This article was previously featured in the Journal of Government Financial Management
The CFO role is rapidly evolving as government operations transform and expectations and pressures on CFOs grow, particularly in grant-related responsibilities. The recent COVID-19 pandemic and current economic conditions represent a once-in-a-lifetime combination of increased federal funding and extraordinary limitations in the availability of raw material, supply chain logistics, and staffing resources. For possibly the first time in history, the normal problem of prioritizing and deploying limited funds to most effectively serve our communities is overshadowed by the specter of available funding that cannot be deployed as quickly as our communities expect.
Local governments are most commonly responsible for developing and implementing the programmatic aspect of federal and state grants and for monitoring compliance with requirements related to those funds. While these tasks do not present a new burden for the government, pressure has become significantly more intense and widespread in response to the pandemic. Organizations that previously received little to no federal funding are now subject to the Uniform Guidance (2 CFR 200) and generally accepted government audit standards (GAGAS), also known as the Government Accountability Office (GAO) Yellow Book requirements. Suddenly, the day-to-day policies and operating procedures, once considered appropriately designed and implemented, are insufficient under enhanced compliance standards.
Even organizations previously subject to these enhanced requirements can become overwhelmed by the abrupt expansion in the volume of funding and never-before-seen programs with new programmatic requirements, leaving the CFO in a precarious position, wondering how to invest in training to gain the resources necessary to respond to the enhanced requirements. “What about the training I need to oversee and certify our organization’s compliance?” the CFO wonders. “How long will the training take, and how do I mitigate the risk of noncompliance in the meantime? Do I already have the capacity for training and additional programs on my team, or do I need to hire additional staff? If the funding has a time limit, what happens when the funding is gone?”
Fortunately, there is a solution. Outsourced CFO services allow the public sector to access highly trained, experienced finance professionals to augment or enhance their current organizational structure. Government entities that are suddenly subject to new programmatic and compliance requirements can outsource for a CFO who can quickly assess current policies and procedures and assist in designing and implementing changes to limit the risk exposure of noncompliance. For entities with significantly expanded programs, the outsourced CFO may partner with an internal CFO for added expertise and capacity without the typical learning curve and leverage lessons learned to avoid pitfalls in efficient, effective implementation. In both cases, outsourcing addresses immediate concerns about necessary expertise, short-term capacity, and long-term funding sustainability.
Benefits to Governments
Ultimately, outsourcing CFO services drives organizational value, because an organization with quality internal controls, additional time and money, and excellent financial information and reporting equates to better productivity entitywide, as well as increased visibility in the profession. Professional and financial advisory firms with a robust CFO outsourcing services practice group offer clients an opportunity to work with skilled CFOs and their teams whenever they are needed — from temporary project-based work to permanent placement and full finance department outsourcing.
From a grant-funding perspective, using a third-party CFO provides local governments expertise in grant funding, acquisition support, effective monitoring, and strong oversight. An outsourced CFO would also allow entities to streamline their accounting work. Once a grant is secured, CFO outsourcing services can help a government organization effectively monitor and manage the use of funds and appropriately categorize costs allowable under the terms of the grant. All reporting requirements would then be addressed in an accurate and timely manner.
CFO Outsourcing ROI and Risks
The important question for most government entities is about the risk involved. Many public sector organizations do not even explore outsourcing options because of the perception that firms are expensive and hiring a CFO or finance team from the private sector would bust the budget. Interestingly, a firm’s ability to leverage resources across multiple clients provides a unique value proposition for the public sector. Targeted training programs and a deep bench from the outside bring an organization both expertise and capacity at a fraction of the cost to develop the same internally.
Governments also consider the political risk of outsourcing a CFO, as some communities believe it suggests the government is not in control of the solution without an internal employee in charge of financials. To the contrary, a well written service agreement with a reputable firm provides more control. For example, a government employee might leave the job with relatively short notice, which would force the government to scramble to recruit, train, and transition responsibility in a timeframe typically ranging from two weeks to 60 days. Once employees give notice, the ability to hold them accountable for performance expectations is practically nonexistent. In contrast, contracted, well-defined service terms make the outsourced firm responsible for reassigning and replacing resources and for maintaining service quality, rather than face reputational risk.
The return on investment for outsourced CFOs can be measured in a multitude of ways, all favorable to governmental entities. In the current labor market, many governments need to look to private sector candidates who then have to adapt to the governmental environment and the complex accounting and compliance requirements unique to it. On the front end, governments will save money, since outsourced CFOs come pre-trained, bearing a breadth of experience to translate for use in the specific government body. Moreover, they do not arrive with a big learning curve ahead or need an expensive, time-consuming onboarding process. In all, it is important to consider the cost of recruiting and the training, benefit and legacy costs involved, depending on whether the entity has defined benefit pension plans. Also, consideration must be given to the potential sunk cost when a a staff member does not work out and forces a do-over from scratch. Outsourcing a CFO, rather than hiring one, is a cost-effective solution that helps government organizations avoid problems and move forward.
Nathan Baldermann, CGFM, CPA, is Principal of Governmental and Not-for-Profit Services at Rehmann. He is the primary business advisor for a multitude of state and local governmental clients, leading financial statement audit, single audit and consulting engagements.
Richard Carpenter, CGFM, CPA, CGMA, is Principal and Director of Outsourcing for Governmental and Not-for-Profit Services at Rehmann. He and his team specialize in providing cost-effective, efficient CFO and finance department services.