Following on from our article on the impact of Covid-19 on remote working and outsourcing we explore the reasons why more and more businesses are using an outsourcing model.
Traditionally, businesses tended to hire professionals for back office and administrative functions such as finance & accounting, IT, HR, compliance, and marketing. However, over the last 10 years or so more businesses are outsourcing these functions to external service providers.
Due to the impact of Covid-19 which has necessitated cost cutting, particularly through redundancies and wage cuts, coupled with advances in technology and the ability to work remotely and virtually, the outsourced approach will continue to be more widely adopted by businesses.
Firstly, the most obvious advantage is in cost efficiency. Outsourcing is typically less expensive than hiring full time employees (FTE) for the same role. In addition to the salary of the employees, any benefits such as pensions, flights, insurance, and bonuses should be taken into consideration when comparing the cost of hiring a FTE vs the cost of outsourcing.
Indirect costs such as mobile bills, IT costs, office space are also saved and should not be ignored in the comparison.
Recruitment fees which can be a significant percentage of an employee’s first year salary can also be saved.
Outsourcing also reduces fixed costs meaning it is easier and quicker to scale up the resources to cope with additional business. Conversely it is easier to scale down an outsourced service than it is to make redundancies of full-time employees.
At the outset outsourcing reduces the time spent on the hiring process which can be extensive when all the hours spent on advertising vacancies, interviewing and selecting candidates, and then training is included.
On an ongoing basis the management or business owners spend a significant amount of time on managing, mentoring, training and appraising. Through outsourcing this time can be used more constructively to focus on core value add areas such as product development, marketing and business development.
Speed of Launch
Businesses in the start-up or launch phase are able to launch and ramp-up their business much more quickly by outsourcing certain functions. The outsourced approach provides access to a larger resource and the expertise to support the growth of the business.
Access to Industry Expertise
Outsourced service providers employ people who have experience and expertise in their field. These providers normally service many clients in the same industry and should be able to leverage this knowledge and experience to support the business with solutions on industry standard best practice approaches. Instead of relying on one or a few full time employees to have the requisite knowledge and technical ability the business will benefit from the larger knowledge base of the outsourced service provider.
Hiring full time employees can lead to a dependency on these employees and the business can suffer if adequate cover is not put in place for instances such as holiday leave, sick leave, or if an employee leaves the firm.
A key advantage of outsourcing is that there should always be sufficient cover within the outsourced service provider’s team so that the service is not impacted or disrupted when an employee is on leave or resigns.
Furthermore, in the event of a business disruption for example the business is unable to operate due to damages to their office premises or because of an IT failure, the functions which have been outsourced to an external firm will continue without disruption.
The outsourced service model, when carried out effectively, should result in significant benefits. However, care must be taken in selecting the right outsourced service provider. The service provider should be seen as an extension of the business providing functions previously carried out in house. It is important that the service provider fully understands the business and there should be regular communication to ensure the service is as seamless as possible.
Therefore, any business which is selecting an outsourced service provider should develop and follow a robust selection process. As part of this process one of the key criteria is the data security process used by the service provider to ensure client data is kept confidential.
My2 provides outsourced accounting services. The founders have 30 years of experience in finance and in employing the services of numerous outsourced firms. As such they understand from a client’s perspective both the advantages and risks of outsourcing.
We aim to act as a true business partner to our clients so that our services, reports, analysis and guidance are customized and tailored to their business and management style.
This approach is delivered by us proactively interacting with our clients to gain a full understanding of their business and sharing the same care and passion for their success.
At the same time we take confidentiality of client data extremely seriously and follow strict policies to ensure all data is kept secure and confidential.