Billy Leigh is finance transformation practice leader at Embark. Views are the author's own.
In a perfect world, finance organizations could tackle every function in-house. But that obviously isn’t realistic, so choosing between third-party and in-house teams is a common CFO challenge.
Although there’s no single benchmark that provides an answer to the third-party vs. in-house choice, identifying function-area inflection points can make the decision more straightforward, and that process begins by understanding your objectives, constraints and strengths.
The risk factor
To level-set upfront, there’s nothing off-limits for a CFO when it comes to outsourcing. Even the CFO role itself is fair game. The sheer number of outsourcing options available, no matter what function needs to be filled, means CFOs don’t have to worry about whether competent third-party choices are available. That part of the equation is solved.
However, just because CFOs can outsource any function doesn’t mean they should. Instead, CFOs should consider using risk as the common denominator when choosing what to do. Which approach helps an enterprise deleverage risk most effectively?
Between factors like costs, organizational size and maturity, complexity, and objectives, risk provides the context in which in-house vs. third-party decisions are made. For instance, an acquisitive company always has the option of bringing valuation services in-house. But risk is the reason the vast majority of companies use outside specialists.
First, ramping up an in-house team requires time and money, each posing a risk to the enterprise. Second, unless the company is extremely acquisitive, in-house teams will struggle to stay current with the latest market movements. And third, with the exception of the biggest companies, just keeping those teams busy throughout the year will be hard.
In short, bringing valuation in-house — even as part of a corporate development team — exposes the company to acquisition risk from a lack of timely, relevant market insights. Outside specialists don’t bring that pain point to the equation.
This is an obvious example but the kind of risk analysis that goes into thinking about an acquisition team applies across the finance organization.
Although finance transformation never has an endpoint — technology continuously evolves and processes should always improve — tasks like combining disparate data sources or building a data warehouse are essentially one-off jobs.
For that reason, enterprises typically outsource positions and tasks involved with a transformation. There are exceptions, however, particularly for data-driven enterprises that have consciously developed a robust data culture. In these instances, leadership often opts to bring in-house crucial roles, like the data scientists and engineers who keep the data environment and systems running smoothly.
The office of the CFO, typically managing multiple projects at once, can be one of the busiest corners of any organization. It’s in these offices — the ones juggling M&A, technology implementation, other strategic initiatives and daily operations — that require a significant project management presence.
Since each of those projects typically requires its own manager, keeping a team of in-house specialists is usually beneficial. However, when a company only takes on an occasional project, outsourcing project management duties often makes more sense than adding dedicated in-house positions.
Coming out of an IPO, it’s common for companies to continue using their capital market advisor or another external party in an investor relations role, at least for the first year or so. After that, it becomes a matter of finding the right person for the in-house position. So, in this case, the inflection point involves the budget as well as the person with the experience and skill set showing up.
In theory, a finance organization should be a hub of decision-making for the entire enterprise. However, between AR, AP, inventory, payroll, and the other responsibilities involved, it’s easy for financial leadership to get bogged down in the day-to-day rather than keeping an eye on the road ahead.
Thus, whether from a lack of headcount, sufficient growth, or both, when critical but time-consuming tasks in accounting and finance start limiting strategic thinking, outsourced accounting becomes an attractive option.
Internal audit isn’t just about compliance within reporting time frames. Today, with the use of analytics to gauge a company’s health and identify trends, it’s evolving into a continuous risk monitoring function.
That makes especially subtle the inflection points for deciding when to bring this function in house. Ultimately, the decision point occurs when leadership finds the benefits of a continuous, in-house model exceed the cost savings of outsourcing the function. Practically speaking, many companies will adopt a hybrid, co-sourced approach where external specialists augment an in-house team when needed.
Complicated tax structures often go hand-in-hand with growth. Until companies reach the point where it makes sense to bring in a tax director with years of experience, most prefer outsourcing tax. However, when complexities in tax structure expose an enterprise to increased risk, it’s time to look at expanding in-house talent.
Many companies are either too small or go public too quickly to hire a director of financial reporting. In these cases, until reporting becomes sufficiently complex, the inflection point between outsourced and in-house talent is about finding the right person for the job. In other words, when it’s affordable and someone with the right set of experience and skills shows up, then in-house external reporting makes sense.
Every company is different, but using inflection points as a starting point for deciding when to bring a function in house can help. Given the sheer number of outsourcing choices now, though, it really is a golden age for CFOs when it comes to getting the third-party, in-house mix just right.