Backsourcing: The latest accountancy trend?

The accountancy sector has traditionally relied on outsourcing, with one out of three internal audit departments worldwide now outsourcing at least some of their work. Outsourcing can bring a range of benefits, but what happens when it goes wrong and the outsourced service provider fails to meet expectations?

After decades of outsourcing, the market has been experiencing a greater prevalence of back-sourcing, also known as insourcing. Backsourcing involves bringing back in-house functions and business processes that had previously been outsourced to external suppliers. What’s more, where backsourcing had previously largely been implemented by banks and large corporations with the requisite scale and resources, new technologies mean that this trend is now being seen across different sectors and within smaller organisations.

Key drivers for backsourcing include the following.

1. Control

Organisations perceive backsourcing as a way to regain or improve control of business-critical functions and processes. Whereas a particular function may have been regarded as low level and a functional part of operations, experience may have shown that the function and the decisions it takes have far-reaching impacts on a business. One example is IT architecture, which affects IT policy, strategy and security.

2. Change flexibility

Outsourcing agreements typically accommodate changes to the agreement through a prescribed change process which requires coordination with the outsourced provider and which may result in a cost impact. Backsourcing services make changes primarily an internal business activity, and are therefore perceived as giving organisations a greater degree of control in determining the nature of the change, potentially limiting the cost impact.

3. Cost reduction

Backsourcing removes the supplier’s margin therefore leading to a potential cost reduction.  Additionally, labour arbitrage, often a driver of outsourcing, is losing its appeal with increasing costs in outsourcing centres, along with the rise of automation and robotics, which can reduce the labour component of certain activities and functions. Backsourcing does not automatically mean onshoring of services, however, for primarily UK-based organisations operating in a post Brexit decision environment and with a significant drop in the value of the pound, the reducing cost differential between outsourcing to offshore suppliers as compared to bringing functions onshore may influence decisions to backsource.

Enhanced access

The increasing prevalence of “as a service” solutions, cloud offerings and robotics, alongside simplified purchasing routes and commercial models for these new technologies, have allowed businesses to re-take activities which would have previously relied upon legacy technology and infrastructure and, therefore, outsourcing suppliers. Cloud accounting services, which one commentator estimates already automate 80-90% of transactions for clients, allow companies to store data without needing rooms full of servers to do so, and lower the need for specialist skilled personnel and significant levels of staffing. In addition, software-as-a-service applications can allow organisations to log, access and analyse data.

Automation and artificial intelligence are on the advance too, with 37% of small and medium-sized business owners of the opinion that accountancy is becoming more automated. Indeed, as technology solutions develop and become more widespread, affordable and intelligent, there are likely to be further increased opportunities for backsourcing, with technology reducing the need for large labour workforces, and filling gaps where there is a lack of available talent, therefore reducing costs and mitigating other personnel-related challenges.

It is these technologies that are making backsourcing more widely available and there are now a number of consultants and advisers who can assist organisations with implementing such changes.

Backsourcing challenges

Organisations should be aware of the challenges that can come with backsourcing, for example, (i) recruitment and training of personnel, or transfer of personnel; (ii) amendments to processes; (iii) data transfers, systems reconfiguration, user access modification; (iv) IT licences reviewed and assured; (v) updated governance; (vi) new reporting, and so on.

Implementing the new operating model post the backsource carries the greatest operational risk for the business. It is essential that the organisation has undertaken sufficient due diligence to ensure that it understands the scope of the new backsourced activity and how it will align internally within the business and with ongoing third party providers. Some organisations may not have the specialist in-house skills to undertake this assessment and may need to engage a consultant to assist.

Backsourcing is typically a partial rather than complete takeover of a previously outsourced activity.  This brings its own challenges. Contractually, even if the customer is granted complete flexibility by the outsourcing agreement to terminate portions of the service, the practical implementation of a partial termination in terms of cost allocation and impact on remaining services means that this can act as a barrier to backsourcing.

Accountancy firms should also consider the impact of TUPE on backsourcing, particularly where outsourced functions are “labour intensive” or involve significant employee support. It is key to consider to what extent is it the preference of either party that employees transfer back in-house (bearing in mind the need for knowledge and skills transfer) and to what extent this supported by both the application of TUPE and the relevant provisions of the outgoing agreement.

Outsourcing agreements are evolving to reflect a greater trend towards backsourcing, with businesses increasingly focused on the potential future structure and operating model design. This is a trend that accountants should be cognisant of and should ensure that any outsourcing agreements entered into anticipate such changes.

Mike Pierides is a partner and Sarah Bryan is an associate at Pillsbury Winthrop Shaw Pittman.