Outsourcing in Strategic Management Accounting - Essay Example

ACCOUNTING FOR STRATEGIC MANAGEMENT AND CONTROL Topic : Outsourcing in Strategic Management Accounting Introduction : Because of a growth in the number of high-tech companies in the early 1990s, the term “outsourcing” became better known largely. It is often not large enough to be able to maintain large customer service departments of their own easily. The decision to outsource any major function, such as maintenance, is not one that should be taken without due consideration, and careful consideration of all major issues is vital, if the transition to contracted maintenance is to be smooth and acceptable to both companies. Journal Literature Review : Outsourcing that defined as the management and/or day-to-day execution of an entire business function by a third party service provider. Nowadays, companies are looking at alternatives by which they can upgrade their products faster, give total customer satisfaction and bring down the price at the same time. It has become increasingly clear to product development companies that support and maintenance of their products is a critical activity. This includes upgrades and other changes, which have to be made quickly and effectively, while maintaining the quality of the product. Then they applied outsourcing as a part of their business activity. Discussion : I think that the cause to outsource is to release critical management time to work on significant things. If we take place to save some money in the process, that is an additional advantage, but not the outsourcing driver. Strategic outsourcing also agrees with the people and transitional questions, and how to manage the business and the employees on one occasion the activity is outsourced. Criticism to Outsourcing : The costs involved in managing the outsourcing process could be a cause for worry. However, it is not very difficult. Make sure we clearly plan our management strategies and adapt them to outsourcing. Whether our business is small or big to enjoy the benefits of outsourcing, a proper management framework to organize the process is integral. Conclusion : Outsourcing is now a mainstream phenomenon and is affecting more and more workers, in nearly every knowledge-based sector. Better outsourcing management helps in optimizing your business for maximum performance. A systematic outsourcing management will surely produce the following benefits and improve your outsourcing business. I. Introduction The concept of migrating internal business processes or functions to an outside organization may seem quite appealing on the surface. Reducing internal resource constraints and corporate expenditures and increasing quality may make service providers a potent draw. Today more types of services are available than ever before. Among other things, we can choose to outsource our network infrastructure, e-mail services, Web applications, and collaboration activities. Over the last decade, the attitude of businesses toward outsourcing has undergone a change of opinion reflecting the need to compete globally and focus on core competencies. Most processes have traditionally been kept in-house where it was thought they could be controlled most effectively. For many companies, an outsourcing decision represents the longest and largest financial commitment the company will make. The selection of an outsourcing partner will directly affect the company’s growth and future performance. In short, the outsourcing decision is critical to the company’s future success. However, without careful planning and preparation our outsourcing project can easily result in lost revenue, added expenses, and, potentially, litigation. II. Journal Literature Review In order to reaching efficiency that believed can obviate company from bankruptcy, a lot of method and concept are have been developed. One of them is by doing outsourcing. However, besides promising many strategic benefits, it also brings consequence of the appearance of strategic risk. Growth of outsourcing over the last century has been driven by the ever-expanding quest to improve productivity, reduce costs, and deliver greater value to customers and shareholders. Outsourcing decision is taken by all management to improve their company performance that is related with process business, which is not representing core competence or core business. Expected by “delivering” the management process to other company (as business partner), which is owning core business in the area, process with the optimal performance will be created (“Anatomy of an Outsourcing Decision”, 2005). Outsourcing enables us to tap into the breadth of knowledge possessed by many personnel contained within our outsourcing partner, all working together as well oiled machine. We get excellent service. To get the same coverage our self, we would have to have a big IT department 1. Even in the same industry, what is justification to outsource for one company is not adequate justification for another. There is no right answer. Our organization must determine whether outsourcing is appropriate and why. This is not a trivial exercise and there will be disagreement within the organization. However, determining whether or not to outsource, what to outsource and the objectives to be achieved are important steps in the process. This will provide the foundation for evaluating outsourcing vendors should we proceed with the procurement process (“Outsourcing - A Strategic Decision?” 2005). The nature of outsourcing is transforming in both its use and its impact. Outsourcing is in both its use and its impact. Outsourcing is an accepted management tool for redefining and re-energizing the corporation. In the industrial countries, outsourcing is being applied to every facet of the company - from human resource, inventory control, the information systems and related communication to maintenance and repair (“Anatomy of an Outsourcing Decision”, 2005). Most of companies select outsource since improved business focus, free management from day to day operations oversight; implement significant cost saving measures and redirection of resources (Dunn, S., 2005). Due to the increasingly use of outsourcing, outsourcing initiative is a very important process that influences all organization’s future. Top management should decide carefully whether it is better for the organization’s culture will support an outsourcing decision, determine which functions are completed by vendors, and determine which vendor he will make relationships. In other word for vendor selection, it must be realized to prevent outsourcing from becoming the worst choice. So it is serious consideration must be given to references and reputation, commitment to quality, cultural match, flexible terms and price (“Outsourcing - A Strategic Decision?” 2005). Business process outsourcing (BPO) takes advantage of economies of scale by handing off non-revenue generating activities to third parties with the resources and expertise to perform them more efficiently, and for whom those activities are part of their core competency. BPO also creates strategic value by reexamining longstanding business processes and changing the way they are performed. It is common for service providers to reengineer existing processes to incorporate their acquired expertise, introduce best practices, or to leverage technology in new ways. Outsourcing can even improve the way a particular business process affects and interacts with other internal activities, utilizing service providers’ knowledge of integrating their solutions into all kinds of business environments (“Gatner Consulting Says Finance and Accounting BPO is a Key Enabler for Increasing a CFO’s Efficiency”, 2005). From its earlier days when it was viewed as little more than a good tactic aimed at reducing costs, outsourcing has now matured into a strategic management tool. An outsourcing arrangement can be either “tactical” or “strategic”. An outsourcing is tactical when it is driven by a desire to solve a practical problem 2. III. Discussion Some companies view receivable management as a support function, making the strategic decision to outsource all or most of the activity. Others see credit and collections as a vital ingredient in their customer relationships, but seek opportunities to outsource some tasks. In either case, the reasons for choosing to outsource are varied. Although reduction in operating costs is not necessarily the first reason to outsource, practically every such decision should result in cost savings. Yet some companies (or departments within companies) actually resist outsourcing, believing they can do it better and more cheaply in-house. In a few cases, this may be true. However, in most, this thought process is not based on a complete and accurate analysis of the facts. A principal motivation for the change in management accounting is the changes in business processes, and organizations, in response to increased global and domestic competition. These changes include a renewed focus on the customer, aggressive cost reduction, outsourcing, rightsizing and reengineering, total quality management, advanced manufacturing technologies, and increased use of information technologies. The management accountant is no longer just a reporter and analyzer of financial information, but a business partner developing the financial and non-financial information the organization needs to be successful. As such, the management accountant plays a strategic role in the business, developing and presenting the information that is critical for the organization’s success. This is an integrative role, which requires the management accountant to understand the organization’s strategy, and to understand how both financial and non-financial information is developed across all the management functions. In many cases, employees work side by side with the outsourced specialists, to monitor the process. Business process outsourcing means that repetitive or time-consuming tasks are now performed by the outsourcing service. This frees up the employees’ time, and directs focus to more core business objectives. The potential of outsourcing has moved on from activities that are regarded as support activities such as catering or security services, to some critical areas such as marketing and distribution, accounting, or information technology. Immediately, almost the entire value chains are open to the use of external supply The concept underlining outsourcing is the theory of transaction cost analysis. Transaction costs are the expenses that accrue from the time a company begins considering outsourcing through the managing of the contract once it is in place. These costs include the time and money spent to search for a vendor, to negotiate and write a contract, and to monitor delivery of services. Most experts recommend hiring a consultant with outsourcing expertise to facilitate the outsourcing process. While most consultants utilize a similar methodology, the significant differentiator is how well the consultant understands your organization, interrelates with potential vendors, and designs a solution to address your situation both now and in the future (Dunn, S., 2005). In addition to selecting the “right” consultant, the success of the outsourcing procurement will largely depend on the time, resources and focus your company gives to the process. The following factors will directly affect the quality and timeliness of the decision process. A structure that approaches a partnership like arrangement where the organization that is outsourcing and the service provider see each other as equals engaged in a common enterprise-tends to allow the service provider to deliver greater value during the course of the arrangement. This, however, is not an easy course to chart for many large organizations. As the influences driving outsourcing intensify, the pressure on outsourcing relationships also increases. How well a company handles that pressure determines the success of its outsourcing relationships and, ultimately, its success in the marketplace. Only the companies that are best in world are going to do well (in the global economy) and they are going to have to focus on what they do well and outsource the rest. Strategy has to become an integral part of the management system of an enterprise. Strategy work cannot be delegated just to the CEO, his executive colleagues and to the strategic planning department that is serving as a staff department to the CEO. Everyone in an organization who makes decisions has to be linked to strategy and into a strategic feedback loop that feeds back important information as fast as possible about what is working and what is not working to those, who have to make or change major strategic decisions. The problem with strategy is that not everything can be decided in advance, because information and knowledge about the situation, where action and operational decisions are required to execute on strategic objectives, is missing at the time, when a decision on the strategy is made. Moreover, this decision may be based on incorrect assumptions and information too, requiring corrections in the execution phase. Target costing emerged as one of a number of new techniques that held out the promise of restoring management accounting’s lost relevance. Target Costing is a management technique that determines the desired cost for a product upon the basis of a given competitive price, such that the product will earn a desired profit. Target Costing is now regarded as a powerful approach within strategic cost management, conceived of as the pursuit of cost management as a business strategy. Consequently, it offers an alternative to activity-based cost management framework. In this context, cost management is understood to mean those actions that firms take in order to satisfy their customers whilst continuously reducing and controlling their costs (“MANAGEMENT AND ACCOUNTING WEB”). Target cost management philosophy embodies a powerful approach to the enactment of the strategic management concept. Because adopting a market orientation shares so many features with the philosophy of target cost management, it can legitimately be identified as a parallel approach to the enactment of the strategic management concept. Indeed, it possible to understand it as essentially the same approach, emerging in the marketing literature more or less contemporaneously, and in response to largely similar concerns to those that resulted in the relevance debate within management accounting (“MANAGEMENT AND ACCOUNTING WEB”). The contributions made by a wider spectrum of organizational participants are acknowledged, together with the implications this has for a target cost management philosophy. The benefits to be gained from viewing target cost management as a means of enacting strategic management are argued to significantly outweigh those that result form identifying target cost management as an approach within strategic cost management. Several of the insights contained within it can be incorporated into target cost management to create a more robust approach to strategic management (“MANAGEMENT AND ACCOUNTING WEB”). Target costing is a management accounting technique in the normal sense. Management accountants contribute to target costing. They are target costing as a management accounting technique in the normal sense. Management accountants contribute to target costing. They are involved in the determination of target profit margins, in relation to both the sales and finance aspects of this process. Within the value engineering process, their involvement is central to functional cost analysis, and in a more traditional way, as the party responsible for the maintenance of cost tables. Ultimately, however, management accountants are one group of specialists among a wide range of such groups working in conjunction with each other (“MANAGEMENT AND ACCOUNTING WEB”). Target costing was developed in the light of the recognition that in industries such as motor vehicle or audio-visual products manufacture, a significant proportion of production costs are committed in the planning, design and development stages. By seeking to reduce product costs at these stages of the product’s life cycle, manufacturers will find themselves better placed to provide products that are competitive in the market place. Downstream cost reduction is to be viewed as a bonus, the main basis for competitive products being laid in the early stages of new product development. Taken together, target costing can be viewed as embodying a total cost management philosophy, something quite different from the traditional cost control emphases of management accounting. While target costing was regarded as a promising approach to what was subsequently to be referred to as strategic cost management, it was always recognized that it exhibited a number of features that differentiated it from the stock of management accounting techniques. One such feature is its underlying market-driven emphasis. Whereas management accounting based approaches to pricing, including those that embraced activity-based costing, move from cost to price, ie projected cost plus desired margin = selling price, target costing begins with price and works back to cost, i.e. market price less desired margin = allowable cost (“MANAGEMENT AND ACCOUNTING WEB”). Target costing is not a technique at all. It is a development more similar to some form of management philosophy, which is crucially reliant on the different functional specialists including management accountants, cooperating in an attempt to meet the challenge of continuously satisfying customers at a profit. For the management system of the enterprise that means, that strategy has to be linked and integrated with the operational management. Tying strategic planning to performance monitoring and decision support at a tactical level creates a very powerful approach. However, this is not all, what companies need to do in order to be successful in the new economy. The drain of resources not only affects the bottom line of company, it also limits the flexibility of company, as the team cannot readily adapt their automated systems to respond to new strategic demands. Many companies have responded to these challenges by leveraging the technical skills and experience of outsourcing companies. By moving core applications to a professional outsourcer, the company is able to take advantage of reduced costs and greater strategic flexibility (Williams, Danny., 2005). Costs are reduced through the outsourcer’s vast economies of scale and the quantity and quality of resources they can dedicate to the management of their application portfolio. The savings generated by the outsourcer are then passed on to their bottom line. Moreover, company’s flexibility is increased because their resources are no longer devoted to information technology tasks - instead company can focus on the core competencies that have made their business a success. Under outsourcing, a company entity remains fully responsible for the division of affected services and maintains control over management decisions, while another entity operates the function or performs the service (Williams, Danny., 2005). Outsourcing is not an end to itself. It is a management tool and should be approached in that manner. In determining whether to outsource, management will make numerous decisions that have significant consequences. In the course of the outsourcing process, management must address several critical issues in order to achieve success. These issues include identifying potential organizational problems, factoring in human resources and behavior, considering asset transfers and authorities; establishing and negotiating contracts; and overcoming political obstacles. These issues are key reasons that mandate top management's involvement throughout the entire process (Williams, Danny., 2005). IV. Criticism to Outsourcing Inadequately, outsourcing can make a company seem lethargic. Outsourcing can significantly improve an organization’s market share, its profits, and its technical leadership - or it can harm all three. I can argued that there is less incentive for the agent to show loyalty or work ethic in its representation of said company, because “outsourced” workers are not actually paid agents of the company. The quality levels of customer service and technical support of outsourced tasks are lower than where they have remained “in-house”. I can analyze outsourcing as it represents a new threat to labor, contributing to rampant worker insecurity, and reflective of the general process of globalization. I can tell one criticism of outsourcing is that product quality suffers. However, the outsourcing firm has freedom to move a firm department or division back home if its profits are suffering because of poor quality. Policy solutions to outsourcing are also being my criticism. One solution often offered is retraining of domestic workers to new jobs. However, some of these workers are already highly educated and already possess a bachelor’s and master’s degree. Retraining to their current level in another field may not be an option due to years of study and cost of education involved. There is also little incentive given that the jobs in their new field could also be outsourced as well. The risk factor is the biggest concern in outsourcing. A complete assessment of possible risks will give us an upper hand in being aware of our risks and studying them to ensure that they are managed well. The process of making the decision to outsource our business to actually getting our work done is a long one. This demands constant and effective communication between the outsourcing partners. We will have to establish proper communication channels that facilitate open communication. The main advantage of maintaining good communication with our partner is transparency in all activities. Outsourcing is only one of the tools available to achieve an organization’s objectives. If used, it must be consistent with the organization’s strategy and its strengths and weaknesses should be understood. Outsourcing has the potential to solve some difficult problems for some organizations. Outsourcing is not a cure-all or a quick-fix situation to a long-term challenge, but it is a potentially beneficial strategy when used in the right situations. As a final point, I can say that outsourcing is not without risk. When company allows a third party to run part(s) of their business process, risks of security and privacy are inherently associated. Leakage of information is one simple example. Therefore, the company - as the owner of the process that responsible for any related risk - must ensure that the outsourcing process is well managed and controllable. V. Conclusion Education, technical skills, infrastructure, and a welcoming business and political climate also play a critical role in the outsourcing decisions of industrial world corporations. Outsourcing has been around for a long time. The concept is not new, and most likely, we are not the first in our industry to consider outsourcing. However, one size does not fit all. Outsourcing is not an easy solution. Considerable time and effort must be spent by an organization to maximize the benefits of the outsourcer and to ensure contract compliance. Management issues and not technical issues take a dominant role in outsourcing. As a company’s technology needs are dynamic, the nature of its relationship with its outsourcer is also dynamic and needs to be managed like any other business process. We should try to understand the specifics of our organization, and what is exactly we hope to achieve from outsourcing. The outsourcing decision has three aspects: vendor capabilities, cost and cultural fit. Each of these must be evaluated in the context of our organization and our requirements. Design the solution that positions our organization for future long-term success. Figure 1: The integrated process of strategy and performance management Figure 2: Technologies can help our business to be more rapidly harvest the benefits of outsourcing Works Cited Anatomy of an Outsourcing Decision. (2005). Retrieved November 20, 2005 from http://www.bpo-outsourcing-journal.com/sep2000-special.html Barret, R. (2004). SHARED SERVICES; SHARE AND SHARE ALIKE (Pg. 28). Post Magazine Cost Control is Firmly Back in the Corporate Agenda. (2005). Financial Times Information. Global News Wire – Asia Africa Intelligence Wire Dunn, S. (2005). Maintenance Outsourcing - Critical Issues. Retrieved November 20, 2005 from http://216.109.125.130/search/cache?p=outsourcing+decision&prssweb=Search&ei=UTF-8&fl=0&Z=1&u=www.maintenanceresources.com/ReferenceLibrary/MaintenanceManagement/Outsourcing.htm&w=outsourcing+decision&d=W8NlL46CLxkv&icp=1&.intl=us Gatner Consulting Says Finance and Accounting BPO is a Key Enabler for Increasing a CFO’s Efficiency. (2005). 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Retrieves November 30, 2005 from http://216.109.125.130/search/cache?p=management+control+affects+outsourcing&prssweb=Search&ei=UTF-8&fl=0&Z=1&u=www.findarticles.com/p/articles/mi_m0BKU/is_2004_March/ai_n6147875&w=management+control+affects+outsourcing&d=Gx5wPI6CL1GN&icp=1&.intl=us . Read More