Embarking on outsourcing finance – the smart way

Ever considered outsourcing finance functions in your company? You are part of a growing number of business leaders moving in that direction. According to a study conducted by US-based research company Ovum, the number of finance and accounting projects worth more than 1 million dollars has increased over the past two years.

An article featured by Forbes says that as the outsourcing market matures, “companies contracting for outcomes are exploring fresh ideas and seeking new answers to streamline finance and accounting processes.

This means the practice of outsourcing finance is expanding to new areas.  Responses from 150 companies interviewed by Ovum showed that driving efficiency was a major rationale behind the movement.

“There is a wider trend in outsourcing as a whole,” Ed Thomas, an analyst for Ovum told Forbes. “Cost reductions are the table stakes, and companies want to know what else their outsourcers can do to make their processes and technology run more efficiently.”

The study found that companies are “moving up the value chain” in terms of the accounting and finance processes they outsource. Years ago, outsourcing finance was limited to basic or transactional functions such as debt collection. However, companies are increasingly delegating more strategic tasks. One out of three respondents in the Ovum research had outsourced finance by way of internal auditing – seen as a strategic and often sensitive undertaking.

The cost benefits to outsourcing finance and accounting functions can be leveraged as the number of delegated functions increase. The wider the angle of insight that the person or company appointed to provide the outsourced services enjoys, the more valuable the service he can provide. One example of this, cited by Jag Dalal, managing director of thought leadership at the International Association of Outsourcing Professionals (IAOP), is accounts payable and receivables. An outsourcer delegated to follow up on accounts payable will do only that. However, someone outsourced to oversee accounts payable as well as receivables will be able to see when cash comes in and goes out, and therefore plan around and optimize on cash flow. Overall, he will provide more value to the business.

Potential pitfalls

Despite its growing popularity, outsourcing finance is not without its risks. Business blogger The Curious Manager shares some potential pitfalls of outsourcing finance. Among them is listed:

• You are no longer among colleagues. Because the person appointed is not an employee of the company, there is the possibility of encountering less flexible service. Also, anything that’s not part of the job contracted for could be charged for. Outsourcing contracts often hit the company with a number of unforeseen “extra’s” that are billed for as the project unfolds. Your company’s task is to look for a service provider that adopts a team-player mindset and also comes with a transparent cost model.
• An initial dip in quality or lengthened turnaround times. It’s almost inevitable when outsourcing finance. Teething issues arise when the outsourcer assumes the functions that were initially handled in-house. When you take the decision to go external, you run the risk that quality never quite recovers. Your task is to appoint someone well-suited enough to the task, and with enough experience, that down-time is minimized and the quality of your company’s output is maintained.
• Loss of motivation internally: In some cases, outsourcing finance results in redundancies. At other times, it merely means a shift in the way something is done or the need to accommodate a new team player; someone who will bridge the gap between the internal environment and the outside world. In either case, it will require prescient management to anticipate where existing employees might resist the change. The outsourcer should be able to anticipate and tactfully – and effectively – deal with what could potentially dampen productivity.

Whilst there are definite benefits to outsourcing finance, there are simultaneously risks inherent in making the shift. The answer to successful financial outsourcing is to manage the internal reaction to the change and appoint an outsourcer skilled enough to ride the almost inevitable backlash that will accompany his or her appointment.

The Finance Team helps to connect companies with skilled and experienced finance executives who can head up outsourced finance and accounting functions. These professionals have the experience and know-how to ensure your company derives the cost benefit of outsourcing while simultaneously avoiding the potential pitfalls that can accompany the practice.