Essay on Outsourcing: Access Quality Services, Cut Costs & Focus on Core Functions

Introduction

Outsourcing is a business practice where a company transfers the responsibilities of some of its operations from an employee group to a non-employee group. Different reasons inform the decision for outsourcing. The company stands to gain access to the latest technology in the market hence high-quality output. Through outsourcing, the company cut down on costs and can focus on other core functions of the company. It avails a platform to access quality services from professionals at a cheaper rate: this report highlights the different financial models and factors to consider before making an informed decision.

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The process of making a sound decision to have a positive impact on the company

To make an informed decision, the company should first understand its needs and reasons for outsourcing. Activity analysis enables the company to distinguish between core and peripheral activities. In this case, the company is both a manufacturing and a service provider. However, due to the changing dynamics in the market, they need to expand activities by specializing in manufacturing activities. Identifying the core and peripheral activities makes it easy for the company to decide whether to outsource. It enhances efficiency since the company will allocate resources accordingly based on its core activities (Reiley, 2014). The decision-making process is cost analysis. The company needs to establish whether outsourcing services will reduce overhead costs in the long term.

Resource analysis should also be considered to determine the availability and cost of acquiring the resources. If outsourcing resources are cheaper, reliable, and give assurance of high-quality output, the company will opt to outsource. Transaction cost analysis considers the frequency of the transaction, the risk involved, and the specificity of the task ( Nielsen, 2010). All these analyses considered during the decision-making process should ensure that the company achieves its goals and objectives even after outsourcing. The impact on the customers in the market after outsourcing should also be analyzed. Outsourcing services should still retain current customers and even gain a larger market share.

Financial models to be considered during the decision-making process

Financial models are used to assess the company's performance. In regards to outsourcing, the following are the most relevant. The three statement model considers the three financial statements: income statement, balance sheet, and the cash flow financial statement. The model ensures that the books of account are balanced. The three financial models are linked with formulas in excel, and thus any slight assumption can affect the financial statements. Another model is the budget model, which analyses the salaries, and finances needed to acquire resources. The budget model is based on the income statement, which enables executives in financial planning and analysis. The forecasting model makes it possible to compare the budget and financial proceeds before and after outsourcing.

Financial data needed and its relevance

Based on the above financial models, the most relevant financial data to be analyzed is the revenue, production cost, and administrative costs. The data is obtained from the income statement, balance sheet, and the cash flow statement (“Top 10 financial models”, 2020). With the forecasting model, it is easier to project the revenue and overhead costs to be incurred after outsourcing. The current data, in comparison to the projected data, is used to make an informed decision on whether outsourcing is relevant or not. The revenue earned should be retained or maintain an increasing trend after outsourcing. Instances where the company stands to make losses, outsourcing should not be considered.

The purpose of outsourcing is to reduce production costs by focusing on the core activities of the company. The company should consider outsourcing only if the production cost will be reduced. Reduced production costs increase the revenue earned. The production cost covers both salaries and the cost of acquiring resources. Outsourcing reduces the cost spent on wages since the company's service employees will be laid off, reducing overhead costs. The outsource supplier should be able to provide services at an affordable cost, preferably lower than the current costs incurred. The relevance of the data is to make comparisons when using the financial model to make informed decisions.

Financial option recommendations

Outsourcing cuts down on the overhead cost. The finances which were initially directed to paying salaries and sourcing the materials needed by the service employees will not be incurred anymore after outsourcing. The funds will be directed into expanding manufacturing activities. However, this will not be enough to get the 20 million needed for the new manufacturing activities. Another option will be through crowdfunding. The company uses a reliable online platform such as Kickstarter to gather funds from interested parties after pitching their idea of expanding their manufacturing activities (Carmicheal, 2020).

The company is established and familiar with the market; it will be easy to find investors willing to assist in funding the new project financially. The good thing about this option is that the money received is not refunded. It will not be a financial burden to the company. The company could also opt for a bank loan. This option involves interests and eventually will be a financial burden to the company. The company could also opt for an angel investor for a one-time appearance or partial ownership. This option requires set rules to govern the new partnership so that no party is disadvantaged.

Conclusion

In conclusion, the company should opt for outsourcing only if it stands to gain financial. The impact on the market should be positive. The outsourcing supplier should be reliable and efficient to ensure the company achieves its set goals and objectives. The financial options mentioned should be considered and thoroughly utilized to analyze the relevant financial data needed to make an informed decision. Crowdfunding is the best financial option to get 20 million funds. However, it is not a long-term strategy. The company could opt to get a bank loan.

References

Reiley P ( 2014) "Outsourcing decision making: can we make it more considered?" IES Perspectives. Retrieved 16 June 2020 https://www.employment-studies.co.uk/system/files/resources/files/mp99.pdf

Top 10 financial models (2020) Corporate Finance Institue, Retrieved 16 June, https://corporatefinanceinstitute.com/resources/knowledge/modeling/types-of-financial-models/

Carmichael, D. G. (2020). Financial Options. In Future-proofing—Valuing Adaptability, Flexibility, Convertibility, and Options (pp. 145-148). Springer, Retrieved 16 June 2020 https://link.springer.com/chapter/10.1007/978-981-15-0723-6_10.

Nielsen, L. B. (2010). Reflections on the outsourcing decision-making process and the use of outsourcing from a management accounting perspective. Aarhus University, Aarhus School of Business, Retrieved 16 June 2020 http://pure.au.dk/ws/files/14035/PhD_Thesis_LBN.pdf