Outsourcing is a system of resource borrowing from the outside. It entails the performance of certain tasks or business processes by third parties. According to the Entrepreneur’s staff, “The practice of having certain job functions done outside a company instead of having an in-house department or employee handle them; functions can be outsourced to either a company or an individual” (Entrepreneur, 2015, p. 1). These tasks and processes are usually not within the company’s field of specialization, but, nonetheless, necessary for normal functioning of the business in order to optimize the activities of the enterprise by focusing on the main activity and the transfer of secondary functions and corporate roles to the external specialized companies.
Outsourcing is conventionally divided into two types: manufacturing outsourcing and business process outsourcing. Manufacturing outsourcing involves the transfer of the production processes or the entire production cycle of the company. In addition, the sale of the units to other companies and further interaction with them in the framework of outsourcing is also possible. It is known that more than half of the industrial firms have outscored at least one component of their production process.
Manufacturing outsourcing allows the company, first of all, to focus on developing new products and services, and, secondly, to increase the flexibility of production. It is easier to deal with the restructuring of the production process and diversify the manufactured products, and, finally, use additional benefits of doing business in the markets with cheap labor and small plants.
Business process outsourcing involves the transfer of individual business processes that are not main and vital for the company to the third party. For instance, human resource management, accounting, marketing, advertising and logistics can be outsourced. Thus, outsourcing is an extremely dynamic view of businesses optimization. It is necessary to note that outsourcing demonstrates the greatest growth in the fields of finance and accounting.
It is believed that the term “outsourcing” was first used in the United States by Alfred Sloan who headed the company General Motors. It was necessary for him to win a market share from the main competitor – Henry Ford’s company. Sloan was the first person who paid particular attention to the division of labor into the major and minor types. It turned out that it was possible to reduce costs and streamline business processes significantly by transferring the functions for execution to a contractor. That is why outsourcing became known as the transfer of unprofitable functions of the companies to the firms that specialize in particular areas.
In the United States and Europe, almost all secondary functions can be referred to as outsourcing, because the firms focus all their efforts, means and opportunities on the main business activity. For example, it is difficult to find the enterprise in the United States, which has such a regular accountant or lawyer. Even ordinary citizens use the services of the firm providing accounting services. They entrust such firms to fill their tax returns.
The costs of accounting outsourcing depend on several factors: the tax system, the number of employees, the volume and type of activity, the number of counterparties and cash transactions, etc. It should be noted that the price is approximately equal to the salary of accountants, and in some cases it is even lower. However, customers receive a lot of benefits. First, businesspeople can save costs. They do not need to maintain the accounting department, which means that the companies can get rid of the expenses for the organization of jobs, wages, sick leaves, vacation payments, and supplies that are needed by an accountant. In addition, accounting outsourcing firms often offer complex accounting, auditing and legal services, so the customer may also seek advice of the auditor and legal assistance, if necessary.
Moreover, it should be noted that the costs of accounting outsourcing depend on the number and type of services provided. It is very difficult to specify the exact costs of accounting services, since too many factors affect the final costs. If a company indicates the price for accounting services on its website, there can be no mistake, because in reality it can be different. As Springboard Enterprises note, “Unfortunately, many overseas outsourcing firms lure you into a deal and hit you with additional charges later” (2014, p. 1). If the terms and conditions of outsourcing are not clearly defined, there may be hidden costs and legal issues. The actual price of services is impossible to define beforehand. For example, the final costs of accounting outsourcing depend on such basic factors:
- the type of enterprise – private, big business, etc.;
- the tax system;
- the number of employees;
- document volume and its condition at the time of signing the service agreement;
- the kind of business;
- the number of counterparties and cash transactions;
The advantages obtained by the user services for external management accounting can be divided into two groups. The first group is the standard inherent advantages of outsourcing of any activity. They include the already mentioned opportunity to manage not to be distracted by managing service functions and thus focus on the core business of the company. Outsourcing allows businesspeople to solve problems related to recruitment, training and retention of qualified personnel, as well as business continuity. The replacement of staff during holidays, sick leaves, and training is guaranteed by the service provider.
In addition, there is flexibility in the management of resources. Companies do not need to worry about reducing the numbers of their employees in the changing market conditions, re-profiling, reducing the volume of production, etc. According to the Flatworld Solutions, “You can get your job done at a lower cost and at better quality as well” (2015, p. 1). The customer can also avoid the costs of investing in equipment and software necessary to support the transmission of business processes and their subsequent technical support, and there is also the possibility to reduce the cost of office and administrative services.
However, the main benefit is the ability to use this experience for dealing with similar problems and constantly accessing new technologies and knowledge. The company specializing in the provision of certain services invests into the production of solutions for the problems and the development of appropriate technologies for the constant personnel training. The narrow specialization in the subject area allows to provide reliable and high-quality execution of functional outsourcing. Because of performing the same operations for different customers, the suppliers can keep competitive prices for their services. In order to ensure the same quality independently, the customer requires a significant investment in staff development, hardware and software. It is necessary to remember about it when assessing the cost-effectiveness of switching to outsourcing. Businesspeople very often wrongly exclude these components from the calculation of costs and simply compare the costs of services with the costs of the staff involved into the transferred business process. If all the above factors are taken into consideration, outsourcing will have a lot of advantages. If not only price, but also the price-quality relationship is considered, the business model of outsourcing will become preferred. Coontz states that “Reduction in labor costs is one way to reduce costs of production” (2008, p. 16).
Outsourcing can allow the company to take advantages of resources, the access to which would otherwise be impossible, for example, in the case of expanding the activity of the firm or the creation of a new company. The second group has specific advantages for outsourcing of financial functions where the outsourcing company is responsible for accounting management and the correctness of its performance. Professionals who know the specifics of customer’s enterprise in detail address the whole range of issues related to accounting and reporting. Accounting and auditing firms can find unconventional solutions to solve problems arising in the course of outsourcing, and then defend them in a dispute with the tax authorities or in the court. Thus, the risk of wrong decisions is reduced and the chances of success in the discussions with the tax authorities for the protection of beneficial solutions for the client according to those contentious issues for which there is double interpretation of the current legislation increase. Any outsourcing company should compensate for the damages related to the improper calculation of taxes or untimely submission of statements. However, Mukherjee claims that “Outsourcing may work in some businesses while may be a risky adventure in others” (2014, p. 1).
Overall, the benefits of accounting outsourcing are sufficient. It is beneficial and convenient to use this new approach to business solutions. In any case, accounting outsourcing provides a company with a competitive advantage. In order not to fall behind in the competitive race, it is necessary, first of all, to accept the rules of the game dictated by the modern business. However, wishing to avoid hidden costs of outsourcing the firm should select a quality provider of outsourcing services. Therefore, before deciding whom to partner with, the management should ask how long its potential partner has been in the market, check his reputation and appraise its customers.