Insights for Making Outsourcing Decisions
An Insider's Guide to Offshore Subcontracting Services
by Charles F. Benton, CPA
Plato said, “The beginning of knowledge is the definition of terms.” I went to the Webster's dictionary and looked up “outsourcing.” The word, which was added in 1982, is defined as, “the practice of subcontracting manufacturing work to outside and especially foreign or nonunion companies.” This does not seem like a definition pertaining to outsourcing public accounting as evidenced by the inundation of emails and telephone calls many of us get from places like India . (I receive at least two calls and or emails per week from companies that claim to have the “best of the best” bookkeepers and accountants). I think a more appropriate definition is “the practice of subcontracting service work to outside and especially foreign companies.” For the purpose of this article, I will use the term “subcontracting services” for this definition.
In the early 1990s, the accounting firm in which I was a partner had just lost one of its major clients to one of the Big 8 accounting firms. It was my job to make sure that the information we had accumulated over the years about the client was properly transitioned to the new firm. I asked the partner that I was working with for the name and contact information of the team leader that would be handling the transition. The partner reluctantly informed me that the transition team was in the Mumbai, India office as the costs were significantly less. I have since learned that this type of engagement handling in the major accounting firms is standard operating procedure.
Here is what many are being told about offshore subcontracting services:
1. The labor force is highly trained in American accounting skills.
2. English is the native language.
3. We can hire these individuals by the month for $1,600 per month.
4. Their work month includes 200 work hours.
5. Client financial information is secure.
6. The newest technology is being used.
I have been to India , Sri Lanka , Dubai and Singapore several times since 2002 to investigate these assertions. During those visits, I have spoken with staff and managers of firms with few employees and to firms with thousands. I have been taken to the largest cities and some of the smallest villages. I don't have all the answers, but I have gained important insights that provide a clearer picture. Although some firms do deliver what they promise, here are some general observations of which to be aware:
1. Labor Force — The accounting labor force is highly trained; however, it is usually in International Accounting Standards and the Indian version of the British Accounting Standards. Although the leading universities in India are excellent and are feverishly working on including American GAAP in their curriculum, it will be some time before U.S. GAAP is fully implemented. The Indian equivalent of a CPA is a Chartered Accountant (CA). These people are very well trained and have spent time working in a public accounting firm in India before they are granted their CA credentials. Most subcontracting service firms, however, do not offer this caliber of staff, although a CA will typically oversee bookkeepers.
2. Language — Although English is the business language of India , most people speak and write English poorly unless they have taken a special course. Communication problems are one of the biggest areas of concern.
3. Cost— The stated cost of $1,600 per month for subcontracting services is a fairly accurate average with some firms charging less and some more.
4. Work Hours— It is technically correct that the work month in India is 200 hours. However, in actuality, this is not the case because there are many more holidays in India than there are in the U.S. and there is a high absentee rate in most firms. A more accurate amount would be about 140 work hours per month.
5. Security — The security of client financial data depends on who you are working with. I have seen some firms that have much better security than any CPA firm in the U.S. Some smaller firms, on the other hand, have almost no security. Most firms that have security usually have a document that spells out the measures they have taken. It is advisable to read this document and ask questions to determine how the standards are being followed.
6. Technology — Most firms have adequate technology. Backup power and adequate Internet capacity are sometimes an issue. You also need to watch for the fact that there is a lot of pirated software in use in India . You would be well advised to make sure that the firm you are dealing with has licensed software.
Larger firms will be able to ferret out the good providers, by sending a team to investigate. Some U.S. companies are already putting together networks for providing tax return preparation services for the major software packages. Unless you have the resources to check out a subcontract service provider for yourself, I recommend going with an established U.S. company who has demonstrated that they have set up a secure outsourcing system with a subcontract provider.
Charles F. Benton, CPA, is president of CFB Associates, Inc. He can be reached at (253) 404-3840.
