Outsourcing: An analysis of the competitive advantages in Kazakhstan

By Madi Mashakov, Account Manager

The research discussed in the article involved an industry analysis of the existing market for accounting outsourcing in Kazakhstan. A comparison of the advantages and disadvantages of accounting outsourcing and the use of in-house accountants serves as the main focus of the article, which was produced to complete a requirement for a Doctoral degree from KIMEP University.  The study provides an examination of the market environment and an identification of competitive advantages. It also considers the core competencies of providers from the viewpoint of the accounting outsourcing industry. A survey of global executives conducted by CAPS research and A.T. Kerney, Inc. in 2004 greatly contributed to the analysis.

The phenomenon of outsourcing has significantly affected the accounting industry over recent decades. The constantly changing modern business environment forces companies to adapt and accept new practices. Outsourcing allows modern companies worldwide to concentrate on their core activities, while the outsourcing of accounting is an effective process-optimization tool that has rapidly become popular in dynamic markets. The perception of outsourcing has undergone a transformation in Kazakhstan in recent decades and the country’s relatively new economy is a fertile one for the development of various types of outsourcing, including accounting services. However, while the market possesses a great deal of potential and many opportunities, there are certain challenges that need to be considered.

The managerial concept of competitive advantage has arisen due to the complexity of the modern business environment, the effects of globalization, the dynamic change of consumer needs, the importance of information, and market competition. A SWOT analysis allows for the assessment of an analogy between the  strength parameter and competitive advantage. It is valuable in this situation as it helps to assess a company’s resources and capabilities in relation to the competitive environment in which it operates. The following SWOT analysis has been conducted to differentiate between companies that specialize in outsourcing accounting and companies that use in-house accountants. The comparison will help to identify competitive advantages.

The SWOT analysis clearly defines the position of each subject. The strengths of accounting outsourcing are weakness for in-house accountants and vice-versa.  One of the main strengths of outsourcing accounting are economies of scale, as most costs associated with in-house accounting are fixed. This is especially noticeable for small organizations. On the other hand, outsourcers face a duplication of costs including rent, utilities, furniture depreciation, and amortization of less tangible aspects. Therefore, it is extremely important to maintain the necessary volume of turnover to prevent losses.

The outsourcing of accounting provides flexibility in adjusting the number of personnel to the volume of operations. This is especially beneficial for companies with a highly fluctuating performance, which can result from factors such as seasonality, short project-based operations, and even the state of the economy. Another advantage of outsourcing accounting is that both Hiring/Recruiting costs and Severance/Termination costs could be diversified. An in-house accountant is less likely to be this flexible, which makes the company more vulnerable strategically. However, this strength is a double edged sword. The provider of outsourcing services is completely dependent on the requests and performance of the customer. This leads to uncertainty surrounding the financial budget, among other negative outcomes. Another related challenge is market saturation is another important issue.

One of the main advantages of outsourcing accounting is the resultant core activity concentration. "Let each organization do what it does best" would be an optimal slogan for many accounting outsourcing firms. Numerous companies fail due to the lack of knowledge and expertise in certain required areas. Outsourcing is a relatively small price to pay for the opportunity to concentrate energy, personnel and other resources on the core activity of a company. But on the other hand, each additional service that is outsourced causes a decline in a company’s control of its organization. Regardless of procedures and internal policies, a company loses "unity" as both the function and control are delegated to the outsourcer.

The longer a provider of accounting outsourcing has been on the market, excelling and developing its core competencies, the better its accuracy, quality and transparency. Each employee of the provider can easily be reassigned to fill the role of a coworker. Since employees work in an organization with the same style, standards and guidelines, they can continue to consistently offer quality services.  In contrast, in-house accountants tend to work in a more individualistic way, which makes the substitution or reassignment of staff more difficult. Accounting outsourcers also have a very serious responsibility to comply with the service agreement and the quality of accounting services demanded by it.  Usually the agreement is implemented by risk sharing or a security deposit guarantee.

Access to the latest technologies, constant awareness of legislative updates, and experience of various accounting projects enriches the expertise base of accounting outsourcers. In comparison, the functions of an in-house accountant rarely change over time. But accounting outsources face other challenges, as they deal with confidentiality issues. Occasionally providers are prohibited from even mentioning their customer, let alone financial data and information. This demands additional effort from an accounting outsourcer, who must coordinate, control, and manage the security of each customer’s information.

The success of accounting outsourcing providers is demonstrated by the number of new accounting outsourcing companies that have opened and their achievements on the market in Kazakhstan. The dynamic development growth of this particular segment of the market has broken the post-soviet business mentality, which did not take accounting outsourcing seriously. Globalization, internalization, and improved competition are drivers for the creation of more sophisticated forms of business, which shatter stereotypes and create new opportunities. The results of the SWOT analysis demonstrate the opportunity for success of accounting outsourcers. However, due to general attitudes and the current state of the economy, competition in the accounting outsourcing market will not reach its peak in the next few years. When this time comes, accounting outsourcers will have to preserve their competitive advantage in order to survive in a difficult environment surrounded by competitors.

SWOT analysis of accounting outsourcing companies in contrast with in-house accountants in Kazakhstan

Strength 

Weakness

Opportunity

 Threat

Cost reduction: Economies of scale

Duplication of cost 

Tax authoritative position 

Legal risk 

Flexibility to adjust personnel to customer 

Dependence on clients. Market saturation 

Network with suppliers 

Starting operating cost 

Ability focus on core activities for customer 

Reduction of control for the customer 

 

 

Learning curve & expertise 

Shared responsibility. Contract binding 

 

 

Transparency, accuracy, and quality

Confidentiality issues 

 

 

This article first appeared in  Investor's Voice, October 2013. Read the original here.

 
Opinion
  Opinion

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