The Inevitability of Outsourcing

For several years I have been expressing the view that outsourcing abroad some of the less valuable aspects of compliance services is (or should be) an inevitability.  I still firmly believe that will happen but I can’t help being amazed at the resistance that is being shown to it from (some) professional accounting bodies, governments and most firms.We hear emotional arguments like “we’re exporting jobs”, “how will we train our people if they don’t get this experience”, “the ‘security’ risk is too high if confidential client information leaves our office” and some non-emotional arguments like “it’s too hard to make it work, these people make too many mistakes”, “we don’t have enough control over the job”, “it’s quicker and easier to do it here.”

Where work is done should not be of any concern as long as confidentiality is preserved, it is competently done and it is cost-effective.  What seems to me to be the important issue is that this work is low value and it becomes high cost when it is not performed with lower cost resources.

Think back to the mid 70’s to the mid 80’s.  At that time, many firms were generating quite substantial fees from write-up work and they saw the “computerization” of bookkeeping as being a threat to their revenue and their “control” over clients.  Indeed, they should have been concerned.  The emerging hardware and software technology was quite obviously going to change the ball game because of its functional power and affordability.  However, those people who resisted this evolution went nowhere.   In adversity there is always opportunity and those firms that embraced it and looked for ways they could actually help their clients implement IT solutions and then re-deploy their resources in higher-value service activities have prospered.

Throughout history we’ve seen major shifts in employment that precede new waves of economic growth as new technologies change the shape of the playing field.  For example in the 1930’s there were 30 million people employed in farming in the US.  Within 50 years that number had dropped to 3 million but during that time farm output increased tenfold!  Where did the displaced farmers go? Manufacturing of course.  Then, again citing US data, in the 60’s 40% of the workforce was employed in manufacturing but by 2000 employment in that sector had dropped to 20% even though output had increased fourfold.  Interestingly, total employment in 2000 was at historical highs so what happened to all the people who were displaced from manufacturing? Answer: they re-skilled and were re-deployed in other industries.  This cycle has been going on since mankind started playing around with fire and wheels.

The big lesson here is that technological innovation radically changes productivity AND industry structure which leads to unemployment which in turn frees up resources that are then able to be utilized doing much more valuable work for clients.  That in turn leads to an increase in wealth and the standard of living for most people.  In other words, a rising level of unemployment is a lead indicator of impending economic growth and new wealth creation!

However, not everyone immediately participates in the growth in wealth.  Success goes to those who adapt and learn new skills the fastest.  Their economic potential is driven by how quickly they abandon old ways of doing things and adopt new innovative ways to use their intellectual and physical resources.

So … here’s a thought.  Why not take a look at outsourcing and instead of focusing on the implementation challenges that are inevitable with the introduction of any new way of working look at the huge upside your mastery of this service offers.  The challenges you might experience will be the source of your competitive advantage because most of your competitors don’t have what it takes to risk embarking on such an initiative (for the record, history reveals that not embracing change is far riskier than embracing it but let’s keep that to ourselves!)

There are several proven successful outsourcing solutions out there one of which is offered by Rydge Business Management—it’s run by wonderful people I’ve known for nearly 20 years based in Melbourne.  In the US I like Xpitax based in Boston, MA and in the UK I’m impressed with IRIS’s solution. When (not IF) you successfully overcome any outsourcing challenges you’ll be able to create a business model that has outsourced compliance capacity at its core with high value-added, premium priced services wrapped around it.

However, I want to SCREAM a word of warning. DO NOT, I repeat, DO NOT implement outsourced tax returns as an opportunity to do more returns at a lower price in order to build your practice.  That is a very un-smart (un-smart is code for “dumb” or “really silly”) thing to do because all you’ll achieve is the opportunity to do more work at a lower margin for people who come for price and will leave for a price.

One of our favorite mantras at Principa is “you are only rewarded to the extent you add value to those people you’re privileged to serve.”  If you want to create more value for yourself you need to create more value for those you serve and they include your team members, your clients and your business partners.  I believe outsourcing is one way you can position yourself to create more value for all stakeholders in your firm.