The ripple effects of Covid-19 have caused severe disruption to the businesses and economies and insecurity in people, creating deep economic and social instability all over the world.
For an initial period, we were somehow hoping that we were facing a short-term crisis; however, it does no longer seem to be the case. We can now say that this may well be a new reality that we need to face and that requires us to transform the way we think and work. We must acknowledge the various risks and challenges we are in, such as the need of workforce and resource optimization and budgetary constraints just to name a few, the impact of which the companies have already endured in the last couple of months but their impact is yet to be seen.
What's next?
In response to the situation, the companies need to reconsider the operational models and working methods built in the past in the context of the successful business continuation from now on. Based on our conversations with companies, we notice that the expected difficulties aroused by the pandemic would force many businesses to cut costs, adapt and develop new ways of working with a view to achieving better business sustainability. This process will be particularly important for the region of Southeast Europe, where my team and I have direct observations. The economies of countries, such as Bulgaria, Romania, Greece, North Macedonia, Albania, Kosovo are primarily composed of small and medium-sized businesses with limited reserves and financial resources. Leveraging their experience also from the last mainly financial crisis, these SMEs are now making plans and developing different scenarios in order to ensure business continuity.
One of the main directions in these analyses is how to keep the focus on the core business activity and retain people with key competencies within the company. Other non-core or supporting functions are outsourced to external professional service providers – marketing, accounting, payroll and HR administration, etc.
This is exactly what is happening in the field where we, at EY, have direct observations. Many companies outsource their accounting, tax and payroll processes to an external professional services provider. Up until now, the chief accountant in SMEs, although not fully utilized, was also helping with other tasks (e.g., supporting the Sales department); however, it may turn out not to be justified to keep an inhouse finance or tax person at all in the context of an expected downturn of the business that many SMEs are now facing.
Why change the model?
Indeed, what are the advantages and disadvantages of outsourcing non-core functions to an external professional services provider and why do many companies consider BPO to be one of the most reasonable ways for improving the resource management and efficiency? Many of our clients share that one of the main benefits of such a solution is that it frees the company to concentrate on its core competencies. Maintaining internal departments can consume a lot of an organisation’s time and energy, as well as requires continual oversight and innovation. The company would rather prefer to focus on its core strengths and/or money makers by outsourcing.
BPO can also be a key tool for cost reduction. In addition to salary costs, the maintenance of an internal finance department has a lot of cost components for staff training and qualification, while hiring full-time employees who have periods of peak workload, followed by non-work periods, creates significant inefficiencies. Here we add a number of other costs for staff retention and motivation, office space, hardware, software licensing and equipment, costly management time and a lot more... Many SMEs do the math and just decide, it is not worth it.
Moreover, outsourcing accounting, tax and payroll functions allows companies to hire experts they would not normally be able to bring on-board permanently. A specialized external provider offers a range of related highly complex services which are readily available upon request. This also brings synergies in providing a comprehensive and high quality service. There is no need for further investment in IT, system upgrades for legislative changes and related trainings, as the SME uses the systems of the service provider. Indeed, the specialised statutory accounting and payroll compliance software can easily be cut, as it is normally unrelated to the core business of the companies. Nowadays, there are a lot of regulatory changes in the context of the pandemic, and, also, outside of it. The legislation of the countries in the region is dynamic and constantly developing. There is the threat of sanctions (even lawsuits) for wrongful termination of contracts, safety violations, tax compliance issues, etc. When outsourcing the services to an external professional provider, these headaches become theirs.
Most importantly, the outsourcing solution improves the quality of the finance and payroll function because a professional provider brings higher productivity and quality through better processes and knowhow. As a professional organization, it generally develops highly motivated people focused on the client as their customer driven by front office mindset, making a difference from in-house back office function personnel.
What are the risks?
Indeed, BPO may create very real risks that should be carefully considered. External providers may have their own agendas. This may lead to a loss of company control over the quality of service. Furthermore, the prices of the BPO service can vary considerably between different providers, which may prevent the outsourcing solution from bringing the full potential for cost savings. The provider’s speed of response and attention to the needs of the company may be reduced. An important element of an outsourcing solution is to provide reliable data protection regarding sensitive commercial information or personal data of employees and contractors. For all these reasons, the selection of a suitable BPO partner should be made carefully, as it is certainly of great importance.
