Outsourcing on the March

In 1998, the U.S. Navy finally closed the dairy farm that had been part of its operational infrastructure, alongside aircraft carriers and cruisers, since 1911.

The navy owned the land and a 250-strong herd of Holstein cattle in Maryland, across the Severn River from its own Naval Academy.

Strange as it might seem, the U.S. Navy was in the farming business – the herd provided fresh milk to the Academy mess. The equivalent today might be Microsoft owning an apple orchard to supply the office canteen. So, the Navy bowed to the inevitable and sold off the herd and land. It realized that one organization could not do everything, or at least not efficiently and at cost, especially when that thing had nothing to do with its core activities. It now outsources its dairy needs to the private sector and focuses its attention on the defense of the nation.

From in-house to outsourced

The U.S. Navy’s experience of cow sheds and milking parlors is a rather niche example of the process many organizations have been undergoing for the last three decades or so. The transition from in-house to outsourced services has been a feature of business in the modern era. The global business process outsourcing market was valued at $245.9 billion in 2021 and is expected to register a compound annual growth rate (CAGR) of 9.1% from 2022 to 2030.

Outsourcing at scale is a relatively new phenomenon. In the past, large enterprises aimed for the control that came with self-sufficiency. They employed typing pools, cleaners and repair shops. They operated large customer service departments where rows of employees would spend the day answering phones. If something could be done in-house, it generally was.

Compare that to a company of today. Some of those functions might still happen on the premises, but there is a very good chance that many or all of them are undertaken by third parties contracted especially for the task.

Contact centers are a well-known example of the trend. They field calls and – increasingly – texts and emails, helping customers solve issues or pay bills. When people call their utility, broadband or financial services provider these days, it is quite likely that their query will be answered by the employee of a third-party provider. The outsourced contact center business, already significant, is predicted to grow by $13.6 billion a year up to 2024.

The contact center is an obvious example of business outsourcing but there are many others. In fact, a full spectrum of business functions can now be outsourced, from IT and HR to finance, facilities management and secretarial services. Some companies outsource some of these functions, many outsource all.

While outsourcing used to be reserved for large organizations, the trend is filtering down the strata of business. Research has found that more than a third (37%) of small businesses outsource at least one business process, and more than half (52%) plan to in future.

A technology-first approach

But how does outsourcing drive efficiency? One of the chief attractions of handing over a function or department to a third party is that you are outsourcing to a specialist. Ideally, your third party service provider will have wide sector knowledge alongside proven systems and processes. By utilizing focused expertise, they will streamline your technology estate, create time-saving shortcuts and employ scalable services and applications to keep costs down.

That is certainly the case with Client Accounting Advisory Services (CAAS), the specialist outsourcing service of U.S. member firm UHY Advisors. CAAS national practice leader Kane Polakoff says scalable technology is a vital part of the outsourcing mix.

“Developing standard, repeatable operating procedures within our practice allows us to create efficiencies for both the client and ourselves,” he continues. “We have found significant benefits in adopting and increasing technology automation and digitization for clients, including increasing workforce effectiveness and transparency, and freeing up capacity to reallocate resources to higher-value activities.”

This move to digitization can be found throughout the outsourcing world. Contact centers, for example, are increasingly investing in AI-driven chatbots to manage basic customer queries. Investing in an advanced digital service might be cost-prohibitive for a company on its own, but cost-effective for an outsourced partner that can offer the same service to multiple client businesses at the same time.

 Post-pandemic advances

In fact, the increasing ubiquity of cloud-based services in particular is creating further opportunities for outsourcing. Outsourced HR and finance functions use cloud-based software to instantly share information with clients. When everything is in the cloud, both parties in an outsourcing partnership have access to the same data in real time, improving transparency and nurturing trust.

The COVID pandemic accelerated the adoption of cloud technology, and with it the attraction of outsourcing at least some back-office functions. Polakoff believes the Great Resignation – the pandemic-fueled re-evaluation of life and work – is playing its part too.

“With the Great Resignation, businesses found themselves with a lack of skilled accounting and finance workers to perform essential daily, weekly and monthly tasks and began to fall behind. Because of this, businesses needed to find high-quality service providers to assist them,” he says.

Outsourcing with care

Whether it is because of technology, pandemic trends or simply the need of many businesses to scale at speed, outsourcing is enjoying a surge in popularity. As Polakoff suggests, payroll and accounting services are among the functions businesses are increasingly keen to transfer to specialist third party providers. CAAS offers a full suite of customizable solutions to clients. Many other UHY member firms offer outsourcing in one form or another.

In accounting, as in all potential outsource agreements, businesses should choose a third party partner with care. The quality of service can vary, and some outsourcing agreements can be inflexible. Polakoff suggests businesses ask trusted advisors for recommendations and check that any potential partner has experience in the relevant sector. They should have existing clients that match your own operation in terms of size, industry and ambition.

No magic bullet

Of course, not all back- and middle-office functions are suitable for outsourcing. It will depend to some extent on the sector you operate in, but considerations around confidentiality, data security and capacity – an outsourcer may not be able to scale quickly enough to meet seasonal peaks in demand, for instance – all need to be considered.

And note that global outsourcing, where businesses hand functions over to partners in other jurisdictions, comes with its own set of potential benefits and pitfalls.

Nevertheless, outsourcing has become an important part of the business landscape, and for good reason. In a competitive world, businesses want to focus on what they do best. To achieve that, they are increasingly willing to entrust activities to specialist third parties that can offer efficiency and scale at reasonable cost.