5 pitfalls of outsourcing financial tasks

More and more, outsourcing financial tasks is becoming standard among companies. It allows for cost savings and FTE reductions. Sourcing from experienced service providers often increases the quality of work, helps complying with international accounting standards and focuses the company on its core activities. However, there are some pitfalls one should be aware of when outsourcing finance;

1. If financial tasks are outsourced too much, you will find yourself are at the mercy of the third party. As soon as the service provider knows you cannot do without him, the balance of power will tip. Sure, a customer can always change to another provider, but there are significant switching costs related to a move like that.
2. You are no longer among colleagues: flexibility in a service provided can actually drop. Your counterpart now has his own P&L to take care of, and like any consultant he will always try to charge more for any additional small item you need help on which is not covered by the contract.
3. When announcing and executing the project, people in the affected department will almost invariably lose motivation. No one likes a change like that. Like with any of these projects, a clear communication is key. Redundancies need to be made clear from the start, that way these employees can prepare for a job search, internal or external. For the remaining employees, a clear time line showing what is expected from them when will help to find their new purpose. Identify a fewer early adopters and promote them to ‘change agents’ that help to show their colleagues there is life after outsourcing.
4. In my own experience, an initial dip in quality is unavoidable. Depending on how much time is invested beforehand and on the complexity of the outsourced tasks, count in a number of months where you will suffer a lack of clarity, have a surge in work in the own finance department, and will have to set up additional communication lines with the other party. A way to cope with this is to organise the outsourcing in waves – only when a first set of tasks has been properly executed and signed off, the next wave can follow.
5. Clearly define roles as early in the process as possible. The sooner everyone knows what he/she will be responsible of, the better. The easiest way is to map out the process and go through it with both parties, and step by step assign who does what. Additional with that, a communication matrix can help to clarify who needs to be contacted on what, which avoid certain individuals being showered by emails.

There are different levels in outsourcing. Depending on the tasks you give out to third parties, you will lose direct control but will be compensated by cost benefits. Apart from the classic story where an American company will offshore an entire department to India, there is a possibility where certain processes are kept in-house or where the service provider resides in the next building (near-shoring). These are de-risking alternatives which often bring the same benefits and are easier to get buy-in for.