What are the Reasons,Risks and Opportunities when Outsourcing The Accounting Function of a company ( Part 1)

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In my earlier article,I mentioned about some dinosaur functions in the Accounting &Bookkeeping function. I further elaborated on share service centre and  outsourcing which can take away the livelihood of the accounting staff. This is because in a  big group of companies,  the Group CFO is constantly looking at ways to eliminate non-core transaction processing function and to move towards business partnering role and offering higher efficient services to the operating managers.

Typical and easily outsourced functions in the Accounting and Bookkeeping Section include the following: 

• Transaction processing – Accounts Receivable and Accounts Payable
• Treasury namely cash management,
• Collections of monies from Accounts Receivable,
• Keeping books of accounts until preparation of financial statements,
• Internal auditing,
• Taxation,
• Company secretarial,
• Payroll
• Investment
• Pension

 REASONS FOR OUTSOURCING YOUR ACCOUNTING AND BOOKKEEPING FUNCTION:

Generally,there are many reasons to outsource a company’s accounting/bookkeeping functions. This includes the following: 

• Focus on strategy and its core function

By outsourcing,it is able to avoid spending the  bulk of the day handling,checking and reviewing the low value transaction processing operations. Time can be better spend on high key strategic and business partnering function, 

• Avoid  major investments

Sometimes,management needs to make a decision to make a major investment in the function in order to modernize it. By outsourcing the function,the company can permanently avoid having to make this investment.
 

• Handle overflow situations,

There are times of the day or year when a function is overloaded for reasons that are beyond its control. In these situations,it may be cost-effective to retain a supplier/outsourced provider to whom the excess work can be passed to when the in-house staff is unable to keep up.

• Elimination of fixed costs

Instead of handling overflow situation,the function can be wholly pass for outsourcing simply to converts a fixed cost into a variable costs- the prices of the outsource provider will fluctuate directly with the transaction volume it handles

• Improve ratios

It enhances especially profitability or productivity per person. This is especially true if you have too hugh manpower in the accounting function

• Reduce costs 
• Enhance credibility by passing the job to the Big Accounting Four or larger reputable accounting firms 
• Jumping on the bandwagon.

As more and more coverage and publicity are on this,we see senior management of the companies asking their CFO’s to look into this option or strategy.

• Improving performance

Sometimes,a company may find that the accounting functions has bloated costs or inadequate performance. This tempted management to “shake up “ the accounting function by advocating outsourcing to internal ( share service centre )  or to external party.

WHAT ARE THE RISKS AND OPPORTUNITIES WHEN OUTSOURCING YOUR BOOKKEEPING AND ACCOUNTS DEPARTMENT:

Despite the above mentioned reasons to outsource the accounting department,there are also the risks that we should be aware of: 

• The outsourced provider’s ability to supply the services may change over time.

The situation may change in the future,causing  problems in the outsourcing relationship. This might be due to the provider having financial difficulties or it’s change in strategy that forces it to provide different services,

• Another risk is that available information about the success of outsourcing is usually skewed in favor of success stories. 
• It’s might ruin or dent  the reputation of the company,if the company lays off a large number of  employees as a result of an outsourcing arrangement. This is especially true if the employer has been known to be a very caring employer whether  towards it community and its staff.   

Therefore,it is very important to reiterate that if we were to outsource the some of  or all of the accounting function,the financial executives need to carefully plan ahead by examining some of the following factors:

• 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.

• Establishing Control Points When Outsourcing The Accounting Function (Part 2)
• Establishing KPA/KPI or Performance Metric For Outsourcing The Accounting Function (Part 3)
• 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.
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