Why trust someone else to do your tax returns?
Quality and cost are two good reasons for farming out some in- house operations, as Ian Welch discovers
Wednesday 04 October 1995
In late July, 120 Conoco staff transferred to Andersen, which has been consistently one of the biggest players in the outsourcing market. Aside from 10 per cent of its consulting income coming from IT outsourcing or facilities management, Andersen has handled BP's exploration accounting for four years and does similar work for Sun Oil and Asco.
Perhaps not surprisingly, research by Andersen earlier this year indicated that 90 per cent of big UK companies have discussed outsourcing, with 70 per cent doing so at board level. Yet these figures were not dissimilar from a survey of more than 200 finance directors by venture capitalists 3i a year earlier, which revealed that top companies' experience of outsourcing had been overwhelmingly positive.
The benefits shown by 3i included giving managers more time, allowing concentration on core business issues, and reductions in staff costs. Often it resulted in a better-quality service, too. The downside was seen as the possible communication problems with service suppliers, and maintenance of high service levels, though most of the areas outsourced were peripheral activities such as catering, car fleet maintenance and software development.
Yet with outsourcing of accounts functions to the big accountancy firms, these problems have been far less evident. And Andersen has set up a dedicated unit in Warwick to deal with the anticipated work from clients, following the Conoco deal.
Norman Cook, a partner in Andersen's outsourcing department, admits to "disappointment" that, despite many companies expressing interest since the 1991 BP deal, few have gone ahead. He says it is important for them to work out what they want to achieve from outsourcing. But the inspiration could be either strategic, wanting to achieve a "partner" service, or simply cost-cutting.
While many find it hard to believe big accountancy firms can undercut company departments, Andersen cut BP's costs by 5 per cent a year, and had to promise a similar deal with Conoco. And while a number of Conoco's 120 accounting staff - half of whom are contractors - will be shed, the others will benefit from an extensive training and career development plan.
Conoco says the move is aimed to improve service quality, allow increased focus on core issues and achieve "set cost reduction targets". These, it feels, are achievable because finance work is "Andersen Consulting's core business whereas for Conoco it is not".
This point is backed strongly by Ian Barlow, head of tax at KPMG, which took over the tax department of National Power in 1992, shortly after British Telecom and BP had also outsourced their tax departments. Mr Barlow says that with commercial tax departments filled with qualified people, there is no reason why accounting firms should not be as cost-effective. He says: "Lots of clients are asking if we could do their compliance work on a projected fee basis, because as a big firm with our IT systems, we are geared up for doing it. I think you will see more companies slimming down their tax departments, while keeping the brain of the function in- house."
The outsourcing trend may pick up particularly strongly in tax, where a move to self-assessment in the personal and corporate fields is expected to herald a shift to a more investigatory culture within the UK's tax authorities. Many companies will wonder if they have the in-house skills to cope. Both KPMG and Price Waterhouse have set up units offering clients efficiency studies of their tax function.
Brian Birkenhead, National Power's finance director and next chairman of the influential 100 Group of finance directors, says the move has paid dividends in terms of time, cost and recruitment. "The time taken to do our compliance is down, and because of our peak and trough workload, it is more cost-effective this way. It had also become difficult for us to recruit and retain staff at our Swindon location."
He predicts that outsourcing will once again rise in popularity, as work patterns become more flexible in the next few years. "Most companies have accepted that if it is not part of your competitive advantage, it is up for grabs," he says.
In the public sector, too, the consulting arms of the Big Six are handling more and more internal accounting departments. CSL, part of Touche Ross, now runs the Accounts Services Agency on behalf of the Department of Trade and Industry and the billing and collection of the Corporation of London's rates and council tax. And with the onset of the Government's compulsory competitive tendering programme, the public sector looks set to provide bumper revenue for the big accountancy/consultancy firms in the rest of the decade.
In July, local councils were told bluntly by the Audit Commission that the practices of many of their finance departments were outdated and expensive. The commission concluded: "A centralised accountancy function is very high-cost and not an efficient use of resources."
Not many private-sector companies have yet concurred with this. Even National Power has not chosen to do so, believing transactions in the electricity industry to be sufficiently specialised to be best kept in- house. Yet Andersen Consulting anticipates 50 per cent of its business to be in the outsourcing field by the year 2000. Mr Cook says that it is a natural follow-on from designing and building systems for clients to start running them.
While the desperate financial straits of the early Nineties that inspired the original outsourcing mini-boom - often as much from the accountancy firms, which had excess people they needed to use - the delayered corporate environment, post-recession, has left many companies with barely the manpower to run effective departments. Outsourcing could be in for a boom in the second half of the decade.
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