Outsourcing has long been one of the leading trends in the global labor marketplace. Usually associated with manufacturing and IT industry, outsourcing is now spreading more quickly to finance and accounting. More and more companies prefer to entrust their financials to the expertise of overseas professionals in an attempt to receive the services typically performed by local professionals for a lower cost. F&A outsourcing is certainly a viable alternative for small and start-up businesses using it as a way to survive. However, the nation should not encourage outsourcing as it takes away the jobs that would otherwise have been taken by US citizens.
1. F&A Outsourcing Market Today
In a constant drive for both cost and process efficiency, modern corporations try to strip their operations of every process that can be transferred elsewhere at a lesser cost. Accounting and financial operations are no exception. Given today’s globalization trend, it has become easier to outsource F&A functions. One of the reasons is that the finance and accounting function has to become even more standardized.
In addition, there is a trend towards the creation of larger service centers, concentrated in a few convenient locations and the opportunity to use Internet for swift exchange of information. All of this allows US companies, for instance, to move their financial operations abroad, while keeping the same standards and opportunity to connect quickly and conveniently with people who are doing their accounting. IDC projects growth at 9.6% a year in the accounting and finance market that is expected to go over $47.6 billion in 2008.
Although F&A is not expected to to become a fully outsourced function in the foreseeable future, the scope of the process is projected to increase by embedding multiple FA functions and streamlining cross-function processes, such as procure-to-pay or order-to-cash.
The greatest increases at this point are forecast in outsourcing of tax and transaction management functions. Among the primary reasons for outsourcing, IDC names cost reduction. However, companies interested in outsourcing do not only pursue cost-cutting: they are also driven by strategic considerations of expanding their reach abroad.
The company called EquaTerra in its 2004 study sponsored by Exult and the law firm of Hunton & Williams LLP discovered that for many business professionals who opt for outsourcing matters of competency mostly drive the satisfaction.
Many are attracted by high service levels offered by overseas professionals and are also pleased by control they retain over operations. Companies are using outsourcing in order to comply with a host of government regulations, including in the first place the Sarbanes Oxley Act. Ability to delivr better services than before is the major factor that will drive customer satisfaction rates.
David Narrow, employed in PricewaterhouseCoopers (PwC) Business Process Outsourcing (BPO) practice in London, outlines two major trends in that will drive increases in F&A outsourcing: cost efficiency and process effectiveness. Cost efficiency, as the name implies, includes the need to reduce the cost of operations and administrative expense in order to remain competitive compared to the rivals. Process effectiveness, in contrast, relates to making the maximum use of the emerging technology that, in Narrow’s opinion, will require only 20 or fewer employees to process the transactions that today require 100.
These two motives, cost efficiency and process effectiveness, can be behind the company’s outsourcing plans.
2. Pros of Financial and Accounting Outsourcing
As is stated above, one of the major drivers for outsourcing in general and FAO in particular is the desire to slash costs through using services of foreign workers comfortable with lower wage levels. Cost efficiency then contributes to gains in productivity, desired by every company. A survey performed by Accounting Principals, recruitment agency for F&A professionals, interviewed representatives of about 200 firms to find that more than a third of businesses that outsource certain accounting and finance functions have seen productivity gains of more than 10 percent, and for 7 percent of firms these gains exceeded 20 percent.
Productivity is of great importance for the firms and will allow them to expand their share of the market and to produce more goods at a lower cost. For consumers, F&A outsourcing also has advantages. If productivity increases and costs fall, the company may be able to pass some of the savings resulting from outsourcing to their consumers in the form of lower prices. This will reduce the cost of goods to consumers, hopefully reduce inflation levels and increase the consumers purchasing power.
Besides, F&A outsourcing is part of the broader trend to get rid of the operations that are not the company’s core competence. Previously, every company considered it a must to have an accounting department or at least one accountant that would take care of the whole process. Clearly, in such a setup competence is often dispersed, and a single professional, to be sure, can often come across reporting procedures on which he or she lacks competence. A company of professionals has probably accumulated more expertise in organizing accounting procedures, factual knowledge of various regulation areas and technical competence to handle the accounting and financial matters with more professionalism than companies own departments. Thus, in Equa Terra’s 2004 report 57% of the companies have chosen to outsource F&A because this function was not reliable in-house or not a core competence.
The fact that many choose overseas, not domestic, companies most probably has to do with cost.
3. Downside of F&A Outsourcing
For all the advantages of outsourcing the non-core competencies such as F&A, there is also a downside to such arrangements. Some of them are connected with pure inconvenience. Thus, Internet, for all its speed, cannot always replace direct face-to-face communication. Difference in time zones forces managers in charge of outsourcing projects to wake up before dawn to connect with members of the offshore team before they’ve concluded their workday.
Lack of managerial expertise in dealing with outsourcing contracts and models for managing the success of such projects is another reason why many feel dissatisfied with outsourcing.
F&A outsourcing inevitably entails sharing sensitive internal financial data, which may raise concerns about degree of confidentiality available at outsourcing providers.
Even with the toughest controls in place, the fact that now more people know the company’s secrets increases the risk of espionage. Within the company, there is potential for discord as accounting and finance professionals are trying to defend their jobs. Even if they are transferred to the outsourcing provider, a short-term upheaval is inevitable.
4. Economic Effect of Outsourcing on Host Nations
Deloitte Research has found that the globe’s 100 largest financial-services companies will move operations worth about $356 billion abroad. This trend favors nations with vast pools of educated workforce, with India being the No.1 target for F&A outsourcing, followed by Ireland, Latin America, South Africa, China, Malaysia and Australia. These nations will be able to capture a large revenue stream that will allow them to invest in infrastructure development and diversify their economies. This is especially pressing for developing nations like India and China that can break their dependence on low-technology production at the expense of BPO outsourcing.
However, outsourcing can only slightly raise wage levels in the developing nations that host such facilities. Cost is an important driver for those companies that prefer to shift their F&A functions abroad, so these nations are vitally interested in keeping their labor costs low. Besides, outsourcing will often be attracted by nations in which work conditions are on a par with the West and the workforce is unionized and has the same bargaining power. Thus, economists Feenstra and Hanson in a study sponsored by the National Bureau of Economic Research insist that outsourcing is largely driven by lack of such bargaining power and unfavorable position of workers in developed nations. In a sense, outsourcing can perpetuate low wages and depress improvement in work conditions in developing nations competing for offshore deals.
5. Economic Effect of Outsourcing on US
In the US and other industrialized nations, the public has long recognized the danger posed by outsourcing to employment. A study reports, for example, that 240,000 out of 3 million jobs lost in the US since 2001 were moved to offshore destinations. Future projections put the possible impact in the range between 3 and 14 million lost jobs.
These are serious numbers, given the heavy impact of today’s jobless recovery. They show that outsourcing already has sizeable impact on US unemployment levels, and this influence is expected to grow over the years as companies overcome fears associated with outsourcing and acquire expertise in managing such projects. Speaking of $356 billion foreign investment projects in F&A, this means that this money will leave the US, although it could have been invested in developing similar accounting services providers in the nation that would give jobs to Americans.
Unemployment has highly negative consequences for the economy, decreasing consumers purchasing power and depressing growth. Thus, the positive effect of increasing productivity and a possible drop in price levels will be offset by lack of consumers buying power in the domestic US market. The nation may strive for efficiency, but it takes time to create jobs that will employ people laid off as a result of outsourcing projects.
At the same time, F&A outsourcing can contribute to development of small businesses and start-ups that may find it hard to support finance and accounting operations on their own. In this case the effect on the US market will be positive, since these businesses could not have come into existence without outsourcing at all.
Financial and accounting outsourcing is definitely here to stay, as the already sizeable market continues to grow over the years. F&A outsourcing is a comfortable way out for many companies, eager to slash costs, to streamline their operations, and to solve strategic problems. Even in the face of obvious cons such as difficulty in controlling foreign partners and need to share internal information, companies will continue to outsource their accounting and financial operations due to the high competency levels of their providers.
Costly FAO projects allow developing nations to receive part of the capital that could have stayed in the US, promoting the development of the domestic economy. Outsourcing has a negative impact on employment trends in the US, depressing job creation and triggering lay-offs. Although it is helpful for small businesses dependent on cost-cutting for survival, F&A outsourcing has to be restricted by the government in order to save jobs inside the US.