The hyper-competitive nature of the global economy is linking the world’s major economies and changing the landscape of international business. This fast pace of change is compressing internal investment cycles into shorter payback periods thus creating a pressure on earnings expectation.
Earnings are products of operational efficiency while engaging people, process, and technology. Most operational activities across organizations are becoming increasingly specialized and knowledge-driven. Rapid advancement in every field makes it practically impossible for any organization to develop and sustain best-in-world expertise in every facet of its operation. Against this backdrop, organisations are moving away from the classical model to a more dynamic and contemporary internal service orientation. In this unfolding era, organisations focus their internal resources on the activities that provide them with a unique competitive advantage, while engaging external service providers through outsourcing for their critical, yet non-core activities.
Outsourcing is a long-term, result-oriented business relationship with a specialized service provider. The services contracted for may encompass a single activity, a set of activities, or an entire end-to-end business process. In this arrangement, it is implied that the service provider is assuming responsibility for the people, processes, and technology employed along with the responsibility of ensuring quality delivery per contract.
Outsourcing is a management tool that entities use to move away from the traditional vertically integrated, self-sufficient structure to a business-oriented structure where it is able to make more focused investments in the areas that provide its unique competitive advantage. With outsourcing, these entities are able to focus more of their resources – people, physical and intellectual resources, and capital; on the core parts of operations – the activities that provide its unique competitive advantage; thereby improving the company’s ability to leverage its most valuable capabilities. Another important point is the ability to free an executive’s time to focus outwardly on strategy and customers as opposed to inwardly on current operational issues.
According to Deloitte’s CFO survey, CFOs across the world are having to spend more hours on less strategic things. For many executives, dealing with day-to-day details of operational activities robs them of time that would be spent on customers, shareholders, investors, and suppliers. To leap out of this less strategic involvements, some CFO’s have considered the option of finance and accounting outsourcing because it saves valuable time for strategic activities.
A specialist finance and accounting services company would give utmost priority to manage the business of their clients as agreed upon. Outsourcing the finance and accounting process would ensure that the tasks are in trusted hands and are given the importance they deserve. Another benefit is that finance and accounting outsourcing ensures an entity can keep pace with advanced technology solutions at lesser costs. Service providers may be able to provide the improved technology for less than the cost of the firm’s old technology.
The costs could be lesser than the upgrade costs that the business would have to invest in. Furthermore, the business can take advantage of the fact that the service provider is likely to have a much larger and more specialized pool of staff. The provider can ensure that there is a small group of expert outsourced accountants working on its projects at crucial times or for complex rules and regulations.
This would probably never be cost effective if done in-house. By freeing up intellectual and financial capital, outsourcing can help minimize certain operating risks. When an entity shift functions to a service provider, it also shifts the associated risks to them. This is because it is the responsibility of the service provider to deliver the functions as agreed. An outsourcing specialist will generally have multiple levels of review built into the quality review process.
This means that they would be more likely to detect errors and make corrections as appropriate. An accounting outsourcing service will have experts with more detailed or up-to-date knowledge of accounting principles and complex tax regulations, which is a necessity in today’s highly regulated business environment. Keeping track of constant changes in accounting rules in this era of IFRS reporting is a huge burden and a distraction to some entities.
However, for a business that has dedicated itself to financial process outsourcing, tracking developments and global changes are inherent in their standard operating model. Outsourcing mitigates the risks associated with wrong hires. This would in turn help avoid unnecessary human capital management issues. While most companies get stocked with employee profiles that will not add longterm value to the business, outsourcing gives them the required human resource mobility and flexibility in line with what the business requires at every point in time.
Labour issues and crises are avoided to a considerable extent through outsourcing. Certain administrative costs such as staff welfare, PAYE administration and other social benefit costs of engaging in-house non-core personnel are eliminated or reduced considerably. When in-house non-core personnel resigns, sometimes it can result in a disruption in workflow during the period of sourcing a replacement which usually comes with its attendant cost and also the risk of a recruitment error.
With outsourcing, the service provider has a buffer of skills to draw from and still offer the same service seamlessly. There might be busy and low seasons in the monthly, quarterly, and annual financial reporting cycles. This requires businesses to budget for their in-house resources and manage the costs of outsourced staffing during the busy season. Therefore, companies need to handle staffing for financial reporting on a regular basis and ensure the cost-effectiveness of the activity. Outsourcing can help firms to make minimum cost commitments for staff during low season.
An experienced finance and accounting outsourcing provider will perform resource management planning and ensure the delivery of lower per-unit resource cost. In Deloitte’s Global Outsourcing and Insourcing Survey, finance and accounting services outsourcing is expected to grow over the next few years. 30% of respondents in the survey, expected to outsource additional services across all areas of Finance and Accounts including CFO outsourcing for subsidiaries while engaging the group CFO in-house.
Currently many outsourced activities are basic transactional accounting processes such as Accounts Payable (AP); however, companies are starting to experiment with outsourcing non-transactional functions such as financial analysis and financial reporting.
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