ACCA AAA INT Syllabus D. Audit of Historical Financial Information - Outsourcing v Insourcing - Notes
The use of external suppliers for finished products &services
Outsourcing
is when an external specialist organisation (also known as a service organisation) is used to carry out functions which would normally be performed within the entity.
Service organisations usually operate in one of two ways:
The service organisation fully maintains the outsourced function (keeps accounting records and internal records)
The service organisation executes transactions only at the request of the entity, or acts as a custodian of assets.
Here the reporting entity will maintain internal records relating to the outsourced function.
Insourcing is making the finished products & services yourself
When to outsource
Low strategic importance processes
Eg. Payroll
When to insource
High strategic importance process
Eg. Where value is added
The current economic environment presents an excellent opportunity to further utilise outsourcing as a way to reduce their manufacturing and design costs, there are challenges and difficulties that come with this kind of change.
The most successful situations are those where the customer understands that outsourcing is as much a cultural change as a strategic one for their organisation
The bottom line is that even in the best of economic times, the decision to outsource should be made based on a careful cost/benefit analysis. It is not a quick, short-term solution