Managing risks in finance outsourcing: success best practices

Financial functions outsourcing has been a popular method adopted by companies to reduce costs, gain access to specialized knowledge, and concentrate on their main operations. Nevertheless, although outsourcing may be of considerable benefit, it is not devoid of risks, especially in the highly sensitive and regulated field of finance. Successful management of these risks is imperative for companies that want to survive in the world of financial outsourcing.

In 2021, Deloitte conducted a survey in which it was found that 59% of companies perceive outsourcing as an essential strategy for enhancing their finances. 

However, almost 40% of organizations say they have been experiencing challenges concerning vendor management, regulatory adherence, and information security in their outsourcing contracts. This emphasizes how vital it is to navigate such risks with careful attention to yield successful results.

In this article, we shall present the risks associated with finance outsourcing and provide best practices to counter these risks. By adhering to these principles, companies can increase the advantages of outsourcing while reducing possible pitfalls.

Understanding the risks in finance outsourcing

Although outsourcing financial activities can be a force for cost savings and efficiency, it is not risk-free. Companies that don’t confront these risks directly could end up experiencing data breaches, non-compliance fines, or operational inefficiencies. 

Knowing these risks is the first step in managing them successfully.

Data security and privacy issues

Safeguarding sensitive financial information is perhaps the most critical issue in outsourcing. When you offshore finance operations, you are essentially exposing sensitive information to third-party providers, heightening the possibility of cyber risk.

In 2020, a KPMG study showed that 70% of firms are concerned with data security in outsourcing key functions such as accounting and finance. The challenge is also compounded when dealing with offshore vendors who are not subject to the same data protection regulations as your area.

To avoid data security threats, companies should ensure that their outsourcing partners enforce robust cybersecurity practices. 

They include encryption, multi-factor authentication, and recurrent vulnerability scanning. Additionally, executing strong Data Processing Agreements (DPAs) that define the roles and responsibilities of both organizations can avoid data breaches and ensure data privacy law compliance, including GDPR and CCPA.

Regulatory and compliance risks

The financial sector is one of the most regulated in the world. Companies are required to comply with regulations like the Sarbanes-Oxley Act, Anti-Money Laundering (AML) guidelines, and the General Data Protection Regulation (GDPR). 

While outsourcing finance operations, companies should make sure that their partners adhere to these regulations. Non-compliance with regulations may result in hefty fines, legal penalties, and loss of reputation.

As per the 2020 Global Regulatory Outlook of PwC, financial firms face more and more risk from regulatory change, particularly in data privacy and cyber security. 

Firms must have their outsourcing vendors adequately knowledgeable in the regulations and having established controls to sustain compliance.

Loss of control and operational efficiency

Finance operations outsourcing involves handing over key functions like payroll processing, accounting, and financial reporting to a third-party provider.

This removal of direct control over key financial processes can result in inefficiencies, errors, and delays. Incorrect financial reporting or delayed filings can have severe implications, including penalties and loss of stakeholder confidence.

Having control of outsourced functions is paramount, notwithstanding if day-to-day operations are assigned to a contractor. Constant communication and monitoring are important to ensure that outsourced financial processes are aligned with corporate goals and regulatory compliance. 

Furthermore, companies should also track performance via KPIs and service level agreements (SLAs) to ensure that the outsourcing partner provides quality service.

Best practices for avoiding risks in finance outsourcing

Now that we’ve identified the risks associated with finance outsourcing, let’s explore some best practices for mitigating these risks. 

Implementing these strategies can help businesses maximize the benefits of outsourcing while minimizing potential pitfalls.

Conduct thorough due diligence when selecting an outsourcing partner

Selecting the optimal outsourcing partner is important to eliminate risks in financial outsourcing. Carefully screening for partners involves reading through their reputation, experience with the finance business, and historical record. 

Consider checking their finance stability, security standards, and compliance certifications.

Ensure the outsourcing provider possesses relevant industry certifications, like ISO 27001 for data security management and SOC 2 for security, availability, and confidentiality of the data 

Also ensure the vendor has compliance with such applicable regulations like GDPR, HIPAA, and other national or local laws related to finance functions.

Draft clear and detail contracts

A well-written contract is an essential tool to handle outsourcing risk. The scope of services, pricing, schedule, and performance requirements must be defined clearly in the contract. 

Service Level Agreements (SLAs) must detail the level of performance, such as accuracy of financial reports, timeliness of deliverables, and conformity with applicable law.

Apart from typical SLAs, ensure that the contract also contains provisions regarding mitigation of potential risks, including data breaches, service disruption, and regulatory breaches. 

This may be in terms of penalty clauses for non-adherence, data breaches, or failure to meet deadlines, acting as an incentive to the outsourcing partner to perform at high levels.

Define strong communication and monitoring mechanisms

Open communication is essential for the success of finance outsourcing. Periodic meetings with the outsourcing partner will allow you to keep track of progress, address concerns, and make changes as required. 

Further, establishing transparent reporting systems and real-time dashboards can provide visibility into financial processes and performance to your team.

To maintain control over outsourced processes, it’s also important to establish a dedicated team that can oversee the partnership. 

This team should regularly audit financial operations, review reports, and ensure that the outsourcing partner adheres to all agreed-upon standards.

Invest in data security and privacy measures

Data security tops the agenda for outsourcing financial operations. Besides ensuring that the outsourcing partner adheres to stringent data security practices, organizations also need to do their part in securing their data. 

This involves using encryption, conducting security audits periodically, and making sure access to sensitive information is limited only to approved personnel.

It is important to have a general data protection strategy that includes internal and external security measures. 

Such a strategy needs to include also how data storage, transmission, and access would be handled in the course of the outsourcing partnership.

Ongoing risk monitoring and auditing

Outsourcing is not a “set it and forget it” activity. Companies ought to regularly oversee and audit their outsourcing contracts to verify that risks are being effectively mitigated. 

Regular audits, risk analyses, and compliance monitoring can assist in the discovery of new risks emerging and addressing them before they grow out of control.

Employing third-party risk management software or hiring independent auditors to evaluate your outsourcing partner’s performance can assist in ensuring that you are still compliant with applicable regulations and standards.

Conclusion

Finance outsourcing has the potential to offer organisations much value, in the forms of cost reduction, access to specialized skills, and greater organisational efficiency. 

Nevertheless, these benefits have intrinsic risks associated with them that need to be addressed effectively. 

Through good due diligence, transparent contracts and SLAs, effective communication and monitoring, and investments in data protection and compliance, organisations can effectively deal with the pitfalls of finance outsourcing.

The key to successful finance outsourcing lies in proactive risk management and a strategic partnership with a trusted outsourcing provider. 

If you’re looking to outsource your finance operations while minimizing risks, SUPERSTAFF offers comprehensive solutions tailored to your business needs.