Considering outsourcing? Read this first


Considering outsourcing? Read this first

What's the secret to flexible, agile growth – without significant fixed cost increases? For many, it is outsourcing.

Released this month, Grant Thornton's 2015 International Business Report, Outsourcing: Beyond Technical Expertise, explores what companies look for in their outsourcing relationships.

With at least two in five mid-sized businesses saying outsourcing is an important way to reduce costs, improve efficiencies and (in many cases) ensure compliance, outsourcing back-office processes is now an established business practice. Australia is seen as a 'mature' outsourcing market – Grant Thornton's 2014 study found 42 per cent of Australian mid-sized businesses currently (or plan to) outsource business processes.

Ian Herman, National Managing Partner at Grant Thornton Australia, established Grant Thornton's outsourcing practice many years ago. He shares his insights into what's driving this urge to partner with third parties – and what might be next.

Are we outsourcing more these days?

"It's certainly gathering momentum. We are seeing many of our own clients explore opportunities to outsource so they can not only keep costs down but gain access to specialist resources and skills to remain competitive," Herman explains.

"As confidence in outsourcing grows, we are seeing more focus on outsourcing to do things better, rather than just cheaper."

The 2015 report highlights payroll and HR processes as the most typical things being outsourced, with 34 per cent of businesses seeing these transactional processes as more easily outsourced. But as technology becomes increasingly sophisticated, more complex requirements can be handed over.

So what other activities are Australian businesses outsourcing successfully?

"Any form of business processing, from design to data analytics," says Herman. "One area that is just ballooning, as technology becomes smarter at interpreting data, is anything requiring algorithms, data collections, analysis or research."

He says the main driver is cost-effective efficiency and capability gains.

"One of the biggest challenges for mid-sized businesses is how to fund their growth. Outsourcing can be a great way to convert some of your fixed costs to variable, mitigate your risk and give you access to resources or technology you don't have in-house."

As confidence in outsourcing grows, we are seeing more focus on outsourcing to do things better, rather than just cheaper.
Ian Herman, Grant Thornton

What should you look for in an outsourcing partner?

Although cost savings are a key motivator, the survey found reliability of service is more important globally than all other factors in selecting an outsourcing partner.

Cost is still a very important consideration in more mature outsourcing markets, including Australia (50 per cent of respondents). But trust, an understanding of the business and a proven track record in servicing similar organisations play a key role in outsourcing decisions around the world.

The report describes this as the 'c-suite' of outsourcing criteria: "compliance, cost and confidence." If you are dependent on your outsourcing provider for key back-office services, it's not that surprising that cost comes second to trust and reliability.

Companies are also looking beyond technical skills and internal processes when choosing an outsourcing partner. 'Intangible assets' such as communication skills (according to 88 per cent of respondents) and good relationships (87 per cent) are the main ingredients of a successful outsourcing arrangement.

Responsiveness is part of this: nearly three-quarters of businesses say their main outsourcing provider needs to be able to meet with them at very short notice.

Outsourcing requires careful assessment of the risks and benefits, and ongoing monitoring through very clear service arrangements. The report suggests widening the scope of due diligence to include communication and responsiveness, and reviewing relationships at least every two years. You may need to consider reporting additional KPIs, such as average response times to client queries, or the success of provider ideas for streamlining processes.

"Once outsourcing is in place, you just can't walk away," Herman comments. "Get the foundation and incentives right, because if you depend on their service as a core part of your business, you need to be able to rely on that partnership."

This was reinforced through the latest report findings. Around eight in ten businesses in more mature markets have never brought an outsourced service back in-house. Once a business process is outsourced, it tends to stay that way – unless service quality or standards become an issue.

What does success look like?

Herman gives the example of an accounting department in a client's business.

"They had acquired multiple businesses so had different ways of running that function. We helped them standardise the processes, and then outsource the accounts payable and transactional procedures – right up to standard reporting."

The business achieved efficiencies through this consolidation, and better cost certainty, but also freed up more time for analysing and interpreting the results, rather than just preparing them.

"About three months later, they were then able to spend more time on forecasting and implications. We saw a fundamental shift in the finance team's approach, moving to an advisory role."

A new offshore model in the cloud

Herman believes cloud-based computing has opened up global regions for smaller businesses, where previously only large corporates could finance and control their own offshore operations.

"Now there's an opportunity for businesses to get offshore capability using their own systems, with the data housed in Australia," he says. "They feel like they've got the best of both worlds under a hybrid model – their systems, their terms."

"I think technology will continue to change the game, because it continues to be able to do more human-like functions," Herman predicts. "The cloud outsourced model will take more market share, and we'll be able to automate even more."

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This material has been prepared by Macquarie Bank Limited ABN 46 008 583 542 AFSL & Australian Credit Licence 237502 ("Macquarie") for general discussion purposes only, without taking into account your personal objectives, financial situation or needs. Before acting on this general information, you must consider its appropriateness having regard to your own objectives, financial situation and needs. The information provided is not intended to replace or serve as a substitute for any accounting, tax or other professional advice, consultation or service.