Written by John Chand in April, 2011

Outsourcing or offshore outsourcing is where an organisation, most commonly a business enterprise, engages an external organisation in a different country to carry out some of its labour intensive service administrative functions, for example, data processing and customer support.

The trend for Australian business enterprises to use offshore outsourcing has grown at an alarming rate since its early beginnings when, by outsourcing IT services, call centres and other administrative process to lower labour cost countries, substantial savings could be achieved.

There are four basic areas of offshore outsourcing:

1. ITO – Information Technology Outsourcing
2. BPO – Business Process Outsourcing covers things like running call centres.
3. RDO – Research and Development Outsourcing
4. KPO – Knowledge Process Outsourcing covering things that require a higher knowledge base such as Finance, Accounting, Engineering and Investment analysis.

KPO is the newest form of offshore outsourcing and is set to become increasingly popular in Australia as business enterprises follow their UK and US counterparts and begin to outsource a wide range of white collar jobs which require a skilled personnel base.

As identified in a study by KPMG in 2008, the “offshoring” of financial services is growing in both strategic and operational significance as shareholders of financial institutions, particularly in the current environment, seek a flatter expense base, by reducing labour costs, whilst striving to improve productivity.

Though the advantages of outsourcing financial services seem rather straightforward, i.e. lower costs, there are several disadvantages, which include:

• The security risks of sending confidential information to a different country.
• Ensuring that the timing and quality of service to be provided is of an expected and sustainable level.
• The loss of managerial control, as the work is performed in a different country.
• The further loss of control when collaborating with third party service providers.
• Underestimation of the running costs involved in KBO.
• Ensuring that the time taken to review the work outsourced combined with the costs of outsourcing the work costs less than it would for the work to be done in Australia.
• In relation to Accounting Firms outsourcing some service, their customer’s views in relation to foreign workers handling their confidential information.
• Also in relation to Accounting Firms and the services they provide, taking into consideration their customers views in relation to paying an Australian Firm Australian prices for work, which in turn is done overseas for non-Australian cost.

The last disadvantage listed above raises a serious issue regarding KBO, particularly in relation to the disclosures made to clients regarding the use of KBO for accounting work. Not only does it beg the question as to whether these circumstances are being disclosed in the first place, but also what charge rates are being used for the services performed by the overseas parties.

It is inevitable that more and more businesses will consider the outsourcing of financial services, including accounting, due to the cost saving benefits. However, for businesses to achieve the cost saving benefits of outsourcing they must first evaluate the structure of their businesses and how to best incorporate outsourcing. This is a much more difficult task and many small to mid-sized businesses will need to go through a third party known as an outsourcing agent to accomplish this.

As the outsourcing of accounting services is in its early stages, its effect on the accounting profession is yet to be seen. What is certain is that it will undoubtedly change the profession, in particular what, where, and by whom accounting services are being performed.

PLEASE NOTE:  All information contained in the articles below was correct at time of publishing.