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Economics of Outsourcing

In this article, we will explore the potential cost savings that an organization may realize through outsourcing. The economic argument to consider outsourcing is quite compelling.

We will start with a basic definition of outsourcing. We refer to outsourcing as taking a position vital to your organization and having an expert work on it from a consultative standpoint as opposed to hiring an employee.  Consultants can work either within your office or virtually from their own office allowing you to better utilize your office space.   

 

Typical Cost Structure: Bookkeeper

Bookkeepers are responsible for essential and regular accounting activities including managing cash management (accounts payable and receivables) and performing bank reconciliations as well as other month-end reconciliations. While a bookkeeper’s salary and associated costs can vary based upon geographical region, in this article we will use averages that we typically come across and which we believe are reasonably representative of what many organizations experience.

  • Salary: $45,000
  • Payroll taxes: ~10% of salary ($4,500)
  • Employee benefits and overhead: ~10-15% of salary ($5,500)
  • Estimated all-in expense for a bookkeeper: $55,000

This all-in expense presumes that the bookkeeper will be working a full 40-hour work week. If the bookkeeping function requires less than a 40-hour work week, then that bookkeeper’s slack hours need to be repurposed or expenditures may go to waste.

 

Associated Expenses

Along with the human resource related expenses of a bookkeeper, there are also costs to establish and maintain an accounting system as well as the overhead expenses for their workspace. This can include the cost of software, software maintenance, and technology infrastructure including items such as servers and printers. Costs for these items can vary greatly from one organization to the next but need to be factored into the economics discussion.

A potential “soft” cost associated with a traditional bookkeeper is that they may be tasked with performing higher level services such as budgeting and forecasting and where they may simply not have the training, experience, or tools to perform these functions. An organization may experience either inadequate or improper attention to these key matters if a bookkeeper is not properly fit to do the job. So, even though an organization may be spending more than $55,000 on salary along with infrastructure costs, these expenditures may not result in fulfilling all of an organization’s accounting and financial needs.

 

Typical Cost Structure: Controller or CFO

The salaries associated with more skilled and experienced controllers or CFO’s can vary greatly depending on geography and industry. For the sake of this article, we will look at the all-in cost for a controller or CFO to be in the low six figures. And while many organizations require the skills and expertise of a controller or CFO, there may be situations where their services are required only on a fractional basis. So, an organization may be facing a situation where they are carrying significant expense for a person who is not fully utilized or is severely underutilized.

 

The “Math” of Outsourcing

The following is a scenario designed to depict how outsourcing may be cost beneficial to an organization. Let us assume the following:

  • Estimated full time cost of a bookkeeper: $55,000
  • Percent of time to complete all required tasks: 70%
  • Estimated part-time (50%) cost of a controller/CFO: $50,000
  • Percent of time to complete all required tasks: 30%
  • Total cost to the organization: $105,000

We will now look at the potential cost savings:

  • Estimated costs to outsource bookkeeper and controllership functions: $80,000
  • Estimated dollar savings: $25,000
  • Estimated % savings: 24%

 

What is not accounted for in the above scenario are the associated IT infrastructure/technology costs required to provide the essential accounting services. Outsourcing providers, such as VAS, include that as part of its service offering.  Please see the chart below that provides other comparative cost metrics:

 

 

In-House Accountant

In-House CFO

Accounting Dept.

Outsourced Dept.

Annual Savings

Savings %

Ave. Salary

$43,000

$90,000

$133,000

$120,000

$13,000

10%

Payroll Taxes (10%)

$4,300

$9,000

$13,300

NONE

$13,300

100%

Employee Benefits & Overhead

$13,300

$14,700

$28,000

NONE

$28,000

100%

Total Costs

$60,600

$113,700

$174,300

$120,000

$54,300

31%

 

ROI

We will conclude this article with another way an organization may look at the return on investment from outsourcing.  While the numbers shared in the prior section demonstrate high level cost savings, the following will address ROI at a highly practical level.  VAS clients have often shared that they may typically spend 16 – 20 hours per month on month-end reconciliation efforts using a complex web of Excel spreadsheets. By outsourcing the accounting function to an organization such as VAS and its streamlined processes, the time required to perform month end can be reduced to a total of 3-5 hours. The organizational time savings of approximately 13-15 hours/month can be redeployed to higher value strategic functions.

In the end, it is all about organizations finding the highest and best use for its resources. Outsourcing has proven to be a cost-efficient approach worthy of consideration.

 

We actively work together with you to make informed, confident decisions. Let us know how we can help you. Reach us at 518-459-6700 or at bstco.com.


Posted on July 8, 2020 at 9:31 AM