In an economic downturn, many businesses begin to explore the options for reducing costs, such as outsourcing financial services. The initial savings associated with any outsourcing project are often very appealing. However, it is important to carefully review all the costs and benefits associated with this project over a three- to five-year time frame to make an informed decision. Major areas that should be considered when reviewing outsourcing financial services include legal implications, quality assurance, and cost.
The legal implications of outsourcing financial services are an important consideration, regardless of the size of the organization. The laws surrounding confidentiality and legal recourse for breech of contract vary widely around the world. The vast majority of outsourcing firms are located outside North America, where the cost of living is lower. From a contract law perspective, it is important to determine where the work will be done and under which laws the contract was signed and will be enforceable. It is wise and prudent to retain a law firm that specializes in this type of contract to provide advice and guidance.
Most people assume that outsourcing financial services will completely replace all the accounting staff within the organization. However, this is untrue. It is neither practical nor realistic to separate business operations completely from accounting activity. At a bare minimum, the organization will need to have a team of accountants to review the financial reports, analyze spending, and provide information to senior management.
The services most commonly outsourced are invoice processing, accounts receivable, purchasing, and payroll. All of these services are very compartmentalized and can function independently. It is important to note that it is the actual data processing that is outsourced, not the financial analysis or account management. This distinction has a huge impact on the potential savings in both head count and salary costs. The processing or clerical staff costs are typically the lowest of all the accounting staff. However, a large company will also save on the overhead costs associated with these positions.
The core accounting staff will become responsible for quality assurance and data validation. Although this function is a core requirement in any organization, internal controls, business processes, and supervision all minimize the risk of error. With an outsourcing firm, management is removed from the work flow, and additional steps are required to maintain the same level of quality.
A cost benefit analysis of outsourcing must include all the human resources and overhead costs for each position that would be eliminated. Typically, organizations find they need to hire a more senior accountant to manage the outsourcing firm. In addition, the actual contract costs may be based on volume, dollar value, or turn around time. Check these details with care before signing a contract.