Outsourcing of back office functions can seem scary but it need not mean losing control, as Sue Weekes explains

The very description ‘back office’ suggests something that can be left to run itself in the bowels of the organisation, while those in the front office and customer-facing roles cheerily go about their business, oblivious to these processes. Experienced business owners know, though, that they neglect this part of their operation at their peril. The back office, from which people are paid, the business accounts are run and where the increasing burden of administration and legislation is most felt, is much like the backbone of an organisation and needs to be treated as such.  

Outsourcing core back office functions such as payroll, accounts and HR doesn’t mean you never have to think about them ever again but it does free you of their day-to-day running and enables a business owner to focus on more core tasks. It is a natural step for many businesses in the recruitment sector.

“Given the level of entrepreneurial flair that leaders within this sector have, it is appealing to have the mundane and routine tasks outsourced but close enough to control,” says Sharon Wiltshire, regional managing director for Bibby Financial Services, which provides factoring and outsourced invoice services. 

For others, whether or not to outsource can remain a dilemma for many years. Some fear loss of control while others fail to recognise the false economy of trying to keep the back office running efficiently in-house at the expense of spending time on revenue-generating tasks such as finding new business. 

“In our experience, many recruitment companies spend 20-30% of their time dealing with salary enquiries and finance administration,” says Sanjay Swarup, director of SKS Business Services, which provides a shared services business model for accounting and finance. 

“For those with weekly salary requirements — which is more commonplace in the recruitment industry — the additional costs of servicing can far outweigh the relevant returns.” 

David Thornhill, MD of Simplicity, provider of outsourced back office and financial services to the recruitment sector, agrees and says while many recruiters do look for outsourced help immediately, others try to go it alone, before seeking help when they realise they can’t cope. “Naturally, this very much depends on individual characters, strengths and experience, as no one is the same,” he says. “It’s sometimes better from the outset to let go of the areas where you’re less experienced and focus on the parts of the business that will make you more money. The management gurus call it ‘sticking to your knitting’.”

Before making any business case for outsourcing, it is important to assess what you want to achieve by making the switch. “The operational benefits are numerous; just be clear on what you are trying to achieve, and assess the potential implications for your brand,” says Miles Lloyd, chief executive officer of Outsauce, provider of outsourced back office support and contracting services to the recruitment industry. “Firstly, identify the business drivers and establish the criteria by which you will measure success. It could be improving quality, enhancing the customer experience, minimising cost or limiting headcount.” 

Sheila Wade, MD of back office solutions provider Genius Professional Services, agrees it’s important to understand why you want to outsource other than to save costs. “Once you have an understanding of the other opportunities it offers in giving you a competitive edge, the decision-making process and what you require from the service may be different from one purely focused on cost savings,” she says. 

Having decided this, it follow up with a thorough cost analysis. Back office costs affect a business’ fixed and variable costs. As Thornhill points out, the costs for payroll support and software must be factored in, along with the mechanism of paying your workers (a bank or BACS facility), staff to run this process (with additional staff to cover during annual leave), credit control staff (and again, additional cover staff) and processes to collate reports, particularly as different systems don’t talk to each other — “such as invoice and payroll systems to create gross margin reports”, he points out. “So someone will have to manage this.” 

Start-ups in particular need to make sure they know what the “real” cost of running their business is. Thornhill reports that as a start-up, between 7-10% of the net invoice value is the real cost of your back office and finance packages. “So with volume, this will reduce,” he says. “It’s surprising how many recruiters don’t know enough about their finances, so I’d strongly advise them to look carefully at their back office and finance costs, as it will make them more money in the long run.”

Bear in mind that the administrative costs of Real Time Information, the Agency Worker Regulations, Pensions Auto-enrolment and future legislative demands should also be factored in. These have — or will in time — considerably added to the back office burden and in many cases require your team to have a far more in-depth knowledge of employment and related law than previously, and the potential cost of this can be vastly under-estimated. “Outsourcing gives the business the structure it needs to cope with such developments,” says Wiltshire. “Clearly such developments have a financial demand upon the business. This underlines the fundamental importance of understanding the numbers from the outset and having the correct level of funding.”

When looking at the costs associated with outsourced options, it is also important to consider the actual cost in terms of time and resources of finding the right provider and making the transition. “This will require time to investigate the possibilities and potentially travel costs in meeting with shortlisted providers,” warns Wade. “On choosing a provider, time will be required to manage the transfer process and the ongoing time required to manage the relationship and processes between you and the outsource solution. Time spent on non-core areas of your business has an associated cost that needs to be included in your case.” Furthermore, she advises agency owners to ask what requirements the provider has to allow them to interface with the business or if there will be development work and costs involved in this.

One area that is often overlooked in the business case for moving to an outsourced model is the impact it may have on other business processes. For instance, you may decide to outsource the payroll function alone initially but you must examine what impact it will have on those left in-house running accounts and finance or indeed HR. 

“Map out the entire process, from implementation to operation,” says Lloyd. “Identify all the touch points that could cause problems in other business areas. Include parallel running of systems and processes wherever possible to provide a safety net during the critical launch phase.”

Having selected a provider and drawn up an agreement, business owners should ensure this is reviewed by someone with legal expertise. They must themselves be alert to any hidden costs or any issues that may incur costs further down the line that would dilute the business case. Wade warns that you should also check that both the contract and price allow for any planned growth of the business. “Services that are needed later down the line will be charged as add-ons if not included in your original scope and contract,” she says. “It’s worth taking both the time and necessary advice to protect your costs down the line and including this outlay in your business case.”

Central to the business will, of course, be the estimated time for a return on investment. If the initial outlay is low, this could come sooner than you think, especially for start-ups. “From the perspective of a new start the outlay can be minimal; therefore the return on investment will be seen more quickly,” says Wiltshire. “And the overheads and outlay can be better controlled.” Wade adds that it can even be possible for start-ups to see a return on day one. “Our pricing structure is tied in with business performance, which keeps costs low for start-up businesses and eliminates the need for them to recruit headcount and purchase hardware, software, licences and so on,” she says. “For existing businesses often the access to a wider skills base and robust purpose-built systems gives them an immediate competitive edge against those who are still using legacy systems. A typical transition can take anywhere between three to 12 months and we would expect our clients to see a financial return once this transition has taken place and any historic costs associated with an in-house solution have ceased.” 

As you’d expect, longer-term outsourcing agreements will typically offer more competitive rates. When negotiating these, Lloyd says, ask a supplier whether it can tailor its costs to your business projections. “Outsourcing facilitates growth, and growth increases economies of scale,” he says. 

For those who fear a loss of control when they outsource, technology is helping to allay these fears. Lloyd points out that a fully outsourced facility should always retain full transparency and control for the customer but adds that technology has made it easier than ever to outsource myriad services and processes that were once “sacred and core”. Meanwhile, cloud-based technology has improved the quality and efficiency of the information that is provided to outsourcing providers. “For instance, payroll information can now be sent directly from candidates via smartphones, further reducing admin for the outsourcing customer,” he says. 

Swarup agrees that recruiters should be making use of such technology to ensure these savings are felt on the bottom line. “The cloud facilitates such cost savings by providing real-time access to documents from anywhere in the world,” he says. “Recruiters should be accessing the global economy to maximise efficiency and minimise costs where they can.”