With £3.8 billion worth of government grants cut from charities’ coffers over the past decade it is no wonder time and resources are at a premium in the sector.

In the light of this stark NCVO Civil Society Almanac figure, charities are increasingly looking at outsourcing back office finance functions as a way of focusing staff time on front-end delivery.

Robert Nieri, senior associate at solicitors Freeths, says: “Saving money is ultimately why they are looking at it. One charity chief executive who is looking at this approach said to me recently ‘there is precious little money out there so we need to cut back on cost’.”

But outsourcing experts warn that achieving savings from the strategy is far more nuanced than simply comparing an in-house finance team’s salary cost with an outside provider’s fee to handle functions such as accountancy, payroll and financial strategy.

Andrew O’Brien, Charity Finance Group (CFG) head of policy and engagement, says in terms of fees versus salaries an outsourced firm may even cost more. But over the long term “increased quality and performance can outweigh that and savings can be made”.

“Flexibility of being able to turn outsourcing off and on when you like” based on changing financial situations is a key long-term saving of taking on an outside provider, says Chris Harris, partner at accountants MHA MacIntyre Hudson.

He adds that outside providers can also provide short term support if a senior in-house financial officer is taken ill.

Other long-term cost benefits of outsourcing include being able to tap into providers’ access to latest finance and IT products and services, which would be too expensive for a charity to keep on top of, says Kerry Hallard, chief executive of the National Outsourcing Association (NOA).

“When you outsource, the provider has the responsibility to keep up to date with IT and the regulatory changes,” says Hallard, adding, “they know all the latest software to drive efficiencies. If you have a small in-house team doing that how do you find the resource to train them and keep up to date?”

Risk

While there can be cost efficiencies to outsourcing the strategy is not without risk, as around 200 clients of Charity Business found when the financial outsourcing firm collapsed suddenly in 2012.

Loss of service user data, payroll problems and potential late tax returns are among challenges charities need to prepare for should such a scenario happen, says Nieri.

He urges charities to ensure contingency plans are built into contracts with clear procedures in place for recovering data and paying staff in particular.

“Charities have to accept that outsourcing will incur cost and management time through supervision and control to make sure things don’t go wrong,” Nieri adds.

Charity Commission head of accountancy services Nigel Davies says that it is trustees’ responsibility, under section 130 of the Charities Act 2011, to ensure they can “explain all the charity’s transactions”.

“The trustees need to be confident that any outsourcing arrangement can maintain and preserve these records and make them available as and when required,” he says.

Nieri adds: “Trustees need to know that the buck stops with them. Even if a charity outsources a function trustees have to have their finger on the pulse. At the end of the day if anything goes wrong it is on their watch.”

Among NOA priorities is to help charities and businesses minimise the risks involved in outsourcing, by ensuring clients only take on reputable providers, who will remain solvent, are ethical and have a strong focus on transparency.

“My goal is to rid the outsourcing industry of cowboy behaviour,” says Hallard, who adds that its members have to sign up to a code of conduct covering areas such as good governance and transparency.

She also recommends contacting other charities a prospective provider has worked with as part of due diligence in the procurement procedure.

“Is the provider’s culture really as they describe it to you? Does sustainability go right through their supply chain? These are the types of questions charities need to be asking those who have worked with them,” adds Hallard.

Trust

Other ways to bring success to an outsourcing arrangement is to make sure the relationship between client and provider is honest and friendly.

Hallard says: “If a charity has a review meeting and starts calling the provider’s team ‘idiots’ for not reaching targets then that damages motivation. Providers need to be treated like your own employees, as part of a relationship that should be nurtured. Do not create a ‘them and us’ culture.”

Examples she gives of building such bonds are having the charity’s “branding as part of the outsource firm’s working environment” through posters and wearing t-shirts. In addition the outsource firm could encourage their staff to take part in fundraising activities for their charity client.

Another key to success is “not to outsource a problem and hope it fixes itself”, says Hallard. If there is a problem with the charity’s accounts or processes then that needs to be made clear to the provider from the start, she adds.

In addition, outsourcing has to come straight from the top of the charity’s management structure with senior staff needing to be “culturally ready for outsourcing,” says Hallard. “If you have a finance director that has outsourced before and really wants to do it but a chief executive who really isn’t a fan, as they like to have lots of people on the payroll, then that relationship will be set for failure as there isn’t top level buy in,” she says.

Focusing the relationship away from being merely contractual also helps foster good relations, says Nieri. “Rather than having a 20 page contract, often it is better to have a small contract with lots of meetings built into the arrangement. That retains contact, offers flexibility and helps the relationship,” he adds.

Trends

Among recent trends in outsourcing is a greater focus on outcome-based measures, with providers offered incentives for good service and meeting clearly defined targets.

Giving financial information to trustees and regulators on time as well as avoiding payroll glitches are key performance indicators Nieri recommends using.

As well as improving efficiency, such targets also help promote the reputation of the charity, he adds.

“If you file accounts late or trustees don’t have information at hand at an important meeting then that can impact on the charity’s reputation,” says Nieri.

Harris agrees that an outcomes model is ideal for the transactional, “process driven” nature of back office finance functions as “it is all about minimising errors and processing as quickly as possible”.

Another outcome that can be built into a contract is to invite the provider to review back office functions and propose a new approach. Nieri says: “If that succeeds and simplifies the process, with timings getting shorter and costs brought down, then the provider will get rewarded.”

Another trend in the outsourcing is a shortening of notice periods in contracts to reflect the market’s increasing competitiveness, says Hallard.

That competition could be even greater over the coming years, according to Nieri, who anticipates that charities could soon start to come together to set up separate companies themselves, dedicated to running their back office functions.

“This is already happening in computing in the charity sector and could provide another way of outsourcing back office finance functions as well,” he adds.

According to a charity survey in the CFG and Institute of Fundraising’s Managing the new normal 2016 report, there’s certainly interest in the sector for greater collaboration.

This survey found that 38% are planning to collaborate, either with each other or specialist providers this year.

Despite the potential risks outsourcing back office functions is clearly a solution charities are set to increasingly turn to as they battle for survival in austere times.

Joe Lepper is a freelance journalist

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