Outsourcing is becoming increasingly popular in the corporate world, particularly among large corporations whose executives find it cheaper to have a private organization handle some of their work rather than manage it internally.

These firms may be contracted to handle a number of jobs, including billing, claims processing or customer support.

Some organizations may simply find it impossible to compete with external suppliers, or they may be unwilling to invest in the resources, technology and expertise to carry out certain services internally.

For those companies managers who have determined they can save money by outsourcing, the following steps should help get the most out of their outsourcing endeavor:

1. Develop a clear understanding of the strategy of the business the unit serves. Consider potential changes that may alter competitive forces and require a change in strategy. Consider the implications of outsourcing on the achievement of a business strategy, including cost, quality, flexibility and timeliness.

2. Recognize the scale of cost and potential savings. Ensure a clear definition of services to be outsourced, as well as their their value, including such aspects as "free" advice and flexibility. Include all costs; alternative revenue from re-deploying staff and releasing facilities; and social costs of termination. Use appropriate activity-based cost measures. Avoid developing cost penalties for activities that remain, whether it be through increasing cost allocations or loss of economies of scale.

3. Protect and retain core capabilities and those where integration with other activities is vital. Outsource to enable focus on core capabilities. Don't release proprietary information on key technologies or customers. It could be used by your competition.

4. Select by evaluating the supplier's capability, culture and fit. Explicitly state and agree to expectations of service levels and future developments. Specify and communicate expected performance from each partner and how it will be measured and compensated. Consider how disputes will be settled. Aim for a simple contract with a scope to develop the relationship.

5. Use in-house technology sparingly and anticipate changes that may require different technologies. Outsource when the internal unit does not have the capability to keep up with changes.

6. Be ready to review, revise and develop sourcing arrangements and make sure your contract permits changes. Review the potential cost of change in the context of changing business needs.

Firms see moving the problem out of the organization as the most prudent and easiest course of action to end inter-departmental disputes, poor service and "unreasonable" costs.

And while implementation of finance and accounting outsourcing (FAO) can be complex, as well as often impacts people and strategy, it may be the wisest alternative.

The author is Chartered Institute of Management Accountants' former Asia Pacific director.

(HK Edition 03/07/2008 page3)