The benefits of outsourcing Featured

7:00pm EDT January 31, 2007
As companies sink their teeth into the new year, it may be time to perform a profitability review. The competition is heating up, and many mid-size companies are consolidating costs and streamlining operations to compete with larger organizations. When was the last time you took a close look at the functions of each department in your operation?

A thorough review may identify departments that are perennial cost centers, departments that have transitioned from a profit center to a cost center, or functions like financial and SEC reporting may be perfect candidates for an outsourcing partnership. “It’s an opportunity to find a partner who has the ability to help you achieve your strategic objectives without having to worry about back-office functions,” says Cathy Thomas, a partner with Armanino McKenna LLP in San Ramon, San Francisco and San Jose. “Outsourcing allows companies to control costs and focus on their core competencies.”

Smart Business spoke with Thomas about how to identify and implement an outsourcing program that provides flexibility, expertise and cost benefits.

How can a company best determine if it would be more cost-effective to outsource?

Typically, a company would perform the analysis to determine if a function requires an in-house skill set to keep the operations going. An emerging example of this is the SEC reporting required for public companies under Sarbanes-Oxley. A lot of activity happens each quarter and at year-end, but many times not a lot goes on in-between. Many companies are choosing to outsource that expertise because they don’t need a full-time person. It’s more cost-effective for them to use an outside source that is trained to handle these functions every day. The cost savings and effectiveness of this partnership can be dramatic.

What other departments can benefit from an outsourcing partnership?

Payroll outsourcing has been around for a long time. It is usually one of the first areas a growing company looks to outsource. Tax and financial accounting positions and IT functions are all areas that can benefit from outsourcing.

IT outsourcing can be extremely effective. Often, a company needs a well-trained technician for a certain number of hours to deal with a specific issue but may not need a full-time employee. It can be difficult and costly for companies to keep an in-house IT programmer trained and competent at all the systems they have running, because of their specialized nature.

There is also a continuing trend toward outsourcing a piece, or even the entire function, of the HR department. For years, companies have been tapping boutique HR firms to handle certain specialties within that department with great success.

How do clients respond to outsourced departments?

It depends on the service line, but it’s like any other client service — there are always skeptics. Some people are more willing than others to work with consultants. Outsourcing within the U.S. can be successful if the executives that are fostering the change state it up-front. If the tone at the top is well conveyed to the service group that the outsource company will be assisting, there is usually a fair amount of support.

Outsourcing can also raise many political and security issues that have to be addressed.

What are the key benefits of using an outside firm?

The main benefit to the client is having somebody on call that is trained and technically competent but doesn’t have to be compensated on a full-time basis. It’s the provider’s job to be fully trained and up to speed on the necessary skill set. The client is getting the best of both worlds in terms of cost and competency.

In the end, if you add up the salaries, benefits, and the cost of training, it’s generally cheaper to use outsourcing — and usually you get a better product.

What steps should be taken to switch a service to an outside firm?

Initially, it is important for management to assess who will be impacted by an outsourcing plan. The communication and the reasons given for the outsourcing should be made in a very thoughtful manner. Employees will react differently depending on whether or not they’ll be long-term players with the firm. It really depends on how it affects their lives.

From our standpoint, we first go in to assess everything that needs to get done and put a plan in place. We then go back to management and make sure the plan is in line with their strategic objectives. We typically sit down with the client every three months, as well as annually, to get an assessment of our work, and to ensure the plan is working and meeting both partners’ objectives.

CATHY THOMAS is partner in-charge of consulting with Armanino McKenna LLP in San Ramon. Reach her at (925) 790-2656, or cathyt@amllp.com.