General Study on Finance and Accounting Services Outsourcing (fao)

GENERAL STUDY ON FINANCE AND ACCOUNTING SERVICES OUTSOURCING (FAO): WHAT ARE THE FACTORS DRIVING THE FAO AND ISSUES IMPACTING THIS MODEL?

Contents Page

Table of Contents ...i

Index of Similarity ...ii

Chapter 1 Overview of Outsourcing ...1

Chapter 2 Outsourcing of Finance and Accounting Services ...2

2.1 Introduction to Finance and Accounting Outsourcing (FAO)

2.2 Factors driving the FAO

2.3 Benefits of FAO

Chapter 3 Issues and Challenges in Finance and Accounting Outsourcing ...5

3.1 The issues and challenges faced in FAO

3.2 Probable recommendations and resolutions

Chapter 4 The Prospect and Future ...8

Chapter 5 Conclusion ...10

References

CHAPTER 1

OVERVIEW OF OUTSOURCING

What is "Outsourcing"? Outsourcing can be defined as an act or a process of contracting a function and/or service and/or business to another company or an external party. It can also be referred to as; 'Use of external suppliers as a source of finished products, components, or service. This is also known as contract manufacturing or subcontracting.' (CIMA Official Terminology, 2005). According to Wikipedia, there is no precise definition for outsourcing yet.

Outsourcing may be a new concept to many people but it is definitely not a new phenomenon in today's business world. This concept is the most recent management tool and business model established in response to economic change and globalization. The emergence of this new business model is driven by the booming of the information technology and is becoming more popular and common in the business environment. While outsourcing is viewed as a new component in the market, this model has in fact entered the business world since the eighties. Outsourcing is believed to be originated from the United States and is now spreading rapidly throughout Europe, Australia and also Asia. Referring to Murem Sharpe's journal on "Outsourcing, Organizational Competitiveness and Work"; the Outsourcing Institute had estimated that in 1996, US organizations spent USD100 billion on outsourcing (extracted from Journal of Labor Research, Volume XVIII, Number 4, Fall 1997). This fact has proven how much the outsourcing market has grown in the market.

A company can outsource its processes, services and/or products to an external service provider. A company that outsources its job to others is generally known as the buyer whilst the other party providing the service is known as the outsourcer or service provider. Generally the service providers specialize in a specific field or area of operation. Outsourcing can be categorized into several types based on the nature of the operations and functions that are being contracted out. Many companies prefer to outsource specific functions but it has become a norm in these days to outsource the entire operation or task to the external service provider. Outsourcing can be categorized into two areas namely the Information Technology Outsourcing (ITO) and Business Process Outsourcing (BPO). In the context of BPO, it can be sub-divided into a wide range of corporate services such as accounting and finance, human resource, general services, etc.

As we may know, there are many reasons to why jobs are being contracted out to another company. However, the most prominent reasons are cost saving and restructuring. Other common reasons are to enhance the ability to focus on core business, lack of area expertise in the company, to gain access to other expertise and skill, advancement in technology, to improve quality and performance, to enhance innovation, to transfer and manage risk, and tax benefit. However, there are also some disadvantages in this new model. Outsourcing often eliminates the direct communication between the company and its customers thus preventing the company from building strong and solid relationships with their customers which leads to dissatisfaction. Outsourcing may bring other dangers too such as delay in communications and implementation of an operation and leaking of sensitive or confidential information of the company.

In this paper, we will discuss why companies outsourced their finance and accounting processes to others. This paper will explore the underlying facts of FAO (known as Finance and Accounting Outsourcing), advantages and disadvantages of FAO as well as issues, challenges and probable resolutions in addressing the problems faced in FAO. At the end of the paper, we will conclude by looking at the prospects and future of this new business model in the finance and accounting services.

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CHAPTER 2

OUTSOURCING OF FINANCE AND ACCOUNTING SERVICES

2.1 Introduction to Finance and Accounting Outsourcing (FAO)

Finance and accounting is one of the most critical and mammoth tasks in all companies as they need good and accurate financial reports and analysis irrespective of the organizations' size. Companies often implement outsourcing as one of their business strategies. When the accounting services and functions are outsourced to external providers, the responsibilities have been transferred to the hands of the professionals. This will put the companies at ease and hence able to turn their concentration to other core processes that are more vital.

Krell (2007) explained that the FAO market has increased steadily since year 2000 and by more than 45% in year 2005. In March 2007, Interactive Data Corp (IDC) study forecasted that the global finance and accounting outsourcing market will exceed $47.6 billion in 2008. Nicholson and Aman (2006) explained that outsourcing of accounting