What to Consider when Outsourcing your Finances
Although outsourcing has many advantages, such as lower production costs, business expansion, and obtaining external resources, you should take a deep look into how outsourcing will affect you before diving right into it.
This is due to the development and implementation of the outsourcing process and whether it fits your company’s current business processes. Failing to do this can present your company with many uncertainties and business risks.
Therefore, to avoid the hazards of outsourcing your financial activities, it is essential to fully consider and analyze its impact should you decide to use it for your business.
Read: Financial Outsourcing and How It Can Help Your Business Grow
If you are not careful, overlooking the factors to consider could trap you with risks that will not only greatly impact revenue; it can even lead to loss of control and core competencies.
Overall, the factors to consider when outsourcing your financial functions are the following:
The overall strategy of the company
The outsourcing strategy must match the company’s overall strategy. The overall strategy is the basis on developing specific initiatives. This not only determines outsourcing decisions but also affects the scope of business given to outsourced resources.
Ensure that your company’s strategy when it comes to business decisions can cater to the presence of an outsourced partner. Coordinate with in-house talents regarding what functions you may need to outsource.
Nature of work
Now that you’ve seen that outsourcing is a viable strategy for your company, you must now decide on the scope of its implementation.
To successfully implement outsourcing, you must first determine which of your business processes are for outsourcing, and which must be kept in-house. Your choice of resources gives you a degree of competitive advantage and to keep that competitive advantage, you can divide your business processes into core businesses and non-core businesses.
Core business (such as software companies, R & D, and manufacturing industries) invest resources up, and has a key role in the survival of the company. Often, the company can create a high-yield development potential and market prospect business activities. The strategic importance of non-core businesses to focus on core businesses is low. For example, manufacturing financial activities, human resources, as well as logistics business, belongs to the non-core business.
To keep the quality and competitive advantage of your company in-house, you can then focus on outsourcing your non-core business processes and secluding your core business processes within your own employees. Your financial activities, for example, do not affect your competitive advantage and are safe for outsourcing to the right partner.
The degree of asset specificity
Business input requires assets and restricts the choice of outsourcing strategies. The transaction cost theory is that the higher the degree of asset specificity, the higher the costs of market transactions, and thus the greater the investment risk. The so-called dedicated assets refer to the assets' investment in support of a particular transaction.
The parties to a transaction have a strong dependence breach and will allow the other party to generate huge trading risks. The ideal choice for this type of market transaction is a special degree of a low asset that is easy to obtain. For medium degree of asset specificity, the product or business can be outsourced to external suppliers to achieve economies of scale.
Outsourcing vendor selection
Outsourcing vendors and external suppliers form a partnership, as the outsourcing vendor’s performance affects the manufacturer's level of service on the market. Therefore, the choice of the outsourcing provider is a decision that needs to be considered when choosing the most suitable suppliers.
Vendor selection is difficult. When you decide to outsource, you must have a clear purpose – is it to access resources or reduce costs? Follow this with a scientific evaluation system to assess the potential of outsourcing suppliers, such as the quality of inputs, the transaction price, delivery time, technical capacity, service levels, and satisfaction.
The ability of the outsourcing provider is the key to enterprise evaluation and selection of suppliers; the blind pursuit of low prices would damage the quality of the outsourcing business and affect the performance of the market.
The outsourcing process of management
Because outsourcing is a boundary between two different business entities, difference in culture, practice and even management practices need to be considered when deciding and managing your outsourced partner as it can lead to miscommunication. In addition, with cooperation philosophy and cultural differences, ineffective communication mechanism may lead to the failure of outsourcing. Therefore, it is very necessary to strengthen the management of the outsourcing process, you can do this through the establishment of appropriate management coordinating body.
Build open communication channels to solve the problems and contradictions in the outsourcing process to prevent miscommunication. You can establish a quality assurance system and management control to strengthen the supervision of the outsourcing process to reduce the risk of information asymmetry.
Read Next: How to Select the Best Financial Accounting Outsourcing Services
Find the right outsourcing partner today
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This post was first published on 5 August 2014 and edited 5 May 2023. Edited by: Aly Tagamolila