Most businesses rely on “someone in Finance” to create their financial models and therefore see no need to outsource this activity. However, while Finance or other functional groups should have day-to-day responsibility for operating financial models, development of these tools through outsourced services makes good business sense.
Reviewing five traditional criteria for outsourcing provides some perspective:
- Is the activity primary to the business? For almost every firm, the development of projected financial statements provides key information but does not affect the core commercial and support operations that drive the business.
- Does the activity provide a competitive advantage? While receiving more thorough and timely financial projections always helps management in the decision making process, this information rarely imparts benefits in the head-to-head struggle with rivals.
- Is the activity required full-time? Business leaders often require frequent updating of actual values and projections in their financial models, but the creation or structural modification of these tools may only occur once per year e.g. prior to the start of budget season.
- Are better services available externally? Many firms use substandard financial models because “someone in Finance” sees model creation as an annoying, one-off project that impedes their efforts to address more immediate responsibilities. External developers, who usually have the “big blocks of time” advocated by Peter Drucker, can dedicate themselves to creating well-structured models that offer easy, reliable operation.
- Will outsourcing reduce cost? Businesses often believe that they incur no additional cost by having “someone in Finance” create models. However, the distraction and frustration which accompany these efforts, coupled with the demand on co-workers to cover the day-to-day responsibilities of the modeler, can exact a real and substantial toll on employees and their performance.
In many cases, outsourcing development of financial models provides long-lasting benefits for businesses.