More companies are strategically exploring outsourcing to drive efficiency and add value. In 2023, business leaders are discovering that outsourcing opportunities open the door to an entire ecosystem of core services and support services providers, effectively redefining what it means to outsource work.
And more notably, the shift towards outsourcing is delivering strategic results. A recent survey conducted by PwC noted that nearly half (46%) of companies who outsource financial services are 100% satisfied with the outcome. Finding that success comes down to finding the right partner–and model.
Different outsourcing business models, such as traditional, managed services, or strategic partnerships, offer varying levels of collaboration and engagement. Choosing a provider based solely on cost may not always lead to the desired outcomes.
What is Financial Services Outsourcing?
Financial services outsourcing is the practice of contracting external service providers to handle specific financial functions and tasks on behalf of a company. An organization can outsource a wide range of financial functions depending on their particular needs, but commonly outsourced services include:
- Accounting and bookkeeping
- Payroll processing
- Financial planning and analysis
- Auditing and assurance
- Financial reporting and compliance
Common Outsourcing Models
Outsourced services have a global market value of $95.2 billion, with finance and accounting sharing the top slot with IT as the leading service provider. However, each provider is offering something a little different. Let’s take a look at how different outsourcing models compare.
Traditional outsourcing is a contractual delegation of specific tasks or functions to an external service provider. The contract with the service provider clearly outlines the scope of work, deliverables, performance expectations, and other terms such as timeframes.
The service provider then assumes responsibility for executing the designated tasks using their own expertise, resources, and technology to deliver the agreed-upon outcomes. For example, a retail company that outsources its entire payroll process likely functions on a traditional outsourcing business model.
Trust is critical to building a strong traditional outsourcing relationship, as the client company has a less hands-on role in the deliverable process. Businesses considering this approach should weigh the following factors:
- Potential for cost-savings by eliminating the need for in-house resources.
- Access to specialized skills and knowledge in the outsourced function.
- Reputation of the service provider for meeting needs and expectations.
- The ability of the service provider to ensure data security and confidentiality.
A traditional outsourcing provider might look like a company that offers a la carte bookkeeping services at bargain pricing models. These providers might be on-shore (US-based) companies or off-shore (global) service centers that specialize in efficiently managing administrative workloads. Traditional providers are just that–service providers. They do a job but aside from the potential time or money savings, they may not support your strategic growth.
Managed services as an outsourcing business model is a more intricate relationship between the client company and the service provider. Managed services involve outsourcing a specific business function where the service provider takes full responsibility, and the goal is improved operation.
A company that outsources its financial risk management function allows the provider to assess, monitor, and mitigate risks within the organization. The provider implements strategies based on the assessments and provides ongoing recommendations.
In a managed services model, an established strong partnership with open lines of communication must be set to ensure the operation's success. While a managed services provider can deliver improved efficiency, productivity, and cost optimization, there are special considerations, including:
- Potential for misaligned goals despite a shared objective for optimization.
- There may be a complex transition process moving from internal functions.
- Fees associated with comprehensive coverage may be higher than traditional models.
A managed services provider often looks like a done-for-you bookkeeping and accounting solution. The idea is that these specialized providers can take entire tasks or needs off your plate at a cost-effective price (but not necessarily cheap) price. The downside is that these relationships come with little flexibility and variable shared responsibility, leaving you wondering if you have a partner or a provider.
The highest level of collaboration between client companies and service providers is the strategic partnership model of outsourcing. A strategic partnership transcends the transactional nature of outsourcing. It develops a long-term collaboration with shared goals to achieve mutual success.
Strategic partnerships often involve shared risk and rewards where both parties have a vested interest in the relationship's success. Bookkeeping can be an example of a strategic partnership when the service provision team is aligned with the objectives of the client company.
This type of outsourcing model has the potential for dynamic wins for all parties involved. However, to achieve victory, it’s essential that each company leverages the other’s strengths and complements its capabilities; otherwise, cultural friction and potential conflicts of interest may arise. When scouting partners, look for:
- Teams with a diverse spread of expertise.
- Providers that align with your business goals and have the capabilities to provide strategic support.
- An equal balance of subject matter expertise and business acumen.
Strategic partnerships often look similar to advisory services that blend functional capabilities like accounting and bookkeeping tasks with executive-level financial leadership capabilities. These models support true partnerships based on collaborative efforts and shared successes.
Next, let’s clear up a common area of confusion. Outsourcing and offshoring are two terms that are often used interchangeably–but there’s a difference.
Outsourcing vs. Off-Shoring
Outsourcing refers to the practice of contracting work with specifically delegated tasks, usually with a focus on leveraging external talent or expertise. On the other hand, offshoring occurs when a business relocates operations to another country, typically to cut costs.
Outsourcing is a way for two businesses to collaborate with a shared purpose in a transactional manner. In the offshoring business model, companies still shoulder production costs and responsibility; however, it's usually at a cheaper rate.
While the practice of offshoring is almost always financially motivated, it comes with hidden costs. Cheap offshoring carries a risk of lower quality outputs, which are compounded by language barriers, cultural differences, and greater distances, impacting effective management and misunderstandings.
Furthermore, there’s a long-standing stigma associated with offshoring, making it a risky move. In today’s politically charged climate, where 66% of consumers consider a company’s stance on issues to be an essential factor in loyalty, offshoring requires careful scrutiny.
How to Choose the Right Outsourcing Solution
When considering the right outsourcing solution, a company must ask specific questions to ensure alignment with its needs and goals. Every provider is offering something a little different, and these questions can help guide the decision-making process:
- What is the provider’s business model? The outsourcing ecosystem includes a range of service providers and strategic partners, each offering a little something different. Before you can choose one, you need to choose what.
- Does the company have a successful track record with reputable clients? This question aims to ensure the outsourcing provider has a proven history of success and is well-established in the accounting and finance industry.
- What does the company’s workflow and integration processes look like? Understanding the provider’s workflow and processes helps assess how compatible your internal teams are and ensures effective communication and collaboration.
- How will the company monitor and measure financial performance and KPIs? Understanding how the provider will align your company’s KPIs to support ongoing monitoring and performance measurements is important.
- Will the company be willing to adopt internal security practices to protect data? Seeking assurance that a provider has strong measures in place while being adaptable to your company’s security practices helps establish necessary trust.
- What are the qualifications, training, and credentials of team members? Ensure that the professionals assigned to your account have the necessary qualifications and knowledge to handle your financial accounting needs.
Asking questions helps establish trust and confidence between the client and provider, which is critical to securing any outsourcing business model. These questions will help make an informed decision when selecting the right financial and accounting provider.
Partner or Provider: What are You Really Looking For?
Outsourcing services can help businesses access top talent and achieve greater efficiency. While costs are a consideration, it’s important to note that cheaper isn’t always better. Making a well-informed decision based on trust, compatibility, and expertise is critical to selecting the right financial and accounting provider.
Asking the right questions to establish confidence can help businesses navigate the complexities of outsourcing and forge successful partnerships that contribute to long-term growth and success.