Third-Party Services vs. In-House Teams: A CFO's Decision Checklist

Editor's note:Billy Leigh isEmbarkthe leader of the financial transformation practice. The views expressed in this article are solely those of the author.

In an ideal world, a finance organization could rely entirely on its internal team to handle all functions. However, this is clearly unrealistic, so choosing between third-party services and internal teams is a common challenge CFOs face.

Although there is no single benchmark that provides a standard answer to the "third-party vs. internal" decision, identifying the "inflection points" in each functional area can make the decision clearer. This process begins with a deep understanding of your own goals, constraints, and strengths.

Risk factors

First, it should be clear that for CFOs, there are no forbidden areas for outsourcing—even the CFO role itself can be outsourced. Whatever functional gap needs to be filled, there are plenty of outsourcing options in the market, meaning CFOs need not worry about finding qualified external suppliers. This aspect of the issue is already resolved.

However, being able to outsource does not mean it should be outsourced. CFOs should use risk as a common yardstick for decisions: which approach most effectively helps the company reduce risk?

Among factors such as cost, organizational size and maturity, complexity, and goals, risk provides context for the internal vs. outsourcing decision. For example, a company with frequent acquisitions could always choose to internalize valuation services, but risk considerations are exactly why most companies still use external experts.

First, building an internal team takes time and money, both of which bring risk to the company. Second, unless a company has extremely frequent M&A activity, it is difficult for an internal team to keep up with the latest market developments. Third, except for a few very large enterprises, it is also quite difficult to keep an internal team fully utilized year-round.

In short, internalizing the valuation function—even as part of a corporate development strategy team—can increase M&A risk due to a lack of timely, relevant market insights. External experts do not bring this pain point.

This is an obvious example, but similar risk analysis thinking applies to other functions within the finance organization.

Financial transformation

Although financial transformation never ends—technology continues to evolve and processes should be continuously optimized—tasks such as integrating disparate data sources or building a data warehouse are essentially one-time efforts.

Therefore, companies typically outsource transformation-related roles and tasks. But exceptions exist, especially in data-driven companies that have deliberately built a strong data culture. In these companies, management often tends to internalize key roles, such as data scientists and engineers responsible for maintaining the smooth operation of data environments and systems.

Project management

The CFO's office is often one of the busiest departments in an organization, frequently managing multiple projects simultaneously. These offices need substantial project management support because they handle M&A, technology implementations, other strategic initiatives, and day-to-day operations all at once.

Since each project typically requires a dedicated project manager, retaining an internal team of experts is often beneficial. However, when a company only undertakes projects occasionally, outsourcing project management responsibilities is often more sensible than adding dedicated internal positions.

Investor relations

After an IPO, companies typically continue to use their capital markets advisors or external agencies to handle the investor relations function, at least for the first year or so. After that, the question becomes how to find the right person for an internal role. Therefore, in this case, the inflection point involves both budget and the availability of someone with the relevant experience and skills.

Accounting

In theory, the finance organization should be the decision-making center of the entire enterprise. However, among accounts receivable, accounts payable, inventory, payroll, and other responsibilities, financial leadership can easily get bogged down in day-to-day matters and lose sight of the long term.

Therefore, whether due to understaffing, undergrowth, or both, when key but time-consuming tasks in accounting and finance begin to limit strategic thinking, outsourcing accounting becomes an attractive option.

Internal audit

Internal audit is not just about compliance within reporting deadlines. Today, by using analytical tools to assess company health and identify trends, internal audit is evolving into a continuous risk monitoring function.

This makes the inflection point for deciding when to internalize this function particularly subtle. Ultimately, the decision point arises when management finds that the benefits of ongoing internal patterns outweigh the cost savings of outsourcing the function. In practice, many companies adopt a hybrid or co-sourcing approach, where external experts supplement the internal team when needed.

Tax

Complex tax structures often accompany corporate growth. Until a company reaches the point where it is necessary to hire a tax director with years of experience, most companies tend to outsource the tax function. However, when the complexity of the tax structure increases the risk to the company, it is time to consider expanding internal tax talent.

External reporting

Many companies are either too small or went public too quickly to hire a director of financial reporting. In such cases, until reporting becomes complex enough, the inflection point between outsourcing and internal talent lies in finding the right person. In other words, when the cost is affordable and someone with the relevant experience and skills becomes available, internalizing the external reporting function becomes reasonable.

Every company is different, but using inflection points as a starting point for determining when to internalize functions can be helpful. Given the abundance of outsourcing options today, this is indeed a golden age for CFOs to precisely calibrate the mix of third-party and internal resources.