 and welcome to this session in which we will discuss alternative business options or alternative support services for businesses. And specifically, we're going to be looking at shared services, outsourcing and offshoring. So I will discuss each one of those separately, explaining what each service is, give an example, advantages and disadvantages. Starting with shared services, how does it work? Well, let's assume or let's say a large company with multiple business units, they have a consulting arm, software development division, renewable energy division, and maybe some other division. Now, each unit or each division has its own finance and accounting function, as well as HR, as well as payroll. Well, instead of having each business unit have their own finance and accounting operation, separately, what we can do, we can create a centralized finance and accounting unit that will provide services to all business unit. We could do the same thing with HR and payroll. And this new unit will be responsible for processing payments for all of them, managing account receivable for all of them, managing accounts, payable, conducting audit and providing financial report to all these units, but it'll be one centralized unit. This unit may also provide financial analysis and support to help each business unit make strategic decision. The purpose of all of this is to reduce duplication of effort, streamline processes and improve efficiency, means doing things at a lower cost. This leads to cost saving, as the company no longer needs to duplicate finance and accounting staff, as well as resources across each unit separately. It have one centralized unit. Also the centralized unit can benefit from what's called economies of scale, because we are producing at a large scale, enabling the company to negotiate better prices and terms with vendors and suppliers, because we have one centralized buying all what we need from one division. Before we proceed any further, I have a public announcement about my company, farhatlectures.com. Farhat accounting lectures is a supplemental educational tool that's going to help you with your CPA exam preparation, as well as your accounting courses. My CPA material is aligned with your CPA review course, such as Becker, Roger, Wiley, Gleam, Miles. My accounting courses are aligned with your accounting courses, broken down by chapter and topics. My resources consist of lectures, multiple choice questions, true false questions, as well as exercises. Go ahead, start your free trial today, no obligation, no credit card required. Now, are there any disadvantages to shared services? Of course there are disadvantages. One is resistance to change. Implementing something like a shared service may face resistance from employees who are accustomed to working in decentralized. Decentralized means each unit or each division has its own HR, its own accounting, its own finance. This can lead to delays and increased cost implementation. Ocean and coordination challenges, which can lead to confusion and delays, because the way AP is for one division or AR for one division could be different from another division. So this could create a problem. Loss of autonomy. People don't like to lose their autonomy. Implementing a shared services or a division will loss of autonomy. People don't like to lose their autonomy. So implementing a shared services model may require the department to give up, to relinquish some control over their operation, which could perceive as a loss of autonomy, and that's people don't like that. There's also a risk of service disruption. A shared service model can be vulnerable to service disruption if the central service team experience technical issues. Now, if you have technical issues, it's affecting all the divisions, not just only one division. If you have a staff shortage, if you don't have enough employees, now all the divisions across the companies are affected and this could have a ripple effect on the entire organization. So those are the disadvantages of shared services. Let's talk about outsourcing. What is outsourcing? Well, let's start with an example. Let's say a software development company needs to develop a new mobile app for its business, but it does not have an in-house expertise or resources to do it. So one way is to hire people, train them, learn the ins and outs of the business and do it. Or the other option, the company will decide to outsource the mobile app development to a third party vendor that specialize in mobile app development. So that's what outsourcing is. The organization is contracting with an outside party, with an external company or individual to perform asserting business function or service. That could be either previously performed in house or we need to perform now. So by outsourcing the mobile app, here's what we did. The software development company can benefit from specialized expertise. Maybe the company that we're outsourcing the service to, that's all what they do. And as a result, they have a special expertise in app development. We don't need resources. We don't need to invest in building. We don't need to invest in new software. We don't need to build a new team or acquire new tools or technology. Why? Because we outsources this process to someone else who is doing this day in and day out. As a result, we could also have a cost savings, just like shared services, increase efficiency, maybe faster time to market for a new mobile app because they have more experience with this. Are there disadvantages to outsourcing? Of course there are. There's a pros and cons for everything. One is loss of control. Similar to loss of autonomy, outsourcing can result in loss of control over business processes and operation because someone else is handling this for you. This could be challenging for some organization. Also communication and coordination, especially when working with vendors in different time zones or different cultural norms. You're outsourcing, but you're having difficulty with that. That could happen when you have outsourcing. You need to establish clear communication channel, providing detailed project requirements and timelines, regular monitor of vendors' performance to ensure that the project is delivered on time, on budget, and with the desired quality. So those are challenges that you could face when you are outsourcing. Also quality concern. Remember, we have to have the desired quality. When someone else is working on your product, well, you could have quality concern. If the vendor does not have the same level of commitment to quality and customer satisfaction as your organization, they may not care as well, which in turn you don't like this because you care about your product. You could also have security risk. When you outsource, you are giving up something to an outside party. This could increase the security risk, as sensitive data and intellectual property. You might be telling them exactly what you want to do, and that could be by itself an intellectual property that's shared with an external vendor exposing you to a risk who may not have the same level of security control in place. Let's talk about offshoring. What is offshoring? Well, let's say a company based in the US need to produce a large number of clothing item, but they want to do it at a low cost. In the US, the labor cost is high. We have a shortage. What would the company would do? They will decide to offshore its manufacturing operation. Well, let's assume a factory in Bangladesh or Vietnam where labor costs are lower than the United States. We can't say China anymore because it's not as low as before, but you could still offshore to China. Offshoring is what is a business practice in which an organization relocate its business process or service to a foreign country, usually to take advantage of lower labor costs. You could also have a tax incentive or other favorable economic conditions, simply put, you want to save money. So the term offshoring, okay, it's referred to relocation of business processes or service to a foreign country, whereas outsourcing can refer to relocation of the business processes, either to a foreign or a domestic third party. But when we say offshoring, you're always going to another party, another country, not party. That's the concept of offshoring. It doesn't have to be off the shore. It could be to your north or your south. It doesn't matter, but it's in another country. What are some benefits of offshoring? Well, let's take a look at them. Well, it could involve a wide range of business functions such as manufacturing, customer service, IT and more. So you could use offshoring in many different fields. Okay. And this practice, when you offshore, it's usually associated with developing countries where labor costs and other business expenses are lower. Okay. And it could provide the benefit and the main benefit is what cost saving. That's why we do that. You could also by offshoring access the new market. Why? Because you can sell your product now in that market. You could have access to talent pools. People are there. Maybe they are well educated, well trained. You will take advantage of that and increase scalability if you can increase your operation. Now, are there any disadvantages or risks to offshoring? Of course there are. There's risks and disadvantages and everything. The first one in offshoring is language and cultural barrier. Offsharing, offshoring can involve working with vendors or partner in foreign countries where you can create a language and culture barrier that can be sometimes challenging to overcome. These barriers could lead to miscommunication, misunderstanding and other issues that could impact productivity and quality. That could happen. They don't understand it. Maybe what you are telling them means something else in their language. It means the same thing translation literally, but it could mean something else in the context of that culture. Control quality issues. Again, control could be affected. Offshoring could create control issues, especially if the offshore vendor don't have the same quality control or standard that you have in your organization. This could lead to product defects, delays, other issues that could impact, which is something very important, customer satisfaction. You could also have some ethical issues when you are dealing with offshoring. What are those ethical issues? Labor practices and working condition in the offshoring country. The organization may face criticism or backlash if it's discovered they are working with vendor that engage in an ethical or illegal labor practices, such as hiring minors or working in unsafe conditions. You could also have security risks. Offshoring could create security risk relating to sharing the sensitive data or intellectual property with vendors in foreign countries. Notice those benefits and risks are similar, not the same, similar between outsourcing, offshoring and shared services. Not not shared services, offshoring and outsourcing are very similar. The organization may need to take extra precautions to protect its data and intellectual property from theft or misuse. And you could also have a potential negative political impact on the domestic job market. Offshoring can lead job losses in the organization home country, which could have a negative impact on the local economy and the job market and could have also a political backlash against the company. What should you do now to learn more about these three concepts? Go to Farhat lectures, look at additional MCQs just to help you solidify, learn these concepts. That's what you need to do. Invest in yourself, invest in your career, whether you are studying for your CPA, CMA, accounting courses or some other professional certification. Good luck, study hard and of course, stay safe.