The True Cost of Outsourcing Versus Hiring Back Office Staff

Outsourcing versus hiring internally is an important decision for any organization, especially when it comes to bookkeeping, payroll, accounts payable (AP), and accounts receivable (AR) services. The choice between these two options can significantly impact a company's financial health, operational efficiency, and strategic focus. This blog post digs into the true cost of outsourcing these services versus staffing them internally, exploring financial implications, benefits, challenges, and strategic considerations to help businesses make informed decisions.

Financial Implications

Outsourcing Costs:

Outsourcing bookkeeping, payroll, AP, and AR services typically involves paying a fixed fee or a variable fee based on the volume of transactions. This fee covers the cost of labor, technology, and expertise provided by the outsourcing firm. One of the primary financial benefits of outsourcing is the reduction in overhead costs. Businesses save on the expenses associated with hiring employees, such as salaries, benefits, training, and office space. Additionally, outsourcing firms often have economies of scale, which can lead to lower costs for their services compared to maintaining an in-house team.

Internal Staffing Costs:

Staffing these functions internally involves significant financial commitments. In Canada, the total cost of employing someone extends well beyond their base salary, encompassing a variety of additional expenses that include both mandatory contributions such as Employment Insurance (EI), Canada Pension Plan (CPP) contributions, Workers' Compensation, and potentially the Employer Health Tax (EHT), as well as voluntary benefits like health and dental insurance, retirement savings plan contributions, and life and disability insurance. Employers also bear the cost of paid time off, recruitment, training, and providing office space and equipment. While these costs can vary significantly based on factors such as industry, company size, and the benefits offered, it's generally estimated that the true cost of employment can be 15% to 30% higher than the employee's base salary. This percentage can increase in industries with more comprehensive benefits packages or roles that require extensive training and equipment, highlighting the importance for businesses to carefully consider these additional costs when budgeting and setting salary levels.

Benefits and Challenges

Outsourcing Benefits:

1. Expertise and Efficiency: Outsourcing firms specialize in their respective fields, offering a level of expertise and efficiency that can be challenging to replicate in-house without substantial investment.
2. Scalability: Outsourced services can easily scale up or down based on business needs, without the need to hire or lay off employees.
3. Focus on Core Business Functions: Outsourcing allows businesses to focus on their core competencies by relieving them of the need to manage non-core but critical functions.

Outsourcing Challenges:

1. Less Control: Outsourcing can lead to less control over these functions, which can be a concern for businesses that require tight integration of these services with other business processes.
2. Security and Confidentiality Risks: Handling sensitive financial information externally can pose security and confidentiality risks, though reputable outsourcing firms have strict protocols to mitigate these concerns.

Internal Staffing Benefits:

1. Control and Integration: Having an in-house team ensures more control and easier integration with other business functions, facilitating cross-functional collaboration.
2. Dedicated Focus: Internal staff are solely focused on your business, potentially leading to a deeper understanding of company-specific challenges and opportunities.

Internal Staffing Challenges:

1. Cost and Resource Intensity: The financial and managerial commitment to maintaining an in-house team is significant, especially for small to medium-sized enterprises (SMEs).
2. Flexibility and Scalability Issues: Scaling an internal team up or down in response to business fluctuations can be challenging and costly.

Strategic Considerations

Business Size and Complexity:

The decision between outsourcing versus hiring often depends on the size and complexity of the business. Small businesses and startups might find outsourcing more cost-effective and less administratively burdensome, allowing them to focus on growth. In contrast, larger companies with more complex operations might benefit from the control and integration offered by an internal team. Being strategic when considering the pros and cons of outsourcing versus hiring is very important.

Industry and Regulatory Environment:

The regulatory environment and industry standards can also influence this decision. Industries with stringent compliance and reporting requirements might prefer the control of internal staffing, while businesses in less regulated industries might prioritize the cost savings of outsourcing.

Long-Term Strategic Goals:

Businesses should consider their long-term strategic goals when making this decision. If the goal is to scale quickly or expand into new markets, the flexibility of outsourcing might be advantageous. Alternatively, if the business strategy emphasizes building in-house expertise and maintaining tight control over all aspects of operations, staffing internally could be the better choice.

Conclusion

The true cost of outsourcing versus hiring for bookkeeping, payroll, AP, and AR services involves a complex analysis of financial implications, benefits, challenges, and strategic considerations. There is no one-size-fits-all answer; the best choice depends on a company's specific circumstances, goals, and the value they place on control, flexibility, and expertise. Businesses must weigh the immediate and long-term financial impacts, considering not just the cost savings but also the strategic advantages that each option might bring. In the rapidly evolving business landscape, the flexibility to adapt this decision over time as the business grows and changes can be a critical factor in long-term success.

At Enkel, we provide managed accounting and reporting services for Canadian businesses and not-for-profit organizations. We strive to provide business operators with better bookkeeping and accurate financial reporting, so they can make better decisions and focus on achieving their goals.