By Bonnie Buol Ruszczyk
Originally published in Current Accounts, The Georgia Society of CPAs, March/April 2013, Volume 11, Issue 2
by Bonnie Buol Ruszczyk, president, and Sarah Warlick, writer and copy editor
Years after the broad outsourcing trend picked up steam, industry segments that rely on it are still refining the technique. The two main drivers of outsourcing – reducing costs and increasing quality – have been consistent. Just as accounting focuses on delivering efficiencies in each department as well as across a business, outsourcing certain functions is often based on the goal of enhanced efficiency that leads to measurable cost savings, without negatively impacting quality. In fact, increasing quality is the second prong of most shifts to an outsourced approach.
Experienced CFOs are aware, as the general public often is not, that outsourcing doesn’t necessarily mean sending American jobs across borders or oceans. Allowing certain functions to be performed by local specialists external to the company can be a good thing for the economy as well as the individual company.
Nor must outsourcing be limited to only mundane processes. Though strategic functions like planning, human relations and marketing are often kept in-house, a significant minority of companies have found it worthwhile to send out these tasks as well as the basic transactional processes.
It is the precise targeting of services to be outsourced and providers to handle these externalized functions that create value. What today’s successful outsourcers know is that:
Smaller companies can benefit from outsourcing as much as large ones, possibly even more. It’s not just the IBMs and Deltas of this world who are reaping the rewards of outsourcing. In 2011, close to 60 percent of contracts to third-party accounting and finance service providers came from companies with annual revenue below $5 billion.* While that’s still a fairly large cap, the trend for smaller companies to benefit from outsourcing is consistent. In fact, it is often a great way for a company to fill a new or expanded role until it makes sense to commit to an official headcount. The company typically benefits from this arrangement in a variety of ways, and the relationship also helps them more clearly define the skills that will be needed and type of person they’ll want when the role grows into that of a full-time employee.
Even critical functions can be outsourced for added quality and reduced cost. The advantages of a specialized focus and economies of scale that inspired outsourcing in the first place remain valid as companies look for further areas appropriate for externalization. Often, functions are deemed core that could in reality be well handled by an experienced vendor. The only true limits are services that create differentiation. If performing a given service in a unique and inimitable fashion is what defines you in the marketplace, don’t consider outsourcing it. Everything else is fair game. That’s not to say the rest should be outsourced, but that it is suitable for examination. If it could be performed just as well and at a lower cost by others, you may want to think about seeking the right provider. Is it really what makes you special, or is it a commodity?
Cost savings must be measured in total cost of ownership, not just unit cost. Selecting functions to externalize, sourcing providers, negotiating contracts, coordinating with vendors, reviewing work, arranging delivery and payment, handling mistakes…the costs of all these and dozens more must be factored into the total price of an outsourced arrangement. Assessing the cost of x services for y per-unit cost must be approached realistically, taking into account the full cost of the process from beginning to end. Many companies have found their bottom lines out of alignment with the perceived savings from an outsourced arrangement through incomplete accounting of the costs. Others have been surprised to learn that ongoing costs remained higher than anticipated because they did not adequately establish expectations at the outset.
Seamless communication and delivery define the ideal outsourcing arrangement. Honest and thorough communication between provider and client is an absolute necessity. During contract negotiations, both parties must be able to realistically assess the volume and quality standards that are not only reasonable, but consistently achievable. Smooth delivery that doesn’t demand excessive time from either to manage misunderstandings about process, quality or productivity can only occur if the original discussions are comprehensive and reality-based. Defining KPIs from the outset is key to satisfaction for all parties.
The right fit between function, vendor and company are critical factors for realizing potential value while maintaining quality goals. Once you’ve picked out services ripe for outsourcing, it’s important to find exactly the fit you need from a provider. Doing the research to get a great fit is well worth the investment of resources, because the wrong vendor, even if they’re great at what they do, won’t be able to give your company the savings and quality you’re seeking. Size isn’t a critical factor as long as they have the necessary scale to meet your service needs. What’s important is that the vendor understands your business and its nuances. They should have a verifiable history of excellence in the service you’re looking to outsource. Follow up on the references they provide to learn firsthand about their communication style, delivery methods, process, weak areas and overall performance. Note that just because the fit wasn’t right with another company, that doesn’t mean they won’t be perfect for you. Finally, before you commit, be sure the company has the financial stability to be a long term partner if things go well.
As we continue to refine the model, outsourcing will continue to change. However, there is already enough evidence to help you approach or expand your own outsourcing plans to create added value and greater efficiency to help your company today and into the future.