Magazine article CMA - the Management Accounting Magazine


Magazine article CMA - the Management Accounting Magazine


Article excerpt

In the latest trend of cutting costs and improving efficiency, outsourcing has become an acceptable way of resourcing an organization's operations.

In the private sector, it is geared to competitiveness in selling goods in the world market as the world moves more and more towards a global economy. When an organization has to compete with others who build the same product, it is important to reduce costs to maintain competitiveness.

In the public sector, as budget times get tougher, it has made organizations look where they can save dollars. Trying to meet service commitments with limited resources has made efficiency the number one priority.

What is outsourcing?

When an organization contracts out its non-strategic operations to a third party, it is called outsourcing.

Many believe this practice has been around for a long time. When computers became part of the business environment in the 1960s, the cost of data processing in-house was enormous, forcing companies to buy computer time from outside bureaus. Moreover, organizations have always used outside parties to process their payrolls, run their mail-room services, answer their telephones, and the like.

Outsourcing has gained new acceptance over the past few years as its benefits have become more apparent. The practice has become quite common in the information technology area because the benefits and savings have been readily recognized. In a small organization, outsourcing is an attractive alternative when the firm cannot afford the huge capital and operating costs required to implement and maintain computer services. In a large organization, it makes practical sense to outsource in order to keep up with the times in an environment of rapid technological change.

As an example, oil and gas companies that have used outside services, such as commercial airlines, drilling rigs, and fuel trucking, do so as a means of letting others perform part of their operations. With time, a growing industry finds that it has increased capability to command the means to accomplish its needs in its own environment. As the industry matures, it can clearly understand its needs and find increased confidence to outsource. In a mature industry, the outsourcing environment is attractive as more and more services become available in the market. This concept can be portrayed as in the accompanying graph.

What functions can be outsourced?

"Companies will be surprised at how many functions could be outsourced if they really focused on what the costs are," says Ron Erickson, manager of resources and corporate systems at Shell Canada Limited. "There are some functions we don't have to be experts in, and we don't have to train our own staff so that we can have these functions done inhouse."

The question then becomes, "What are the real core requirements, and is any value added by having the internal staff do them?" If no value is added, then it often makes sense to have the operation outsourced. By outsourcing, organizations are eliminating the low-value tasks that they would otherwise have to do.

Most experts agree that an organization does not have to be an expert in every aspect of its business in order to be competitive. There are some areas, both on the economic and the feasibility side, that give each organization its strength compared to the competition, which it would not like to expose to outside firms. Each organization would thus concentrate on those areas that give it strategic superiority over its competition and would outsource any operation that is non-core.

It is not essential to have the apparent cost advantage. Sometimes simply breaking even is attractive as it is not necessary to spend energy doing something that is not vital to the core business In a sense, the total picture should be looked at before considering outsourcing because it is not just the cost savings that would influence such decisions every time. …

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