BY MARK FAGAN
As we have discussed, a CEO must separate him or herself from the tactical, day-to-day duties in order to spend more time on strategic activities.
This can be difficult for companies with limited resources and personnel. A solution is outsourcing. Outsourcing is also a way to focus on the core business and reduce risk by limiting operations you can do best. A company may have a great product design, but no space to house mass-production facilities. Or it may not have the people with the right skills to manage its servers and technology.
If your company fits this description, consider outsourcing non-essential activities, and outsourcing to small and mid-market companies. Many Fortune 500 companies will outsource functions for a variety of reasons, but all in the name of achieving greater efficiency.
Of course, there are naysayers. Outsourcing within the U.S. has a reputation of being more expensive than performing duties in-house, but if you consider the indirect costs tied to those duties and the potential time-savings that can result from outsourcing, it can be effective.
While there may be cost-savings with outsourcing internationally, there are a number of pitfalls, as companies like Apple ”” which sources many of its product components from Chinese firms ”” have seen over the years.
Here are a few examples to consider:
Human resources: This can range from hiring a payroll service to completely outsourcing certain functions of your business offshore. Outsourcing payroll is a no-brainer for most companies. Performing payroll functions in-house is time-consuming and risky, because business owners are personally liable for misappropriated withholding or payroll taxes.
Outsourcing health and welfare administration functions has been very popular and will only increase with the Affordable Care Act. Recruitment, compensation planning, relocation and records management are other functions that are commonly outsourced.
Outsourcing entire departments offshore (to places like India) can significantly reduce costs and increase productivity and efficiency. In addition, it frees an organization from investments in technology, infrastructure and people for administrative functions. Disadvantages to outsourcing can include loss of confidentiality, control over deliverables, problems with quality and delays in work output.
Technology: Redundancies, server choices, technological advances, disaster recovery, license requirements, security, down-time: IT is a world unto itself. More and more companies are outsourcing at least part of their IT function because the broad range of expertise required to keep an organization on-line has become too complex. IT issues that affect productivity and efficiency include employee down-time, maintenance of networking and website functions. Maybe the only thing worse than sending your employees home early due to system failure is an inability for your customers to purchase your goods because your website is down.
The company that has its own team of IT employees for managing networking may need additional support during bigger issues. Hiring outside vendors to lend a hand to your team can allow you to maintain efficient timing and make a big problem smaller with additional input and solutions.
No matter what your need may be, locating the right group of people to help is important. The outside team you select should make sure to keep you informed and maintain an open line of communication about the stages of work being done in your project.
One great aspect of modern technology is the rate at which upgrades hit the market. By keeping a professional team of experts on top of your IT systems, you will have less risk of falling behind. Always remember: Your competition is most likely staying tuned to the latest in technological advances as well.
Bookkeeping: Like payroll service companies, there are many local bookkeeping companies with efficient accounting processes that makes this service affordable and can also improve the timeliness of financial reporting. Outsourcing your bookkeeping and accounting functions should not, however, include any treasury functions (such as investing, signing checks, authorizing bill payments online, executing wire transfers, etc.), which should remain completely under your control.
Manufacturing: Many companies struggle with their identity. Is their core competency in manufacturing, design, engineering, marketing or some combination of those? Managing all at once requires resources, attention and expertise in each of the different disciplines.
Manufacturing is often capital- and labor-intensive, and for many products is a commoditized activity. Outsourcing manufacturing in order to concentrate on the core business can be done through local and national production firms. This will likely increase the direct cost of the product, but will allow you to reduce headcount and facility space and to concentrate on what your organization does best.
Outsourcing manufacturing with the goal of cutting costs will most likely involve looking abroad, which presents additional challenges. Distance, cultural differences, language barriers, international trade regulations, foreign exchange rates, and lack of enforcement of intellectual property rights are all factors to consider. Yet companies from well-developed countries have almost always used outsourcing to save on the cost of acquisition of contract manufacturing.
An important disadvantage to outsourcing internationally is the extended cash cycle. Capital outlays for the purchase of raw materials and production of finished goods can be required six months before collection from the sale of such goods. In addition, letters of credit securing the full purchase are often required upon shipment, which will reduce your line of credit availability. Look into the ability to obtain financing from purchase orders and fully understand the cash cycle when you consider international outsourcing.
Mark L. Fagan, CPA, is the managing partner of Citrin Cooperman”™s Connecticut office. He can be reached at mfagan@citrincooperman.com or (203) 847-4068.
