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An argument for outsourcing

By Fiona Crawford

What are the real benefits, and risks, of sending more and more roles to third-party providers?

That businesses think outsourcing can and does work is evidenced by a worldwide trend that has seen it move beyond the ubiquitous call centre to a range of business functions, including finance and accounting, governance, risk and compliance services, human resources and legal processes.

And outsourcing is no longer the province of the multinational. Small and medium-sized enterprises are also joining the charge.

Outsourcing, and its geographically more extreme partner, offshoring, refers to shifting a business function to a third-party provider. The business functions typically outsourced are back office functions, including finance and accounting, IT and customer service.

Clearly, organisations are enthusiastic about the benefits offered by outsourcing, with a 2014 Deloitte survey of organisations around the world finding that outsourcing growth is expected to continue at rates of 12%–26%.

A 2008 Global Industry Analysts report found that offshore outsourcing of finance and accounting services alone comprises 10% of the approximately US$975b global business process outsourcing market, and the total number of finance and accounting services outsourced is expected to increase by approximately 70% over the next few years.

Why outsource?

At first glance the decision to outsource seems to be all in the numbers – the business case a beautiful equation in which the variables of costs and benefits are neatly balanced to create a perfect world.

In this simple perspective the decision to outsource is purely about cost. Advances in technology have made outsourcing more achievable and transactional activities that are easily automated and that do not add value to the business, such as payroll, are usually the first to go.

The most significant cost saving in outsourcing is the shift from capital expenditure to ongoing expense. In making the outsourcing decision most organisations aim to reduce the number of employees and the associated costs of having a workforce. But they are also seeking efficiency gains and economies of scale.

Avoiding in-house duplication and relying on a third-party provider may result in streamlined processes that require fewer workers operating from one location. The benefits in offshoring to low-cost economies may be even greater.

But organisations also see benefits other than cost. Outsourcing provides job specific expertise – why try to do everything in-house when an expert is on hand when required? While it may cost more, you only pay for it when you need it. It also creates a customer–client relationship between the outsourcing organisation and the outsourcing provider, which may bring improved service.

Because providers share services, they are likely to have access to better technology, particularly in relation to cloud-based solutions. Also, better talent, overcoming skills shortages in the outsourcing organisation.

It’s a global world so organisations no longer rely on their domestic market for expertise; technology means that the workforce is global and flexibility is more important than geography.

According to Sam Dagan CA, senior manager with EY Outsourcing Advisory Management, the benefits of business process outsourcing can be summed up by the “four Cs”: creating focus on the core business, increasing capability, enabling flexible capacity and, lowering cost.

However, he says that labour arbitrage shouldn’t be the benefit you chase.

“Instead, the lower labour costs should fund the business case for realising four C benefits and freeing up finances to invest in partnering through improved tools and capability,” Dagan says. Dagan also points to an emerging trend in which “organisations use business process outsourcing as a lever for transformation – the outsource vendors bring process excellence and improved decision support tools that can be implemented at a lower cost offshore”.

The benefits of outsourcing are not restricted to organisations seeking to maximise advantage to their business. There are benefits to outsourcing providers too.

In the case of offshoring, the benefits are perhaps more evident for low-cost economies. In these countries, like the Philippines and India, providing offshore services has contributed to wages growth and upskilling of the workforce, increasing the standard of living and opening up new consumer markets for organisations in developed markets.

Further, with an eye on their reputation and the potentially devastating damage to corporate image from a scandal, western organisations bring western values of corporate social responsibility, which can have positive consequences for the environment and human rights in host countries.

Of course, offshoring locations are not always in low-cost economies. Australia and New Zealand are uniquely positioned to provide offshoring services for organisations looking for an Asia– Pacific base. With a stable political environment, educated workforce and secure environment, increasingly Australia and New Zealand may benefit from an emerging trend in outsourcing of highly skilled analytical roles.

Downsourcing

As with so many things, weighing up the costs and benefits is a lot more nuanced than our seemingly balanced equation suggests. Unsurprisingly, there are downsides to outsourcing.

The most glaring of these is job losses. For example, business processing jobs away, either through automation or offshoring, and the business process workers are unemployed. That’s a very simple equation.

Even for those workers whose tasks are not outsourced, a fundamental relationship – the psychological employment contract – is broken by such a shift to business processing jobs and their loyalty to the organisation is undermined.

The organisation may also be subject to reputational damage if customers are dissatisfied with what they perceive as a breach of an organisation’s core values. While the custome/client relationship between the outsourcing organisation and the service provider, discussed above, suggests improved service for outsourcing organisations – the customer is always right – in reality, dissatisfaction with the service of an outsourcing provider does not always mean that an organisation can take its business elsewhere.

In entering an agreement with an outsourcing provider an organisation is relinquishing some control of its
business functions and becoming dependent on a third party.

Attempting to revoke outsourcing is a very expensive enterprise, not least because of the loss of know-how internally. With job losses in processing roles, key personnel with strategic oversight of these positions may also seek pastures new when outsourcing takes place.

Peter Green FCA is a professor at the Queensland University of Technology Business School. He points to lessons for organisations seeking to outsource their accounting functions from the IT industry. An emerging trend in IT is backsourcing, in which organisations bring their IT functions back in-house in an attempt to regain control over their infrastructure and strategic growth.

Green asks: “How do staff manage an outsourcing relationship if they don’t understand the processes being outsourced? If accountants aren’t exposed to low value, low complexity processes how do they understand the value of these processes to the organisation? How do they negotiate a contract? How do they know the right process to outsource?”

Know the risks

In relinquishing control of business functions, an organisation is also subjecting itself to risk, not least in relation to data ownership.

Outsourcing providers take great care to protect client data but lapses can and do occur. For example, in 2014, the Australian Defence Force severed its relationship with its optometry provider after the outsourcer sent Defence Force personnel’s optical claims offshore for processing in breach of its contract.

This breach is indicative of a wider concern about loss of control when business functions are outsourced. Inevitably there is a gap between the organisation and its third-party provider, whether that provider is down the road or on the other side of the world.

In attempting to supply low-cost services, outsourcing providers cut costs, which can mean high staff turnover and a lack of expertise. How do organisations outsourcing their business functions measure the performance of their outsourcing provider?

Dagan has not heard of an outsourcing arrangement that has completely avoided all problems and issues and says that outsourcing deals often fail to meet expectations due to inadequate risk identification and mitigation early on. Getting the service management framework and service level agreement aspects of the contract right is critical.

He also highlights some lessons learned.

“Don’t outsource a problem. If the process is held together by the goodwill of your people and ‘tribal knowledge’, the problem will be exacerbated when it’s performed by a team offshore.”

Outsourcing for accountants

Useful outsourcing guidance for accountants in public practice can be read in the Accounting & Ethical Standards Board guidance note APES GN 30 Outsourced Services. There is also a free Chartered Accountants ANZ guide named 20 Issues on Outsourcing and Offshoring available from charteredaccountants.com.au/ businessbriefings

So is the move toward outsourcing and offshoring bad news for accountants in Australia and New Zealand?

In short, the answer is no – and yes. The outsourcing of transactional processing repositions accountants at the core of a business where they can add value by focusing on complex strategic work.

No longer is the accountant’s role about identifying costs and risks. Rather, it’s about finding value creation opportunities.

While this opens up exciting new opportunities for accountants it also means that accountants of the future
require a different skillset.

Those who will succeed in the post-outsourcing world need skills that cannot be easily outsourced or automated. That is, they need to be good problem solvers with critical thinking skills, flexible, creative and good communicators.

Employers frequently identify these skills as lacking in new graduates, suggesting that higher education providers are not necessarily producing graduates who are ready for the future work of accountants. According to Green, accounting education is now at the leading edge in ensuring that skills such as critical thinking, reflective practice and ethical decision making are built into units of study.

With 80% of the finance function outsourceable, according to Dagan, accounting graduate employers – particularly professional services firms – will be looking for specific skills. What happens to those not equipped with these skills? Goran Roos is chair of the Value Add and Industrial Growth Sub-Committee of the Economic Development Board in Adelaide. In Chartered Accountants ANZ’s recent thought leadership publication, Future Proofing the Profession: Preparing Business Leaders and Finance Professionals for 2025, he argues that middle skilled positions are those most likely to disappear as outsourcing increases.

Roos says: “Historically ‘high-status’ professions like law and accounting will be low-volume employers in tomorrow’s world. The few who succeed will be at the top of their class with an innate ability and capability in the areas of creative problem-solving and interpersonal skills providing them with a potential to reach the top of their chosen profession.”

There’s a certain irony that accountants who led the charge in identifying the cost savings of outsourcing are now finding their own roles outsourced. But that also means that accountants are very much in the driving seat. How the profession chooses to redefine and reinvent itself is an exciting, albeit daunting, responsibility.

Fiona Crawford is an editor and writer and founding member of the editorialcollective.com.au

This article was originally published in the October 2015 edition of acuity.