Outsourcing Core Functions
Outsourcing Core Functions
The outsourcing industry has experienced a significant change, particularly in the aspect of the operating environment as evidenced by the gradual breaking down of globalization. Most countries slowly embracing localization initiatives with an emphasis on more dependable resources and supplies, rather than cheaper and simplest forms of resource supply which are the end outputs of globalization. However, despite significant changes in the outsourcing industry’s operating environment, there are many reasons why companies consider outsourcing a function. Furthermore, outsourcing functions of the company do not necessarily confine to foreign suppliers rather the mechanics of outsourcing is largely similar should a company outsource a specific function to local suppliers.
In our opinion, outsourcing remains a popular choice, especially for an organization’s CEO, GM, and/or executive members. The obvious reasons are cost savings, attempting to consolidate specific expertise of suppliers, or transaction overflow situations. On a high-level consideration, the outsourcing strategy is adopted for several reasons. For example, acquiring an entity after locking down the acquisition target supplier will usually outsource a specific function to the targeted suppliers. The objective is to test the quality of its product and/or service deliverables and gain an in-depth understanding of its corporate culture through outsourcing. Furthermore, outsourcing can also be a viable solution for financially troubled entities. For example, a financial distress company may outsource its functions to a supplier as driven by its need to reduce costs and to dispose of its assets to the supplier in return for excess cash to meet its debt requirements and working capital purposes.
Despite our team being equipped with the relevant expertise and experience in assisting with realizing the benefits associated with outsourcing strategy, we strongly management of the company places an equivalent or if not more weight on the risk aspects of this strategy. Outsourcing strategy if not handled properly could expose the organization to significant risks. As a start, management should be well-informed of the potential risk before finalizing the outsourcing decision, as the wrong decision could expose the entire organization to a variety of risks from major business disruption to potential legal risks. Some common risks comprise decision by management that is often based on data that are skewed toward favoring a success side of the unrealistic expectation and, as a result of which, management opt to ignore the relevant risks. In addition, there are risks associated with suppliers such as supplier’s conditions may be subject to future change, supplier failure, the risk of losing key knowledge and confidential information, and many more. Certain companies that have dominated the local markets, these companies may potentially be exposed to severe legal and political risks since the outsourcing arrangement may involve initiating a major worker layoff program among the local community which has been depending on the companies as the primary support for generations.
Our team could assist with advising important aspects of the outsourcing function. Some of these are as follows:
Locating the Best Supplier
This aspect of our service generally includes sharing of advice and proposing recommendations in exploring methods of how to find an outsourcing supplier, establishing potential criteria of potential outsourcing supplier evaluation, outsourcing costs assessment, and introducing best practices concerning layoffs program to minimize potential legal and political issues as a result of outsourcing certain core functions of the company, establishing reviewing and monitoring process with an outsourcing partner, and measuring the performance of outsourced functions.
Contract Issues
Our team has acquired extensive experience in assisting companies in handling contract issues associated with outsourcing relationships. Relevant contract clauses comprise two general groups – general clauses and specific clauses. Some examples of general clauses include arbitration in dispute, service scope agreement, and engagement of subcontractors. Specific clauses are clauses found in specific outsourced functions in question. Our team could assist in sharing our views and recommendations on the process to follow when constructing and signing a contract, critical function areas need to be considered carefully with emphasis on the pricing aspect as this aspect of the contract represents an area of which most negotiation will take place. Furthermore, it is relevant to take note the contract clauses could vary significantly according to different outsourced functions. For example, contractual issues of outsourcing the logistic function include predefined minimum storage fees, delivery speeds, short-term storage pricing, inventory insurance coverage, etc. As opposed to outsourcing the Sales and Marketing function, Sales and Marketing contractual issues which may include retainer elimination, public relations staff rates, advertising usage restrictions, salesperson payments, etc.
Managing the Supplier
When a company is considering outsourcing several functions or all of its primary core functions, we strongly recommend the company modify its existing organizational structure to manage the outsourced functions more effectively. The primary reason for this change is that the company no longer operates the existing activities since they have been outsourced. Instead, the company plays a key role in managing these outsourced activities to ensure the outsourced functions can be operated most effectively. In other words, the outsourced functions are not abdicated but rather company is now acting as a managing role to effectively manage these functions to leverage the unique supplier capabilities. Our team specializes in assisting the company with organizational structure change and role transformation. Our broad array of services provision ranges from higher-level activities of assisting with setting up functional coordinators and supporting personnel, a specific advisory committee to provide relevant support to managers and the team who were assigned to manage the outsourced functions, to lower-level activities comprising specific issues such as computer services and engineering, information technology and accounting.
Similar to contract issues, the required approaches in managing relevant suppliers vary significantly in different outsourced functions. For example, the logistic coordinator report straight to the vice president or department head of logistics or production. The logistics coordinator may have to manage multiple activities such as managing suppliers of multiple freight brokers, warehouses, freight bill auditors, and trucking firms. The logistics coordinator should equip with different skill sets and knowledge which may comprise a general knowledge of distribution resources planning; transport rates for truck, rail, ship, and plane; and requirements for duties, customs paperwork, and packaging. As opposed to managing the outsourced Human Resources function, the coordinator of the human resources area requires a greater skill level in the business process flow. Human resources functions that are typically outsourced—insurance, relocations, recruiting, pensions, and training—tend to be paperwork intensive. The human resources coordinator must have excellent people skills since there is constant interaction with company employees.
Ceasing the Outsourcing Arrangement
Terminating or ceasing an outsourcing arrangement is another key risk aspect that will be exposed to significant risk if they are handled with great care. Companies need to keep in mind significant resources and assets are still held within the custody of the suppliers, which may include technical know-how, confidential information, machinery and equipment, and many more. The first step of ceasing an outsourcing arrangement is for the manager needs to be fully informed of the existing outsourcing arrangement is no longer a viable option or the underlying arrangement has failed to meet the minimum service level requirements of the company or deviate significantly from the initial expectation of the arrangement. Our experiences suggest many outsourcing arrangements require early termination before the contractually scheduled date. Therefore, it is highly recommended that the management considers this issue in advance, particularly from the aspect of how the termination is to be handled. Our team could provide advice on relevant termination clauses to use in the original outsourcing contract. These termination clauses could be used to guard against a series of problems associated with unexpected service stoppage. In addition, as mentioned in contract issues, the relevant contract clauses deviate significantly according to specific outsourced functions, and therefore the same principle applies to termination clauses. Furthermore, we could further extend our scope of services to inform management on what are the problematic signs that normally arise before termination is deemed necessary.
Accounting Function of an Outsourcing Arrangement
The accounting department is a core function of most companies as it supports almost every function of the company, ranging from cash management, bills payment, invoicing customers, budget monitoring, assets tracking, payroll calculation and disbursement, compliance with applicable accounting and reporting standards, taxation, and many more. Therefore, a series of changes are required for the accounting function to maintain the variety of supports. Failing to implement these changes within the accounting department may lead to major interruptions in company functions that will occur within a short timeframe.
Our team specializes in assisting with introducing changes in this regard. The underlying changes are generally divided into five specific categories. The first category deals with data collection. As all accounting-related activities are handled by the supplier and on its premise, accounting personnel is required to seek new ways to gather these data from the supplier’s site. The second category is management and financial reporting. Suppliers may adopt different accrual basis, charts of accounts, reporting formats, and many more which may significantly impact not only the accounting department but also the departments of the accounting department supports. The third category is the system of controls. The fourth category is measuring the performances. Apparently, with changes in fundamental operations attributable to the new outsourcing arrangement, certain existing performance measurements outsourcing will be removed and shall be replaced with new ones. The final group is transaction volumes. With outsourcing arrangements, the company now deals with fewer transactions and therefore it is relatively easier to manage.
Specific Outsourced Functions
As mentioned in the preceding sections, outsourcing strategies, risks involved, requirements, monitoring, and measurements of outsourced functions vary significantly by the nature of the functions being outsourced. Our team members specialize in outsourcing several core functions of the company such as Accounting Function, Computer Services, Engineering function, Human Resources function, Logistics function, maintenance function, manufacturing function, sales and marketing function, and administration function. Our specific specialties include advising management on the potential benefits and expected risks of their outsourcing decisions, following by proposing recommendations on transition issues, developing control points, and measuring the outsourced function, which may vary significantly depending on the function outsourced.
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