To outsource or not to outsource

Kesh Sharma, director at Magellan Consultancy Services, examines the benefits and pitfalls of outsourcing for small businesses.

SMEs have been struggling with this dilemma for years but nowadays more SMEs than ever before have embarked upon, or at least considered, some sort of outsourcing project.

But, are they looking at the right areas? Should they be more bold and look to offshore outsourcing rather than the equivalent options onshore. Can going offshore enhance the struggle to achieve the evermore burdensome compliance demands placed on businesses?

In the first instance there is the basic question as to what areas should be outsourced.

In terms of low risk, economic gain and speed of implementation, it is the back office services of a business which most easily lend themselves to outsourcing. Where a department has a direct interface with clients it will be more difficult to achieve success.

Our recommendation is, rather than risk a vital relationship by outsourcing your front office functions, why not turn to the other side of the engine-room? Accounting, IT, payroll services, HR, document processing, to name but a few, all contain within them a measure of labour intensive repetitive tasks. Of course these functions also control vital relationships with outside bodies like banks, analysts, shareholders and suppliers. Most important of all they are concerned with employees. However, it is inescapable that part of their remit covers the submerged part of the iceberg. Here the opportunities are considerable.

The next key question is whether to outsource onshore or offshore. Onshore outsourcing in the UK is said to be less threatening, easier to control, less of a cultural change and better for employees. However, in terms of a financial option it cannot compete with the incremental value of an offshore arrangement. Most of the offshore projects we have encountered produce full payback in one year and rates of internal return only dreamt of in everyday commercial life.

As far as the employees are concerned, many of the outsourced tasks involve an element of drudgery which has probably obstructed the enhancement of job enrichment. In many instances staff are not necessarily made redundant, many may be employed more productively in more managerial capacities, checking the offshore work, managing its successful achievement and developing in them a more varied skill base.

In terms of financial processes, projects can be undertaken offshore which would probably prove too expensive if they were to be staffed locally. Several of the classic headaches for the person charged with managing the companies finance function would be suitable for outsourcing, such as:

• Reconciliation differences
• Manual processes in an environment of non-integrated business and financial systems
• Suspense items
• Mismatched items
• Proper reconciliation of supplier statements to company records
• Cash allocation and partial cash allocation

A degree of education is required but projects and processes can be designed offshore which cope with these uncertainties and provide a more secure financial base from which to produce management, regulatory and statutory data.

In short, outsourcing provides an interesting management tool; it is probably more attractive commercially if it is undertaken offshore and to take advantage of the more fruitful areas, it should probably concentrate on back-office functions.