Outsourcing Non-Core Functions

Clayton & McKervey

At our June 10, 2010 CFO/Controller roundtable, we discussed outsourcing non-core functions. Summarized below are key points of the conversation.

Outsourcing is typically viewed as: the contracting of a business function to an external provider.

Common benefits of outsourcing

• Cost savings
• Administrative efficiencies allow you to focus onyour core business
• The move from a fixed to variable cost structure (paying for what you need, especially when your need is changing throughout time)
• Improved quality
• Access to specialized knowledge or operational expertise
• Enhanced capacity for innovation
• Reduced time getting a product or service to market
• Scalability (ability to increase or decrease services as needed)

Hidden benefits of outsourcing

• Security benefits
• Frequent technological updates are real time as apposed to when you update your system
• Training of your staff by the outsourcing firm is often more fluid
• Concerns related to outsourcing
• Quality risks
• Accountability
• Failure to deliver business transformation
• Security
• Perception of employees and outside stakeholders
• Loss, or perceived loss, of control

The culture and morale of the company can also be affected when an area is outsourced, and could potentially harm a company’s image or lead to employees being concerned for their own employment within the company.

There are many functions companies are outsourcing, including operations, sales and marketing, financial and administrative, and telecommunications services. The list below is by no means all-inclusive.

Operations outsourcing

• Component manufacturing
• Contracted services
• Warehousing
• Freight

Sales & Marketing outsourcing

• Outside sales representatives
• Marketing
• Advertising
• Public relations
• Market research

Financial and Administrative outsourcing

• CPAs
• Attorneys
• Payroll processing
• Insurance brokers
• Employee benefit advisors
• Investment advisors

IT consulting

• Credit and collection firms
• Telecommunication outsourcing
• Web conferencing
• Call centers
• IT help desks
• Customer service departments

Additional areas for outsourcing

• Human resources
• Professional employer organizations (PEOs)
• Expanded accounting services
• Cloud computing

The outsourcing of human resources and these other functions are increasing because of the changes in today’s environment, such as the new W2 and 1099 requirements resulting from health care reform and other legislation.

Outsourcing is typically considered after a specific event occurs or for a specific need the company is unable to fulfill. Ideally, you would be thinking ahead and being proactive instead of reacting.

When contemplating outsourcing, think about the future. For example, when outsourcing a staff position, in addition to considering the savings from hiring the employee directly, such as wages and benefits, also consider the savings that would result from no longer having to pay the training expenses to update the employee’s skills for new developments. This employee’s training would now be a firm expense.

A payroll situation was discussed, in which a company had one person performing all of the payroll processing functions. The company is now outsourcing the functions as a result thinking ahead. They chose to outsource the functions to reduce the risk of the payroll not being processed, to manage growth by anticipating the increased payroll responsibilities that will be required as the firm grows and hires more employees, and to keep up with technology, such as pay cards and direct deposit.

When considering an outsourcing company, a plan to evaluate such company needs to be in place. The stability of the outsourced firm needs to be researched and understood before making a decision. The financials and z-score could be an indicator of the growth or decline of the company. In addition, asking how they could respond in an emergency situation could also be vital to your business.

To answer the question “What not to outsource?”, responses included: a company can outsource any function as long as they were comfortable, but it was also mentioned that areas including technical secrets, intellectual property, what brands the company – the know how, idea or product, and potentially R&Damp;, should not be outsourced. You should always maintain your company’s uniqueness.

Another question posed was “Does the outsourcing have to save money?” Other factors besides saving money were discussed, such as if the outsourcing company could do the function better and add protection from compliance risk and improve the process. The oil spill in the Gulf and BP were given as an example. BP used various companies for different purposes, and now the blame game is anticipated.

In summary, there are many considerations in regards to outsourcing, including the benefits, concerns or potential drawbacks, and how you would evaluate the outsourcing company you hire. But clearly our attendees are outsourcing many areas of their operations.