Bombay bound

By René Lewandowski
Illustration: Tracey Wood

First it was IT; then HR. Now it’s accounting’s turn to be outsourced to countries such as India. But are too many companies shipping their finance functions overseas?

Peter Cullen always thought he’d become an entrepreneur. After 20 years of practising in small businesses in Orange County, Calif., the 47-year-old certified public accountant thought he would be tied down to working as an accountant for the rest of his life. Then, in 2000, he found that big companies were outsourcing their accounting functions to Asia, after discovering the wonders of using the Internet to get accounts to another location in real time. Since then, his professional life has undergone an evolution. “I’ve become a businessman,” he says.

Real Time Accounting, the business he founded in April 2002, provides virtual accounting services to small businesses across the US. Now Cullen seldom sees his clients, except maybe to meet them for the first time, to take them out for dinner or if the client requests a meeting. Today, instead of entrusting their bookkeeping to an accountant or handling it internally, his clients simply fax their documents to a toll-free number. Through the magic of digital imaging, the documents reappear in India, in real time, on the computer screen of an Indian accountant who simply enters the figures in the client’s books, accessed through the Internet.

“You’re dreaming,” you say. Think again. To listen to the experts, in five, maybe 10, years, most businesses will be outsourcing some or all of their accounting and finance functions to the other side of the world. First it was IT and HR — particularly payroll processing — and now it’s the finance function’s turn to be outsourced to emerging countries. “This is a major trend,” says Bryan Mekechuk, partner with Pacific Crest Consulting Group, a California outfit specializing in outsourcing advisory services. According to a study published in July by US market intelligence firm IDC, the global finance and accounting outsourcing market should grow 9.6% over the next five years to reach US$47.6 billion in 2008. And most businesses will outsource these services offshore, particularly to India and Eastern Europe. In 2002, according to Toronto-based outsourcing consultants Everest Group, 80% to 90% of the finance and accounting volume outsourced by US companies was handled offshore.

India is especially attractive because of its huge pool of educated and qualified workers, most of them English-speaking. With more than one billion inhabitants, most having access to higher education, India is the second most populated country on earth after China. Its educational system produces more than two million graduates a year. As the unemployment rate remains high, labour is available, motivated and cheap.

Not surprisingly, cost savings drive the decision to outsource accounting functions, especially if they are substantial. Savings can add up to 25% to 30%, according to Accenture, a management consulting company, not to mention the gains resulting from streamlining space, infrastructure and equipment requirements. And when work is outsourced offshore, the costs are even lower. “At least 50% lower,” says Clarence Schmitz, chairman and CEO of Outsource Partners International, a Los Angeles-based firm that specializes in outsourcing finance and accounting to India.

At Real Time Accounting, Cullen ne-gotiated a maximum rate of US$7.50 an hour with his Indian supplier for each of the 10 accounting assistants he employs. In the US, a beginner can start at US$15 an hour. “But I’ve paid as high as $45 an hour,” says Cullen.

Cost-cutting is not the only incentive for businesses to outsource their accounting. For many, outsourcing allows them to implement better controls, speed up procedures, obtain more timely financial information and, above all, take routine tasks off management’s hands. “By outsourcing basic accounting, a financial officer is free to concentrate on management analysis, planning and control,” says Tony Masella, partner at Accenture in Montreal.

Businesses begin by outsourcing basic accounting activities, such as bookkeeping and accounts receivable and payable management. A November 2003 study by Everest Group shows that of 86 transactions recorded in the US from 1991 to October 2003, 81% involved the outsourcing of accounts receivable and 65%, accounts payable. But surprisingly, the same study claims almost one out of two businesses (44%) fully outsource their accounting and finance functions, including budget forecasts, treasury and risk management, and management and analysis reports.

Actually, technology is making it possible to outsource more and more services without human intervention. Accenture uses a technology that recognizes printed characters. As soon as an invoice is digitized or faxed, it is sent directly to a computer screen, often overseas, and the system automatically processes it. This system is currently used for mass billing involving a large volume of the same type of invoice.

Some businesses opt to outsource accounting and finance-related functions. For instance, a British automobile insurer decided to outsource all his claims processing to India. If one of his clients is involved in an accident, the client calls the insurer directly from the scene of the accident. The call is automatically transferred to a service provider in India where an agent fills out the claim. The insured then drives his or her car to a certified garage that later issues a bill, also processed and paid from India.

Currently, finance and accounting outsourcing is more prevalent in the US. In Canada, businesses are just starting to take an interest. “But many businesses are giving it more thought,” says Gilles Roucolle, vice-president at Mercer Management consulting’s Montreal office, who declined to name Canadian corporations considering these services.

He’s not alone in insisting on confidentiality. In the US, outsourcing has been a volatile subject since the media started criticizing firms that export jobs. Cullen never tells his clients that their accounting might be processed in India unless they ask. “If they ask, we tell,” he says.

What is taking Canada so long? First, wages are lower here, so until now there was less motivation in that sense. Plus, Canadian businesses have been slower than their US competitors to invest in information systems. When you make the decision to outsource, you have to be very technologically advanced.

This probably explains why the big outsourcers are US. Accenture and IBM Corp., which together own almost 72%  of the market according to Everest Group, inordinately dominate this sector. But other players, such as Exult, ACS, Cap Gemini, Ernst & Young, and Deloitte & Touche, are starting to gain a foothold. And some US outsourcers have a Canadian division.

In Canada, small outfits mainly serving small businesses are cropping up. BPM Outsourcing in Toronto provides accounting outsourcing services — primarily bookkeeping and accounts receivable and payable management. It offers bookkeeping packages ranging from $85 to $125 a month, depending on the size of the company, but prices can be as low as $50 a month for some virtual clients. Small businesses are not the only ones dealing with BPM Outsourcing: its clients include accounting firms. In fact, some Toronto firms now hand over their clients’ bookkeeping in batches of up to 80 clients at once. “Public accountants would rather  outsource bookkeeping than hire specialists at $45,000 a year,” says Ron Johnson, CEO of BPM Outsourcing.

Unlike its competitors, BPM Outsourcing decided to set up its processing centre in Montego Bay, Jamaica, rather than India. For Johnson, the cost difference between the two countries is not high enough and proximity counts for something. If a problem crops up, it’s better to be three hours away by plane than one day away.

It is also easier to train employees on site when they are fluent in the language of Shakespeare. In this line of business, training is essential. In Jamaica, accountants who process data receive training on US and Canadian accounting standards. This could change in the near future, however, as the Institute of Chartered Accountants of India is exploring the issue of membership reciprocity with North Amer ica. “Also, many accountants from India are gaining North American accounting designations through private agreements,” says Khalid Nainar, associate professor and chair of accounting and financial management services at McMaster Univer- sity, in Hamilton.

Some 40% of BPM Outsourcing’s cli-ents are Canadian businesses, but a growing number of US companies are using the Toronto firm’s services. In order to meet demand, BPM Outsourcing recently acquired a processing centre in the Caribbean with 260 workstations. “We are hoping to fill those jobs very soon,” says Johnson.

Many US businesses are starting to outsource their accounting functions to Canada. Why? Although costs are higher than in India, it is still cheaper to run an administrative office on Canadian soil. “In some cases, total costs are 30% to 40% less than in the US,” says Roucolle. And there are substantial benefits: proximity, language, cultural similarities, same time zones, etc.

Canada has another edge over its competitors: the North American free trade agreement (NAFTA). According to Mekec-huk, if a US business wants to outsource operations within the US, it must also consider the tenders of Canadian outsour- cers, who are protected under NAFTA.

For about 10 years now, the Ontario Ministry of Economic Development and Trade has been trying to convince foreign businesses to outsource their IT and HR functions to Ontario. However, the finance and accounting outsourcing trend has escalated to the point that last year the ministry decided to feature outsourcing in its promotional activities.

All this being said, there is more than one outsourcing model. The most classic one consists of outsourcing operations to a single location, yet many large organizations prefer to diversify according to their needs. It is not uncommon to see a company outsource its basic accounting (bookkeeping, accounts receivable, etc.) to India, and its management accounting somewhere else, such as Canada.

Doing this has two advantages. One, strategic functions (analysis, planning, etc.) remain close to home. Two, outsourcing operations to various locations puts a business in a better position to cope with various countries’ regulatory issues. This strategy can even help a business speed up its development plan. For instance, a Canadian business that recently wanted to expand into Europe and China decided to outsource its finance and accounting functions. Management estimated it would have taken its finance department five years to get a handle on Chinese regulations. By outsourcing through Accenture, which has processing centres worldwide, the company was quickly able to penetrate several markets at once, without worrying about regulatory pitfalls. For its European and Chinese operations, the Canadian company’s accounting was outsourced to Prague and to Accenture’s processing centre in Shanghai.

Rather than entrust their accounting to an outsourcer, some large businesses set up their own outsourcing centres. They are big enough to do it and it allows them to centralize one or several functions from their various subsidiaries. In business speak, this is what is called a shared ser-vices centre. General Electric Capital International Services (GECIS), a subsidiary of the US giant that has been operating in India since 1997, is a good example. GECIS has more than 11,500 employees and provides outsourcing services to the multinational’s many subsidiaries. The company has nine centres providing ser-vices from insurance claims processing to accounts payable, strategic analysis, information technology support, etc. Of course, GECIS also has a centre that processes the finance and accounting functions of 32 subsidiaries of GE.

For public accountants, the rise of outsourcing to emerging countries represents both a threat and a business opportunity, says Mekechuk. A threat because an increasing number of tasks that were once assigned to rookie accountants are now being transferred to India or elsewhere. Even intermediate jobs could eventually disappear, he says; maybe not entirely, but enough to start giving accountants serious cause for concern.

On the upside, outsourcing offers excellent opportunities to those who are open to redirecting their careers. Outsourcers need seasoned managers who understand financial issues and can lead multidisciplinary teams. Outsource Partners International already has on staff more than 200 CPAs who occupy various positions in its US offices or its service centres in India. The proliferation of shared services centres could also open many doors in years to come.

CAs who want to jump on the outsourcing bandwagon will have to acquire new skills though, says Roucolle, “in order to communicate more effectively, learn to manage foreign service centres and stay abreast of technological developments.” 

René Lewandowski is a freelance journalist in the Montreal area