Outsourcing:Introduction,the Pros &Cons and Planning Ahead

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Introduction:
In today’s highly competitive environment,the CFO is pro-actively working together with top management to aggressively pursue ways to achieve efficiencies,improve customer services and save money. In my earlier article,I have also discussed about the continuing trend of finance transformation role from a low value transaction service provider into higher value added service provider.
It is therefore not a surprise that outsourcing option will poise to be one of the financial strategy of the CFO. This is particularly applied to non-core business processes &activities and related labor and resource intensive tasks.
 

Definition of Outsourcing:
Outsourcing in general can be defined as passing of service provision or production to another internal or external party.
 

Advantages and Disadvantages of Outsourcing:

The advantages are:

• It reduces the dependency upon internal resources and increases the flexibility to meet the changing business and commercial conditions,
• It facilitate best-of-breed implementations,
• It reduces capital expenditure over a business process.
• It’s a way to manage costs and convert fixed assets to variable costs –while staying abreast of new technologies.
• It brings predictability and reliability to the management of information technologies. It offers the advantages of converting fixed costs into variable costs without sacrificing service quality.
• Outsourcing allows management to meet the challenges of today’s global economy.It is a powerful management tool to meet several critical success needs in today’s global economy. These include speed to market,a standardized global presence,overcoming skill shortages,and coping with trends like the rise of e-business,deregulation and privatization.

However,we must not overlook the disadvantages of outsourcing:

• we tend to loose the managerial control. This happens because it is harder to manage the outsourcing service provider as compare to managing one’s own employees,
• generally we might tend to under-estimate the potential hidden costs of outsourcing like legal costs of putting together a contract between companies and time spent on coordinating the contracts.
• It can prove to be a threat to the security and confidentiality of issues of a company. If your company is outsourcing business process such as payroll,confidential information such as salary will be known to the outsourcing service provider. Therefore one must be very careful in choosing which business process to outsource and which one not,
• Outsourcing may also result into the possible loss of flexibility in reacting to changing business conditions,lack of internal and external customer focus and sharing cost savings.
• Loss of internally generated talent is yet another problem associated with the outsourcing as it may hamper the growth of an employee by depriving him from the experience he would have gained by handling the business issue himself then by passing it over to some other external party.

Planning Ahead: 

Outsourcing should be well planned ahead before a company decides to outsource its business process. Perhaps some of the key factors to consider are as follows:

• The need to have a clear definition of the desired relationship. We should not jump into the vendor selection process,
• The need to remember that outsourcing is not all about cost cutting. Otherwise,  the results will be disastrous,
• To allow outsourcing option a success will depends on the way requirements are defined,the way objectives are laid,the way vendor is chosen and the way service level agreement is written.

 (For the service level agreement,please refer to my article on SLA in Shared Service Centre)

• Establishing Control Points When Outsourcing The Accounting Function (Part 2)
• What are the Reasons,Risks and Opportunities when Outsourcing The Accounting Function of a company ( Part 1)
• What are the advantages and disadvantages of Outsourcing The Internal Audit Department of a Company. Give some KPA/KPI to measure the performance of the outsourced provider.
• Investment Appraisal Methods:Pros And Cons of Internal Rate of Return.
• TOPICS COVERED UNDER THE HEADING OF OUTSOURCING
• OUTSOURCING MARKET TREND IN MALAYSIA
• Workflow Management for Finance Departments –Introduction of Concepts