Knowledge Base

Reasons for Outsourcing

In today's world of increased automation, a growing scarcity of highly skilled employees has necessitated businesses to explore new processes to outsource. One of the most needed outsourcing services is that of financial services.

Actually, outsourcing is not exactly a new idea, but it has been made very easy by the growth of communication facilities. Many forward-thinking companies use financial outsourcing today to reduce their overheads.

In outsourcing the strategic control remains with the main company while procedural control (i.e. the day-to-day function) is completed by the service provider.

Why do Companies Outsource?

When companies expand and need to develop or upsize their financial department many find that the costs of doing so are prohibitive and that readymade financial solutions rarely suit all the individual requirements of the company.

So, increasingly SMEs and even many larger companies outsource their finance department to a dedicated provider, who can provide a level of expertise in a range of fields that would be impossible to deliver themselves. As companies grow they need to increasingly call on additional financial services such as risk management, collections and customer service in order to compete efficiently in their marketplace, and those services can be seamlessly bolted-on by an efficient outsourcer.

Therefore, rather than employ specialists in-house at great cost and build or buy-in sophisticated software developing systems from scratch, it is a far better solution for many to outsource their finance function. Further, this leaves owners free to concentrate on growing the business, rather than worrying all the mundane, but essential financial services professionally taken care of by the outsourcer.

Advantages of Outsourcing  

With outsourcing, it is possible to receive the highest quality of work possible. Outsourcing no longer only refers to overseas sweatshops where employees work long hours for little pay. It now also occurs domestically and often at prices which are more than generous. Thanks to savvy entrepreneurs who realize the benefits of offering their services on a contract basis, outsourcing has become the wave of the future.  

One of the most advantageous aspects of outsourcing is the ability to employ industry experts for the completion of certain tasks. This becomes beneficial in situations where a business is faced with a complex problem which is beyond the expertise of the in-house employees. Outsourcing gives the business the opportunity to outsource the task of solving the problem to a highly qualified candidate. Take for example the complex task of payroll processing. This is a very critical task, and companies cannot afford to make any mistakes in the remuneration process. Holidays, extra work, late arrivals, taxation - there are many aspects to consider while finalizing salaries. Even with a good software, the task is daunting. Many organizations therefore prefer to outsource payroll processing to experts. If one focuses only on finance and accounting, end to end accounting, audits, asset evaluation and management, inventory audits, taxation (including the GST introduced in India in 2017) and costing are some services that companies prefer to outsource. Here is a gist of advantages offered by outsourcing:  

  • Allows companies to focus efforts on outputs and outcomes, while the provider focuses on inputs and processes.
  • Provides the client firm the discipline to identify and learn what their core competencies are, and in doing so, aids strategic planning.
  • Frees up assets to reallocate to core competencies
  • Client firms can gain unique access and business opportunities that the outsource provider brings with them
  • Clients firms may find they have outsource capacity that they can sell to other firms
  • Outsource provider brings their core competencies to the client, helping the client maintain state of the art performance.
  • Gain outside, latest technology instead of retaining older legacy systems. In other words, pick and chose newer technology anytime is needed, since the client firm does not have to invest in such technology. The provider can even help client firm personnel learn newer technology
  • Client firms can improve their images bys association with an outstanding outsource provider
  • Can mitigate risk by transferring problems with human resources, technology, and systems to the outsource provider
  • Can be used as a strategy for downsizing or reengineering a client firm
  • Allows the client firm to conserve capital to invest in core competencies 

In the international context too, outsourcing offers the following benefits:  

  • Greater profits because the cost of business activities outsourced to a foreign provider operating under less restrictive laws (e.g. environmental protection laws, labour laws, etc.) can be considerably less than in-sourced costs of the client firm. This is especially true of outsourcing manufacturing
  • Takes advantage of outsource provider foreign markets to raw materials and labour otherwise unavailable to client firm. Again, true of outsourcing manufacturing activities
  • Improved markets potential – outsourcing provides a good way to learn about running a foreign operation, expansion into foreign operation, expansion into foreign markets, and taking advantage of all the other benefits of foreign location has to offer than to work closely with outsource providers in that country
  • Protect home country markets from imports, since it takes advantage of lower cost foreign labour and materials
  • Save on time, especially if the time difference between the client firm and the outside provider works in favour of the client firm (e.g. outsourcing of medical transcripts to India from U.S.)
  • Outsource provider can serve as a de-facto branch of a client firm, which can thus avoid going international and also the complexity of dealing with currency and language issues, multinational accounting problems, etc.