In the first part of this series, we discussed the benefits of outsourcing accounting, taxation and bookkeeping compliance to an offshore provider.
Understanding the risks associated with the outsourcing is as important as evaluating the benefit.
Outsourcing has 3 key success factors / risks: Quality, timeliness, price.
Generic business risks are generally well understood and relate to a large extent to these key success factors: These risks include the service Quality, timeliness of the service, or cost benefits not meeting the accounting firm or the client’s expectations, a loss of internal skillsets that lead to a dependency on an external provider, a loss of internal capabilities which may have a longer term effect on ability to review work done by the offshore provider, an inadequate outsourcing agreement not covering all contingencies, and critically the risks with respect to privacy and data security.
The checklist of potential outsourcing risks includes:
- Data security and client confidentiality
- Operational efficiencies
- Service quality
- OSP doesn’t have sufficient competent staff
- Technology of OSP may not be reliable enough to ensure work completed within required timeframes (consider Internet speed, transfer of back-up, cloud sharing or server access, ability to access government agency portals)
The above risks are maybe out of your control as it comes from the OSP side. You should ensure that those issues are examined prior to the outsourcing agreement.
- Your in-house systems cannot cope with outsourcing IT requirements (consider Internet speed, transfer of back-up, cloud sharing or server access). You should also look at systems that will be implemented e.g. Cloud technology
- Intellectual property and protection of proprietary information
- Legal and contractual issues
- Incompatibility with IT systems
- Loss of internal capabilities / process knowledge
- Level of innovation on part of the OSP
- Loss of managerial control
- Lack of support for outsourcing in corporate culture
- In-house problems and staff motivation issues
- Lack of acceptance from customers
- Evaluating contract performance
- Dependency on provider
Make sure you anticipate the possibility of those risks within your firm so that you are ready to cope with any possible issues in the future.
When you have full time resource deployed, you need to consider the following:
- Performance measurement difficulties, i.e. not knowing the metrics of success.
- High employee turnover in OSP, especially if you are engaging in “offshoring” where an untrained full time resource is being offered.
Especially when the OSP is located offshore, there are risks related to social, cultural and political that you should be aware of. They are as below:
- Cultural differences with employees in offshore location, including public holidays, but also personal leave requirements.
- Wage inflation in offshore location, especially important where an untrained full time resource is being offered. Where there are no fixed rates or fees, you can expect to have to pay increasing adjustments for increasing salaries.
- OSP won’t or can’t adhere to appropriate jurisdictional privacy legislation.
- Domestic industrial relations
- Domestic political backlash
- Political instability with offshore location, both internal in terms of the current political scene, but also internationally with respect to near neighbours
- Problems due to regulations in OSP country
- Issues with respect to climate e.g. typhoons, hurricanes and storms have historically created not only power (electricity) issues, but also prevent employees from attending offices, or accessing internet.
Once you identify risks that are relevant to your business context. You can work on your plan to cover these risks, so that you are putting your firm in a position to outsource successfully.