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Outsourcing Your Finance Function May Not Be The Best Option

It is increasing being incorporated into company strategy, but it may not be the best solution

9Feb

Many businesses now include outsourcing as part their long-term competitive strategy, and it is growing increasingly prominent in the finance function. In Deloitte’s 2016 Global Outsourcing Survey, 42% of respondents from the finance function said that they currently outsource, while 36% said that they were going to increase their use of outsourcing in the future - the highest increase of any function surveyed.

The imperatives of the finance function and the business climate in which it now operates mean that it is understandable that many would see outsourcing as a solution, but is it really the best way to go?

It is firstly important to understand how the finance function is evolving. CFOs and other finance leaders are in the midst of turbulent climate and they require agility more than anything. This means focusing on lowering costs, flexible skillsets, and access to the latest technology. They are also looking to drive transformational change and improve business results, acting more strategically to help drive growth. All of this is, to a degree, offered by outsourcing.

According to the Deloitte survey, 59% use outsourcing primarily as a cost cutting tool. An outsourcing model means you no longer bear the costs of recruitment, training, and managing staff. It also means there’s no insurance, payroll taxes, unemployment taxes, sick days, holiday pay, medical insurance, or retirement benefits to pay. Of course, whether or not this actually works out cheaper depends on how much the vendor is charging, so it is important that CFOs are careful to measure every cost and keep an eye on the ROI being provided by outsourcing.

It is not just the cost of staffing, though. The skills required by finance teams are now more varied than ever, with a greater expectation for them to think creatively and contribute to growth. This means that there will often be tasks that in-house staff are simply unable to complete, even if there seem to be spare members capable. You don’t want a qualified accountant inputting data, for example, and neither will they want to be doing it. Outsourcing affords access to a full complement of different skills and knowledge as and when they are needed, whether it is simply to fill a temporary skill shortage or as a more permanent solution. It also means reduced dependence on key staff so that should someone leave, you do not also lose their knowledge. Outsourcing also means that you can use specialist IT technology.

While these are clear benefits, there are a number of concerns. The CEO of startup Zirtual, Maren Kate Donovan, for one has blamed their failure on the outsourced CFO company they hired, telling Fortune magazine that the provided ‘burn rate’ projections did not take into account how the company would have three pay periods (rather than two) in May and October because of calendar anomalies. There are many questions that must be asked around whether a vendor can deliver the consistently high quality service required, and they need to be careful - negotiating a smart agreement and ensuring that liabilities are in place.

They also need to be careful what they outsource. The finance function has changed, which has meant an increase in the amount of governance finance has to focus on. You can outsource governance without problems, but you cannot outsource guidance as it needs you to be close to the business and its partners, especially around confidential information. Confidential information is a particular problem given the increase of hacking activity and damage that can be done if customers’ personal data is stolen, both financially and reputationally. While outsourcing vendors have a responsibility to their clients to ensure their client’s data is secure, it is down to the CEO/CFO of the client to check their credentials to actually do it beforehand.

Ultimately, the key issue with outsourcing is the loss of control. You can keep an eye on employees when they are in-house, you can monitor their activity, and they will have a greater knowledge of your business which should enable them to be more innovative. It is an exceptionally difficult relationship to substitute. However, for those who feel it is the best option, they need to remember to vet vendors carefully, to communicate your needs and challenges precisely, and to stay on top of them constantly. There are many benefits, but caution should also be exercised. 

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