Outsourcing: Fact or fiction

Outsourcing is a common business practice among companies that use external providers to complete business processes and tasks. Outsourcing became a recognized business strategy in the 1990s as companies shifted the responsibility of some in-house processes to outside firms. Some companies use a shared services model, staffed by their employees, where like business functions are consolidated into a single unit that operates as its own entity to deliver services to the entire organization.

Why it matters: Oftentimes, a company will outsource to cut labor costs, manage risk, or to take advantage of global supply chains and specialized production capabilities. Outsourcing is also used by companies that want to focus on the core aspects of the business, leaving the less critical operations to outside organizations.

By the numbers: A recent eNews poll revealed that 33% of credit departments outsource between 1%-25% of the credit function.

Some companies will outsource their entire credit department while others may only outsource specific functions. While outsourcing tends to get a bad reputation because of the potential downsides, there are a few common fears that can be debunked.

Myth #1: “The company will find cheaper labor offshore. There goes my job!”

Debunked: Not necessarily. In most cases, outsourcing your role can be a motivator to enhance or add onto your skills and reevaluate your value in the company. Many supporters of outsourcing believe it can provide an incentive for businesses to pour resources into the areas in which their employees are most effective. Outsourcing also helps maintain free-market economies globally. It is all about perspective. Outsourcing can also create the opportunity to build a partnership with the third-party team—making them an extension of yours.

As a credit professional who is currently implementing RPAs or robotic process automation in his department to help with automation, Christopher Finley, CICP, global credit manager at Club Car LLC (Troutman, NC), said he is outsourcing some team functionality to India.

“I have two bots that are now running, and to me that’s a form of outsourcing because one bot took an eight-hour day of work and consolidated it into a 20-minute review process for my team,” Finley said. “Because of its success, we are now trying to implement it elsewhere within the business, and I am fighting the groupthink fear of the potential for bots to eliminate positions within the organization. We need our team’s providing more hands-on service to our customers—and if those types of repetitive tasks can be simplified, we enable the team to focus on more value-added tasks for the business.”

Myth #2: “It’s so much cheaper to outsource.”

Debunked: Though many companies turn to outsourcing as a way to cut costs, there is even more cost involved in replacing an employee. It takes time, money and investment into onboarding and training a whole new team on the ins and outs of each customer. Outsourcing can also be more expensive in terms of:

• Task complexity
• Location of the outsourcing entity
• Company internal costs
• Communication issues due to cultural mismatches

“Most companies will turn to outsourcing tasks such as collections or tasks that are considered the easy stuff,” said Charles Edwards, Jr., CCE, vice president of credit operations at SRS Distribution Inc., (McKinney, TX). “For example, calling customers with a smaller balance and small amounts of past dues are easier than facing the bigger customers where you want to retain the relationship. I think most of the larger companies are starting to outsource parts of their credit collections functions, accounts payable and accounts receivable.”

Myth #3: “Outsourcing is 100% safe to implement.”

Debunked: Turning to a third party does not do away with liability. In the event of any compliance issues or exposed risk, your company is still at fault if the third party gets into legal trouble. But not only does the risk exist in legal bounds, it can also impact the ability to collect. For example, if you give your entire collections function to the outsourced party, their responsibility and primary purpose is going to be to collect the dollars—not necessarily to retain the customer. If you have a longstanding relationship with a certain customer and they suddenly have a downturn in their sales, the third party will not pick up on those small yet notable differences.

“If the only objective is to collect those dollars, an outsource might not be as easy or as friendly to that customer as they could be to try and maintain that relationship,” said Edwards. “If the collections function was in-house, you know you would make arrangements such as a payment plan or use some other process to try and maintain that customer somehow.”

The bottom line: Outsourcing is a widely used business strategy, with benefits such as cost reduction and risk management, however, its effectiveness largely depends on the specific needs of the company.