“Outsourcing” refers to the practice by which one company hires another company to perform a service or process which would traditionally have been performed in house by the company’s own employees. Although businesses (especially smaller companies) have always been contracting other companies to complete some part of their business process (an example would be publishers who have been outsourcing printing jobs of their original copy material to companies that run printing presses), it was not until the late 1980’s that outsourcing was formally recognized as a valid business strategy and the early 1990s saw large scale adoption of this model.
It began with hiving off the services that were deemed to be non-essential to the core business like accounting, data processing, internal mail distribution, security, housekeeping and maintenance of company facilities. And now, in today’s fluid globally connected business environment, there is, in fact, less focus on whether a particular business process is considered core and therefore not liable to be outsourced and more on whether outsourcing will achieve greater efficiency in said process, in which case, in all likelihood that process will be outsourced.
Key advantages of opting to outsource
Outsourcing offers tremendous benefits, such as :
- access to a larger talent pool,
- increased efficiency and productivity,
- 24/7 availability of services,
- easy up-scaling,
- laser-like focus on core processes and knowledge sharing
- lower costs.
A company can employ the best talent in the world with fat paychecks and great benefits, locate its offices in locations where these employees would be willing to relocate, ensure round the clock operations by locating teams in different time zones or pay hefty overtime to employees to work night shifts, invest in a training program to upskill its employees, even invest huge sums in infrastructure (real estate, machinery) in locations where such infrastructure is expensive, hire its accountants, customer service staff and even employ maintenance staff to clean its various offices and employ more workers when needing to upscale. But all this will cost quite a lot. And competitors who outsource these processes cleverly will not have to spend as much.
Take the example of a fashion brand manufacturing garments and headquartered in the United States. Its manufacturing will be handled by a company running a generic plant in Bangladesh, the main design studio will be based in India and will be guided by a small team of fashion experts based in the United Kingdom and Italy, the accounting will be handled in the Philippines, customer care will be handled by a call center in Vietnam and social media presence and internet marketing by a start-up in India. With this setup, if required to increase production by 50% of its new line which is very popular in the market, it will be able to do so in a matter of weeks (by quickly hiring another manufacturing company in Vietnam). All of this achieved via the medium of short term contracts with specialized companies providing the above services. The United States headquarters will be staffed by a bare-bones senior management team whose main task will be guidance and monitoring. In such a business environment, a company which just for argument’s sake, chooses to employ its workers for all the above processes and base them in the United States will probably have to shut up shop in a matter of months.
What you must be cognizant of when outsourcing
Outsourcing does come with a few disclaimers. And they all stem from the fact that the senior management team (no matter how diligent it’s functioning) loses some amount of control of the various processes that make it a company. Even with a watertight contractual agreement, there is a threat that intellectual property and sensitive data may be leaked by incompetent or unscrupulous contractors to competitors and the danger of potentially dissatisfied customers due to low-quality products and poor customer service.
There is also the chance of a catastrophic breakdown of any process because of circumstances that the senior management team cannot have foreseen due to their remote location. Taking the example of the garment manufacturer again: its latest line of designs may be leaked by an employee working in the design studio (after all the employee does not have any loyalty to the company never having being employed by it); the plant in Bangladesh may have been contracted by competitors offering better rates which will then lose focus on its main customer and shift its garment manufacturing to newer and lesser-skilled workers who will manufacturer substandard garments; the complaints of customers may be handled by a call center which has recently slashed wages leading to a lack of motivation and interest when dealing with customers, the accounting company may have invested in a substandard data center which suffered a wipeout resulting in a situation where payments are delayed.
Financial compliance requirements and the opportunity costs of noncompliance
Most nations have a complex web of financial/tax laws and statutes at the central, state and local level that requires experts to untangle. Indeed, there may be interpretation involved in, even whether a particular law or statute applies to a particular start-up. Then comes the compliance requirements with the applicability of that law.
For many companies (especially start-ups) it is simply more efficient and cost-effective to outsource their financial compliance needs to experts rather than employ an in-house compliance team. Others may choose for reasons of cost, to ignore or not prioritize compliance (for example by tagging on the responsibility of compliance to a manager whose expertise lies elsewhere). But this is not recommended because the costs of a potential non-compliance are just too great, especially for start-ups.
Compliance requirements for start-ups in India as per Companies Act 2013 include but are not limited to conducting Board Meetings in a prescribed manner/time intervals and maintaining records of same, appointing auditor and filing various forms like ADT-1, MGT-7, AOC-4, MBP-1, DIR-8 concerning the finances of the company and its directors. Needless to mention the Companies Act also requires maintaining financial records and various statutory registers.
The Goods and Services Tax Act (GST) has also increased the compliance burden. Start-ups registered under the GST have to file monthly and quarterly returns. The Income Tax Act comes with its compliance burden with Tax Deduction on Source (TDS) filings and the standard Income Tax Returns forms. It is quite clear that this involves a lot of accurate number crunching, diligent record keeping/data entry and regular interaction with statutory bodies. The perils of non-compliance are great and include hefty fines, unplanned and expensive litigation, loss of reputation in the market and even total business failure. Hence opportunity cost calculations in almost all cases will validate hiring experts for meeting compliance requirements.
The Filings and its MiCFO feature
TheFilings, offer financial compliance services to start-ups. MiCFO is business services product staffed by experts in finance, accounts, and law providing 360-degree compliance services for start-ups so that the business owners focus on their core business and leave the compliance headaches to the experts. Data security, transparent pricing, 24/7 customer service, and professional advice is guaranteed.
CFO is one of the most critical posts in an organization. If companies are small or startups, they usually cannot afford to have a full time CFO. The MiCFO program, allocates a CFO who by coordinating with accounts, management, operations, and technical teams, will put in place a system that will ensure financial discipline. With an expert CFO in place, the founders and senior management team receive expert advice on financial risks and opportunities in the new fiscal. The MiCFO product, therefore, goes over and above the usual compliance service and must be considered by all start-ups.
To know more about this service and see its applicability in your business, reach us at [email protected] | 044-46315959