Mark McRae is identified as one of the Sunshine Coast entrepreneurs in Australia who owns more than 30 companies. According to him, “Outsourcing can give you an array of highly skilled professionals from all over the world despite the size of your company. To produce a documentary, you can hire a scriptwriter in the USA, film crew from Canada, post-production team in Croatia, and an editor in Serbia”. There are no boundaries to outsourcing if the expectations and objectives of outsourcing are identified.
However, it is critical especially for accountants to understand the role of outsourcing as a business strategy because they are the guides who light the path towards a firm’s goals and objectives. According to GIA, outsourcing finance & accounting functions comprises 10 percent of the global business process outsourcing (BPO) market and it is expected to grow in the future. Reasons like globalization, stakeholder pressures, increasing costs, changes in the regulatory, political environment, value-added services to the business make a firm move into outsourcing strategies. Outsource was just a niche strategy followed by large-scale firms a few years ago, but today even SMEs are focusing on outsourcing. There are various ways an SME can use outsourcing Finance & Accounting functions as a strategy to gain benefits.
Cost reduction strategy
- Wage arbitrage is generally the largest benefit that the firms will get, especially in countries like Australia where the labor charges are relatively high. Outsourcing of a firm usually happens with a country/company/region where the cost is lower compared to the parent company. The Full-Time Equivalent (FTE) cost will be lower and there will be no additional costs like overtime, insurance, payroll taxes, or incentives. It even reduces office space. Also, concepts like automation can eliminate labor requirements to do a particular task.
- Labour consolidation efficiencies are another cost-saving aspect. There are many instances where outsourced activities run like shared service centers where similar activities are done in the same place. For example, all the financial and accounting activities of a group of companies are handled by one center rather than having different accounting departments to its various subsidiaries. This helps to reduce the FTEs required to do a particular task and gain cost reductions.
- Process harmonization efficiencies are arising from undertaking the same activities in the same way. It creates process streamlining and can increase process quality. Costs will be reduced through labor consolidation and having fewer processes. There will be less time involved to complete tasks because of employee specializations.
- Tax Savings can be gained through outsourcing as there are different regulatory requirements in different countries. Even within Australia itself, there are changes in payroll tax thresholds.
- The finance department of a firm has several peaks and valleys during a year with reporting deadlines, tax deadlines, etc. When there is in-house finance staff there are difficulties in their scalability during peak times. There will be minimum cost commitments for overtime and temporary staff if the finance tasks are outsourced. When signing the outsource contracts there are clauses for annual efficiencies. So, the outsourcing agents are bound to give cost reduction efficiencies each year.
When the cost is saved, there will be funds available to achieve other business priorities that can gain growth into the business. For SMEs, it can create a competitive edge over the other firms in the industry. Giants like WhatsApp, Alibaba, Unilever and Google also have embraced outsourcing strategies into their business as cost reduction strategies. If such giant companies can gain benefits from cost reductions through outsourcing, it is definite that an SME also can achieve cost reductions.
Outsourcing as a strategy to attract external expertise
When outsourcing the accounting function to an offshore partner, an SME can gain access to talents which they cannot afford to hire in their city or region. In some regions of Australia, there are labour shortages for some specialized talents. In outsourcing companies, some individuals are professionally qualified and experienced working in many industries. Those professionals can give valuable insights to the business and there will be minimal errors that can harm the image of SMEs. Also, there can be situations where there are particular language skills required if the business has dealings with global partners. There are outsourcing agents who offer financial experts who are fluent in various languages. SMEs also can use outsourcing as a global pitching strategy.
Risk Reduction Strategy
The financial activities of a firm come with different levels of risks. There are penalty charges, legal obligations on a misinterpretation of data and various other legal & monetary risks. Many SMEs face difficulties trying to balance between selecting the correct strategies, increasing reliability and maximizing profitability. When a firm does everything on its own, there are difficulties in eliminating risks, there will be huge infrastructural capital, time spent. This leads to eating up a firm’s efficiency and profits. In 1997, Boeing was finding it difficult to be in the industry with the competition coming from Airbus. As a strategy Boeing outsourced several of its processes to China which helped to reduce their costs and risks. It made them able to compete with Airbus.
When the SMEs outsource the financial tasks, those risks will also be transferred to the outsourcing agent. There will be better compliance on all the regulatory requirements a firm has to fulfil and that will give a good image to the firm.
Many SME firms have a lack of necessary house- technical skills, traditional disparate strategies in recruiting technical employees and a lack of training programs to update the existing in-house technical employees. The technological world gets updated each day and an SME will have to spend a lot on all the infrastructural and human resources in getting the new technologies. Firms cannot run in the old-fashioned way without adapting to new technology because they can destroy the firm. A good example is how Kodak was bankrupted due to not adopting the new technology. One of the best options a firm can look into is outsourcing technical capabilities because it can be cost-effective than implementing it in house. Automation, robotics is changing the entire financial & accounting functions. Outsourcing firms have expertise & resources which can make these changes possible to an SME at a lower cost.
Outsourcing as a Revenue Focus strategy
Finance & accounting activities can be categorized into a hierarchy of value-added activities varying from strategic finance decisions to the transactional activities at the bottom tier. The first activities that usually get outsource are the transactional activities making more space for SMEs to focus on strategic financial aspects. Usually, transactional activities do not add value to the business. Compared to transactional activities, managerial accounting, budgeting can create wealth for the firms. The managers of the business will be able to focus on increasing revenue instead of worrying about the complexities involved with accounting tasks.
Accounting can become a ‘forward- focusing’ profession because of outsourcing. It can gain many strategical benefits into an SME if it is done carefully, systematically with explicit goals and expectations. It will be a vast cutting-edge avenue if the firm needs to grow and compete in the market.