Topic: General Posts

Subject: IT Outsourcing
Sue Gardner
Member: 1999
Posts:9
Submitted on 08-08-16 7:11 pm
Message:

My company recently outsourced IT to a small IT startup. There are still some company IT employees who now report to the IT company. The ratio of company employees to outsourced workers in IT is roughly 1/3 to 2/3. I believe within the next year there will not be any company employees in IT. The outsourced company is responsible for all of IT including mainframe operation, technology product management, vendor management, operations, end user support, security development and DB administration. Most of their workers are housed at our company using our equipment. All the IT equipment is still company owned and all of the IT contracts are still company contracts. Within their contract, the IT company was given invoice approval authority for small amounts up to $20,000. What is happening now is that workers who work for the IT company are approving invoices to be paid by my company. This seems odd to me and is not consistent with how we handle other outsourcing arrangements at my company. For example we outsource our cafeteria. We own all the equipment (i.e. we own the building )and our employees approve the invoices related to equipment,repairs. The cafteria company is responsible for the food ordering, etc...which is handled by their corporate office.


Has anyone seen an IT outsourcing arrangement like the one I mention(sort of a hybrid)? If so what is the best practice for IT purchasing and invoice payment? It just seems unusual to me that non-employees are approving company invoices? Right now I have a different opinion on this than the CEO and CFO.


Thanks.


Sue Gardner

 
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Replies
Ramiro Ortiz
Member: 2012
Posts: 4

Subject: Re:IT Outsourcing

Submitted on 08-09-16 6:21 pm.
Message:

I would say that it depends on how the contract is structured. Are there controls in place to monitor the spend? For example are there limits on what can be purchased and total spend? Are there approved suppliers for the items purchased?  Are there audits on the invoices paid or does someone review the invoices prior to making payment.  It sounds like your company retains the payment approval and remittance.  It could be that purchases up to $20,000 are not material and the risk of having invoice approval performed by the outsource provider is mitigated by other controls that are in place.  


However if the outsourcer has free rein on the purchases then I would say that there is some risk in the arrangement.


I hope this helps.

 
Krishnan Subramanian
Member: 2016
Posts: 3

Subject: Re:IT Outsourcing

Submitted on 08-11-16 11:01 am.
Message:

Transaction processing (example Invoice review and approval) can also be outsourced to the vendor IT company. However the vendor must keep the audit trail of the approval and the same must be available to the Company Controller for review at any time. In the outsourcing world, we have to follow the "trust but verify" principle. I have done this before in our company(Hewlett Packard) and there were no issues.

 
Jerry McLellan
Member: 2016
Posts: 2

Subject: Re:IT Outsourcing

Submitted on 08-11-16 12:22 pm.
Message:

In a former controller role, I was involved in doing something very similar.  Once the IT Outsourcing firm approved any invoices, they still came to me for final review and approval before being submitted for payment.  I was responsible for them - and had to be knowledgeable about all projects.  IT was my budget.  I looked at it as the outsourced IT employees were part of the department, and any invoices went through the department manager for approvals, before coming to me for final approval and payment.


 


If the approvals are going straight to payment processing without a review from an internal responsible person - I would agree that is a problem!


 


The role of laison between Accounting and IT has been a function I have been a part of since college graduation.  Since that was in 1983, I was heavily involved in computerizing every company I worked for early in my career.  Today, I am still amazed by how many accountants have not embraced or understand the technology behind accounting systems!


 


This is also a role I have filled as a consultant, and would be happy to review and discuss with your company management.


 


Jerry McLellan, CPA


jerry.mclellan.cpa@gmail.com

 
Sue Gardner
Member: 1999
Posts: 9

Subject: Re:IT Outsourcing

Submitted on 08-15-16 7:41 pm.
Message:

Right now the outsourcer has free rein. There isn't any internal review of invoices approved by the outsourcer. Recently the $20,000 limit was raised to $75,000. According to the contract, our president is supposed to approve any IT invoices over the outsourcer's limit.

 
Bill Harrison
Member: 2012
Posts: 1

Subject: Re:IT Outsourcing

Submitted on 08-17-16 1:31 pm.
Message:

Sue,


There are lots of risks in outsourcing IT, particularly to smaller firms and startups.  In my experience, companies which decide to outsource tend to lean towards larger service providers because a) the larger IT service providers can generate greater efficiencies by sharing expensive IT resources (e.g., experts in DR, IT security, etc.) across a large client base, b) they can achieve, and share with you, significant savings on purchases of hardware, and over time enable the customer to reduce the capital requirements to support the IT function.


Outsourcing is a big decision, and presumably your CFO and CIO made an intelligent joint recommendation which the CEO and Board approved.  If that is the case, then it will be hard, and probably counterproductive, for your to question the overall direction of IT in your organization.  If you are an accounting/finance team member, it would probably be better to:



  1. focus your energies on: a) at a macro level, ensuring that there is appropriate accountability for results (in other words, monitoring the hybrid arrangement to determine whether it is delivering the promised savings and efficiencies) and that the corporate decisionmakers have decided who "owns" responsibility for the arrangement; and b) at a micro level, ensuring that someone is tracking service level agreements ("SLAs") and other contractual commitments of the service provider and, if necessary, exercising appropriate remedies under the outsourcing contract if the service provider is not meeting those SLAs; and

  2. ensuring that hidden risks of the arrangement (e.g., lack of expertise or bankruptcy risk associated with a "small IT startup") have been taken into account and will be reevaluated annually or whenever the outsourcing contract is up for renewal.


Lastly, companies that outsource much of their IT function can inadvertently lose their ability to evaluate the risks and rewards of IT outsourcing.  Your firm will at a minimum need to ensure that when the outsourcing contract is up for renewal, it has retained the competency to reevaluate and if necessary rebid the business and potentially transfer it to a new service provider.


Good luck!

 
Vin Ritraj
Member: 2013
Posts: 1

Subject: Re:IT Outsourcing

Submitted on 08-18-16 10:10 am.
Message:

Hi Sue,


 


Aside from the risks, which are elevated when you use a startup, care needs to be excercised if the company also does the IT pocurement. Many variables exixt within IT Infrastructure and maintenence contracts and you may very well find that you are paying too much for old equipment. IT jargon can be overwehlming. Be on the lookout for established relationships - familiarity breeds contempt.


 


Vin Ritraj


VRitraj@Outlook.com


516 851-6330


 

 
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