In and out

We talk to BRAL’s Jim Brown to discuss the DOs and DON’Ts of outsourcing that are essential to the success of financial institutions.

FST. Certain organisations may feel that employing outsourcing could lead to a loss of control in their business. Is this sentiment in any way justified?
JB. Loss of control is a big concern. Overcoming it comes down to selection of the correct supplier. This is a common concern and outsourcers should be able to demonstrate the systems and processes they have in place to reassure their clients. In many cases control can actually increase through an outsourcing relationship.

The best suppliers will be members of accredited bodies or will have their controls independently verified. A SAS 70 Type II audit is probably the ultimate confirmation of control. This audit confirms that the systems in place are acceptable for the demanding standards of Sarbanes-Oxley.

Whilst there are cost savings to using an outsourcer, especially in foreign locations, there can be a loss of control. This can arise through the distance itself or cultural differences. Where control is an issue it may be appropriate to outsource to a closer location, either for the whole process or appoint a local specialist to manage suppliers in a lower cost location.

FST. What are the major benefits of outsourcing functions to a specialist provider?
JB. There are numerous benefits of outsourcing. The obvious benefit is cost control. However, if an outsourcing relationship works well, this should end up being a relatively minor benefit. Other benefits can be less tangible, especially during the negotiation process, but can be more significant over time.

The most immediate benefit of a successful outsourcing relationship is allowing a company to “stick to the knitting”. Companies increasingly need to focus on the service they deliver to their clients. Day-to-day tasks can be outsourced to someone for whom this is a core service in itself. Such specialism builds on the solid principles of comparative advantage and prevents management becoming distracted by administrative issues.

The specialist provider may bring new ideas that can improve the performance of the company as a whole. This could happen because the outsourcer has completed similar tasks time and time again, and can build upon that expertise to create a better solution to a problem or to get to the same answer more quickly.

FST. What are the vital questions businesses should ask of any potential outsourcing provider? What are the risks if a company begins an outsourcing relationship without adequate diligence?
JB. Client references are the extent of the due diligence that many buyers enter into. A provider should be able to give you multiple client references and allow you to call them (without a chaperone) to discuss the quality of the services that they have received. Such due diligence should be completed on multiple suppliers.

Obtaining client references should not be the first, and certainly not the only, due diligence undertaken. The first stage is to detail each factor that matters to you in finding a partner. These factors should be ranked according to importance and each provider given a mark for each factor. This will allow a more objective measure and ensure that decisions are not made on the back of an emotional or relationship led decision.

An outsourcing relationship tends to be a long-term commitment. Even if the contract has a break clause, it may not be easy to action due to the difficulties in transferring the relationship to another provider or bringing it back in-house. Therefore getting the decision right first time is essential.

FST. Given the current financial climate, many organisations will be keen to realise the cost savings an outsourcing agreement can bring. What are the specific ways in which outsourcing can help reduce company overheads?
JB. It is possible that more significant savings can be made from improvements to the systems, processes and management of outsourced teams.

Companies providing outsourcing services do so as a core service. As such, they will streamline processes wherever possible to reduce the time spent, whilst maintaining appropriate controls. This can be as simple as introducing a continuous improvement culture, although anyone who has tried this will understand that simple is not the most appropriate term.

IT investment is likely to be higher as the cost spread can be spread across multiple clients. This allows up to date systems to be installed and configured in a way that may not be cost effective for a standalone company. Often outsourcers will have specialist expertise in house to tailor these systems in just the right way.

Teams of staff are also likely to be managed in a different way. The management team at an outsourcing company are likely to focus on cost savings. Some of these should be passed on to the customer in order to retain custom in the longer term.

Jim Brown is managing director of BRAL Limited (www.bral.com) a company that assists international groups with financial reporting and administration of their subsidiary entities. He is also a partner in Blick Rothenberg, a Chartered Accountancy practice that advises companies on a range of issues, including UK FSA compliance.