Outsourcing is a business practice used by organisations to move certain processes, functions or activities to specialist external providers. Organisations choose to outsource these areas of their business for various reasons, including, if they do not have the relevant expertise in house, this allows them to reduce operational costs and frees up time to concentrate on their core business.
For example as organisations grow many choose to outsource their payroll function. This function requires significant compliance and submissions to HMRC and by employing a specialist payroll company the compliance risk is mitigated, as are the issues which arrive from having to implement changing tax rates on an annual basis.
Before any organisation makes the decision to outsource any of their services to an outside entity, rather than perform them in house, it is essential to understand the associated advantages and disadvantages.
The advantages to outsourcing include:
- Cost savings: outsourcing reduces the need to hire staff in-house and purchase expensive software to operate the service so can lead to large operational cost savings;
- Access to expertise: the outsourced entity will be specialist in their fields who have the technical expertise and equipment required allowing them to processes transactions faster and ensuring a quality output is achieved;
- Risk-sharing: outsourcing certain processes allows the organisation to shift responsibilities to a specialist provider therefore mitigating the potential risks of non-compliance with laws or regulations;
- Flexibility: outsourcing gives organisations flexibility in staffing; and
- Focus on core business: Outsourcing the non-core activities allows management to concentrate and focus their expertise on the core business rather than spending additional time unnecessarily on an administrator task.
The disadvantages to outsourcing include:
- Data security issues: when an organisation outsources services it will involve a risk of exposing confidential information to that third party. This is particularly relevant given the introduction of GDPR;
- Deliverables not met: if the wrong provider is chosen certain deliverables may be missed or late;
- Lack of customer focus: the outsourced partner will be performing these services for a number of organisations and there may be a lack of focus on your organisation’s service resulting in delays;
- Losing management control: management may no longer be able to control activities they would previously have been responsible for;
- Quality issues: Failures or delays as a result of appointing a provider without the proper skills, experience or capacity; and
- Unforeseeable circumstances: Risks such as bankruptcy of the external provider could leave a business loosing valuable information and possibility incurring financial loss if statutory filings are not meet or liabilities paid on time.
Outsourcing part of a business’ activities is becoming more common and the fact that many successful multi-national companies outsource significant parts of their administration functions underlines that it is worth all businesses considering if it is appropriate for them.