‘Choosing the right vendor is key when outsourcing services’

Even in the best of circumstances, it takes time for external companies to get to know your processes and workflow (Getty Images/Jose Luis Pelaez Inc)

Outsourcing has long been an attractive option for firms that want to free up time and resources to focus on what they do best. But experts generally agree that it’s important to find a balance between services that are outsourced and those that are provided in-house. That is because, at the end of the day, outsourcing comes with its own set of risks: quality control, branding and legal liability, among others.

Here, CPA Ismail Akhter, director, members in practice (tax and audit) in CPA Canada’s Member Development and Support department, explains some of the pros and cons of outsourcing for professional firms and how they can best prepare themselves for such a move.

CPA CANADA: How prevalent is outsourcing in public practice?
Ismail Akhter (IA): Depending on the size of the practice, it’s quite prevalent. The larger firms use outsourcing as a way to perform some of the more mundane tasks. That’s because a client doesn’t come to you for one service. They might be looking for accounting, bookkeeping, auditing, tax services, advisory and more. As a firm, you then say, what does it make sense for me to outsource rather than create a whole service line myself?

When it comes to smaller firms, they usually collaborate with each other. They might decide to provide accounting services for one client, but ask another firm to provide the tax services for the same client. I wouldn’t call that outsourcing, because it’s done on an ad hoc basis.

CPA CANADA: Can you give us some examples of activities that a firm might outsource?
IA: Outsourced activities are often administrative in nature—such as completing bank confirmations or looking after payroll. In some cases, a firm might not want to have staff members dealing with confidential or sensitive data, so they might decide to ask a third party to handle it.

Another kind of outsourcing that has been gaining traction has to do with disruptive services—digital transformation and automation. For example, you might ask an outsourcing company to digitize all of your working papers and then ask that company to continue doing that work for you. Or you might outsource all your staff training to a professional vendor.

CPA CANADA: What are some of the advantages of outsourcing?
IA: Cost savings are probably No. 1. If you plan properly, you can save on office space as well as labour costs. And you gain access not only to a larger talent pool, but to more diverse talent. For example, not everyone can afford to hire a data scientist internally. But if some of your customers need that service, you can outsource it to a company that specializes in that area. In some cases, that can allow you to improve efficiency or gain a competitive advantage in an area where you might not otherwise have the upfront resources to invest.

It’s also worth noting that there are two types of outsourcing—local and offshore. If, for example, you wanted to recruit employees out of India who would remain there, you would have to deal with all the regulations, insurance and other issues involved in hiring them as an employee of your company. That would cost much more than outsourcing the entire function.

CPA CANADA: What are some of the disadvantages of outsourcing?
IA: A few come to mind. First, you give up control over whatever process you are outsourcing. The company you have chosen might take a different direction than the one you intended and that can lead to communication issues—especially if you are not in the same time zone. You might have different preferred methods of communication. Your cultural values might not be in alignment. All of this can cause huge disruptions in workflow.

Often, if you try to outsource locally you might find very quickly that you can’t deliver on your initial goal of cutting costs because the per-hour fees are far too high. You might decide at that point to choose a locale where the labour costs are much lower. But in many cases you can end up compromising on quality.
Outsourcing can also have negative impact on your company culture because staff think you’re taking away their jobs. They don’t understand why you have chosen this way of working when it causes so many disruptions.

CPA CANADA: What are some of the potential issues from a legal and branding perspective?
IA: Let’s say you have assigned a three-year project to an external party and the first milestones don’t meet your expectations. How do you get out of that contract? What are legal issues? It can sometimes be easier to provide a performance review for an employee or even to reassign their work than it is to replace an outsourced vendor.

Outsourcing can also expose you to branding and reputational risks. Let’s say you are trying to avoid raising fees, so you outsource some services to countries where there are questionable business practices. But what happens when your clients find out? What does that do to your reputation? We’re talking about sustainable practices quite a lot nowadays. And sustainability is not just about environmental issues. It includes social aspects as well as labour practices.

CPA CANADA: How can firms reduce the potential drawbacks of outsourcing?
IA: The answer will naturally depend on the activity you are outsourcing. But generally speaking, you should first do a thorough comparison of the costs of performing a function internally versus externally.

You should also plan out the risks in advance. Vet your vendors. Get recommendations from organizations you know and trust. Don’t just choose the vendor whose prices are lowest. That kind of thinking may come back to bite you later on.

Also, it’s important to gain input from your employees if you want to maintain a good company culture. If you neglect your culture, that could have a much bigger impact on your operations than saving a few dollars.

Of course, this doesn’t mean you should avoid outsourcing entirely. In many cases, it can make perfect sense. Just do your homework, keeping in mind that even in the best of circumstances, it takes time for external companies to get to know your processes and workflow. So you need to be prepared for that disruption and have a backup plan.

LEARN MORE ABOUT OUTSOURCING

Considering outsourcing your finance and accounting services? Read these tips from experts and make sure to consult CPA Canada’s guideline on the subject.