The IRS finds that there are critics to every outsourcing deal

* Why the IRS' outsourcing of debt collection is a good business decision

Benjamin Franklin said, "In this world nothing is certain but death and taxes.. If he were around today, perhaps he would add another certainty to that list - "There are critics to every outsourcing deal."

The Internal Revenue Service recently announced the outsourcing of debt collection to private companies. While the IRS looks at debt collection as a non-core function, and therefore a good candidate for outsourcing, critics abound. The issues raised are the usual suspects: security of information, customer service, employee reductions, and ultimate cost effectiveness. Not to mention questioning the definition of core activities for the organization. You should be prepared for a similar set of criticisms if you are proposing a major outsourcing project in your organization.

The first step in evaluating any outsourcing deal is to determine the core functions of the organization and define supporting functions that are legitimate candidates for outsourcing. I think the IRS got it right on this one. The IRS defines its mission as follows:

Provide America's taxpayers top quality service by helping them understand and meet their tax responsibilities and by applying the tax law with integrity and fairness to all.

The IRS role is to help the large majority of compliant taxpayers with the tax law, while ensuring that the minority who are unwilling to comply pay their fair share.

In achieving this mission, the primary role for the IRS is to administer the tax laws, provide information to taxpayers, and efficiently process the majority of compliant taxpayer returns. These functions are staying in-house. In the planned outsourcing, the IRS will retain debt collection for complex cases. So I would agree that debt collection of common cases is a non-core function. Many other government agencies at both the state and federal levels use third parties for debt collection. This seems like a good decision so far.

One of the primary concerns of critics is the treatment of taxpayers during the debt collection process. Because the outsourced debt collectors can get paid a percentage of the collected funds, it is thought that they will be overly aggressive. These agencies are subject to standard consumer protection laws with respect to debt collections. It will be important for the IRS to monitor this activity through direct management of the vendors as well as independent audit.

Another concern is the security of taxpayer information. The sharing of sensitive information to third-party vendors is a factor in many outsourcing relationships. There have been many high profile cases of information theft or just careless handling by outsourcers. This is a real concern, but a manageable issue that should not prevent using a third party for a non-core process. There is a similar risk that employees will compromise sensitive information. Good security practices are required whether work is done in-house or outsourced. And let's not forget that these debt collectors are professional firms doing similar work for commercial businesses that have the same security concerns. This is manageable.

The IRS deal is also being subjected to one of the most common concerns over outsourcing: staff reductions. Let's face it, nothing in the IRS mission statement addresses consistent employment for government workers. If there is a more efficient way to accomplish the core and supporting functions, it should be considered. The resulting impacts on staff levels and future hiring should then be managed.

The most legitimate criticism of the IRS deal is whether it will ultimately be cost effective. Critics have suggested that management overhead to appropriately monitor the third-party debt collectors will result in higher costs per tax dollar collected. The effective management of outsourcers is a key competency for any organization with a major outsourcing relationship. It is the risk you take for the reward of reduced costs, better effectiveness through the use of specialists, and the relief of off-loading non-core tasks. It is manageable, but should be considered carefully.

If you are considering outsourcing a major function, you can expect critics both within and outside of your organization. Be sure to consider this example to ensure you think through the reasons for outsourcing the work and the key topics you will need to effectively manage to make your project a success.


Copyright © 2006 IDG Communications, Inc.

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