Before you start any outsourcing arrangement, make sure you have conducted due diligence to guarantee a partnership that is grounded in accountability, transparency and trust. This article provides information on what you need to know about due diligence in outsourcing.
Accounting is a sensitive business function. Despite this, it remains one of the most outsourced functions due to its technicality, complexity and constantly changing regulations.
Your firm’s reputation, growth and profitability are at stake when you enter this business arrangement. Conducting due diligence before you outsource gives you the assurance that your financial records are safe.
What is due diligence in outsourcing?
Due diligence refers to the process of investigating the reliability of an outsourced service provider. It includes the risks associated with entrusting your business functions to them.
When it comes to outsourcing, due diligence is a two-way process, unlike other arrangements where only the buyer administers the process. As you assess your service provider’s expertise and qualifications, the latter would also check your proposed outsourcing project and the legitimacy of your organization.
When should you do it?
Due diligence takes place:
- after you and your chosen service provider have agreed to a deal and
- before signing a binding contract.
The duration depends on the agreed timeframe in the letter of intent. During the process, you can get hold of confidential data about the outsourced service provider. This is also your chance to ask challenging questions.
The way you conduct your due diligence plays a crucial role in the success or failure of your outsourcing initiatives. To do it right, we enumerated due diligence best practices in the list below.
Due diligence best practices
Ask for assistance
Always perform due diligence with the aid of a lawyer or accountant to minimise risks you might incur from outsourcing. At the very least, seek out professional help who have knowledge on outsourcing requirements in your jurisdiction.
In the United Kingdom, there are certain regulations and requirements to consider before pushing through this business activity. For instance, the HM Revenue and Customs (HMRC) requires companies to report their outsourcing arrangements, particularly when it involves payroll and staffing services.
HMRC reporting is only one side of the equation. A lawyer or an accountant can also give you advise on the following areas:
- Ways to protect intellectual property
- Questions to ask regarding data security, technology and other IT-related issues
- Economic stability in the country of your chosen service provider
- Areas where conflict of interest may arise
- Availability of compliance, risk management, business continuity and disaster recovery programs.
Knowing these pieces of information is critical as it will guide you in making the right outsourcing decisions.
Assess the provider’s track record
With the help of your lawyer, dig deeper into the company’s reputation. Find out and assess their track record with outsourcing. Ask them if they can provide testimonials. What do their previous and existing clients say about them? What are the common reasons why clients close their accounts?
It’s essential that your outsourced service provider has the capabilities, appropriate authorisation, reliability and professionalism to handle your accounting operations for the term of the contract.
Curate all information you need
It’s also a good practice to prepare all information you need prior to performing your due diligence.
Below is a sample due diligence checklist for outsourcing. It contains details you should include when investigating your service provider’s capabilities.
- Nature and scale of the service provider (business model, financial health, business reputation, complexity, group structure, professional indemnity cover)
- Compliance with data protection laws and regulatory requirements
- The effectiveness of risk management and internal controls to protect confidential data
- Industry expertise (experience in working with clients from your respective industry)
- Digital transformation initiatives (technological preparedness to maximise efficiency)
- Portfolio of previous projects (including client testimonials)
Perform due diligence on the outsourced service provider’s labour supply chain
With accounting outsourcing, you are capitalizing on the service, expertise and time of people. It’s critical that you know the working conditions of your potential team to ensure they can deliver quality service.
GOV.UK, Britain’s official public sector information website, published a three-point advise that you can adapt to due diligence in outsourcing. It lays down key activities to minimise risks on your labour supply chain. Here’s the summary:
- Check - Know your own risks, including those of your suppliers'. It includes legal, financial, tax and social obligations risks. You must also check for modern slavery and exploitation risks.
- Act - Once you’ve identified risks, perform the appropriate action to mitigate them or remove them completely.
- Review - Implement continuous monitoring and review of your due diligence procedures and live risk management to protect your business from financial, operational and reputational risks.
Negligence to do the appropriate due diligence will cost your business more in the long run. You may check the complete guidance set out by the HMRC on this page.
Prepare legal agreements and contract obligations
See to it that you have all regulatory approvals to push through the business activity. The legal agreements and contract obligations you must check are:
- Compliance with the applicable law in concerned jurisdictions
- Required licences for services of outsourcing accounting services
- Ability to carry out foreign banking transactions
- Finalised payment schedule and fulfillment of the requirement for any customisation
- The signing of legal agreements such as non-disclosure
Ensure that all legal documents clearly set forth the rights and responsibilities of all parties.
Do an ocular visit
If possible, see if you can do an ocular visit to your service provider’s office to check the actual working conditions of its employees. Happy, engaged and organised teams are positive indicators of good service quality since their well-being has a direct impact on the way they work.
Make due diligence an annual activity
Ideally, due diligence should be conducted at least once a year to ensure your financial records are in safe hands. It also gives you the guarantee that your outsourcing initiative is producing its intended results.
Your firm should also review contracts or SLAs that will soon expire to decide whether or not to renew the agreement.
Outsourcing provides accounting firms easy access to new technologies and helps achieve economies of scale. These features help you adapt and compete amidst the digitalisation of accounting processes. Make it a strategic move by taking outsourcing due diligence seriously.
D&V Philippines values confidentiality, transparency, and accountability. You can count on us to provide all information you need to have the confidence of outsourcing your accounting functions with us. Contact us today for more information about our services.
You may also download our whitepaper, Outsourcing: How to Make it Work, to serve as your guide in your outsourcing journey.