Unprecedented developments in computer hardware and software capabilities, and international communications have meant that the 'traditional' functions of finance staff - transaction processing and 'numbers crunching' - can be performed almost instantly. The primary implication of this for finance staff is that their expertise will be called upon to add value and to contribute to strategy and business management decisions to a far greater extent than ever before.

Benefits
The term 'contracting out' (or 'outsourcing') refers to the process of procuring goods or services from a third party, rather than generating such an offering internally, in accordance with terms which are legally enforceable, or contractual.

• Cost reduction

  In a fiercely competitive business environment, businesses strive to deliver greater value at reduced cost. Direct costs of labour and raw materials may be an obvious initial focus of cost reduction. Direct costs are relatively transparent and therefore, quite easy to manage. Where direct costs have stabilised at an acceptable level, the pressure to reduce indirect (or overhead) costs increases. Indirect costs are those costs that are less directly related to output. The cost of the finance function is an indirect cost.

• Focus on core competencies to add value

  In assigning responsibility for the provision of non-core services to a third party, businesses can focus on the core competencies integral to the creation or addition of value.
  
  Furthermore, by careful selection of an experienced supplier for the non-core service, it is possible to reduce cost and also have a higher quality than could be provided in-house. Where such suppliers have a large customer base and a large operation, the outsourcing company could benefit from the reduced costs associated with their supplier's economies of scale.

Activities that can be outsourced
In theory, any of the operations that a business performs which are not either in direct or strategic support of its specific business activity or which do not constitute an inextricable part of that business could justifiably be outsourced. Such operations are often termed 'non-core' activities.

General activities performed by many businesses, but commonly viewed as 'non-core' include:

• facilities management;
• some elements of personnel management such as recruitment and training;
• cleaning services;
• printing services;
• catering services;
• property maintenance / management;
• legal services.

The finance function – is this a core activity?
The best indication of a core activity is whether it adds direct value to an enterprise's products and services. For businesses that sell financial services, such as the administration of payroll services, it could be argued that the finance function is a core activity.

For other businesses, the objective of the finance function is typically to provide the financial services (transaction processing, budgeting, credit management, debt recovery, bill payment, etc.) necessary to support the core activity. Accordingly, for the large majority of organisations, whatever their nature and legal constitution, their financial services operations are largely non-core and consequentially, there remain – at least on paper – potential benefits of some degree of outsourcing.

New paradigm for the finance function
Outsourcing the finance function will require different skills on the part of the remaining staff who have to manage the service provider. There will be a shift in emphasis from providing those services to managing the relationship with the organisation that does. However, outsourcing frees up time for the finance function to concentrate on value-adding activities. It should be seen as an opportunity.

In the new business environment where competition is global and fierce, companies are focusing on sustaining competitive advantage by enhancing their comparative advantage(s) over competitors. Organisations and their chief executive officers now expect finance directors and financial controllers to become more involved in matters of production, distribution and sales and to play a fuller role at strategic management level, in particular, helping to decide the markets to serve with each particular product. Companies also need better information than ever before to remain competitive. Information needs to be predictive as well as historic and contain non-financial indicators as well as financial ones.

A Case Study
In considering the outsourcing option for one multi-national operation, the financial controller found it helpful to analyse the accounting and finance department and classify its operations according to six main activities:

• computer hardware facilities;
• software development and support;
• input and processing transactions;
• preparing output and providing information;
• business interpretation and analysis; and
• judgement, policy and service specification.

It was agreed that the company would benefit from buying in the expertise available from a third party in relation to the first two of the classifications. The company did not have particular in-house knowledge of computer hardware or software implementation or support. Savings were to be made by assigning responsibility for these activities to a specialist third party with existing knowledge and experience, rather than by developing them in-house.

In relation to both input and processing transactions and the preparation of output and provision of information, these were regarded as simple, repetitive and high-volume activities which would benefit from the economies of scale offered by an external supplier that provides a similar service to multiple clients. Savings in terms of a reduced headcount could be reaped by the company with many staff simply transferring to the new service supplier, although inevitably some staff redundancies were unavoidable.

For the final two classifications of the financial services' operations – business interpretation and analysis and judgement, policy and service specification – it was felt that these activities rely on a thorough knowledge of the core of the business and relate to the longer-term strategic success of the company. Accordingly it was agreed that the responsibility for these aspects of financial service operations remain in-house.

In conclusion, the essence of any business rests with the decision makers and the choices made from available options. It is this decision-making function which holds the key to the long-term survival of any business.