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A partnership between internal audit staff and professional service firms is a cost-effective way to fill even the most specialized needs. EXECUTIVE SUMMARY * CO-SOURCING OF SOME INTERNAL FUNCTIONS is a way for a company to maintain control while cutting costs and maximizing internal audit capabilities. Co-sourcing arrangements with outside vendors allow the in-house auditors to retain responsibility for the internal audit process while relying on the outside entity for specialized technical skills and personnel. By contrast, a company that outsources loses day-to-day control over its activities to the vendor--usually a professional service firm. * INTERNAL AUDIT IS A LOGICAL CANDIDATE for co-sourcing. It is well suited to companies experiencing rapid strategic expansion into global markets and diversifying into a variety of business lines, each focused on a niche market requiring specialized expertise. * CO-SOURCING HAS HELPED MANY companies that don't have the staff capability to deploy new systems. For example, co-sourcing has been successful for information services projects ranging from consolidation of e-mail to establishing electronic data interchange systems. * CO-SOURCING ALLOWS A COMPANY to obtain maximum value from the internal audit function while saving on long-term investment in staff. It also provides in-house flexibility and control, because projects can be planned and executed without adding staff. * CO-SOURCING PITFALLS INCLUDE possible turf battles between staff and outside partners, and the development of a silo mentality, where internal audit staff focuses so much on the department's functional core it fails to oversee global monitoring and profitability issues. Many companies have gone on crash diets, using outsourcing to shed noncore tasks such as internal audit to outside vendors. In the process they've lost day-to-day control over a department to a professional service firm and often gained new problems. Proposed solutions from outside consultants--strangers to the organization--don't always work. As a result, quality, profitability, and employee morale can suffer. Co-sourcing is another way to get a company into shape, trimming costs while maximizing internal audit capabilities and still retaining control. The case study in this article (page 87) shows how co-sourcing can work. Arrangements with outside vendors allowed the in-house auditors to preserve responsibility for the internal audit process while relying on the vendor * For specialized technical skills and personnel to implement risk-based internal audit methodology, such as diagnostic reviews of regulatory compliance issues in the home equity lending industry. * To supplement key technical and consulting skills, such as evaluation and recommendations on hedging practices, derivatives coverage, insurance and other risk-sharing methodologies. WHAT IS CO-SOURCING? Co-sourcing is a partnership between a customer and an outside vendor, a professional service provider. A company chooses the vendor, which works with and often alongside--but doesn't replace--the existing staff based on specific skills needed to get the job done. When the project is finished, the professional service firm's job is over, too. Although it may seem similar to consulting, co-sourcing is different because the company's personnel play an ongoing role in the project. In a typical consulting project, a consultant comes into a company, plans and performs a specific task and then presents a report, working independently most of the time. In a co-sourcing arrangement, the company staff takes an active part in project planning and decision making and may participate in preparing the final report. Instead of relinquishing control over an activity, as is the case with outsourcing and hired consultants, company managers involved in co-sourcing actively manage and work alongside the specially skilled outsiders. …
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