The world is currently undergoing an era of globalization, and it has caused the world to shrink. Borders between countries are crumbling fast, at least virtually, where products and services from other territories can now be taken advantage of without difficulty. A clear indication of this globalization phenomenon is outsourcing. To put it simply, outsourcing is the act of transferring the daily execution of a business function to a provider of the same service, this provider being an entirely different company. An agreement is usually entered between the external service provider and the client that defines what services the provider need to provide and what resources the client needs to give to the provide, such as technology, assets and remuneration, among others. Segments that are usually outsourced are information technology, real estate management, customer support, human resources, and accounting. A common type of outsourcing currently being experienced is offshoring. Offshoring refers to outsourcing wherein the service provider is from another country. Most of the time, these two terms are used interchangeably. However, upon looking closer, offshoring and outsourcing actually have differences.
With outsourcing, the service provider is an entirely different company, whether within the same country or not. Thus, for example, ABC Company of California outsources its accounting functions to DEF Company of Michigan. DEF Company may also further outsource the bookkeeping segment of the accounting function to GHI Company, based in Ireland. Thus, outsourcing may still involve a bit of offshoring. Offshoring, meanwhile involves the transfer of a function to an entity outside of the country of the original company, whether that overseas company is still part of the original company or not. Thus, using the same example earlier, ABC Company of California can offshore its accounting department to either ABC Company - India, an overseas division of the same company, or GHI Company of Ireland, which is an entirely different company. You may look at it as outsourcing focuses on having an entirely separate company do a function and offshoring focuses on having a company outside the country do a function. The most common countries that are used in offshoring are India, Ireland, the Philippines, and China. As globalization of companies continues, the lines between offshoring and outsourcing are further blurred.
Accounting outsourcing has become a growing trend since the turn of the century. The most common accounting functions that are being outsourced are the preparation of tax returns and accounts payable processing. But why outsource accounting functions? The most obvious reasons would be monetary savings in the part of the company. Companies that outsource accounting functions claim huge savings amounting to millions as they incur savings from being spared to put up a separate an accounting department. That translates to savings in wages and infrastructure. These companies do not need to build offices and pay accountants for their accounting department. Instead they pay service providers that only charge a fraction of costs, as these providers have placed methods to cut back on wages and infrastructure, which usually costs much less in overseas markets.
It must be remembered that labor and office space costs in offshoring markets such as India and Philippines are way affordable compared to their American counterparts. Cheaper means of doing business certainly equates to profits for the client company. Furthermore, companies that outsourced would also be spared of having to dole out recruiting and training costs, because it would be the role of the service provider to recruit individuals. As these individuals would already be trained professional, there would be no need for intense training. Lastly, service providers are required by their service level agreement to utilize the latest in accounting software and practices, so the client is assured of improvement in their accounting processes.
Accounting outsourcing also lessens the fear of worker shortages. It is often a fear of American companies that the pool of professional accountants in the country is draining. With outsourcing, particularly offshoring, that fear is alleviated as the job market in India, china and the Philippines can never seem to accommodate the number of Certified Public Accountants plus the addition of accounting graduates that join their workforce every year. Lastly, companies that outsource accounting functions can now focus on their core business, while letting the service provider concentrate on its role which is mainly to provide competitive service in the most affordable way possible while being updated with the constantly improving technology. Both companies could only move forward from there, as they are focused on the growth of their business and operating in the most efficient manner.