FYI - A Publication of Abo and Company, LLC
ASKING THE EXPERT'S EXPERT
With the rapidly changing landscape of technology and the increased competitive pressures to offer innovation, increased production and improved products or services, where does your information technology fall… Friend or Foe? With the advent of the "new economy" fueled by the Internet's e-mail, e-commerce, and e-business, the need for technology has for many firms pushed the limits of their company's resources. It's no wonder that outsourcing has become one of this year's hot topics. While many large companies have adopted the outsource model for years, medium and small companies are starting to realize the benefits.
What is Outsourcing? Outsourcing can come in many different varieties but, basically it's contracting out services. Total outsourcing transfers most equipment, staff and responsibility for delivery services to a vendor, while selective outsourcing is the contracting for services of one or a number of information technology functions. Total outsourcing is a major undertaking, it isn't easy and the stakes are high. The contracts are long, typically five to ten years, and are very structured. Selective outsourcing is the fastest growing area for outsourcing today and can include maintenance/repair, network services, training, application development, desktop systems, end-user support, web-based technology services, data communications or even part-time Chief Technology Officer (CTO) consulting services.
Why outsource technology expertise? We at ABO AND COMPANY, know first hand the value of such outsourcing. In the area of technology, we've seen the benefits brought to the table by such firms like IT Resources and Consulting, Inc. based out of Haddonfield, New Jersey. Speaking with Craig Blackman, IT's president, we learned that "…the options available to today's executive are varied and complex. No longer is the only way to get the job done to hire people, buy technology and manage the process internally. Executives can use supplemental staffing, consultants or information technology outsourcing firms like ours who offer multiple solutions. It just makes good financial sense."
Outsourcing allows organizations to focus on their core competencies, free up valuable internal resources, reduce and control operating costs, gain control of a function difficult to manage or what may be perceived as out of control, gain access to hard to find technical skills, and ensure a high degree of end-user satisfaction. But, how do you know if outsourcing is right for you. Here are a few questions to ask to see if your organization could benefit from outsourcing:
What are our core competencies? Can we fix ourselves internally before we consider an outsource partner? What are the goals we would like to achieve from outsourcing? What might be best accomplished by an outside vendor?
Executives today are looking at all of their options including outsourcing, strategic alliances and joint ventures with information technology firms, that can offer them higher quality and lower costs. They are willing to search inside and outside their organizations to find the solution they and their customers demand. And, as more and more executives rethink traditional business models, outsourcing becomes an attractive alternative to building the needed internal capability.
Firms like IT Resources and Consulting make available their part time CTO consulting service designed specifically for small to medium size companies who need someone only a few hours a month to sit in on meetings, make recommendations, assist top management with technical issues, and help the company met their business goals by using the right technologies. A part-time CTO, who has no product to sell, whose only interest is the right solution, makes a lot of sense for a company who is about to make important decisions both financially and strategically.
In an era of unprecedented technological change, understanding the impact of the changes and how best to position the organization to benefit from these changes, challenges each and every executive. No company is too big or too small to outsource. As a result, outsourcing is growing rapidly because organizations view outsourcing as a more focused way to concentrate on their core competencies… doing what they do best.
SHOULD YOU USE CONTRACT PROGRAMMING?
Among the technology services we've seen clients use is contract programming. In a broader sense, the arguments can be made for other functions in your operation where a professional hired on a contract basis could be considered instead of creating a new position.
Why use contractors?
· You have a major project to undertake and do not have the staff available to do it.
· You have a backlog of maintenance/user requests and no matter what you do, the list is growing, not subsiding.
· You have a temporary peak load (introduction of new hardware, software or opening of a new facility).
· You have a requirement for specific expertise that cannot be fulfilled by your existing resources.
There are four significant advantages of using contract support:
· Immediacy of hiring - Minimal delays need to be encountered in obtaining the resources you need. In general, there are local consultants willing to satisfy your short and long term needs.
· Technical training - Contract help has to be good to survive. This eliminates your cost of training and the resource can be replaced easily if inadequate.
· Flexibility - Unlike permanent staff, if the face does not fit or the skills are not there, you can change the service immediately.
· Cost control - Whether the consultant's earnings are on a fixed bid or time and materials, you know the costs as they occur.
Whether you intend to use contract support for a complete project or supplementary resources to meet a peak load or conversion to a new computer/accounting system, the use of experienced personnel can, without doubt, enable you to achieve your objectives in a most expeditious way. Keep in mind, however, to:
· Obtain guarantees on the work, if possible.
· Pay the little bit extra for project management. It can save a lot of grief in the long term.
· Get regular progress/status reports.
· Monitor the costs.
· Use the consulting company's experience and knowledge of the marketplace in your business applications.
Professional contract support may provide a viable option if your needs are specialized or immediate. Hey, sounds a bit like arguments for associating with a credible CPA firm, doesn't it?
LEASING
For companies with tight cash flow, leasing computer and other office equipment is generally more desirable than installment purchasing. It requires a smaller up-front payment and the payments over the term of the lease are smaller because the lessor can take the equipment back at the end of the lease or sell it to the lessee. If entering into a lease arrangement, it is important to:
(1) determine the interest rate the lessor is using and compare it with the rate on an installment purchase of the equipment;
(2) obtain the exact price to be paid for purchasing the equipment at the end of the lease term, and
(3) review any conditions pursuant to which the lessor can impose added fees at the termination of the lease if the equipment is not purchased.
The lessor often obscures the information, so that many clients who decide to lease costly business equipment often seek our assistance in reviewing the leasing arrangement before they finalize a deal. How about the actual accounting side? Have a lot of debt on your balance sheet? Concerned that you may not be able to obtain bank loans to provide sufficient capital to finance your business operations? Well, one factor that can make a difference is whether you obtain the use of computers, office equipment, vehicles or even machinery under a capital or operating lease. When you use a capital lease, the accounting treatment is the same as if you purchased the equipment. Thus, the cost, equal to the present value of the lease payments, is reflected as an asset on your balance sheet, while an equal amount, the lease obligation, is reflected as a liability. The effect is to increase your debt to equity ratio, a critical measure used by lenders to determine whether additional loans should be made. Conversely, if you have an operating lease, the accounting treatment is as if you were merely renting use of the equipment. Consequently, neither the cost of the equipment nor the rental obligation appears on the balance sheet, and rent expense is reflected in the income statement as you make the rental payments. What distinguishes a capital lease from an operating lease? In an operating lease:
1. There can't be any transfer of ownership of the property to your business.
2. The lease may not contain a bargain purchase option permitting your firm to obtain the property at below market value at the end of the lease term.
3. The term of the lease should be for less than 75% of the estimated useful life of the leased property.
4. The present value of all lease payments should be less than 90% of the fair market value of the leased property.
If these requirements can't be satisfied, the lease has to be treated for accounting purposes as a capital lease since the transaction is viewed as being an installment purchase. It's clear that the terms of the underlying lease contract directly affect the accounting, and indirectly, the firm's borrowing capacity. Here is another area where the advice and skill of us, as your CPAs, can make a difference in your business prospects. It's important to have an ongoing consultative relationship with us and not just to utilize the firm to prepare financial statements and tax returns. Call us before you sign a lease.
COMPUTERS ARE CONFUSING ENOUGH BUT TAXES TOO!
An increasing number of clients are acquiring computers to automate both business and professional practices and making software enhancements to maximize the speed and breadth of data flow. Accordingly, we thought it would be useful to highlight the tax treatment of acquiring the equipment and software. In general, here are the rules:
· If software is included in the purchase price of the computer, the cost need not be determined separately, and both the equipment and software can be depreciated over 5 years. (Small businesses may be eligible to expense the entire cost, with certain limitations, in the year the equipment is placed in operation.)
· If the software that is loaded into the computer at the time of purchase is separately stated, in general, it can be depreciated over a 3-year period.
· Additional software that is purchased separately to update your programs annually is deemed to have a life of one year or less, and can be expensed in the year of purchase.
· New software, or software upgrades with a life exceeding one year is usually depreciable over a 3 year period if it is bought off-the-shelf (i.e. not modified for your specific needs by the vendor).
· Newly acquired software that is specifically designed or customized for you, or for which you have an exclusive license may be written off over 3 years if it was purchased for use in your business. Alternatively, if it was obtained in a business acquisition, it is generally required to be amortized over a 15-year period. (There are also special depreciation rules that apply to software acquired after August 10, 1993.)
· If you develop your own software internally, your research and development costs can be written off either in the year incurred, or over 5 years or a shorter useful life that you can demonstrate regardless of whether the software is patented, copyrighted or sold. In general, if you deduct the costs annually, you must be consistent in subsequent years for tax purposes.
The rules are complex and you may have situations that differ from the general rules we have described. Therefore we recommend that professional tax advice be obtained not only to insure the proper treatment of computer hardware and software, but to also adopt tax strategies that will be most effective in minimizing taxes for your business.
E-MAIL CONCERNS
If your firm is using or intending to use e-mail, here is some eye opening data:
· Almost one-third of employee Internet use at work was recreational according to a study performed last year. This was twice the amount determined by a study just one-year prior.
· The cost of recreational surfing approximates $1.1 billion a year in lost productivity.
· The cost of junk e-mail is estimated to be about $1 per employee per day.
· 31% of 1,000 human resource managers reported that their employees received sexually harassing e-mail.
· E-mail volume is estimated to exceed 7 trillion messages this tear.
It's no wonder that e-mail monitoring is on the rise. According to the American Management Association 27% of large U.S. firms are checking employee e-mail, and 45% are monitoring all sorts of electronic communications including e-mail, voice mail and fax messaging. Data on small employers indicates that about 55% have either informal verbal or formal written policies on Internet use by employees. If you have not yet established any Internet utilization policies, here is an approach that can be taken by firms of any size:
1. Notify all e-mail users of the policy and information security issues that relate to e-mail communications.
2. Establish a company policy on the use of e-mail and its distribution.
3. Establish parameters for the storage, deletion and purging of all e-mail files.
4. Create an electronic media and Internet usage policy covering e-mail and all content, and file transfer methods used to disseminate information.
5. Devise procedures for auditing e-mailto determine that there is compliance with your policy and with procedures you have established to enhance e-mail security.
This is truly a complexing area, one mandating a multi-discipline approach with varied expertise. We suggest calling us if you'd like our input and the names and numbers of network/internet consultants, such as IT Resources and Consulting, Inc., human resource experts and/or attorneys seasoned in this arena.
QUESTIONS ABOUT OUR WEBSITE? - GET THE DISH FROM TRISH
As more and more people are turning to the Internet for information, to transact business or shop, having your own domain name is fast becoming a necessity for any business. This raises the question of whether your company's name will be available as a domain name at the time you want to establish your web site. Since domain names are assigned on a first-come, first-served basis, the best way to insure that your company will be able to use a desired name is to reserve it. You can contact Network Solutions at www.networksolutions.com. to find out whether the domain name you have in mind is available. For a reasonable fee, you can reserve that name for a period of 2 years. Take your time to brainstorm the best domain name that you can come up with. That's a key task for serious web marketers, especially if you consider that "You never get a second chance to make a first impression" and your web address will be the world's link to you. Most Internet Service Providers will register domain names for their customers for a nominal charge. Make sure you are properly listed as the owner of the domain when it is registered. Ownership of your own domain name gives you the option of moving your web site to another host without losing your web address. You can pull up stakes at any time and take your domain name with you without losing the exclusivity that has helped build name recognition for you and your company or the momentum you've gained from previous marketing efforts (and possibly expense) involved in promoting your web address.
It's amazing to us that a CPA and management consulting firm like Abo and Company can have such a volume of activity via its website. Developed internally and updated constantly with valuable information, we're proud to say we've had over 12,000 hits in but 7 months.
Be sure to check out what we're talking about at www.aboandcompany.com.