Cost cutting exercises are taking place in many organisations. Redundancies and salary cuts appear to be quick solutions to reduce operating costs by 10-25%. However, there are also other ways to reduce operating costs. Outsourcing of non-core functions is one of these options. Outsourcing can include smaller niche operations such as internal audit as well as larger functions such as payment processing and accounting. However, it can be quicker and easier to achieve immediate cost savings by outsourcing smaller non-core functions.
Has your organisation seriously considered outsourcing?
How to decide which smaller non-core functions you should outsource
Smaller non-core business functions that have been outsourced successfully by some organisations in Hong Kong include the following:
- Internal audit
- Human resources and payroll processing
- Corporate and employee tax compliance
- Company Secretarial
- Employee benefits/claims administration
- Work visa applications
- Debt collection
- Training
There can be significant benefits to outsourcing but there are also risks associated with such a strategy. All of these needs to be considered when deciding whether a function should be outsourced. Some of these factors are as follows
- Number of external service providers available in the market - there should be a reasonable number of service providers who have experience in delivering similar services. The more providers in the market, the better position you are in when negotiating a deal. It can also allow you to easily switch to another service provider if this is necessary.
- Level of expertise required to carry out the task - some business functions, such as internal audit (corporate treasury audit, IT audit, etc.) and system design and implementation require expertise, which is difficult to retain in-house.
- Quality of service - the quality of service provided by an outsourced function should be assessed. The quality should be no less than that provided by an in-house function. The service provider should also have a proven track record in that service.
- Size of your existing in-house function - an outsource service provider is in that business because it makes a profit, so why should it be cheaper? In many cases it is to do with economies of scale. Therefore, for big organizations with larger in-house functions, it is less likely that full outsourcing will provide significant cost savings. However, many organizations can reap cost savings through full or partial outsourcing of medium and small sized departments.
- Less cuts may be needed elsewhere - if non-core functions are outsourced, this may achieve most of the cost reductions an organization requires, and hence less cuts may be necessary in core functions enabling competitive advantage to be maximized.
- Loss of people - in the current climate very few organizations are expanding. Redeploying current resources into other areas of the business may therefore be difficult and thus retrenchment may be required.
- Loss of control - although outsourcing does not necessarily mean that a company abrogates control of a function to a 3rd party, there will inevitably be a decrease in the level of control exerted by management. Many people may find this uncomfortable and a different management style would have to be adopted.
- Fear of the unknown - unless outsourcing has been used by a company before, management may be nervous about changing the operations. Similarly, the culture of the outsource provider should also fit with the company.
How to achieve cost savings with internal audit
Internal audit is one example of a niche non-core function that many companies have outsourced. Benefits achieved through this strategy have included the following:
- Due to economies of scale, an outsourced internal audit function has access to structured training and auditors have experience in reviewing similar business activities for other clients in the same industry. The ability to compare similar functions between different companies and benchmark against leading market practice provides added value.
- Expertise required to carry out some of the audit work such as corporate treasury and IT audit is expensive if employed full-time. Such specialists are often only required for a number of weeks or months during the year. External service providers can provide the required expertise on an as-needs basis and will only charge for the period of service provided. These people would need to be employed full-time if an in-house team is maintained.
- Immediate improvements in the capability of the internal audit function can be achieved. Many traditional in-house auditors are still carrying out significant levels of transaction based compliance tests that add limited value to an organization. Outsourcing can provide an immediate change to more advanced techniques using risk-based methodologies that are executed by staff with experience in this area.
Conclusion
Currently, outsourcing is not widely used within Asia whereas in other areas of the world it is more prevalent. We expect to see an increase in outsourcing as organisations strive to focus on their core competencies, reduce costs and improve the quality and efficiency of non-core functions. Also, with the large number of small and medium sized non-core functions in Asia, there are relatively more opportunities for outsourcing to achieve some immediate cost savings.
By Duncan Fitzgerald, Partner and Loretta Ching, Senior Manager of PricewaterhouseCoopers' Global Risk Management Solutions Practice.
