pitfalls of accounting outsourcing

Pitfalls of accounting outsourcing and how to avoid them

Posted by  on 03 January, 2015  5 minute read

In theory outsourcing may sound like a fool-proof strategy, but there are issues that should not be ignored. Here are some of the problems that might occur as a result of moving work offshore and the considerations you should make to avoid them.

Pitfall 1 Cost overruns
This is one troubling aspect which has apparently resulted in the biggest single complaint made against outsourcing.

How to avoid:
Ensure you set the prices with variances in advance before you agree to a contract. Cost overruns can be mitigated through contractual specifications and other managerial arrangements concerned with controlling of cost.

Pitfall 2 Security & Confidentiality
There is a concern over the transfer of sensitive financial information that an outsourcing service provider handles and risk of compromise of confidentiality.

How to avoid:
Since any drop in security can put the outsourcing provider out of business, most of them make considerable investments in technology and have back-up systems and software in place. ISO 27001:2005 is a demonstration of an outsourcing supplier’s IT security risk-management capabilities. However, the next best route would be a visit to the supplier’s workplace and evaluate if they use the best IT Infrastructure, encryption and policies to protect your proprietary data and knowledge. Moreover, you will be able to analyze and understand their processes, methodologies and workforce employed to run your accounting processes.

Pitfall 3 Complexity of achieving suitable control from a distance
Whether you are outsourcing the entire finance department or parts of your finance processes, there are chances that you might lose control over the outsourced aspect of your firm.

How to avoid:
Pre-defined SLAs and KPIs with regular reporting should provide full control over your outsourced finance department. Many outsourcing companies help you manage the workforce in your own way through a single-point-of-contact located offshore who reports directly to your Head of Finance. With advances in technology, virtual communication in the form of face-to-face meetings is possible through a video conference facility. By defining an appropriate set of governance frameworks over how a task is performed you will not only gain from the expertise of the service provider, but will actually be able to mitigate risks associated with accounting outsourcing.

Pitfall 4 Cultural Differences
Many an outsourcing deal has been marred by poor communication. There is research based evidence which says that 38% of outsourcing deals fail because of a lack of cultural congruity between the supplier and client.

How to avoid:
This is not the time to cut corners. We suggest you spend at least a week with your outsourcing partner to get a first-hand experience of their work ethos and culture. Get involved with them; attend the staff meetings; interact with your extended team. This is the best way to experience their work culture. India is the second largest English-speaking country in the world after the US and it is easy to find a well-educated, articulate workforce to deal with.

Pitfall 5 Poor quality output
What seems like a cost-saving strategy can turn into a nightmare if the quality of processed output is poor.

How to avoid:
Problems with quality arise when your outsourcing partner doesn’t have proper processes in place. We perfectly understand that quality compliances are a good general measure and the best outsourcing suppliers should have quality built into their systems. But it doesn’t hurt to find outsourcing partners that follow a standard model like ISO. Find companies who are certified by the latest, revised ISO standards as these adopt a process oriented approach and focus on measuring process performance and effectiveness. Other than helping measure and improve quality standards, it also ensures that a company is following defined processes and abides by quality parameters set by the regulating body.

Additionally, look for a company with a proven track record; companies which provide reports on a daily, weekly or bi-weekly basis. These reports help you monitor performances of people who work on your process and take action as the work happens. The only thing that should change when you outsource is the location the work is being processed at. In terms of quality, ensure that your outsourcing supplier delivers similar or better output than your own internal resources. Don’t settle for anything less.

Pitfall 6 Financial Instability
Not all companies enjoy the same financial stability.

How to avoid:
The knowledge about the supplier’s financial stability should be of prime importance before finalizing the one you will work with. Assessment might involve a review of the supplier’s audited financial statements, annual reports, business growth plan and other information that supports financial analysis. Some research on threatened or pending financial or legal claims on the supplier is a good area to explore.

Pitfall 7 Uninvolved clients
We have heard stories of outsourcing failing due to low quality of processed work, unmet SLA’s, differences in language and culture, productivity declines, etc. However, non-participation from the client side is one of the often ignored reasons for an outsourcing deal to fail.

How to avoid:
Many companies these days look at outsourcing as a path to quickly cut costs and improve their financial status. Since they are looking for a quick fix to solve their problems they sometimes fail to prepare themselves for the relationship. We believe, for a successful outsourcing relationship, you need to involve yourselves wholeheartedly. When you make that informed decision to outsource an activity overseas, it is better not to adopt a “They will do it” attitude. Take it seriously at your end and work with your partner just the way you’d work with people you employ directly.