Outsourcing: the riskier option?
Author: Paula Jones FCMA
Outsourcing can deliver significant cost savings for businesses of all sizes. As Britain experiences its worst recession in 80 years, small and medium size enterprises (SMEs) have been particularly badly hit as their narrow product ranges and geographical market exposure provide limited diversification of risk, additionally they have smaller cash reserves than the large corporates to see them through the bad times. Why then are SMEs not embracing outsourcing more?
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Look out for our next blog: Is outsourcing a viable strategy for SMEs?
For more information on outsourcing for SMEs, contact: Outspan. www.outspan.co.uk, 0845 838 1965
Outsourcing, and particularly offshoring, is still seen by some as a risky option. Many SMEs have already outsourced their accounting (for example) to local accounting firms, however the move to offshore is still seen as a step too far. Despite the cost benefits, there are a number of reasons why SMEs are hesitant to consider outsourcing as a viable option. If we look at these reasons, we explore whether they are myth or reality:
1. Reduction in the quality of service provided
If you have accounting staff in house then you can meet them, vet their qualifications, follow up references and see how hard they are working. You can also take management action if their work is not up to standard.
If you have outsourced to a local accounting firm, you may have worked with them for a number of years, you know them on a personal basis, can meet up regularly with them and you can also kick them when things aren’t working properly.
There is a perception that if the accountant isn’t nearby then quality of service will be compromised and worse, it will be hard to get hold of them if things go wrong.
Reality: Quality is a key success factor for outsourcing, often outsourcing providers have stronger financial control and quality systems than with other resource options. “Increase in controls and quality levels versus the client’s previous solution is often something that attracts a client to outsourcing in the first place” says Jim Downey from Outspan (a leading UK outsourcing provider). “Because outsource providers specialise in their field and are providing services for a number of other companies, their control frameworks and management supervision structures are often stronger than those of their clients.”
Businesses like to be able to have the people providing their services within easy reach. There is a certain amount of comfort in knowing that your accountant is in the same town as you, you can pop into their office or they can be got hold of easily by phone. Where the accountant is located in a different country a whole ream of anxieties are raised – can I phone them? Will they understand me if I do speak to them? How will I properly get my point across if I can’t meet them? How much will it cost me to call them?
Reality: In the new world that we live in, face to face meetings and close proximity of suppliers are becoming more redundant with technology allowing us to meet via teleconferencing and get hold of someone by phone just as quickly as if they were in the next office. The need to be able to speak directly to someone is very important in establishing relationships. Outspan for example, operates through an onshore/offshore model, with a UK head office providing account management to clients and a UK phone number for the client to speak directly with the Sri Lankan accountants delivering the work.
3. Loss of control
There can be a feeling of loss of control when you hand over your documents to an outsourcing provider particularly if they also manages a number of other clients. Relationships are important to SMEs, hence the preference for a local accounting firm discussed earlier. Where there is a feeling that a business will been seen as just another client, a small fish in a big pond, there may be a feeling that the client’s needs will not be given the attention they may get with their current providers. On the other hand, no one wants to be the biggest, or worse, only client, as this could result in the outsourcer not surviving and the client left high and dry.
Reality: Developing a good relationship with your outsourcing provider is important to ensuring that your needs are being met. If you are able to work with one who also has a UK presence then you will feel more comfortable with the issues relating to accessibility discussed earlier.
4. Data security, client confidentiality
The UK has strict data protection regulations and a strong UK service contract, or contract of employment, between you and your accountancy provider will give you the reassurance that your data will be treated confidentially. What happens when you offshore? Would the outsourcing provider have the same high levels of control?
Reality: Outsourcing providers, particularly those who have UK customers, will make security of data a priority, loss of confidentiality is a suicide pill for these companies. However, choose a provider who specifically complies with these regulations and spend time finalising the service contract to make sure that you have the necessary clauses included. As a UK company with services centres in Sri Lanka, all Outspan’s client contracts are governed by UK law which should give clients that extra comfort.
5. Dependancy on the outsourcing provider
Outsourcing should be seen as a strategic, long term move rather than a short term solution to overcome a particularly problematic period. However, once the internal processes are set up to direct all documents to the outsource provider there could be a concern that the company is now dependant on that provider and in effect be locked in to a long term contract with them.
Reality: Although it is important to see outsourcing with a provider as a long term solution, it doesn’t necessarily mean that you are stuck in a relationship that isn’t working. Most service agreements with providers have termination clauses (often with a 3 month notice period). Review your relationship and the quality of service you are receiving on a regular basis. Make sure that your contract termination clause includes provision for the smooth handover/hand back of services so that you can minimise the disruption if you do decide that it’s not working for you.
6. Interruptions to service
If you are outsourcing a critical (although non-core) function such as accounting you will want to ensure that you are given a smooth and consistent service each month. Delays in delivery, or worse non delivery, in any particular month can cause real problems particularly if the interruptions coincide with year end or quarterly tax submission dates.
Reality: As with any supply of service, including in house supply, you will need a business recovery plan. The outsource provider should have this in place as standard. When you chose your provider make sure that you understand the plans that they have in place, the backing up procedures they have for data and the staff absence cover they provide. As the outsourcing provider’s business is to provide services to you they should have solid plans in place and this is likely to be more than you would perhaps have internally.
7. Political and socio-economic risks
One of the reasons many people are more comfortable with keeping resource in the UK is that we are comfortable in the knowledge that we live in an environment of benign political and social risks. There is very little disruption to our daily business lives. Once we move out of the country however we add a level of uncertainty that we are not use to. So, it’s best to keep things nearby where we know what’s happening. Or is it?
Reality: Many of the countries now excelling at outsourcing have become more politically stable in recent years, often as a result of the economic benefits that industries such as outsourcing brings (see our blogs on the impact of outsourcing on the developing world). Governments know that stability is the key to attracting international investment and business and much effort is made to achieve this. It’s also important to note that instability can even happen on our own doorstep – who can forget the riots that broke out this summer, or trade unions that strike at the most inconvenient times, both cause disruption to our UK business community.
The fears of offshore outsourcing are many and varied, however having looked at some of the most common concerns we can see that outsourcing is not as risky as first seems. In fact, you could argue that it will become increasingly riskier not to outsource as more competitors get an advantage from doing it, and the amount of time management take running non-core areas distracts you from doing what really drives your business forward.
Contact Outspan today to discover how we can start reducing your costs now at www.outspan.co.uk, 0845 838 1965