Outsourcing: the financial and ethical considerations

Outsourcing: the financial and ethical considerations

As the cost of survival in the UK goes up, it might be time for your business to think about outsourcing some of its accounting services.

Outsourcing: the financial and ethical considerations

For some, the idea of outsourcing is lazy, or the result of bad management – for others, it’s a way to cut costs and grow services. However, for SMEs and large corporations alike, it is a reality that an efficient business model in the 21st century utilises outsourcing.

Since the 1990s, major accounting firms have outsourced their services to centres in India, thanks to an exchange rate that favours the pound and a large workforce. Similarly, Europe and North America have also seen a rise in outsourcing as more companies look to cut costs and improve service.

As UK wages climb and the value of the pound decreases, accountancy firms are looking for ways to make their business as profitable as possible. In a 2016 Deloitte survey, 59% of respondents said that they outsourced primarily to cut costs, with others wanting to focus on their business (57%) or solve capacity issues (47%).

However, while outsourcing has become increasingly commonplace in the industry, there are many considerations that accountants need to be aware of before any decisions are made.

Toby Stanbrook, head of accounting and outsourcing at Mazars, said: “It can be challenging to manage and run a finance team with an increasing level of complexity in areas such as accounting standards, tax legislation and payroll/pensions.

“Outsourcing provides peace of mind that a team who understands the business will provide both continuity and a quality of service without the need for significant oversight.”

Securing the benefits

Goringe Accountants have been providing services in the UK since 2007, and internationally with their outsourcing services for the past seven years. Its founder, Nicky Goringe Larkin, has found that providing outsourcing grew her business organically and affordably, and believes too few small and medium-sized firms are taking advantage of the benefits.

“They may dabble in this area, but they often don’t want to necessarily get involved with too much detail,” Goringe Larkin said. “But I think companies – the smaller companies which do have outsourcing – can benefit so much as they have the resources at hand to cover lots of areas within the financial function.”

There are dedicated outsourcing companies that can help create a plan, as well as firms which provide outsourcing services, and the ever-growing database of digital tools that help facilitate management. However, accountancy firms need to know what they want from the outsourcing relationship before making major changes—particularly with changes happening to the relationship between the UK and the EU.

The ethics of non-disclosure

A moral issue also arises when customers are not informed that their finances are being handled elsewhere. While the American Institute of Certified Public Accountants – the US equivalent to the UK’s ICAEW – has regulations for disclosing offshore outsourcing to clients, there are no UK equivalences.

Whether a firm discloses where their client’s payroll is being filed from, for instance, is a moral matter rather than a legal one, but clients may have a different opinion than their firms do.

When a firm discloses that they are outsourcing some of their workload, they should prepare for their data security to come under questioning. For instance, India hosts many outsourcing centres, but they are not currently GDPR compliant – and with cybercrime becoming more sophisticated, it is reasonable that a client would want to know where their personal info is being stored.

However, it is important to note that not all outsourcing takes place in another country, particularly for small and medium-sized enterprises. A firm in London, for instance, might outsource bookkeeping to an employee located in the North of England, where living costs – and salaries – are lower overall.

In these instances, there’s less of a moral issue, since the employees are still under UK jurisdiction. However, offshore outsourcing brings into question EU data protection laws, which are subject to change under Brexit.

While clients may be wary, incredible amounts of information are transmitted internationally every minute, and while cybercrime is on the rise, security risks can be mitigated with firewalls and human oversight. All of these things need to be considered before moving forward on the decision to outsource.

Inter-company concerns

For companies with a lot of customers and employees, outsourcing certain elements like payroll and taxes makes fiscal sense. It’s more affordable to hire multiple employees in India than an employee in the UK, but this can lead to job insecurity for those UK-based employees.

Outsourcing comes with its own set of challenges, including security risks, the potential for inadequate service and low employee retention.

Additionally, a certain degree of oversight is lost when a business has employees in another country. Their management is ultimately coming from the site manager; however, this manager may have something extra to offer, expanding the company’s creative or functional assets.

“An external advisor can bring a fresh pair of eyes or a different approach to considering performance, which can really help both established and scale-up businesses to bridge between their current performance and where they want to be,” Stanbrook said.

For small enterprises with a limited amount of key staff, managing outsourced employees may take up time they do not have, so the proposed benefits must be weighed against the cons. Outsourcing is popular in accounting because it works, but as each firm has different goals, its important to put your firm first.

For more on how Brexit will affect outsourced and offshore accounting, check back with Accountancy Age for more information.

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