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Double Edged Sword of Outsourcing

In recent years, the accountancy profession in the UK has faced a paradoxical challenge. On one hand, there’s a burgeoning skills and talent shortage, driving salaries upward. On the other, firms are increasingly turning to outsourcing as a solution to these challenges. However, this approach has multifaceted implications, both positive and negative.

The Talent Shortage Crisis Deepens

The UK accountancy sector isn’t just facing a talent gap; it’s facing a potential crisis. This shortage stems from several factors:

Demographic Shifts: An aging workforce means more retirements, with not enough young professionals filling the gap.

Changing Skill Requirements: The role of accountants is evolving. Beyond traditional accounting, there’s a growing demand for skills in areas like digital proficiency, systems migrations, data analytics, cyber security, and environmental, social, and governance (ESG) reporting.

Educational Gaps: Universities and professional training programs are struggling to keep pace with the rapidly changing demands of the industry.

Student Numbers Dropping: The Financial Reporting Council concluded in the Key Facts and Trends in the Accountancy Profession released in 2023 that the number of students across the professional bodies is consistently dropping and by 3.5% in 2022.

Impact on Salaries

To retain and attract talent, firms are compelled to offer competitive salaries. This escalation in payroll expenses is a double-edged sword. While it benefits employees, it places a financial strain on accountancy firms, especially smaller practices.

As firms compete for scarce talent, salaries are rising sharply. For instance, specialised roles in risk management or financial analysis are seeing particularly steep increases. This trend is more pronounced in larger cities like London, further widening the regional disparity in the profession.

However, newly qualified accountants are encountering an unexpected salary landscape according to data from Wade Macdonald and analysed by Accountancy Age. “Despite a clear shortage of candidates, starting salaries for these professionals have decreased by 10%.”

This situation doesn’t paint a very optimistic picture for the upcoming generation. So, what’s the solution? We’re not the only sector experiencing this dilemma. Now, the competition for top talent extends beyond just other firms in our industry to include various other sectors as well.

Outsourcing: A Tempting Solution

In response, many firms are turning to outsourcing, often to countries like India and the Philippines are popular choices due to their lower labour costs and a substantial pool of qualified professionals, can initially seem like a panacea, but it’s a complex issue:

Short-term Benefits

Outsourcing can lead to significant cost savings and access to a broader talent pool. It allows UK firms to manage workload spikes during peak seasons without committing to long-term employee costs.

Initially, firms can save up to 30-50% on labour costs. However, these savings can be offset by the costs associated with managing offshore teams, including communication barriers and differences in time zones.

From my own experiences with outsourcing, and after engaging with hundreds of accountants in recent years, I’ve observed a significant shift in priorities. The primary focus is no longer predominantly on cost-saving. In fact, costs associated with outsourcing have risen, diminishing the financial advantages once expected.

The more critical concern now is the efficient completion of work. It’s about delegating routine tasks to free up senior staff, who could then dedicate their time to more lucrative, value-added services for clients. This realignment in priorities underscores the evolving nature of outsourcing, where the emphasis is increasingly on optimising workflow and resource allocation rather than just cutting costs.

Long-term Consequences

However, this strategy is not without its downsides. There’s a risk of diminishing local talent development, as firms rely more on overseas professionals. This dependency could lead to a further erosion of home-grown expertise in the long term. Let’s focus on professional skills, problem-solving abilities, management competencies, and the potential risk of intellectual property (IP) misuse:

Advisory Leadership and Skill Development: Leading with advisory services requires a foundational understanding of basic accounting practices. However, the current trend of outsourcing fundamental tasks is creating a gap in skill sets for the upcoming generation of accountants. We expect them to excel in advisory roles, but how can they achieve this if they haven’t mastered the basics themselves?

Learning and Automation: The move towards automating mundane, repetitive tasks raises a critical question: How can we develop digital competencies if we don’t engage in these tasks first-hand? By outsourcing problem-solving, we risk losing our own ability to tackle challenges, leaving us dependent on external entities. This could eventually lead to a role reversal, where we become reliant on those we once outsourced to.

Middle Management Competencies: Outsourcing parts of management roles has led to a deficiency in essential skills among middle managers. Many lack the experience in hands-on management and empathy needed to build meaningful client relationships. Without having engaged in the tasks their clients face, they find it challenging to connect and effectively manage client needs.

Risks of Intellectual Property Misuse: There’s a growing concern about outsourcing companies potentially using our intellectual property to their advantage. By gaining insights into our processes and strategies, these firms could directly target companies, bypassing accountants altogether. This not only undermines our role but also poses a significant threat to our business models and client relationships.

Ethical and Quality Considerations

Maintaining the same level of service and adhering to UK standards can be challenging. This includes ensuring compliance with UK GAAP (Generally Accepted Accounting Practice) or IFRS (International Financial Reporting Standards).

There are concerns around the working conditions and fair pay of outsourced workers. Additionally, there’s the moral question of exporting jobs that could be filled locally.

Here is what Dave Sellick of Sidgrove has to say, having experienced firsthand what it is like for the employees involved:

“As someone deeply involved in the accounting sector, I’ve come to realise (based on the experiences I have had) that our approach to outsourcing, particularly in relation to process management and cultural dynamics, needs a serious overhaul. My experiences paint a clear picture of inefficiencies and a rigid adherence to outdated methods that hinder innovation and genuine progress.

One incident, in particular, stands out. I came across a team member laboriously working on a task in Google Sheets, a tool they were mandated to use despite their preference for Excel. This was ironic since the firm owner, who insisted on Google Sheets, was unaware that the team preferred Excel, a tool the firm owner dismissed as inferior. This not only highlights a disconnect between the owner’s perceptions and the team’s reality but also underscores a lack of open, honest communication and a curiosity for better, more innovative solutions.

This situation also shed light on the problematic ‘power play’ dynamic prevalent in the organisation. Decision-making was so centralised within the firm owner that it stifled the team’s potential to innovate or challenge the status quo. The staff, particularly those from Sri Lanka, seemed reluctant to deviate from the defined processes and tools, leading to a work environment where they were reduced to ‘bots,’ merely executing tasks without engagement or personal input.

What’s more upsetting is that these individuals had great ideas and were super smart. Unlike their UK counterparts, who might speak up against methods they didn’t approve of, this team appeared to remained silent, leading to inefficient practices and hours spent on manual processes that could have been avoided with a more open and empowering culture.

The crux of the issue is not the geographic location of the outsourcing team, be it the UK or elsewhere, but rather the flawed processes, management styles, and the dictatorial approach to task execution. True progress in outsourcing will only be achieved when we shift our focus to engaging with, empathising with, and empowering our teams. This is especially crucial when working with cultures that traditionally prioritise pleasing authority figures, often agreeing to tasks without considering feasibility, leading to eventual breakdowns in delivery.

We need to be encouraging a culture that values open conversation, innovation, and mutual respect. It’s not about where our teams are based, but how we lead, manage, and collaborate with them.”

The Path Forward

Firms need to balance the immediate benefits of outsourcing with its long-term impact on the local profession. Investment in training and development, coupled with strategic use of outsourcing, could offer a more sustainable solution.

Investing in Local Talent

Enhancing education and training programs to develop a more robust local workforce is critical. This includes not only technical skills but also soft skills and digital competencies.

Firms should invest in training programs focusing on new technologies and evolving skill sets.

Apprenticeships and internships can help bridge the gap between academic education and practical skills, preparing the next generation of accountants.

However, students need to be engaged in the process and educators need to be upskilled to provide the balance that business owners require from today’s workforce.

We need to engage, empathise and empower the next generation to make better decisions than we have to this point.

Strategic Outsourcing

Outsourcing should not be seen as a replacement but as a supplement to local talent. It should be strategically used for certain tasks, while core functions and client-facing roles remain onshore.

Firms should consider outsourcing routine, time-consuming tasks while keeping high-value, client-facing roles in-house. But remember to complete these high-value, client-facing roles it is highly likely that you will have needed to experience the time-consuming tasks to build the knowledge.

Building strong relationships with outsourcing providers can ensure better alignment with business objectives and quality standards.

Conclusion

Outsourcing accountancy work to countries like India and the Philippines is a complex and nuanced topic. The accountancy profession in the UK is at a crossroads. The decisions made today will shape the future of the industry. A balanced approach to outsourcing, combined with a strong focus on local talent development, is essential for the long-term health of the profession.

As a father of 3 I am concerned with how the future plays out for my children and yours.

We should set aside our selfish thirst for short term profits and consider the long-term consequences of what we are doing for and to future generations. I’m not ready to give up on them yet, are you? Perhaps we need to talk.