3.3 Shared services and outsourcing of finance operations Flashcards
Contemporary developments in the role and activities of FF have for some org meant:
a structural reconfiguration, with solutions based on, for example:
- greater or lesser centralisation
- offshoring - relocation of business activities to another country
- shared service provision
- business partnering
- outsourcing
Outsourcing:
- means contracting out some aspects of work previously done in house to specialist providers (increasingly common)
- a strategy to add value and streamline activities to maintain competitiveness (focus on core competencies)
A shared service centre:
- org with processing centres in various locations chooses to consolidate these activities at one site (aka internal outsourcing)
- may be established for a particular activity of the org
Org will often outsource its
non-core services;
- facilities management
- human resources management
- cleaning services
- catering services
- legal services
It may be unwise for an org to outsource it’s
core competencies which is something they are able to do to drive competitive advantage (could erode this advantage)
The two main reasons (advantages) of outsourcing:
Cost advantages:
- a large supplier may benefit from economies of scale in production
- org will benefit from reduced capital expenditure
- reduced headcount
- savings on research and development
Quality advantages:
- supplier may have superior skills and expertise
- may solve the problem of a skills shortage in certain areas
Other advantages of outsourcing:
- supplier may have greater production expertise and be more efficient, resulting in faster and more flexible supply
- management not distracted with fringe areas and can focus on core bus activities
- org can exercise buyer power over suppliers ensuring favourable terms and conditions
- org has more flexibility to change suppliers based on changing cost /quality considerations
Disadvantages of outsourcing:
- Cost issues - the supplier will want to make a profit (may be cheaper in house) and org may be vulnerable to future price increases
- Loss of core competence - the service may be or contribute to a core competence which could lead to loss of competitive advantage
- Transaction costs
- Finality of decision - once a service has been outsourced may be difficult to bring back in house due to for eg loss of in-house expertise
- Risk of loss of confidential info
- Risk of continuity of supply if supplier has problems
- Difficulty in agreeing to / enforcing contract terms
- Damage to employee morale in case of redundancies or if org culture is eroded
Service legal agreement (SLA):
- is a negotiated agreement between the supplier and customer and is a legal agreement regarding the level of service to be provided
- some of the potential disadvantages of outsourcing can be controlled through the use of an effective SLA
- content includes details of service, targets, consequences if not met
Transaction costs:
- are the indirect costs (ie non production costs) incurred in performing a particular activity
- due to the effort of specifying what is required, coordinating delivery and monitoring quality
- high costs = in house solution / low costs = outsource
Three main types of transaction costs:
- Search and information costs - eg which supplier is cheaper
- Bargaining costs - cost of agreeing on acceptable SLA
- Policing and enforcement costs - making sure supplier sticks to terms of contract and take appropriate action if necessary
Transaction costs are determined by three dimensions (make or buy decisions):
- uncertainty - higher uncertainty, harder to write effective long term contracts, more likely to buy
- frequency of transactions
- asset specificity - the more specific assets are to transaction (value greater than best alternative use) the greater the transaction cost and therefore more likely to make in house
Which FF activities should be outsourced:
Mostly the assembly and analysis activities of the framework (focus on reducing costs):
- Transactional processes (AP, AR, cash management) tend to be popular to outsource
- Improvement in provider capabilities has resulted in outsourcing of services such as statutory and regulatory accounting, financial reporting and tax, management accounting, budgeting and forecasting
Benefits of outsourcing the FF activities:
- Cost reduction - economies of scale through the use of standardised processes and leading edge technology
- Radical transformation (BPR) - can enable broad structural change, shift in resources from operation to innovation (advisory and application activities of framework)
- Access to superior capabilities, expertise and resources of specialist provider
- Business partnering - the retained FF can focus on their role as bus partners, working more closely with bus in decision making
Drawbacks of outsourcing FF activities:
- Loss of control - rely on external provider to provide right level of resource and skill
- Org will need to develop extertise and invest time and money into managing the outsourced service
- Will cause disruption and may result in resistance to change
- Risk of intellectual property theft and data breaches
- Erosion of internal knowledge and skills
