To Outsource or Not to Outsource
In recent years, outsourcing of the accounting function has become a popular choice for many financial services organisations, in particular fund managers. This trend is reflected in the growth of outsourcing departments within advisory firms. However, whilst many businesses reap huge benefits from outsourcing, it may not always be the right path to follow.
In this article, we discuss some of the areas to consider when deciding whether or not to outsource all or part of your accounting function, some of the potential issues that may arise, and how to pick the right outsource service provider for your business.
Key considerations for outsourcing
What is your internal skillset?
As a fund manager, particularly a start-up, it is important to consider the skillset of the current directors/members and employees. Bookkeeping and accountancy experience are essential if you plan to keep your accountancy function in-house. A basic checklist to assess the team’s accounting expertise could include the following:
- Knowledge and experience of accountancy software
- Relevant bookkeeping experience
- Experience of producing management accounts
- Basic knowledge of accountancy standards and applying these correctly
- VAT compliance knowledge
- Payroll compliance experience and knowledge
If you conclude that there is a gap in experience or knowledge in any of these areas then outsourcing that function would be a sensible consideration.
Do you have internal resource available?
Start-up fund managers tend to opt for the ‘lean’ cost approach initially, until the fund provides sufficient management and performance fees. This usually results in the team ‘wearing many hats’ and fulfilling several different roles. It is worth assessing your team’s capacity for accounting tasks or if outsourcing could free up resource for other tasks allowing for the managers needs to ‘get on with the day job’.
What are your shareholder or member reporting requirements?
The reporting requirements to shareholders/members will be another key factor when deciding whether to outsource. Comprehensive financial reporting from an independent party may be considered a necessity when reviewing financial performance or reporting to external shareholders or investors.
Are you scaling up?
Investment managers might consider engaging outsourcing providers on a temporary basis, particularly during the start-up phase of the business. The growth of the fund will naturally result in increased management and performance fees which in turn will provide the additional cashflow required to set up the in-house accountancy department or function.
This allows the accounting software, systems, processes and reporting to be built and implemented with confidence, allowing for a seamless transfer if the decision is then made to take the accounting function in-house.
Is it worth the cost?
For investment managers, the cost of outsourcing plays an integral part in the decision-making process. In the lean, start-up phase, while cost is a significant factor, careful consideration of the benefits of outsourcing should not be overlooked, especially in a sector where regulation and compliance requirements feature heavily.
What are your compliance requirements?
Compliance requirements will also need to be carefully considered when making the decision on whether to outsource. VAT, Payroll and FCA GABRIEL compliance are just a few of the key areas to consider.
Potential outsourcing issues
As with any business service, outsourcing of the accountancy function does not work for all businesses. It is possible to come across potential issues. However, in most cases, these can be resolved with the right outsourcing partner on board. Some of the areas to look out for include:
- Poor communication
A communication breakdown between investment manager and outsourcing provider is a common downfall in unsuccessful outsourcing arrangements. This is often due to an over reliance on email communication, resulting in delayed responses or misinterpreted emails.
It is therefore critical that you set communication expectations at the start of the engagement to ensure a healthy flow of communication between all parties.
- Missed deadlines
Timeliness of work and missed deadlines is another issue that can arise. A combination of statutory requirements, compliance, regulation and internal and external reporting creates a number of important deadlines that must be met. Set and agree deadlines from the start of the engagement and create a timeline to ensure that both parties understand their responsibility in providing what information is required and when.
- Delegation of responsibilities
Sometimes, responsibility for tasks can fall between the cracks during outsourcing engagements. Make sure that you draw up a clear list of responsibilities and agree them at the proposal stage to ensure all tasks are delegated accordingly.
- Managing expectations
Expectation gaps surrounding reporting requirements are another common pitfall. Giving your outsourcing provider clear instructions from the outset about the type of reports you are expecting, for example, KPI reporting, budget vs actual variance reporting or cashflow forecasting should avoid any misunderstanding at a later date.
- Assuming your provider has all the facts
When there is regular interaction between the outsource provider and client, it is easy to assume that the provider is part of the internal team and fully aware of all relevant developments. This is unlikely to be the case and it is best to proactively update your provider with any changes that might be relevant.
Choosing the right outsourcing provider
Once you have made the decision to outsource, it is crucial to select the right provider for your business to ensure a successful partnership. Here are five key steps to help:
- Meet the team
Meeting the outsourcing team is a crucial part in ensuring that the provider is right for you. The engagement Partner and Manager should be the bare minimum of the team that you meet during the initial scoping process. Once the team for the engagement is fully assembled a meeting should then be arranged as early as possible.
- Ask for references
Do not be afraid to ask for references and testimonials from existing clients. The likelihood is that you were referred to the outsource provider, however a second and third reference will ease any reservations that you may have.
- Be sector specific
Ensure that the engagement Partner and Manager are specialised and experienced in the sector in which you operate. Again, asking for references can help eradicate any doubt in a provider’s lack of sector knowledge.
- Ask for costs upfront
Ask for a three-year fee plan as part of the proposal. This will allow you to accurately budget the costs of engaging with an outsource provider over a prolonged period but also importantly limit any huge and unexpected fee increases.
It is also recommended to obtain quotes from at least three providers to compare and contrast with each other.
- Assess their tech
Given it plays such a prominent part in outsourcing, it is important that your provider is embracing and integrating technology but without sacrificing data security.
Cloud accounting and integrated applications have opened up a whole new world for outsourced accounting services; a provider that views such technology as a critical cog of the engagement will result in seamless and efficient systems and processes.