Practice of accounting outsourcing in companies

Introduction 

Within the current economic context where the leitmotif of the companies surviving on the market has become cutting / optimising costs, an important solution, available to any company is outsourcing certain services connected to the company operations such as the IT&C, logistics, financial – accounting, legal, and human resources. In their attempt to minimize costs and maximize profit, the companies’ interest in outsourcing some of  their  services  and even functions has increased. Outsourcing means delegating some managerial tasks to third parties based on contracts. Although this approach has a series of potential advantages, it raises a series of specific problems detailed in this paper.

We are going to highlight some of the main arguments that answer the question why outsourcing services connected to the company operations an important solution in cutting / optimizing costs. The answer to this question would be as follows: because it helps to cutting personnel costs; it reduces administrative   costs; it offers to the managers the opportunity to concentrate on their company’s basic operations; it reduces risks connected to the correct application of all legal amendments, by  receiving  consultancy from the supplier who has more expertise in the field. Moreover, investments in software programmes (e.g. accounting, wages calculations, legislation, etc.) and their upgrading, as the supplier of such services is responsible for such investments and shares the costs thereof with other beneficiaries; a constant flexibility according to the client company requirements by compiling reports in the format agreed by the parties.

Large companies prefer to transfer these activities to some specialised companies because they have understood they can do such things for them more efficiently. In addition, by guaranteeing a high standard service under the SLA (Service Level Agreement), they are sure that things are going to happen according to their wish, as they only need to ask and wait for results according to the contract terms. The expansion of the Internet network, the globalization of the economic environment, and the increases technical performance of the equipment have led to a progressive growth of the phenomenon of companies’ outsourcing services. 

As the new business model characteristic to global economy expands, more and more companies all over the world are compelled to seek outside their own company for highly qualified human resources. This is why most of the Western companies focused on companies specialised in providing services, in search for an ideal balance between high standard professional services and costefficient solutions. Within the context of a crisis, this seems to be the solution for most companies, which want to provide the same quality services, but to reduce significantly their budget allotted to certain activity areas.

Outsourcing as a concept

Outsourcing is the delegation of some tasks or objectives to some organisational segments that belong to other entities, which offer a better quality price ratio or have expertise in  specialized areas [5]. To outsource services means  to  delegate one or more activities within a business to an outside service supplier, who conducts and manages such activities based on some welldefined and measurable performance standards. In other words, outsourcing means to transfer an activity from within the company outside it. Such activity is to be conducted by another company specialised in such activity.

The IT & C literature  [7] defines   outsourcing as representing such practice by means of which companies contract centres that specialise in supplying IT services, within communication networks or software developers with a view to transfer a part / function of their own informational system. Another definition says that outsourcing is a strategy by means of which an organisation assigns major functions to outside suppliers, who specialise in certain  fields and who thus become «valued business partners». However, outsourcing, whether it is offshoring, near- shoring, or multi-sourcing, or crowd-sourcing etc., does not mean merely lohn in the IT & C industry, but IT service outsourcing as well [6].

«Offshore» is another term used in the field and means to delegate an activity to a service supplier, who, from a geographical viewpoint, is located at a great distance from the company clients [6].

«Crowd-sourcing» is a more recent type of outsourcing, which promises further reduction of costs as well as of global economic changes over the last few decades due to outsourcing. Crowd-sourcing means carrying out a temporary collaboration between the company offering the problem and any agent offering a solution [6].

Outsourcing financial - accounting services Outsourcing the accounting function main mean to delegate the following activities: bookkeeping, financial reports to the fiscal authorities,  managing payments   (personnel,    suppliers,    etc);    Cash management / treasury; Financial Management.

From among the major aspects that need to be taken into account when selecting an accounting services supplier, we mention the following: experience in bookkeeping of similar companies; the software such companies uses; flexibility; the contract with the supplier should provides clear terms with respect liability for possible errors or  delays; if the supplier makes full payments of wages and contributions to the Budget, it should be registered with the National Authority for Surveillance of Personal Data Operators as an operator of such data. Irrespective of their field of operations, all entrepreneurs asks themselves, which is the best way to control the activity in their company. A variant adopted more and more frequently is internal auditing. Partial or total outsourcing the internal auditing can be conducted with a view to obtaining a qualified opinion on the compliance with internal auditing international standards, as objectively  and independently as possible.

Oneofthelawsregulatingauditingin Kazakhstan is The Law on Accounting and Financial Reporting, it helps the public entity to meet its objectives by way of as systematic and methodical approach, which evaluates and improves the efficiency and effectiveness  of  the  management   system based on risk management, control and managerial processes.»

The audit standard «SAS 70» [8] presents the specific problems of outsourcing company auditing. It also represents a warranty for the fact that audit was conducted as to the objectives and activities of internal checking of the companies to which services are outsourced.

The outsourcing of the debts recovery service, the creditor will not be forced to invest in a collecting specialised department. Resorting to a specialised company, it will benefit from the  collection services against a set cost most often representing a commission of the amount collected.

We can therefore conclude that outsourcing financial - accounting professional services is an increasingly adopted solution especially due to reasons of reducing financial costs.

Advantages, disadvantages and risks of outsourcing

Some of the aspects that make adopting outsourcing an attractive business strategy are highlighted below [8], [5]:

Reducing associated costs by certain accounting or IT & C services (supplier versus employee). The savings  to  the  company  budget  comes  from  the lower need for employees (i.e. savings in terms of money, time, and infrastructure). The company does no longer carry the burden of responsibilities and problems related to their own human resources (e.g. fewer wages, less infrastructure, les administrative effort). These responsibilities are transferred to the supplier and consequently budget funds «Ovidius» University Annals, Economic Sciences Series Volume XI, Issue 2 /2011 791 are freed and the contracting company has the opportunity to expand without having to use physical resources and related costs therewith;

Professional accounting and IT & C solutions via access to expert services and skills. Most often, the personnel of «outsourcing» companies is made up of accountant professionally dedicated to a specialised field where the contracting company has no expertise. Moreover, the outsourcing companies have advanced technologies or software kits that they own exclusively and that can bring along immediate improvements to outdated accounting software;

The levier effect (quality / price ratio) is very good. Suppliers have the position to carry out the so- called «stair economy» (as they have large volumes of customers, they reduce costs per customer unit by distributing fixed costs to a large quantity). This advantage derives from the fact that such companies have built their business model around a base service that can be applied to interested companies at reduced costs and more efficiently than such companies would try to introduce these services on their own;

Companies focusing on functions that represent the core of a business competences (e.g., functions specific to the operations) Another advantage of third party contracts that can lead to an increased efficiency and productivity, is freeing workforce from certain accounting routines (for instance, primary bookkeeping, calculating and transferring wage-related tax) or IT & C services, repetitive procedures that do not represent the best use of qualified personnel and the companies’ focusing on more valuable and profitable functions, which will have a sizeable contribution to in their success (e.g., production, marketing, budget planning);

Temporary assistance. Whenever accounting activities are intensive, outsourcing companies may respond with appropriate solutions to the temporary demand of personnel. This strategy avoids training costs for new employees and the risk of overloading the company’s own employees thus increasing the risk for them to leave the company at some point in the future;

Security, by accessing a higher risk management. It has been established that whenever an external supplier is addressed companies become much more flexible and thus able to cope with the transformations imposed by the market economy. There are two reasons that lower the risk that an investment is unlikely to be profitable: the outsourcer’s expertise and the fact that one can easily give up the project.

Herein below, we outline some of the factors determining a company to be more reluctant to accepting to outsource its financial – accounting and IT & C services [08], [05]:

Data confidentiality. The supplier should offer warranty with respect to the security of the client’s data and prevention of unauthorised data transfer. The supplier should demonstrate that its own internal control mechanisms are functional and that clients’ data are kept safe from potential   intruders’ «curiosity»;

Conflict of interests (Sarbanes-Oxley Law). In the United States, the «Chinese wall» refers to the internal procedure adopted by the external auditing companies whereby information from a client by a member is prevented from being known by another member who works on a project for a competitive company;

Dependence on the external supplier (fear of losing control over the processes, insecurity of service quality, hidden costs, doubtful performance, inadequate planning). Dilution of the control over the outsourced functions and sometimes the delayed or poor-quality answers.

Loss of important competence representing the know-how or expertise to do something. This risk manifests when an outsourced activity which is really strategic is deemed peripheral;

The risk of losing the competitive advantages. The access of a third party to data on clients, investing policies, marketing policies, etc., can lead to loss of competitive advantages;

The transfer most often implies making redundant trained personnel for whom the company has invested important resources.

Conclusions

Internet network expansion, the globalisation of the economic environment, and increasingly high performance of technical equipment have led to a progressive growth of outsourcing services related to the companies’ operations. In order to be able to survive on the market, companies should  adapt to the  on-going  development  of  IT technology and to regard the information system as a  support to the business, which could ensure uninterrupted operations. 

Moreover, outsourcing services related to the company operations can be an extremely safe way of reducing costs and improving efficiency, owing mainly to the access to specialised workforce and to resources that could not be used by means of the company’s own management. In addition, the decision to outsource should be very well planned, as the supplier who would conduct these outsourced services should thoroughly understand the process and the procedures to be applied to the client’s company. The legal and personnel related issues are of major importance as well. The managerial team should continue to be in control and outsourcing should not be used as an excuse for the company’s failure to meet the objectives set.

Strategies relying on competence and outsourcing may allow for the increase of the revenue, lowering risk, a greater flexibility and a wider capacity to respond to the requirements of the environment. Hence, applying the outsourcing strategy means cutting costs and increasing performance by focusing on the activity conducted and enhancing the company’s flexibility.

References 

1. Outsourcing: A survey and analysis of the literature // The Data Base for advances în Information – New York: ACM Press, vol. 35, nr 4/2004.
2. Don McLoughlin. Best Practices for Succesful Outsourcing», Accounting Today, mai
3. Erran, Carmel, Taxonomy of New Software Exporting
4. Laudon, C., Laudon, J.P., Management Information Systems. Organization and Technology in the Networked Entreprise, Prentice Hall, New Jersey, 2000.
5. Paul Brent, «The Third-Party Solution», CA Magazine, mai
6. SAS 70», Standardul de audit, disponibila online la: http://sas70.com/sas70_overview.html
7. Cloud computing - De la Wikipedia, http://ro.wikipedia.org/wiki/Cloud_computin g#Caracteristici
8. Gestionarea eficienta a relatiilor de Outsourcing (externalizare), disponibila online la: http://www.esupplychain.eu/ro/info/ viewart/1 37,Gestionarea_eficienta_a_relatiilor_de_Out sourcing externalizare_
9. Outsourcing, Wikipedia, disponibila online la: http://ro.wikipedia.org/wiki/Outsourcing