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25.08.2011

Outsourcing

by Cornelis Reiman

Outsourcing

Outsourcing is not a new business concept. Ancient rulers increased the strength of their armies through the use of foreign mercenaries and, more recently, modern businesses have shifted manufacturing to lower-cost locations around the world. Therefore, these days, international trade can be seen as reflecting all forms of outsourcing, in addition to the traditional sourcing of products.

These two examples raise the reasons why outsourcing occurs. Specifically:
• Need - such as to supplement or support existing resources;
• Cost - thereby utilising producers of raw materials, parts, sub-assemblies or finished products that are located in places away from the original manufacturing facility.

In considering the broader impact of this business model, or adaptation of a traditional one, there is:
• Probable loss of jobs locally, where the output of employees is replaced by that of people located elsewhere;
• Possible loss of quality control, in that existing methods of production management and product testing is not taken up by outsourced processes;

At a macro level, there can be significant socio-political ramifications when any industry sector engages in extensive, if not excessive, outsourcing. But, if local resources or producers cannot compete with the same providers and producers located elsewhere, it is difficult to constrain or undo the tendency for businesses to seek economic, profitable alternatives.

Of course, the recipients of any outsourcing initiative gain benefits of employment and income, as well as possible skills development, plus technology transfer. Clearly, the recipients are reliant upon the orders or contracts of others who, often, are located elsewhere and, therefore, the recipients can suffer the vagaries of the business cycle. As such, demand for outsourcing can fall away just as easily as it can rise.

Often, we can imagine that the business-related benefits of outsourcing are supported by low wages, and low-skilled jobs. The work, usually, can be mundane and repetitive, being something not suited to, or wanted by, locals who are rather more skilled and less likely to enjoy that sort of work. But, more often than not, employees are less likely to be the drivers of any outsourcing as they are not a part of the decision making process in any associated business. It is all about profit and outsourcing, and, therefore, can relate to products as much as it can involve services.

The general, and increasing, transition from manufacturing to service economies has a tendency to strengthen the outsourcing trend, with this reflecting an increasing business imperative for more. Of course, the extent to which outsourcing is possible does depend upon endless issues, such as the type of industry and the extent and potential strength of any competition, as well as the desired level of profit or preferred level of cost.

Clearly, responsiveness of the local economy might not be sufficient to meet increased demand in particular sectors, industries or regions. Increasing the skill levels of local employees could come as a consequence of improved demand, although the issue of a cost differential will still be present. Accordingly, outsourcing is ever-present, as is typified by, for example, the success of:
• China for manufacturing; and
• India for technology and call centres.

From a supplier’s perspective, no matter what the product or service, it is a matter of considering the prevailing comparative advantage in assessing the possibility of outsourcing. As already indicated, while cost is a significant factor so, too, is quality.

Accounting and outsourcing
From an accounting perspective, outsourcing is all to do with the same key aspects indentified for other industries, being that of cost and quality. Still, it is worth contemplating that professional accountants are immersed in the provision of a quality service, as is the means by which they gain, and maintain, client business.

One might suggest that accountants are the potential beneficiaries of outsourcing because the cost of providing accounting advice and services is less than what is possible within a client entity if accountants were employed on a full-time basis. Of course, it is possible that the range of accounting services required by a company might necessitate a full-time person who would do all of the accounting work that must be done. In some cases, as is obvious, businesses do employee a number of accountants because the volume of the work justifies that form of investment in people, and warrants paying the associated wage bill.

However, it is worth noting that businesses usually need accounting expertise in a number of areas, such as financial planning, financial reporting and tax. In that regard, it becomes harder to find affordable sources of necessary accounting talent for use within the company, especially of these are small to medium enterprises. Usually, it is less expensive to seek the services of a professional accountant to do the necessary work, especially when such support is provided by a person who is constantly engaged in that area of knowledge and remains abreast of all related developments. Specialist accounting advice, therefore, is more affordable.

No matter what the circumstances, and especially in relation to professional accounting, outsourcing is all about:
• Trust - as to quality and value for money; and,
• Cooperation – in working with the client toward a shared objective of a professional outcome.

The opportunities of outsourcing are ever-present and, for professional accountants, these need to be viewed in terms of what services can be provided to current or prospective clients in a manner that adds value to their businesses. Working in partnership, therefore, is a sure way of gaining business success and a growing a robust reputation that will attract the attention of others seeking to take advantage of what professional accountants can offer, and deliver.


Cornelis Reiman, Ph.D., FCPA (Australia), FCPA (Singapore), Chartered Accountant and Chartered Secretary, applies international start-up, turnaround and business development skills as a Board-level advisor. He is also Independent Director on the Board of the Chamber of Professional Accountants of the Republic of Kazakhstan. Previously, he was President of CIPAEN Inc. an economic development entity promoting International Financial Reporting Standards (IFRS) across the former Soviet Union.




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