At some point in a company’s life cycle, a decision must be made on whether or not to build the necessary infrastructure to support growth in various business activities, such as information technology (programming, security administration, core application development), specific operations (accounting, human resources/ payroll, back-office support, reconcilement, customer service) and risk management (internal audit, regulatory compliance).
Many companies attempt to do this “in-house,” only to find it to be an overwhelming, daunting task. As a result, outsourcing financial services is becoming an increasingly popular option, for both start-up companies that experience resource constraints relative to their sizes and large public companies searching for more efficient, effective and cost-reducing solutions.
“Some industries were outsourcing record retention services as early as 1970,” says Terry Sherrill, a manager with Briggs & Veselka Co.’s business advisory services practice. “With the rapid advancement of technology, however, today’s business world has greater opportunities, as well as reduction of costs, when outsourcing financial services. The decision to outsource is both a human resource issue and an economic capital issue. On the HR side, you need to ask, ‘Can the company afford to hire the person or persons with the necessary skills to perform the functions on a full-time basis? Can you afford the training and related overhead costs to maintain their skills and/or certifications?’ On the economic capital side, ‘Can the company expend the necessary resources to build, support and maintain updated systems to effectively support information technology in-house?’”
Smart Business spoke with Sherrill about outsourcing financial services, how to do it, and how it can help any company.
What are the benefits of outsourcing financial services?
Cost reduction, better experience and expertise, less overhead, improved efficiency, effective product delivery in organizations with multiple locations, state-of-theart technology and staying competitive.
What problems or issues can arise from outsourcing financial services?
Lack of control, confidentiality of customer information, communication, contract compliance and business continuity.
How can the problems be solved?
Establish procedures to ensure that outsourced arrangements are managed and evaluated for risk, just as a company would evaluate a new product or service prior to delivery.
What are the consequences a company faces if this isn’t done?
Unanticipated loss due to nonperformance of vendor contracts and reduction in the operational efficiencies expected to be achieved from the outsourced arrangement.
So, what is the resolution to all this?
Develop processes that mitigate outsourcing risk. The procedures should address the following key elements to effectively outsource financial services:
- Managing and monitoring the outsourcing arrangements The board of directors and senior management must retain accountability for the outsourced function, determine the objectives for the outsourced activity and how it fits with the company’s overall business strategy, and provide necessary approval.
- Selecting a qualified vendor Perform due diligence on the service provider to ensure technical capabilities, managerial skills, financial viability, familiarity with the financial services and a demonstrated capacity to keep pace with innovation in the marketplace.
- Structuring the outsourcing arrangement Negotiate a written contract that is operationally flexible and that clearly articulates the expectations and responsibilities of both sides.
- Managing human resources Involve the human resources department early in the process when staff is to be released or transferred to the service provider.
- Establishing controls and ensuring independent validation Clearly define expected security controls in the outsourcing contract and develop appropriate performance measures to monitor consistent application of those controls.
- Establishing a viable contingency plan Ensure that contingency plans are formulated and viable in the event of nonperformance by the service provider.
If a company wants to outsource financial services, what’s involved with the process?
Submit requests for proposals from at least three service providers. Ensure that a team of company representatives evaluates the proposals and obtains the necessary senior management and board approval. To ensure that long-term outsourced arrangements maintain competitive pricing, I recommend that the company periodically submit the services out for bid.
TERRY SHERRILL is a manager with Briggs & Veselka Co.’s business advisory services practice. Reach her at (713) 667-9147 or tsherrill@BVCCPA.COM.