By Christopher Maswi, FairValue Chartered Accountants
Definition of Outsourcing
Outsourcing is the business practice of hiring a party outside a company to perform services and or produce goods that traditionally were performed in-house by the company’s own employees and staff.
What are the advantages of Outsourcing your critical business services or processes?
In the old days Outsourcing was limited to large companies but today business of all sizes can realize benefits of Outsourcing.
In many cases, the benefits of outsourcing services/products are not for optimization strategy, they are a necessity. In some cases it’s the only feasible way to grow your business, launch a product or delegate certain tasks to an outside vendor.
This does not mean Outsourcing is a burden. Outsourcing offers a number of compelling benefits as indicated below :
Why Outsourcing?
- Shared risk between the company and the outsource partner. The risks are equally shared with the outsource Partner.
- Operational Risk – Keeps the operations going in case of employee turnover.
Overheads
- If the Outsourcing contract is negotiated carefully, it will reduce the overheads that would have been incurred.
- The key is to ensure that the costs per item is lower that the costs of producing the item, or provide the services.
- By Outsourcing the process or service, the organization overhead costs are reduced.
What are the different types of Outsourcing?
- Local Outsourcing – Choosing a company in your own country.
- Offshore Outsourcing – Is finding a company somewhere outside your country e.g India or China where due to economies of scale can produce and land the product cheaper than producing.
What are the risks of Outsourcing?
- Possibilities of weak management in the company to be engaged to outsource.
- Outdated technology.
- Use of inexperienced staff at the outsource company.
- Lack of organisational learning.
- Lack of Innovative Capacity due to outsourcing.
What are the 3 types of Outsourcing?
- Professional Outsourcingg Legal services, Payroll services, Accounting services, IT repairs, Internal Audit, Human Resources. In this case the company uses professional outfits with experience to perform these functions or services better and cheaper than if the functions or processes were done in house.
- IT Outsourcing
In some cases especially in the early stages of setting up the business, one would need good skills but unable to afford e.g an IT person but cannot pay for time required. There is no need to employ one but can engage them to provide services and the company pays for services rendered. Some companies can request for a retainer fee and then charge for time spent.
- Project Outsourcing
This is a process where the company/organization engages a 3rd party with skill and experience to perform functions or manufacturing cheaper, quicker and at a better quality than own production .
What are the Advantages and Disadvantages of Outsourcing?
Advantages
- Increased efficiency which can be an important competitive advantage.
- Reduced risk of running an IT/HR/Accounting department.
- Outsourcing can increase economic efficiency and speed.
- Get experts – Improve performance by drawing niche skills of experts in their areas.
- Things can be done faster.
- Management can focus on what matters.
- Share some risks – By Outsourcing certain processes to experts in their respective fields, the company benefits from enhanced ability to plan and mitigate potential risks.
- If structured properly outsourcing can deliver the service or product at cheaper than own production.
- Outsourcing releases management time to enable them to plan, execute and explore opportunities.
Disadvantages of Outsourcing
- Loss of some control.
- Risk of delayed delivery but this can be mitigated by a comprehensive due diligence of the Partners before engagement. It would help if one does not have the skills and experience to evaluate engage professionals to do the exercise- Its money well spent.
Fairvalue Chartered Accountants started as Fairvalue Management Consultancy offering Outsourcing services. For 16 years we have experience in outsourcing the following services:
- Accounting
- Bookkeeping
- Preparation of Business Plans
- Internal Audit of Corporates and farming businesses
- Internal Audit – We have offered this service to corporates in Zimbabwe, Zambia and Botswana
- Consolidations of accounts
- External Audit facilitation
- Company secretarial services
- Payroll services
- Preparation of Business plans
