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When does outsourcing help with cost control?

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28th Jun 2017
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Outsourcing has long been viewed as a means of keeping a lid on costs, even if it also brings other strategic benefits to a business that wants to focus on its core operation. How is outsourcing being viewed by today’s finance directors? Christian Annesley takes a look

Outsourcing is sometimes a dirty word, being associated in the eyes of some with cheap labour and low corporate morals.

But, as with most things in life, the shorthand version doesn’t get us anywhere useful.

There are times when outsourcing is a great fit for a business and a useful way of cutting costs. In other contexts, the disadvantages of outsourcing a particular business or tech function may mean it’s not the right choice.

So how do you work out when outsourcing is the right move – particularly when it comes to delivering savings? Before we turn to those who have embraced it as a means of cost-control, it’s worth also acknowledging a few aspects of outsourcing’s upside that go beyond price. Try these four for starters.

1. Outsourcing cuts the risks associated with hiring talent. When you outsource certain tasks to the marketplace, you reduce your risks and lower your overall operating cost base. The act of matching talented consultants to your specific needs instead of hiring generalist, full-time employees can work for some businesses. To get started, identify low-risk, high-reward functions to outsource.

2. It simplifies accounting. It’s no secret that hiring an employee is costly from an accounting standpoint – and especially for small-business owners. By outsourcing, a business sets the rules upfront. A freelancer is a contractor, meaning that you can increase or decrease their hours as needed, while contractors also pay their own taxes and cover their own benefits – not to mention the time and money saved by avoiding conventional recruitment.

3. Access higher-quality talent at a lower cost. Many companies struggle to find highly qualified, cost-effective team members. And even if you’re not interested in offshoring, you can still outsource tasks to lower-cost parts of the UK. Sometimes a business will recruit a freelance because his or her hourly rate is lower than comparable consultants in their own cities.

4. It’s less emotional. When you outsource, through a virtual marketplace or some other means, staffing decisions are much less emotional. For example, it’s understood that a freelancer’s contract depends on how a company is doing. There’s an implied understanding that if cash flow tightens up, hours will be cut. Conversely, if things pick up hours may climb. Most contractors understand this dynamic and take the situation for what it is.

Outsourcing and CIPHR

Those are some of the arguments around a certain type of consultancy outsourcing. But how do finance directors approach outsourcing and cost control in practice?

Graeme Scott is chief finance officer of cloud HR business CIPHR. The business has been on a steep growth curve, which means the daily challenge is to ensure the company’s resources support that growth as efficiently and effectively as possible.

“For me, it is about ensuring ‘bang for buck’ in our decisions and selections around all cost control, not just outsourcing” says Scott.

“What kind of thinking underpins this? For example, we think that our marketing spend should be highly targeted on brand awareness and generating customers, and we make that a priority. Another example – not outsourcing-related – is that we think commission schemes should reward only the desired outcomes, such as recurring revenue, rather than one-time sales, and longer contracts rather than shorter contracts.”

When it comes to outsourcing, Scott says CIPHR has outsourced its payroll function in part with costs in mind, but also because it’s not core to the business mission.

“We do this outsourcing via one of our own products, which prevents having to re-key data and therefore eliminates a single point of failure. It's a clear, auditable and compliant process for passing data from HR to payroll. And it’s a move that frees up three staff days per month that can be refocused on more valuable activities.”

Another way to outsource

There is another approach to cost control that many finance directors will take, and that is to outsource the overall responsibility to a third party.

While some corporates have enough scale to have dedicated cost management teams in house, for many larger SMEs with a turnover of, say, between £10m and £100m, it’s likely that procurement isn’t a dedicated function in-house and there are particular benefits to reaching out.

Steven Godfrey is a management consultant for the cost management consultancy Auditel. It runs cost management projects in a huge variety of sectors, and is therefore not only an outsourcing option in its own right but also buys outsourced services for its clients.

According to Godfrey, finance directors approach outsourcing and cost control with different mindsets. “Some will see us as a threat because we can own some of their responsibilities, but plenty will have a different take and embrace what we do. We can deliver results – often on a performance-related basis – and make them look good.”

Godfrey says finance directors are more likely to bring in cost management consultancies when they have a specific problem to solve rather than as a considered strategy.

“That’s my experience. There is usually a trigger event – a crisis that needs solving. I remember Auditel was brought in once by a corporate with 1,000 company mobile phones in the mix and no strategy to manage the phones and their costs. That’s quite a typical kind of a problem we might face.”

Godfrey is there, too, to get finance directors – or the companies they serve – over a “decision hump” with confidence, so they can move forward.

“Once a decision is made, and a new way of working is adopted, in theory it will be more profitable in perpetuity. That naturally gets an FD thinking about other savings that can found and embraced.”

Quick wins in 2017

In terms of the quick wins for today’s finance director, two areas leap out to Godfrey because they apply to most organisations – one is energy and the other is communications and data.

“With communications, there is that constant imperative these days to keep up. Costs are going down and technology is improving all the time, so it’s a challenge to stay on top of that and bring in systems that also promise a degree of future-proofing. But it needs to be done, of course.”

When it comes to energy, Godfrey points out that a big slice of an energy bill is taxes, so the best way to make savings is not to use energy in the first place.

“I’m talking about energy management and energy management systems. Perhaps smart LED lighting or ways of scavenging waste heat and reusing it. There are savings to be made by swapping suppliers, too, or by investing in renewable microgeneration on site, but not using the energy is definitely step one.”

One thing seems clear. When it comes to cost control, outsourcing plays a key role for your average business. Not every move will offer a genuine strategic saving, but plenty will – and it is up to the finance director to know where to start looking up front and where to take things after that.

Replies (4)

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By johnjenkins
29th Jun 2017 09:14

Although a lot of business rely on a stable workforce the costs are becoming questionable.
Certainly I see the smaller business veering away from PAYE and taking on subbies, or even just using agencies.

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By AndrewV12
29th Jun 2017 10:18

Out sourcing is great for Small Companies, especially one off tasks.

For all companies it seems ideal for tasks that evolve risks, let someone else take the responsibility. Long term outsourcing could prove expensive and not advance the business.

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By Mohammed Khayam
01st Oct 2017 12:46

there is better approach to outsourcing..
instead of giving away the control to outsourcing firm SME's can set up and manage their own low-cost operations offshore.
at EXEL solutions you can hire talented candidates in India or Sri lanka and set up your own dedicated team.
visit.
http://www.exelsolutions.com/ourservices.html

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