Outsourcing- what every managers and accountants should know about it.

Technology has made it a no brainer that organizations think very carefully before committing those hard earned resources into any venture. Would it make good economic sense for a small business owner to still invest heavily in procuring huge computing equipment when they can just leverage on various cloud computing vendor?

The above paragraph is an example of what a good outsourcing can be.

Outsourcing has become a global strategic business necessity in implementing the twenty-first century strategy. This is the mechanism that allows organizations to transfer the delivery of services to third parties. Outsourcing is simply obtaining work previously done by employees inside the companies from sources outside the company. i.e running of a modular company/ organization.

A modular company provides products, self-contained experts or companies brought together- outsource- to contribute their primary or support activity to result in a successful outcome.

In a bid to remain competitive, especially in this our time of globalization and e-economy, managers and their advisors (accountants) tend to resort to outsourcing.

In this article, an attempt will be made to explore the: procedure, advantages and disadvantages of outsourcing. So sit back and flow with me.

Procedure of Outsourcing some of your non critical functions

The first step you take in the outsourcing process is to carryout an in-house analysis to find out what your needs are, and then write a RFP (request for proposal) to prospective contractors. This document will serve as an invitation to treat. In this document, the company will state the ‘must have’ features of the product or service it intend sourcing. This can be thrown to the general public via any media or selected companies.

When these proposals eventually come in, the company in question will now carry out its due diligence on all the companies that turned in their proposals to ultimately select the company that most fit into their needs. Some legal documents needs to be prepared.

Best practice is to get a lawyer involved to draft the legal documents paying special attention to the SLA. An SLA (Service Level Agreement) is a common document used in capturing all the deliverables of an intended outsourcing agreement. This document states the level of service that must be delivered by the contracted party.

Also, a non-disclosure agreement must be entered into as vital top business secrets may be let out to the consultant in most cases.

Advantages of Outsourcing:

Outsourcing as a means of creating an agile, virtual organization has many potential advantages:

1. Recurring cost saving: It can lower costs incurred when the activity outsourced is done in-house. Companies may decide to outsource their IT function instead of paying a permanent IT staff. You decide which one is more cost effective. It is also common practice to outsource the internal audit function of an organization rather than having to maintain a full fledge internal audit department with its attendant recurring overheads.
2. Capital expenditure cost savings: Outsourcing when done correctly can reduce the amount of capital a company must invest in production or service capacity. This is more valid in this dynamic world that we are living in today. The equipment (business technology equipment) bought today can quickly become outdated, even before producing any output.
3. Frees up valuable time: The company’s managers and personnel can concentrate on mission critical activities  instead of wasting valuable time monitoring production, managers would invest their time in marketing and customer care activities.
4. Learning opportunities: Careful selection of outsourced partners allows the firm to potentially learn and develop its abilities through ideas and capabilities that emerges from the growing expertise and scope of work done by outsourced partner company. This is where the fees paid to the legal consultants are earned – the contract must be properly worded to carter for knowledge transfer.
5. Promotes specialization: This concentration and focus allow the company to control and enhance the source of its core competitive advantage.
6. Improved chance of success: Outsourcing increases the chance of the right product and service being delivered. It is most likely that companies will select the best hands and expertise that will in turn translate into high quality output.

Disadvantages of Outsourcing

It is a universal truth that every good thing has its own disadvantages. Outsourcing is not an exception, therefore, below are some of its disadvantages.

1. Potential loss of control: It involves loss of control and reliance on outsiders. Even though there was a non-disclosure agreement, some scrupulous ones might still sell out top trade secret. Best practice is to retain services that involves dealing with top secret inhouse.
2. It can create future competitors. A consultant today might turn out to become a competitor tomorrow. For the fact that the greed in man can never be removed entirely, the consultant equipping him/herself with the nitty-gritty of a business or trade may decide to go into it tomorrow. Though this can be circumvented by including a clause in the agreement that forbids them to do so.
3. Increase in negative press: It may cause negative reaction from stake holders – especially the employees and investors.
4. Legal Challenges: It is difficult to craft good legal agreement especially for service engagement. Determining what is satisfactory might pose a big challenge.
5. It may become uncompetitive in the long-run. This is especially true when the company is locked into the contract.

As great as you may think these disadvantages are, outsourcing will soon attain a height that nobody expects it to get to. So always be on the look out so as to join the band wagon when it starts moving.