Accounting and IT outsourcing risks
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In recent years, Latvian companies have been increasingly outsourcing certain services, aware of the advantages such outsourcing brings. According to a TNS study in 2010 the most popular areas were accounting (55% of companies) and information technology (30% of companies). It is safe to say that since 2010 these areas have been firm leaders. This makes sense also from a company’s standpoint because it is costly to employ IT and financial management professionals unless these are the company’s core business activities. The company frequently benefits in terms of cost, but problems arise if it forgets about the risks associated with outsourcing.
A company enters into a standard contract and expects quality services but may not always understand how to control their quality. Even if the overall results of outsourcing satisfy the management, the company cannot be sure that the services are rendered in an amount and quality that match industry standards.
PricewaterhouseCoopers (PwC) as the world’s largest consulting and outsourcing firm is dealing with clients on a daily basis, and we see the sad outcome of careless outsourcing.
Here are the main risks that companies face:
Quality mismatch (outsourced services falling short of industry standards or good practice);
Legal non-compliance (statutory requirements are ignored);
Business interruption (due to unavailability of IT or management information);
Strategic risk (management information is either unavailable or inaccurate); and
Financial risk (unavailability of IT or management information hinders the provision of core services to customers).
Tempting as the benefits of outsourcing may seem, it is important to remember that the company should monitor these services the way it monitors the performance of its own staff. Good practice usually dictates that the company should have at least one expert who is capable of assessing outsourcing quality and demanding improvements if any irregularities are detected.
When it comes to outsourcing, the company should first of all define the scope of services and insert this in its contract. Secondly, the contract should prescribe mechanisms for controlling the quality of such services.
PwC is frequently asked to help define the terms of the contract and conduct negotiations with external providers.
This article will be continued soon to describe common shortcomings and our recommendations.