Outsourcing: A False Economy?

The E1 paper (and the Operational Case Study) could throw up a question on outsourcing. It’s a topic I am really quite familiar having worked in a couple of environments where the company were outsourcing services.

In some instances, it felt like the cost savings made by the company by outsourcing their finance function was actually a false economy. As the quality of the work delivered by the outsourcing provider would ultimately cost the company money as they wouldn’t have accurate and reliable good to make strategic decisions.

OUTSOURCING: An explanation

Outsourcing is the contracting out of services and aspects of the organization to specialist providers. There are two types of competencies that should be considered.

THRESHOLD COMPETENCIES – must be good processes but easy to imitate and they hold no source of competitive advantage.

CORE COMPETENCIES – something you are able to do that drives competitive advantage and it’s very difficult for your competitors to imitate.

Advantages:

  • Cost – the main reason for outsourcing comes down to cost. Large companies will benefit from economies of scale. Reduced capital expenditure and deduced headcount and labour charges
  • Quality – the supplier may have skills and expertise that adds additional value to the products.
  • Focus – company can focus on core areas of the business and increase their competitive advantage.
  • Buyer Power – the outsourcing market is so big, you exercise buyer power to negotiate better deals.

 

Disadvantages:

  • Loss of core competencies – losing core competencies will soon see sales drop and the brand will be damaged and overtaken by competitors.
  • Cost Issues – cost savings may not be realized in the long run.
  • Damage to morale – staff redundancies could affect morale of the existing employees.
  • Damage to brand and company reputation – if your customers are dealing directly with the outsourcing provider they could damage the brand of your company with poor service.
  • Risk of loss of confidential information.

 

Outsourcing, of course, can be very beneficial to a company and in fact improve the services and efficiency of the company. For example, outsourcing the AP function can save the company headcount and they can leverage on the expertise of the provider who should have better and more efficient processes to perform the accounts payable activities.

Moreover, the company can now focus their efforts on the activities that actually add value in maximising revenue.

Outsourcing is one of the very first topics in the E1 syllabus. It’s so common place in the modern business world a lot of CIMA students who are working in a finance function of large companies will have first hand experience of the reality of outsourcing.

 

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