The Indian corporate lingo hardly ever knew the existence of this practice until a few years ago.  And to just think that in that few years a sea change has occurred in the attitude and approach of Indian companies and promoters is indicative of the metamorphosis the industry has undergone.  Yes, we are talking about the practice of outsourcing finance and accounting functions by an increasing number of companies.  The practice has reached a stage where some service providers are talking about and even getting companies to outsource their CFO (Chief Financial Officer).  Though it may sound radical, it is an indication of how core competence and competitiveness has become the mantra of our businesses – big or small.  Considering the increasing occurrence of this practice and its importance, we spoke to a cross-section of vendors who provide this service to understand why this is happening, what can be outsourced and necessary steps to be taken by the companies before doing so.

First let us understand the factors that have led companies to adopt this practice.

Increasing pressure to stick to Core Competence:  Take any typical medium to large organization.  A sizeable numbers of the staff would be in the finance and accounting functions and since they do not directly contribute to the competitiveness of the business or profits they turn out to be overheads.  The new breed of start-up ventures and IT companies in particular were heavily in favor of outsourcing functions that had no bearing on their core business or which did not belong to the core skill set required of the company’s personnel. Obviously they readily agreed to the option of outsourcing and many indeed were pro-active on this front.

Increasingly complex business environment and standards:  Few years back if one casually asked what was GAPP, some would have blinked and some would have even said it is a famous garment brand.  Because Indian corporates only needed to adopt Indian accounting practices FAPP was fairly unknown.  But today, a bevy of companies largely in the IT sector adopt both Indian and GAPP as their accounting standards.  Further as Indian companies graduate to doing global business, they are faced with the need to master and meet newer and hitherto unknown practices and standards.  The scenario can only get more complex as more and more regulations come out to govern businesses and markets.  In this situation, a company has two options – either to continuously train its internal staff on this new requirements and standards or outsource.  Considering the cost of acquisition of such knowledge on an ongoing basis and the cost to company of keeping specialized personnel, it is easier to outsource.

IT and Communication technologies:  Even though the need existed before, the logistics of outsourcing proved to be daunting for both the service providers and the companies till the entry of technology in the scenario.  The quantum leap in IT and communication technologies meant that the bottom half of the functions could be automated and ensured distance was no more a constraint.

Increased choice:  The quality and breadth of service providers in this segment has leapfrogged in the past year or two and this has led not only to more awareness but more choice for companies which could now be comfortable that the segment has grown and has service providers who specialize and have the necessary capabilities to effectively address their requirements.

Increasing number of MNCs:  The past few years have seen the entry of multitude of MNCs.  Brought up in practices like outsourcing, the first thing these MNCs do on entering India is to see if the model can be replicated.  In most cases, their global service provider follows them to the country or services them through its Indian counterpart of subsidiary.

Need for innovations:  Ever than before, there is an increasing pressure on even finance and accounting professionals to respond to the ground situation and come up with innovative solutions.  This entails continuous learning, investment in high-quality personnel by the organization with the end result that most of them prefer it being outsourced to a specialized service provider.

Uncharted territories:  Things like e-commerce or e-tailing have no precedence in India and for companies in this arena there are only two options.  Either they start ground-up or talk to a service provider with exposure to markets like the US that have had a track record in these segments to see which can be replicated or how it could be customized to the Indian market.  Considering the time pressure to get to market or to profitability, most choose the proven path of signing up a vendor who could tap into its global parent’s expertise in these segments.

Flexibility:  These are uncertain times and it pays to be an organization whose structure lends itself to change.  Carrying more internal staff hinders rapid reaction to change.  By outsourcing, the company has more flexibility and it could force the service provider to change quickly or choose another service provider with no pain and hassles.  The same holds true for scaling too.  Scaling up internal accounts staff due to expanding business is not easy while it is comparatively easy incase of outsourcing to a specialist firm.

Best practices:  As more companies strive for excellence in each area of their operations even the accounting and finance arms are not spared.  Adherence to best practices involves identifying benchmarks and evolving processes to attain those benchmarks.  The most effective way to do this is to outsource to firms, which have the necessary expertise and resource base to carry out the task.

What can be outsourced and why and to whom?
The way this segment has evolved it could be safely stated that anything related to accounting and finance functions could now be outsourced.  But the critical question is how much to outsource, which areas to outsource and to whom? Let us tackle these questions one by one.

What and how much to oursource?
The answer to this question is dependent on the size and requirements of the organization.  For example if you were a large corporate it would be more cost-effective to have routine functions done in-house and only outsource specialized requirements on a need basis.  This would work only for large corporates as the amount of paperwork and bookkeeping requires full-time personnel.  However for star-ups and small organizations the same does not hold true and it would be in their interest to outsource at least the creation of processes and systems to an outside specialist.  After that is done the company can either hire a single person to ensure adherence to the process and book-keeping thus lowering costs or continue to outsource even that to a service provider.  However in the case of medium sized organizations, most are reluctant to outsource and do so only if it becomes necessary as between their small internal team and CA firm most requirements are taken care of and outsourcing does not provide enough value.  One point to note here is that even this is changing as is evident from the recent move by companies like GM to completely outsource its functions to a company that provides the same on a shared basis to similar large corporates.

To whom?
There are three types of players in this segment.  The big consulting firms like Andersen Consulting and Ernst & Young among others, chartered accountancy firms which have forayed into this area as an extension of their services and pure-play ventures formed by professionals.  The answer to the question of whom to outsource is thus answered by the requirement of the particular company.  If they requirement is of such a nature that it needs tapping into global expertise, a wide range of capabilities in-house and stature than the big consulting firms are a natural choice.  The consulting firms are also preferred in situations where the outsourcing forms a part of a larger restructuring since they have the wherewithal to do the necessary consulting for the restructuring and weave the necessary solution for accounting and finance requirements as part of the whole exercise.  However if it is routine work or specialized work, which is not large in nature then, the CA firms fit the bill very well. The pure-play players usually are very specialized like Pension and Payroll areas and hence are the right choice for outsourcing only those specific areas.

Before outsourcing
While outsourcing is good and does save costs in the medium to long term there are a few steps companies need to take before they actually go out and sign up someone. Here are a few:

Ensure need match:  Each service provider has his forte or specialization and hence it is advisable to ensure your requirement matches the expertise of the firm.  However, this does not hold true of big consulting firms, which can provide end-to-end solutions.
Check for confidentiality processes:  Since the functions are sensitive, check the service provider’s processes to see if there are any gaps.  Do take a few referrals and talk to them about the firm’s processes.
Ensure flexibility:  If your organization is in the process of rapid growth do hire a firm, which can scale with your needs so that there are no roadblocks in the relationship.
Clarity:  Be clear about objectives of your outsourcing, the type of firm you need and approach it from a long-term relationship point of view.
Domain knowledge:  It would be advisable to go in for a firm, which has done work in your segment as this understanding translates into more effective processes and practices.
Costs:  You are doing it with the savings in mind and hence weigh always the tangible value provided against the outsourcing cost to see if you gaining.
Single point contact:  If you have outsourced the entire function and this involves interaction at various levels within both organizations ask the service provider to provide a single point contact to address issues or effect changes.
Commitment:  This is quite important and do monitor the service provider to see if it is pro-active in its suggestions and actions or only reacts to your instructions.
Comforts levels:  Though intangible, comfort levels with key account personnel at the service firm plays a crucial role since most outsourcing in this area are always long-term relationships even though on an assignment basis.

So do not be surprised if you are asked to go to a CA firm to collect your supplier cheque or if the company CFO sitting across you in a meeting is not on the rolls of the company.  Outsourcing is here to stay and make the best out of it by having a planned approach to it. It is a surefire way to building a lean and effective organization.

(The article is written based on inputs provided by Pankaj Dhandaria of Ernst & Young, Suresh Subramaniam of Andersen Consulting, D S Vivek of Suresh & Co. Chartered Accountants and Jehangir Writer, Director of a leading Payroll and Pension services company.)

Issue BG2 May01

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