employees. We contract with a firm in India that actually does all the HR components, and they are employees of that service provider. But they are our full time responsibility. So we control the workflow and everything else like we would a normal staff, we just have offloaded all the HR elements. And that does not give us presence in India from an employment perspective.

Okay, which I assume is important for tax situations.

Yes, very, very important. Yeah, you start getting into foreign disclosures and things like that, foreign bank accounts, we don’t want to have anything to do with that. 

Okay, that makes sense to me. And then and then the other thing that you mentioned, when we’re talking is that the US based lead for that client is making sure that the I think you said agreement or disclosures are signed. What is the process, you have to get buy in from the client that they have to sign off that? Yes, I understand you are offshoring some of this, and I’m okay with that. How’s that process?

Yeah, this is probably one of the very first hurdles that you’ve got to get over is selling the message to your firm, getting the partners on board so that they can in turn, then educate their clients or get that consent sign from the client. So the IRS has specific terminology that must be used for a form 1040 individual tax return that has a slew of language. But at the end of the day, it says, your information may be transmitted outside the United States, which includes your social security number, etc. That form cannot be altered, and it has to have a physical signature, or an electronic signature by the client. 

Our original consents for 1040s lasted 10 years, so we’re good, I think until 2030. So it’s not something that you got to get every single year. But there is a form that you have to get back before you can ever transmit any information overseas. On business tax returns or any other tasks. It simply just needs to be listed in the engagement letter, and the engagement letter has to be signed by the client.

Okay, so there is disclosure, they understand that this is, again, an extension of your team and that they just happen to be offshore. I know some clients probably will have a safety concern, you know, and I assume that came up when you were starting to tell people about how you were handling this. How did you handle that with clients?

We had a team of about five individuals who really led the effort collecting all the information and in selling that to the office at the beginning. And as a part of that, we developed a two page Q&A document of frequently asked questions that we attached to the consents so that all of our relationship people had the same message, so that when they were asked questions, they could just provide the document to clients, so we were saying the same thing across the board.

It’s pretty impossible to educate 50 folks on the intricacies of the security protocols and everything that’s in place. But I would say the number one question that we got from more sophisticated clients was around security and security of their personal information. So yes, it was a common question, but through my experience with the firm that we use and conversations with anybody else, we’ve never had a breach, nor do I think that’s much of a concern given dual factor authentication and encryption and all that.

Yep. Did you have anybody, I guess, opt out, “Sorry, I do not want this to happen?”

Oh, yes. And that’s really, it’s the message that you lead with clients I think is important. So at the end of the day, It took us about one year to contact all of our clients and ask them the question of yes or no. And at the end of the day, we had a consent rate of about 75%. 

Okay.

Which we were comfortable with. What we’ve heard from other firms is between 70 and 80% is typical. 

But that message that you’re putting out to your clients is very important. You don’t want to lead and say, hey, we have this team in India, we’re gonna send your information over there. Are you okay with that? Probably not gonna respond well. But if you say, hey, we’re trying to keep up with client service, the amount of accounting grads is down, and we have an extension of our team overseas, and your information may be shared with them to help in the prep process? The same message, but different wording helps. 

Right. Okay. And so, so three quarters are opting in. And did you communicate this to all your clients? Or were there just specific clients? All clients were informed?

Correct, yep, we informed everyone. 

Okay. And is everybody that the 75% that opted in, are all 75% being outsourced at some level?

No. So our process works on a global basis across our firm. So for the most part, all of our returns go through a pooling process. And we just turn certain individual employees on or off of the pools. So it’s a matter of workflow if that return is actually going to get prepared overseas or not.

Okay, so it’s just what’s next. And if at the India group is next to grab a return, and that happens to be it, then they grab it, if somebody internally in the US office grabs it, okay.

Yep, that’s correct. It’s all a matter of FIFO in our system.

Alright, got it. Makes sense. I mean, this is great information. This is why I’m so excited to do this interview with you. We talked about this months ago, and we postponed a few times. And I’m glad we got that done today. 

So let’s continue on that. And is there like a list of top things that you would recommend that a firm look into or do if they’re considering outsourcing?

Yeah, absolutely. And especially if you’re thinking about the dedicated service model, you want to think about this in a five year perspective, like, what are the things I need to be thinking about, so that I’m setting myself up for long term success? Again, not just a band aid to, to cover up one busy season. 

And the number one thing you got to think about is the team that you’re developing in the United States to support these individuals. Training is a very, very important piece when you’re involving people of different backgrounds or cultures, and trying to get them onto the same structure and processes that you’re on. So at Lutz, we’ve we’ve kind of structured it that each department that’s using our offshore team has a “champion,” as we call it. So the Audit Department, the tax department, our plant accounting service, each has an individual leader who’s in charge of the training and development of the team members underneath them. 

And we have actually reduced the charge hours and changed the job description of that individual, so that they are prioritizing their interactions with India. I’ve heard from some other firms where it’s like, okay, we started training them, and then we spit them out of the workflow, and it’s not working. Well, you’ve got to continually support the process, much like you got to deal with normal employees here. So developing that team and making it very clear that that individual is going to do less charge work and less client work, but that’s a benefit, is critical at the beginning.

So from that standpoint, have you done, let’s say, track KPIs or something and shown that, hey, we’ve been we can show that we are more profitable or, you know, less hours going into higher revenue or, or anything like that, that you could show from a straight benefit standpoint?

Yeah. So in our busy season of 2022, which was a year ago, we tracked the turn time of returns that were prepared by India employees versus those prepared by US employees. And we tracked on average that a return would go out the door three to four days sooner, if it was prepared by an individual on our international workforce. And really, that comes down to, they work different hours than us. So their crossover time is usually in our morning, but they’re working through the night. So as things stop here, they keep moving over there, which is a really, really nice added feature as well. So yes, the major KPI is turn time and are we delivering stuff faster to our clients. And that was proven, yes, that’s the case.

Okay. Alright. So that was one, was there five key things that you identified? Yeah. Alright. So what’s next then?

The next thing that obviously isn’t an overnight success is the amount of hours that our US employees are working. Our whole goal with offshoring is to reduce the peaks and flatten them out. And I would say we couldn’t quite track that last year in year one, was a success or not. There was a lot of other components in there as well with COVID programs and etc. But this year, we’re probably three weeks into tax season. And we haven’t had one of our interns yet pull a return from the pools, because we’ve been focusing on training them up. And we’ve had already 200 tax returns go through India. So we are leaps and bounds ahead of where we were last year. And I expect that now to start reducing the amount of hours that our folks are working. 

Alright, that’s a great benefit as well. Alright, and then 3, 4, 5, you just keep going with what are the key things.

So on the training side of things, and this is kind of moving off in the KPIs but furthering on the training element is getting it down, broken down to a way that they can understand. When you’re working with folks in India, their culture says that they need to be told what to do, that they need to be told step by step what what the next thing is. There’s probably less problem solving happening with our team in India. So we actually broke down each type of task into a manual. And we provided screenshots along the way, so that if there’s a point in time when we aren’t working with them, or we can’t actively support them, that they have a resource to go to, in the source of a manual, that essentially tells them step by step screenshots of what to do next. So I think that type of thinking ahead has helped us to not have stalled time when we’re not actually crossing over with them.

Right. Yeah, that makes a lot of sense, the go to manual, especially when they’re working at two in the morning. And hopefully everybody here is sleeping at that point. 

Exactly. 

Alright. Nice benefit, then or a nice forethought. Did you get that idea from someone else? Or was just like, hey, this makes sense. I’m, obviously we always borrow ideas from others, so.

Yes, so there was a firm that we contacted early on in the process that is a part of the company that we used to offshore to, and they had recommended that they were actually in their first year as well. So we related to them very well at the beginning. And they said, hey, you know, you may train them, and you may have Zoom calls and stuff, but they aren’t going to retain at all. So having a guide that they can go back to, to kind of refresh your knowledge is very, very important. So that’s where we got it from.

Alright. Alright. That’s awesome. And that’s probably a good piece of advice there. Just reach out to someone else that’s doing this. Not that I’m gonna have, you know, 500 firms call you on this. But I assume at the end, you may give out your contact information. Alright, how about other key things other other things that you would recommend from the start?

So we started the offshoring process in kind of the middle to tail end of COVID. So we actually have gone to India three times over the last year. And I think that is a very critical piece to the equation, is actually spending time and getting to know your team, one-on-one. So there’s a cultural divide undoubtably. The first time that we flew into Coimbatore, India, we’re like, oh my, this is different than Omaha, Nebraska. 

But being able to relate one on one with those individuals critical. At first, they didn’t want to ask us any questions. But we got out to lunch with them every single day, we got to pass along some of our traditions that led us to them. And by doing that, we we’re probably four or five days in and we were shocked that I mean, we were getting invited over to their houses for supper and all sorts of stuff, which when we come back to the US, and we expect them to be working with us, we broke down all barriers. And now they’re asking questions, and they’re functioning like a normal employee would have. 

Kind of setting the corporate culture, you know, halfway across the globe, which is important. I have some friends that own the firm in Atlanta who have an outsourced team in the Philippines, and they just did the same thing. They were just there. It was a bonding experience, they were saying, it was just building that relationship, corporate culture that, you know that hey, you know, we want to do the same thing is here with you in the Philippines that we do in the US. I think that’s making that whole part of the team. And then was there a last, any other key things you would advise on doing the time?

Yeah, another thing is, when you’re building out your team offshore, really finding an individual, or a couple of individuals based on the size, who are going to lead that team at the local location. Mary’s our leader in our India office, and she has been an instrumental part to communicating time off, communicating expectations from our end, but then feeding it to them kind of on a weekly basis. We can hold all the Zoom meetings that we want, but we’re with them every single day. We’re not understanding all the things that are going on in their personal lives, that having that information live, and having a person who’s is very open with us has been a critical piece to the process. That sharing of honest information has been important so that we know things that we need to work on, and vice versa.

Alright, that makes a lot of sense. So a couple of key questions that came out of that, for me is, you know, you’ve got this team over there. I’m just curious how that fits into your whole billing structure. Do they have a rate they’re billed out at? Or do you, how does that tie into what you’re charging clients?

So in year one, we matched them up with what we would bill out our interns at. And then when we, so we’ve been at it now our second busy season. And as of January 1 of this year, we up to the year two people’s rates to our first year staff rates. So really, first year, let’s give them the benefit of the doubt for learning. But then they should be functioning like a staff, so let’s charge them out at the same rate.

Okay. And then you just mentioned that it’s year two, and you have these people now that are at the second level or second rate, billing level? Do you have turnover issues there? Or is it pretty much the same team as last tax season?

Yeah, so we started with 15 last year, and through the summer months, we were down to 13. So we lost two individuals, both for health related matters. And then we ramped up to 30. And we’re back down to 29. So we’ve had a little bit of turnover, probably four to five people total over the course of a year and a half. And one thing I would add to that is turnover is probably going to be typical to what you see in the US, 10 to 12%. However, their reasons for turnover are very unique, like a young lady may get married, and she goes and moves away with her husband’s family. And those processes can happen very quickly. 

Okay. 

Also, a lot of the individuals that are working with us are supporting their elderly parents. So if somebody falls ill, they’re likely going to quit work and support their family, on like a daily basis. So there’s just different things to think about, there’s probably less people moving around to find a better job per se. Because it’s a really good job to them. But on a personal type items can come kind of out of the blue. 

Okay. And when we look at those individuals that we’re looking to hire, we’re looking to retain, is there similar issues that we have in the US where we just can’t find people? Is the job market tight there like it is here, or how’s that?

So we focused on India because the job market is plentiful. Especially in certain areas of the country where there are university hubs, we’ve really focused on building a young team, with those people coming straight out of college. And the amount of accounting graduates coming out of college in India is kind of off the charts when you compare it to the US. So we’ve never had a problem staffing.

Okay. Alright. So I was wondering if that’s a global issue that we’re dealing with right now, but it sounds like there’s individuals available for or looking to it must be a prestigious job there then if the schools are full with accounting majors.

Yeah. And that’s one of the other things is, when we’ve traveled there three times, it really humbles you, and puts things into perspective that we’re working together with these folks on a work basis, but we’re also partly changing their life from a financial perspective. A lot of these folks, this is by far and away the best job that they can get where they’re living. So that brings a lot of satisfaction as well that, yes, we’re supporting people overseas, but we are truly improving their livelihood.

Nice. That’s a great benefit as well. Alright. Well, that all sounds great. I think this is extremely important because of what we just mentioned, what we’re doing, dealing with here in the US is, you know, a lack of people going into accounting. And so the fact that accounting grads are plentiful there is important and like you said, the benefits to them and the benefits to you, it’s kind of a win win as well. 

Any final thoughts before we wrap up this section? I think he shared great information, but anything else you’d like to wrap it up with?

I think I’ve covered most of it. I just continue to recommend doing the due diligence on the front end and really having a long term perspective. And leaning on other firms that have done this in the past. That’s the best way to learn early on, so that you kind of make the checklist and check it all off before you actually start your team. 

Yep, that’s awesome. Alright. It’s final to question time. The one question I don’t think I warned you ahead of time but maybe I did. I ask this to all the guests is hey, this is great. And you personally are a hard worker you’re doing you’re heading up this you know in the tech department but when you’re not working, what do you do for fun? What’s your passions outside of work?

I love travelling, so I’ve been to 49 of the 50 states and I think I hit country 30 this past year. 

Wow!

So I love to get out of the country, love to get out of the office and explore different areas, especially mountains, love places where there’s mountains and water.

Well, I’m in mountains right now I’m in Palm Springs, California. I’ll be in the Central Coast actually, tonight, there are more mountains there. And I’ll be near the water there then as well. So I agree with you. 

And so then the last question, which is pretty easy, I think you can answer this, is if people want to get a hold of you or find out more information just about you in general, or maybe ask you a question about how you’re doing this, how can they get the whole deal?

Yeah, so again, my name is Justin Korth. So you can find my information online. Email is probably best, so it’s JKorth@Lutz.us. Happy to answer any questions that you may have.

Alright, they’ll probably hold you to this. You know, I’m not saying we have a million listeners that are all going to email you but you might get a few emails because this is a pretty cool topic. And it sounds like you’ve dug deep into it. And I think you guys are on the right path the way you’re doing this. So I appreciate you sharing this today. For me, this is something I was really looking forward to and you didn’t disappoint. I am more educated than I was an hour ago. So I really appreciate you being on today.

Great. Thanks so much, Randy.