Who Needs Outsourcing and Why-Publication

Business process outsourcing is an effective advanced tool that allows a customer to delegate non-core functions to a third-party organisation, thus focusing on the key tasks of the company. In Russia, accounting outsourcing services alone are used by about 1 million companies and individual entrepreneurs, and this number keeps growing. Lyudmila Shusterova, Deputy General Director for Transformation and Strategic Development at Unicon Outsourcing, told us about the benefits of service providers’ clients.

REDUCTION OF OVERHEAD COSTS

Today we live in a VUCA world where the business planning cycle has reduced from two years to a few months. Changes in legislation, new restrictions, sanctions and other conditions of turbulence are forcing companies to focus not on the development, but rather on maintaining current positions and preserving working capital. The business strives to reduce any overhead costs: office space, personal cars, non-core specialists that have no direct impact on the revenue growth. At the same time, companies cannot refuse from accounting records maintenance or payroll calculation, so the delegation of non-core functions to outsourcing often becomes a solution for those who are not ready to overstaff the team, spend funds on recruiting, onboarding, training and keeping personnel who are not responsible for strategic development of the company.

To understand how beneficial this solution can be for business, it is necessary to compare the cost of the provider’s services and all personnel costs (in addition to salary): arrangement of the workplace, equipment and software, payment of personal income tax and contributions to social funds.

For example:
The salary of a full-time in-house accountant is 70,000 rubles per month. Additionally, the following costs should be taken into account:

direct: taxes and contributions to funds (24,500 rubles) + rewards, surcharges, bonuses (6,000 rubles) + vacation pay, sick leave, no-show (6,000 rubles) + voluntary medical insurance (5,000 rubles) + training (2,000 rubles) + office rent at the rate of 4.5-6 sq. m (10,000 rubles) + depreciation (8,000 rubles) = 131,500 rubles. Total: 201,500 rubles
indirect costs include licensed software, anti-virus systems, IT support, office maintenance, and potential risks. According to our calculations, on average, indirect costs per employee come to 40% of direct costs: 131,500 thousand rubles x 0.4 = 52,600 thousand rubles per month.

As a result, monthly costs for one employee only amount to 184,100 thousand rubles. At the same time, the calculation does not take into account the cost of electricity, renting servers and data centres for the location of server and network equipment, which will be needed even if the company transfers all employees to remote work. Arrangement of remote work allows to reduce some of the overhead costs; however, by law, the company is still responsible for equipping a workplace: providing the necessary office equipment or agreeing the amount of payment for depreciation of employees’ personal property, and purchasing licensed software.

INFORMATION SECURITY GUARANTEE

During the forced transfer of employees to remote work, the business faced the problem of ensuring information security (IS) among remote workers: it became difficult for companies to control the compliance with data confidentiality, the security level of the networks used, etc. No doubt, the costs of developing IT infrastructure, purchasing or renting additional servers, and buying new software also increased.
Clients of outsourcing companies partially shift these tasks to providers: in terms of service operating capacity it is the provider who is responsible for security.

For example, IT infrastructure and work of our staff are organised in accordance with the requirements of ISO 27001 information security standards. Upon entry into employment, all employees sign a non-disclosure agreement. Any customer data is stored in a single system which may be accessed only by the teams working directly with the customer.

Specialists who work with personal data of clients use virtual machines which are inaccessible for a computer virus and where it is impossible to copy working information from. The use of any copy device is strictly regulated and controlled by the IT Department. Original copies of paper documents are transferred to the customer or to the archive after processing, and their copies are stored for a predetermined period of time, and then destroyed.

EFFECTIVE PROCESS STRUCTURE

Before the start of the pandemic, one of the frequent requests of our clients was a request for an “implant”, i.e. an employee of the provider who works in the client’s territory. This demand was in many cases driven by concerns related to the arrangement of business processes: staff members are easier to control, and it is easier to assess their performance. However, massive transition to remote work format has shown that this judgment is erroneous: well-managed business processes, clear instructions and regulations allow to control the work of any employee, regardless of their location.

In addition, companies have realised that it is not absolutely necessary to hire and keep a full-time in-house specialist if he/she is not 100% loaded with work. Clients of the outsourcing company pay only for the hours actually spent on supporting business processes, and not for the eight-hour working day of full-time in-house employees regardless of the degree of their workload. Also, in cooperation with an outsourcer, client companies receive not just one specialist, but a full-fledged team: an actual contractor, a client manager who will manage the document flow and help the customer with setting tasks, support from methodologists who will regularly inform about changes in legislation, and IT specialists. Compared with in-house employees, external specialists regularly undergo training, have high expertise, certificates and access to the provider’s knowledge database.

REDUCED TAX RISKS

In the presence of an in-house accounting department, all risks associated with incorrectly paid taxes, errors in reporting, fines as a result of field and office audits are born by the company: the case law shows that it is impossible to recover damage from an incapable accountant unless the fact of willful conduct is established.

For example, the chief accountant of one of our clients kept accounting records incorrectly, regularly paid extra money to the budget in order to avoid penalties. After switching to outsourcing, we managed to return over 10 million rubles of excess payment for the company only for the last three years. Unfortunately, the remaining amount could not be returned due to the expiration of the period of limitation.

Cooperation with an outsourcing company allows the customer to relieve itself of tax risks and avoid large fines. If a supervisory authority imposes penalties on the company due to the error of an employee of the outsourcing company, the obligation to pay the penalty will be born by the provider.

In addition, outsourcer’s employees regularly undergo advanced training, have ACCA and DipIFR Rus diplomas, and monitor changes in the legislation, which reduces the risk of errors.

BUSINESS PROCESS OPTIMISATION

The tendency to reduce costs forces companies to analyse current processes and look for optimisation means: if there are any duplicate functions, if it is possible to automate some of the manual operations, how seamless the knowledge sharing system operation is, and so on.

You can conduct such an audit on your own, but in this case you need to be aware that it is quite difficult for staff specialists, especially those who have been working in the company for many years, to think beyond and assess the effectiveness of certain processes with an unbiased eye. External consultants who understand industry trends, who are familiar with other market players, with your competitors and the tools they use, will be able not only to give their opinion on the current processes, but also to offer solutions to improve their effectiveness.

For example, while auditing business processes of one of our clients, it turned out that two departments simultaneously entered the same data into different accounting systems. At the same time, each team had its own methodology for data entry. Consequently, the company incurred increased function costs and faced critical discrepancies in accounting and management statements. As a result, top management could not arrange the business planning process due to the incorrect initial data. Having identified this problem, we developed for the client a relevant method of working with data, regulations for the interaction of departments where we specified the responsibilities of each of them, and also offered a solution to automate manual operations. As a result, we managed to improve the work of one function alone by 20%.

No doubt, outsourcing of non-core functions allows the client to focus on increasing competitiveness and business development. However, like any other tool, outsourcing has a number of limitations. Thus, if a company uses quasi-legal schemes, views a provider only as an opportunity to quickly fill in vacant positions and shift responsibility, while a thought of any changes evokes fear, it is unlikely that cooperation with an outsourcer will be effective. Therefore, we recommend you, firstly, to understand what the company expects from outsourcing, and to assess the readiness for changes and cooperation. An experienced and careful provider strives not only to take over payroll calculation or accounting, but to become a reliable business partner for the client, offering solutions to improve current processes and increase their effectiveness.