Outsourcing. MTSU Accounting Alumni Day May 13, 2004 Jeannie Johnson Harrington. Introduction.
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Outsourcing is the transfer or delegation of a part of the business activity that was previously performed by internal staff to an external service provider with the overall goal of improving a company’s competitive advantage.
Traditional – employees of an enterprise cease to perform the same jobs for the enterprise
Greenfield – the enterprise changes its business processes without the service provider having to hire any outside personnel; for example, a new service is provided by the outsource firm.
Carlsen Company manufactured 6,000 units of a component part that is used in its product and incurred the following costs per unit:
Direct materials $ 10.00
Direct labor 5.00
Variable manufacturing overhead 3.00
Fixed manufacturing overhead 8.00
Another company has offered to sell the same component part to the company for $24.00 per unit. The fixed manufacturing overhead consists mainly of depreciation on the equipment used to manufacture the part that would not be reduced if the component part was purchased from the outside firm.
Asian outsourced market is not as well developed due to cultural issues impeding outsourcing.
Europe is not as further along as U.S.
European Data Protection Directive prohibits data on individual Europeans from leaving the EU unless it goes to countries where the laws are as strict as Europe’s or where there has been a safe harbor agreement negotiated to protect that data. (India does not comply).
Canada seems to have a strong acceptance of outsourcing.
Tax experts say Indian chartered accountants will prepare 150,000 to 200,000 U.S. tax returns in 2004, up from about 20,000 in 2003 and only 1,000 in 2002.
Average accountant in India makes $250-$300 per month
California-based SurePrep, a software and consulting service with 300 Indian accountants, says “it’s going to change the paradigm in which professionals prepare taxes, maybe even more than the way TurboTax changed the way individuals did their taxes.”
If the third-party provider is connected to or involved in the processing of the services offered by the practitioner, there is no requirement to disclose to the client the fact that information is shared with that third party.
Following language must be included: “We do not disclose any nonpublic personal information about our customers or former customers to anyone, except as permitted by law.”
IRC Section 7216 prohibits anyone who is involved in the preparation of tax returns from knowingly or recklessly disclosing or using the tax-related information provided other than in connection with the preparation of such returns.
Exemption is provided for third party preparers
There is no requirement for informing the client that a third-party provider is being used.
IRC Section 7525 provides client confidentiality. The CPA must make sure the outsourcer does not violate this.
“About 90% of the value of services output is now produced within the providing firm, but they expect this share to drop to 60% in 10 years.” McKinsey in Wall Street Journal,1/28/04
A 2002 report by Forrester Research estimates that 3.3 million U.S. service sector jobs could be moved overseas by 2015. Some estimate more than 14 million jobs over that same time period.
However, manufacturing has lost more jobs. And not just in the U.S. Between 1995 and 2002, China, Japan, Brazil and other countries lost more manufacturing jobs than did the U.S., according to an Alliance Capital Management Study.
The manufacturing outsourcing frenzy has caused elaborate quality movements. These movements have not shown up yet in the service sector.
In order to compete, it is expected that service providers will become more specialized and seek new ways to improve their efficiency and productivity.
“There is no job that is America’s God-given right anymore”, Carly Fiorina, Hewlett-Packard CEO, “We have to compete, over time, for jobs as a nation.”
“Nobody is replacing the retiring baby boomers. This will put a squeeze on companies. I see a trend toward outsourcing of every sort to plug the gap,” Daniel Maisler, president of Accountants 4 Contract
Hopefully, outsourcing services will make allow workers to get jobs more suitable to their competencies and all companies will become more efficient.