Outsourcing of Accounting Functions

Question: Describe about the Outsourcing of Accounting Functions. Answer: Introduction All across the world, the inclination toward finance and accounting outsourcing (FAO) by organizations of all size and nature is rising. Companies are no longer focused on bringing services in house, rather they are now focused on optimization of supplier relationships and augmenting operational elasticity. In a perfect marketplace, all the transitions taking place in the outsourcing landscape would lead to substantial value creation for the users and enhanced profitability for both the service providers and the companies. However, not all the transitions will lead to the expected positive changes (Mclvor, 2005). The present paper attempts at understanding the nuances of outsourcing and analyzing its viability for the accounting firm. Outsourcing: An Overview In the simplest terms, outsourcing is when any process or operation that can be or would normally be conducted in-house by a companys workforce is sub-contracted to some other company for a considerable time. Such outsourced functions may either be performed off-site or on-site. In a literal connotation, outsourcing means use of external resources. It takes place when the implementation of processes, tasks and functions hitherto performed in-house is contracted to an external entity specializing in a particular domain based on long run collaboration (Vitasek, Ledyard and Manrodt, 2016). As per Quelin and Duhamels definition, outsourcing is the function of transferring a transaction which was earlier controlled internally to an outside vendor via a long-term contract (Adrian and Alexandru, 2012). As per this definition, strategic outsourcing has five characteristic elements: A close tie between the key success factor and outsourcing process of a company in a sector. The shifting of ownership of a company process earlier internalized, usually entailing a transfer of physical and human assets to the vendor. A global contract, intense and longer than a typical sub-contracting agreement. Service levels and obligations of both the parties defined in contractual terms. A long term binder between the two parties (Adrian and Alexandru, 2012). The FAO Industry The FAO marketplace is arriving at maturity with its growth narrowing down to -6%, as against the double digit increase some years back. Renewals now control a major share of the market activity which is yet another signal indicating maturity. The rate of contract termination fell in 2014, post a spike in 2013. SMEs and mid market companies are emerging as new customer segments. The contract scope is rising in respect of both geographies and processes being served Bhatnagar, Ranjan and Sinha, 2015Global sourcing is also on a hike due to rising pricing pressure from the purchasers. With a greater focus on outcome and output, hybrid pricing frameworks are playing a more significant part than they did earlier. The service vendors are also investing in process expertise and technology solutions to satisfy the evolving client expectations (Bhatnagar, Ranjan and Sinha, 2015). The main changes in the contractual features in the FAO industry are depicted through the following diagram: Figure 1: Main changes in contractual features (Source: Bhatnagar, Ranjan and Sinha, 2015) Benefits of Outsourcing Focus on core areas - It enables the company to concentrate on its value adding, core activities, without the disruption of having to perform support services. These support services may consume both managements financial resources as well as time, which could rather be spent on areas where the organization can use its competencies and resources to achieve competitive edge (Krell, 2007). Cost Savings - Normally the companies to which functions are outsourced specialize in such functions and hence, are going to reap economies of scale from the employment of expertise. There is a likelihood of additional savings in cost if the process is off-shored to a foreign firm functioning in a less costly labor area (Vagadia, 2011). Cost Reductions - As accounting processes are highly complex yet very important parts of a company, keeping a whole accounts department for the same entails budget draining hiring and training efforts. To prevent this, companies outsource either whole or part of their accounting activities to save up substantial operating costs. Quality Improvement - There could be instant improvement in quality if the finance and accounting functions are outsourced to a company having cutting edge expertise and where quality is cautiously outlined in a service level agreement (Valdez and Molyneux, 2015). Efficiency driven outcomes - FAO actually stimulates efficacy and enhanced business performance to any company. Owing to the highly competitive outsourcing market globally, outsourcing firms encounter the pressing need to espouse most recent technologies and customer satisfaction oriented strategies. In view of these situations, the client firms can look forward to efficiency driven outcomes for their projects, as the service providers cannot risk losing customers by providing low level services (Krell, 2007). Access to huge talent pool - If the accounting activities are externalized to a supplier, the client company invariably gains access to a huge talent reservoir, useful and effective for their business to scale up. Small, medium sized and start up firms normally devise a cost efficient business strategy covering outsourcing of internal FA activities in order to get these processes streamlined (Murphy, 2011). There are several accounting firms in both Australia and UK that have outsourced their payroll functions, tax compliance, treasury and cash management, general ledger management reports, accounts receivables, tax planning, budgeting and forecasting and internal audit activities to save costs and focus on their core areas (Murphy, 2011). Potential shortcomings of Outsourcing Security Risk A companys accounting is, by its very nature, a highly critical and sensitive matter. When the company sends all its financial information, statements and records to an external vendor, it stands the risk of losing insider knowledge on one of the most important components of the company (Murphy, 2011). Difficult to reverse Once the company outsources its accounting functions and the internal know-how is moved out, it becomes really challenging to bring that function back in-house. This is especially pertinent during the time of contract renewal: the price hike may be greater than anticipated, but it can be hard to leave the vendor (Bruin, 2015). Less Control When the employees are managed in-house, the management has more power on how things function, from daily processes to training. While a vendor is likely to train its workforce as per the clients preferences, there is always likelihood that some important aspects may not be covered (Murphy, 2011). What must be outsourced? The decision to whether or not the company should outsource its accounting functions can be made easy by understanding what must be outsourced. Harmons Process Strategy Matrix presents helpful guidance regarding which functions can be outsourced safely, and which must be performed in-house (Koszewska, 2004). It makes use of two axes: Strategic significance of the process, and Dynamism/complexity of the function Figure 2: Process Strategy Matrix (Source: Koszewska, 2004) If the process is in the right hand pair of boxes, where its strategic importance is high, then in such cases outsourcing is not advisable. If the business function is strategically significant, it is probably a source of competitive edge. If this is outsourced then the organization would be letting out its most valuable secret (Koszewska, 2004). Summary To summarize, it can be stated that the use of FAO in spreading all across the world. Such outsourcing arrangements provide accounting firms the opportunities to considerably mitigate costs, access updated technology and improved skills and reap many other advantages. The buyer-supplier relationships and contractual agreements in the FAO market are also taking new forms, giving the client companies more leverage. Recommendations From the analysis of the function of outsourcing provided above, and in light of the weighted pros and cons, the accounting firm is advised to outsource its accounting and finance functions. However, there are some recommendations that the firm should follow before deciding on outsourcing the process. Firstly, it is important to conduct a cost-benefit analysis. It should compare and contrast the cost of keeping a finance division in-house, taking into consideration, expenses such as office space, training, equipment and software, salaries and benefits with the entire expense of hiring external vendor to accomplish the same objectives. All the costs pertaining to outsourcing should be clearly mentioned in the written agreement so that there is no likelihood of hidden costs. The more specific and detailed the consented expectations are, the higher the prospects of avoiding unforeseen costs in the future. When outsourcing the accounting functions, it is particularly crucial to unmistakably comprehend and consent on how any required data will be accessed, how often, who can access it and in what format. This would reduce the security risk associated with the process of outsourcing. If the vendor is situated offshore, then it is vital to comprehend how the different time zones, locations, languages and culture are addressed. It is recommended in such cases, that the accounting firm addresses external political or legal risks well ahead of time. Word Count - 1483 Communication Plan As outsourcing of accounting functions is recommended, the stakeholders will be informed about the change by holding a meeting in which they will be addressed about the benefits of outsourcing for the accounting firm. Subsequent to this, a detailed plan encompassing changes in work structure and resource allocation will be communicated to the stakeholders through both the meeting and an email. 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