Outsourcing and offshoring: What not to do

The Philippines is a popular destination for Australian firms looking to outsource or offshore.

In a tight labour market and amid high demand for professional skills, offshoring and outsourcing can appear to offer a quick fix.

However, rushing in will cause critical issues.

“You’ll end up with people who don’t have the skills, the training, or the right cyber security set-up,” David Smith, founding director of accounting practice advisory Smithink, says.

Here's how to avoid five common mistakes.

1 Ethical considerations

Outsourcing, particularly offshore, carries ethical risk – Rose Hiquet and Won-Yong Oh identify three major issues: “poor working conditions, child labour and environmental pollution”.

Guarding against all three in an outsourcing or offshoring program is similar to mitigating risk in any supply chain – but with the complications of distance and different worker protections across jurisdictions.

Investigate possible suppliers to ensure you are satisfied they treat and pay their employees ethically, and share your own company’s values and approach to corporate social responsibility (CSR).

This issue is not new – it has been faced across industries, and large corporations manufacturing offshore have particularly needed to address it.

Writing in Harvard Business Review more than a decade ago, former GE Senior VP Ben W Heineman, Jr argued for the adoption of “policies to assure decent working conditions overseas, both in their own facilities and in facilities of third party suppliers”.

Such policies should be recorded and made part of the procurement process. Firms should also establish written processes for ensuring their offshore partners’ compliance with these policies, and record and report on compliance activities.

The Accounting Professional and Ethical Standards Board revised its guidance on outsourcing at the end of 2023.

The IPA, as an APESB member, contributed to the development of the updated APES GN 30 Outsourced Services, which covers the responsibilities of accountants in practice, risk management, agreements and more. It also includes examples of outsourced services.

Download APES GN 30 Outsourced Services.

2 Quick decisions

“There’s a raft of due diligence you need to do on the provider before you find out whether they’re right for you,” Smith says.

He recommends investing heavily in this stage of the process.

“If you’re really serious about it, you should spend the money to fly over and visit the provider to understand exactly how they’re set up, how they look after their people and how the relationship is going to work,” he says.

Questions about how the relationship and processes will work hinge on the accounting business’s unique needs. Smith suggests starting with three:

• Can the provider help with scaling up and down during certain periods of the year?
• If an outsourced or offshore team member is sick or otherwise unavailable, can they provide a replacement?
• How much training do they offer their people outside of the training the accounting business provides?

He also encourages reference checks – ask for names of some of the business’s other customers and speak with them about their experiences.

“It’s such an important part of the practice going forward. If you’re going to do it, that investment is important.”

3 Technology and security

Careless outsourcing or offshoring risks clients’ data security.

“You have to thoroughly check out the technology side,” Smith says.

“This links to concerns around cybersecurity and privacy of data. You really need to ensure that as far as humanly possible, the provider is doing everything they can to protect data.”

Smith shares an example that he is concerned about – offshore suppliers with staff who work from home. For businesses that don’t outsource, managing sensitive client data in a hybrid or work-from-home model requires stringent processes and close monitoring of compliance with those processes.

Outsourcing, particularly to an offshore supplier, adds complexity to that compliance monitoring.

“I don’t know who is in the home. Can anybody walk in and take a picture of a screen containing client data?” Smith says.

“Most of the high-quality providers have security measures in place to protect data.”

4 Understand outsourcing models

There are three basic outsourcing or offshoring models for accountancy, Smith says.

1. At the most ‘casual’ end of the spectrum, the accounting business sends the work to an outsourcing business and the work is done, often, by an unknown person. The accounting business pays for the work to be done each time, and that is the extent of the relationship. This model is used generally for generic work, such as SMSF administration.
2. The accounting business has dedicated labour offshore, employed by an offshoring entity. The business decides it needs two full-time people, for example, and the provider helps recruit those people. After interviews are conducted, the individuals are employed by the offshoring entity but are dedicated to the accounting firm. They are trained to follow the accounting firm’s processes.
3. The accounting business goes all-in by establishing an offshore centre or outsourced ‘back office’ function. This includes being responsible for the office space, the employment set-up, the technology, the employment agreements and more.

“Firstly, know which model is right for you,” Smith says.

He suggests that for most accountancy businesses looking to ensure a consistent level of service and quality, balanced against ongoing investment, the right model will likely be the second.

5 Integrating the additional resources

Smith cites a common mistake: assuming the outsourced person or team will do their work relatively independently of the main office, thinking that’s what outsourcing tasks or using an offshore team is about.

That’s a recipe for disaster.

“You need a person in your office who is essentially going to be the manager of the offshoring team. If you don’t have that, it just won’t work,” Smith says.

“How will you set yourself up in Australia to work with the offshore team and make sure they’re busy and engaged? If they have nothing to do, they might not pick up the phone and say they have nothing to do.”

Once a provider is decided upon, due diligence has been run, interviews have been conducted and the outsourced person or team has been onboarded and trained, make them a proper part of your team.

“The businesses that have done it well are the ones that will, once a year or so, fly their offshore staff to Australia, so they get a sense of their Australian colleagues, they get some training, and they feel they’re a part of the organisation,” Smith says.

“As a minimum, have regular video conferences to involve them with your team.”

Is outsourcing or offshoring worth it?

Outsourcing and offshoring are often economically wise choices, particularly in an environment in which talent is difficult to attract and retain. But it requires investment, planning and a suitable shift in expectations.

“It’s a big strategic decision. You’ve got to agree to invest time and effort, and potentially not see a return for the next 18 months,” Smith says.

“At the end of the day, it’s still often a sensible thing to do.”