The ICAEW guide to outsourcing
Transferring back office activities to a third-party provider can help you cut costs and improve the efficiency of your business, but the decision to outsource needs careful consideration to ensure that the potential savings are not outweighed by hidden costs.
Quicker, better and cheaper?
The potential cost savings can be hard to ignore, but as outsourcing has matured providers have been able to offer a more sophisticated product that can go much further, as Edward Brooks has outlined in Out of Orbit.
Third party providers can often offer a higher level of expertise in specialist areas than may be available to you through an in-house team, allowing you to focus on what you do best. The best providers can also help you to make significant improvements in service.
It is essential to consider the compliance issues associated with any outsourcing arrangement as well as any strategic risks (e.g. loss of control of the company’s services, the potential transfer of knowledge to the provider, extended supply chains, geographical and political instability).
Taking the first steps
Once you have made the decision to outsource it is important to analyse the costs, service levels and productivity of your existing service to give you a point of comparison with the offers that suppliers make when you go out to tender.
Deciding what and with whom to outsource, negotiating terms and managing the associated risks are all topics that are covered in the special reports From outsourcing to off-shoring and Finance transformation - the outsourcing perspective
Managing the ongoing relationship with your provider is crucial to the success of the arrangement and to ensure that service levels do not drop. You will need to put in place an effective governance structure and ensure that roles and responsibilities are clearly defined in the contract.
The key questions you need to address in the contract are highlighted in Finance transformation - the outsourcing perspective along with advice on how to use service level agreements to check that standards of service are maintained.
Location, location, location
Many companies have combined outsourcing with offshoring, transferring business processes to service centres in countries with lower costs.
It is important to keep up to date with the changing picture on offshoring costs across the globe. Rising labour costs in China and India have recently made those countries less attractive venues for manufacturing companies, with renewed interest in Latin America and Eastern Europe as alternative locations.
The decision to outsource to a supplier outside your home country introduces new challenges, but there are some useful sources of advice that you can tap into and you can find the latest thinking on locations for offshoring in the Library’s selection of the latest online articles on outsourcing (login required).
In the year before your contract ends it is advisable to review your existing arrangement against the market and determine whether your current provider is still the best partner for your company, however what happens when you need to re-negotiate mid-term? Peter Scott offers some advice in How to renegotiate outsourcing contracts.
The ICAEW Library & Information Service offers a range of helpful resources on outsourcing for members working in business, including:
- Outsourcing handbooks
- Articles on the latest developments in outsourcing
- Useful links
The information contained in this article is for general guidance only and does not constitute advice. You should always seek professional advice for your personal circumstances. Please read the full disclaimer.