Business Advisory

Should You Outsource Finance and Accounting? Key Considerations to Decide

Has anyone suggested you should outsource finance and accounting for any number of reasons? For companies who are considering finance and accounting outsourcing, it all starts by asking the right questions….

  1. What can your business stand to gain – or lose – by outsourcing?
  2. What areas of the finance and/or accounting operation typically require outsourcing for the highest level of productivity?
  3. And most importantly – how do you know if finance and accounting outsourcing is right for your business?

There’s no quick and easy answer. In fact, finance and accounting outsourcing may or may not be the right move for your business. But the evaluation process requires research, time and significant change management. To put your company on the right path, consider these answers to some of the most asked questions.

Why has it become more common to outsource finance and accounting functions, and what do businesses stand to gain?

Finance and accounting outsourcing has become more prevalent in the last decade, particularly among industries experiencing shifts in their businesses. This includes firms in the technology, banking and healthcare industries. Offshoring payroll, accounts payable, accounts receivable, general accounting, fixed asset accounting, billings, standard reporting and other finance and accounting functions, particularly those that are repetitive in nature provides significant opportunities to cut costs. And, as the Internet becomes more sophisticated with technologies such as cloud computing, hiring firms on the other side of the world has become far more feasible to outsource finance and accounting.

It is important to note is that finance and accounting outsourcing offers scalability, and it can be a great cost-saving move for both companies experiencing growth as well as companies that are in a downturn. By offshoring non-revenue-generating functions, it becomes easier to expand and contract offshore services, leading to lower in-house costs such as hiring as well as reductions in force. Also, because dedicated offshore finance and accounting firms may have more qualified personnel than your in-house team, more efficient processes and improved ERP systems, companies can often achieve the same or better results by outsourcing at a much lower cost.

Finally, there’s the issue of redundancy. You may only have one team member who understands a certain process – fixed asset accounting, for instance – and if that person is out sick or on vacation or even decides to leave the company, a variety of workflows can come to a halt. With an outsourced firm, on the other hand, there are typically multiple players trained to perform a certain task with no down time and are able to double-check work and collaborate among themselves.

What finance and accounting functions are most commonly outsourced?

Finance and accounting outsourcing is most common (and probably most useful) in transactional areas, where repetitive, step-by-step tasks are being performed such as payroll, accounts payable and accounts receivable. These are the jobs outsourced workers are able to execute following a set of steps (like a recipe) without concern for the “why” behind the process. These tasks are usually easy to explain and document, so they’re ideal when you’re still adjusting to the working relationship with an outsourcing partner. Taking these repetitive tasks away from in-house personnel ultimately allows for more time spent on value-added activities and deeper analysis within your in-house teams and may even improve local team morale.

Some areas, however, are not as conducive to outsourcing, such as a more integrated function like cost accounting. For example, cost accountants work closely with manufacturing operations, supply chain, marketing, and R&D functions, which requires a more intimate familiarity with products, manufacturing processes, multiple site locations, and clients. The tasks are not necessarily always repetitive, so training an offshore vendor would be much more difficult.

Outsourcing initiatives have also extended into finance functions such as Financial Planning and Analysis. Outsourcing lends itself to such tasks as creating and updating monthly, quarterly, or 13-week cash flow forecast reports, which can typically be formulaic and standardized.

What are some of the key considerations in selecting and integrating with a finance and accounting outsourcing vendor?

As with any outsourcing initiative, picking the right vendor is critical, as many items need to be taken into consideration. Near the top of the list is ensuring the vendor has the best qualifications for your firm.

  • Are they experienced in your industry?
  • What similar companies in your industry have they worked with – and for how long – and what have been their results?
  • Are references available?
  • And, if you’re outsourcing a heavily regulated function, are their auditors qualified, certified and up to speed on the latest regulations and legislation? Are they qualified to perform GAAP processes?

Another important factor is culture, with both the country and the company itself. Cultural differences between, say, Southern California and India, can potentially disrupt communication, and it usually takes time to develop a process that leads to the fewest misunderstandings and greatest work product.

There are also other factors to consider, and chief among them are obviously cost savings, but also time zone differences (e.g., is the vendor willing to work 24/7?), how you will measure success (or failure), what are the back up plans in case of system outages, etc.

But, cost should not be your primary concern. Saving money is a top reason for outsourcing in the first place, of course, but offering the job to the lowest bidder can sometimes backfire. When choosing a vendor, companies could potentially pay far more in the long run after partnering with cheaper, less-qualified vendors that end up underperforming. So it is important to do a thorough vendor selection and take all these considerations into account.

What are the potential drawbacks and pitfalls of partnering with a third-party finance and accounting outsourcing firm? Can they be avoided?

Most drawbacks can be mitigated. However, there’s usually going to be some loss of connectivity and continuity within your company. Your entire accounting/financial team won’t be sitting directly in the office, and depending upon the time zone differences, you may not be able to communicate during normal business hours, either.

A viable finance and accounting outsourcing initiative also can take a few months and even up to a year (or more) to set up successfully, and it might actually cost you more money at the outset. You’ll encounter redundancies between your firm and the outsourcing partner as your teams train the outsourced team, and the first couple of quarters may require substantial re-work and re-training and even travel costs.

Both internal and external communication can also be rocky at first. Your company’s managers and executives may be used to dealing with the same in-house senior manager to answer a variety of accounting/financial questions, for instance, while the new process will have them consulting with new personnel overseas. This can lead to frustration if you haven’t instituted strong change management within your organization. The best way to smooth over these difficulties is to communicate with everyone before the transition and make sure they understand how their workflows will change. Provide them with liaisons that are both in-house as well as at the vendor to make the transition smoother. Selecting a finance and accounting outsourcing vendor that is in another country or time-zone requires creating buy-in among the teams who will be working with them.

Overall, what are a few of the most important factors that should influence a firm’s decision to outsource finance and accounting or hire more in-house personnel?

Given the bottom-line benefits most companies are seek, a cost savings analysis should be the first consideration. Price shouldn’t be the determining factor when selecting a finance and accounting outsourcing vendor, but offshoring should be a clear cost-cutter. If it’s not, the rest of the selection process isn’t worth the time and effort.

Some industries are more by-the-book than others, too, and you’ll need to think about whether finance and accounting outsourcing will be more work than it’s worth. If you’re in a heavily regulated industry, for instance, and if your current personnel perform a wide variety of complex, non-repetitive tasks, then the setup and integration costs may outweigh the benefits.

Finally, you need to think about the lifecycle of your business. Finance and accounting outsourcing is a disruptive process, and if you’re going through an IPO readiness process or an M&A, it will probably make more sense to wait.

Considering More

In summary, a finance and accounting outsourcing initiative is a highly involved, time-consuming effort. It requires significant work on your team’s part, and by hiring experienced financial project execution skills from 8020 Consulting you can drastically reduce the potential issues and ramp up time needed for a successful outcome. If you need help determining if outsourcing is right for your organization, we can help. Just contact us.

You can also explore our services in the resource below:

los angeles financial consulting firm

Categorized in: , ,

similar articles

Learn to think and approach problems like our financial consultants.

Resources

Post-Acquisition Finance Transformation Ebook

Our free ebook offers a memorable, staged framework for navigating the complex post-acquisition finance transformation process, as well as key considerations and items for each stage.

October 21, 2021George Jacob

Financial Planning & Analysis

Tools for Building Financial Models for New Products and Services

As we scroll on our phones to pass time, we constantly get flooded with targeted ads for new products. Whether it’s for the latest iPhone or a knife so sharp that it can cut through pennies, the appetite for new products and services is a common, daily pang. The level of demand has no ceiling,… View Article

October 14, 2021Romesh Jayawardene

Financial Planning & Analysis

How to Create Better CAPEX Business Memos

At some point in time, all businesses will need to invest in new equipment, undertake a large project or take on several strategic initiatives to improve efficiency or generate additional revenues. Capital expenditures (CAPEX) are an inevitable part of growing and maintaining a competitive business. Over the years, I have been involved in various CAPEX… View Article

October 6, 2021Ebrahim Allana

See All

Back to Insights