Outsourcing Of Activities By Family Businesses
The last decade has revealed an emerging trend among medium-sized and some smaller family businesses towards outsourcing business activities, particularly functions such as information technology, human resource management, accounting, and internal audit.
Outsourcing is where an organization contracts out certain business activities to an external party to provide services or products previously conducted by an internal source such as an employee or business unit. This article outlines briefly decisions to outsource accounting and auditing activities by family businesses and provides a rational behind some of these decisions.
Reasons for Outsourcing
One reason for deciding to outsource accounting and auditing activities is part of a family businesses broader strategy on focusing on core business activities. Consistent with resource constraints placed on the firm, family businesses outsource as a means of promoting economic efficiency in their allocation of resources. Non-core activities, such as the internal audit function, allow resources to be re-allocated towards performing core business activities. In other words, family businesses adopt a more focused business strategy to outsource non-core functions in order to concentrate on revenue-producing functions.
Other reasons for deciding to outsource is the family business’s pursuit of internal accounting and audit quality and cost-effectiveness. The quality attributes of internal accounting and audit services sought by family business owners are independence and technical competence. Family businesses perceive external providers to be more independent and technically competent than internal providers when performing these functions. Moreover, external providers are more likely to offer a more efficient and therefore cost effective service.
Independence
While outsourcing of accounting and audit services is primarily associated with the demand for quality and cost-efficient services, family business owners are also realising the value of having an independent assessment conducted on their organization. Bringing in outsiders and linking the internal audit function to boards of directors can strengthen family boards and the governance function of the business. Finally, because external service providers are seen as being more independent, family business boards are usually more willing to accept proposals relating to risk and control.
Author Credits
George Tanewski is Senior Research Fellow in the AXA Australia Family Business Research Unit at Monash University. Dr Tanewski writes extensively on family business issues and also sits on the board of a prominent Melbourne family business. For further information please contact George Tanewski on 61-3-9903-2388 or george.tanewski@buseco.monash.edu.au