Outsourcing Onshore and Offshore Accounting Services, Research Paper Example

Advantages and Disadvantages of Outsourcing Onshore and Offshore Accounting Services

Business is today’s society demands many decisions that previously had no relevance. Accounting practices are essentially the backbone of the company because it dictates that true financial standing of that business. Ultimately, companies are continually striving to cut costs in some capacity, and outsourcing On-Shore and Off-Shore accounting services is just one option to consider. The paper will strive to define the differences of the two options, and determine which one holds the most advantages for a company. It will address the pros and cons in respect to the companies, business, and consumers viewpoints. There are also legal requirements that have to be complied with as well. And lastly, the paper will look at the top On-Shore accounting companies in the United States and Off-Shore companies in select locations. There are many advantages and disadvantages of outsourcing onshore and offshore accounting services, and each individual company needs to look at the options in order to adequately choose which is best for them.

There are many important decisions that companies are faced with in handling their daily operations and business practices. A growingly popular consideration is outsourcing to On-Shore and Off-Shore companies. It is important to understand the difference between On-Shore and Off-Shore accounting services. “An On-Shore company is a company that was registered in a country not considered to be a tax haven” (Define). In contrast,  “An Off-Shore or non-resident companies are described as companies that conduct an insubstantial or zero volume of business within their jurisdiction of incorporation” (Define). There are three characteristics that coincide with Off-Shore companies in most instances. First, the incorporators are located outside of the incorporation’s jurisdiction. Second, the majority of the main transactions of business take place outside of the incorporation’s jurisdiction. And lastly, they are entity that is registered within the incorporation’s jurisdiction.

Companies have to consider the benefits for themselves in using On-Shore and Off-Shore accounting services.  “Momentum research from ISG shows that sourcing activity in the Forbes G2000 is relatively entrenched within the world’s largest 500 organizations, with over two-thirds engaged in outsourcing prior to 2008 “ (Card & Stanton). Outsourcing Off-Shore has proven to be the most cost efficient option from many of the larger companies. Wal-Mart, Proctor & Gamble, and General Motors utilize Off-Shore accounting and manufacturing services are a method to reduce cost. The debate with companies like this is that they are that they are creating the ideas in the United States and utilizing Off-Shore options for implementations, which essentially takes the jobs away from Americans. “According to a Nelson- Hall research survey sampling 520 firms, telecommunications, pharmaceutical, retail, consumer-packaged goods, and transport industries are the industries that are most likely to outsource accounting-related functions” (Fersht). There are a substantial amount of middle earning companies who utilize the same practices as a method of advancement. The Off-Shore companies offer higher talent at a much lower cost which is more appealing and a better business decision than keeping the jobs local.

There are also companies that also use the On-Shore accounting options as well. “In many ways, this is what big companies like Apple, Intel, Google, and IBM are doing already. They don’t simply generate ideas here at home and outsource the labor. Instead they create networks of research, development, manufacturing, marketing, and sales centers around the world” (David). Outsourcing to On-Shore companies allow them to keep the jobs local and still save money. They also fall under the same regulatory guidelines which provides a lot more confidence from the consumers and other business partners.
There are many Pros and Cons of outsourcing On-Shore and Off-Shore accounting services from the perspective of the company. The Pros of outsourcing can be extensive, which is why so many different companies choose to utilize this option. Clearly the most dominate advantage of outsourcing is the cost perspective and more often than not Off-Shore accounting services are cheaper. The quantifiable and qualitative organizational benefits of Off-Shore Outsourcing include the following:

Quantifiable

• Reduced operating costs (estimated 20-55%)
• Labor arbitrage (estimated 10-30%, reducing cost per head by moving to a low cost location)
• Productivity and process improvement (estimated 5-15%, process excellence and IT enablement to improve cycle times, lower cost and increase quality)
• Reduced overheads (estimated 5-10%)
• Improved working capital (through the sale of assets and/or facilities to the vendor)
• Reduced capital commitments
• Improved quality.

Qualitative

• Improved service delivery (access to world class processing)
• Stronger control environment (improved controls through process simplification and focus)
• Platform for transformation (leverage the transformation capabilities of the vendor)
• Improve focus on core capabilities (retained staff can focus on ‘value-add’ activities)
• Improved relationships with customers and suppliers
• Access to talent. (Ernst &Young)

It is important to utilize the outsourcing resources for companies to focus on other important factors as well. “”Most entrepreneurs have great talents but many times they think they can do it all that can really stall the growth of the business. By outsourcing the day to day back-office tasks, the business owner has more time to focus on generating income” (Jackson). The upside of outsourcing is that the company can also focus their attention onto other areas of business. “A recent report from the Association of Chartered Certified Accountants (ACCA) found that companies using F&A outsourcing believe they will reduce costs but lose control. However, as they realize those cost advantages, they see that quality is rising because benchmarks are being applied to their performance. In the end, the report concludes, companies could see control was improving, too” (Mullich). This shows that losing control of operational expectations and standards does not necessarily have to occur.

There are a lot of Pros that come into practice with outsourcing, especially Off-Shore, but there are also Cons that come into play as well. The inevitable break-downs that occur when utilizing Off-Shore accounting services. According to an article in Information Week, the most common relationship breakdowns are:

• Deficiencies of the individual enterprise staff involved
• Incomplete or poorly designed processes/policies
• Gaps in the contract governing the relationship
• The enterprise under-investing in the vendor management and governance function
• Poor execution of the roles and responsibilities that the enterprise controls under the outsourcing contract (Sealock)

A con of outsourcing is distance. “No matter how good a service provider is, there’s no substitute for being physically present in your office. You will need to communicate your needs and challenges across distance, maybe even across time zones. There may be times when your questions don’t get answered right away because of the lags involved” (Gramigna). This can make it difficult to get real time answers.

It is significantly harder to regulate the standards and expectations of a company when a large amount of business is being handle by and external company. The productivity can have set standards, but in many cases regulating the standards can be costly. “This cost gap might be closed further by the better productivity of onshore resources relative to offshore, eliminating the management overhead associated with offshore operations, and continued increases in labor rates in offshore markets” (Sealock). There has to be an internal oversight when things like accounting services are outsourced. The labor can be cheaper, talent greater, but it cannot be functional void of company representative overseeing the practices. This can increase the cost of outsourcing and prove to be less cost efficient than originally believed.

There are Pros and Cons from the perspective of the customer. Customers and business partners have specific expectations for what they feel is appropriate customer service. The Pros of outsourcing is that there is on specific company that handles that area, for example outsourcing accounting services. It makes it easy to communicate directly in regards to accounting and get an answer without having to be transferred around from department to department. The Cons of outsourcing both On-Shore and Off-Shore accounting needs is the fact that there are no means for regulating or demanding a certain level of customer service. The company is hired to handing the accounting services, not to handle customer service issues. This could be disastrous because if customers fail to get the service they feel they deserve, they may choose to no longer do business with that company.

The Pros and Cons from the perspective of the customer of the accounting or booking firm who outsources the work is important for the company’s success. “Other important questions for an out-source provider are “Do you use employees or independent contractors?” “Are you employees located in your offices and under the direct control of their supervisors?” We have found that some out-source firms use independent contractors working from remote locations, this makes it much harder if not impossible for them to control access to data and provide adequate supervision.” (Onshore) The lack of control and supervision results in a disadvantage for the customer service area of outsourcing. Clearly it is necessary to be able to regulate all company standards, if they fail to regulate they will inevitably lose business.

There are other issues to consider when implementing outsourcing of On-Shore and Off-Shore accounting services. There are legal, AICPA, customer service, legislation, insurance, data security, ethical and financial considerations that come into play. Clearly On-Shore legal obligations would be easier to regulate because they are governed by the same requirements as the company. However Off-Shore accounting can prove to have much more barriers with the legal standards and obligations. There is an absence of intellectual properties, legal governing protection, data protection, and transfer regulations which requires negotiation for a common ground. Typically these are referred to as SLAs, or service level agreements.

The American Institute of Certified Public Accountants has set standards for their members and third-party users. “The American Institute of Certified Public Accountants (AICPA) has issued guidance dealing with outsourcing and the relationship between clients and third party service providers. Guidance with regard to these topics has concerned issues ranging from computer processing of client returns to ethics rules on conducting outsourcing business with third party service providers” (Cervantes). They mandate contractual agreements which ensure both On-Shore and Off-Shore accounting complies with the necessary legal regulations. It essentially provides regulation regarding accounting that takes place off of U.S. soil.

The customer service issues can also prove to be challenging in outsourcing both On-Shore and Off-Shore accounting services. The reason being is that these individuals need to fulfill a specific job, and they indirectly represent the company that has hired them, however, they do not have the requirements to provide any type of customer service. Therefore when external individuals need to interact with the outsourced accounting companies, they could addressed with extremely low customer service and in turn reflect badly upon the company. This is essential to address prior to the actual outsourcing. Business partners and consumers do not care that a company is outsources when it comes to customer service, they want their concerns or needs to be addressed in the best possible manner that they can be.

The legislation associated with outsourcing is heavily dependent upon the location for which it is located. On-Shore outsourcing legislation will most likely coincide with the company’s requirements because of the location. However, the real issue lies in outsourcing Off-Shore legislation. There are different governing requirements which can drastically change the legislation between the hiring company and its contract. This is a large concern that occurs when considering outsourcing accounting. The requirements for accounting in the United States is significantly structured because there has to be a uniform for true financial standings. Therefore in order to comply in Off-Shore accounting, these standards would have to be dictated prior to hiring them for services. By contracting specifications, they can hold the Off-Shore company liable for complying with the set legislation regulations.

Insurance and data security are also vital concerns in outsourcing accounting services.

“Numerous restrictions and legal requirements are necessary to outsource accounting related services. One such barrier to outsourcing accounting is the strict and prohibitive data protection agreements required by national governments. A few examples are the EU Data Protection Directive of 1995 and the Gramm–Leach Bliley Act of 1999, or WTO-TRIPS” (Cervantes). The hiring company is responsible for securing the necessary insurance and mandating that the data security is where it needs to be. There are also laws in place that set the requirements for On-Shore and Off-Shore outsourcing. It provides protection for the company and the consumers alike.

Lastly it is important to consider the ethical and financial obligations of both company and the outsourced locations. Ethical concerns are important because it is hard to maintain the necessary ethical requirements outside of the specific company. “In addition to regulation, outsourcing accounting-related work poses many ethical and regulatory problems for practitioners. One such topic is outsourcing accounting-related work unbeknownst to the client. The American Institute of Certified Public Accountants (AICPA) has issued guidance dealing with outsourcing and the relationship between clients and third party service providers” (Cervantes).  Having a liaison for ethical and financial obligations is key to ensure the company receives the necessary outcome. Saving money through outsourcing can prove to be extremely wasteful if the standards do not comply with the company or the customers’ expectations.

There are legal considerations for outsourcing and the company’s presence in the U.S. It is also important to determine how such cases are resolved when there is not legal presence. A sourced example would be the case of IBM versus Indiana. The State of Indiana outsources its IT needs to IBM. They also hired them for an extensive welfare system overhaul which they failed to comply with the States expectations. IBM however walked away with the win because of the details within the contract terms. It performed 50 to 80 percent of the service level which allowed it bypass the breach of contract.

This specific case took place as On-Shore outsourcing, however it still could not find the favorable legal presence as the State of India felt that is should have received. “What is hiding between the lines here is that the state wanted to change its culture by outsourcing–always a difficult move, but almost impossible for a government organization. [Indiana wanted to] shift the [welfare] eligibility determination [process] from the state offices to a centralized call center.” says Strichman. “Guess what–when they did that, the old organization magically still had control, and [then they were] paying for two organizations. State organizations are masters at never giving up control. This is a textbook case of why outsourcing often fails at the government level” (Overby). This is clearly a concern and or consideration that needs to take place when outsourcing is utilized.

In Off-Shore outsourcing, the legal presence varies based upon location. “In outsourcing, you and your outsourcing provider have to make sure to include two different legal systems. This heterogeneity in the legal system is an important legal issue with outsourcing that companies have to deal with. This problem exists, because there is no legal system which can be used globally. Different countries even have different intellectual property laws. Since there are no standard legal rules and regulations to follow, it is best to meet your outsourcing provider and make sure that you adhere to both the legal systems. This will help you to sort out any legal issues of outsourcing” (Legal Issues). It is necessary to determine the legal operating standards prior to Off-Shore outsourcing. If the hiring company sets specific standards for the contract company, in many situations the legal governing body will uphold the contract. Clearly this is subjective to location so it is important to research prior to expanding to certain locations.

The top On-shore Bookkeeping company in the United States are Datamark Incorporated, America OnShore, Ceterus, GBP Financial Solutions, and Onshore Outsourcing. These On-Shore bookkeeping companies offer the necessary accounting services at a lower cost than keeping in house. Datamark Incorporated offers many different benefits to their clients, creating a greater value “Lower labor costs relative to the rest of the U.S; A large workforce of college-educated, bilingual speakers; and Communication, travel and shipping is convenient and economical across U.S. time zones”(Datamark). Their presences as an On-Shore outsourcing company has become dominate, this is by no accident. These On-Shore companies provide necessary services efficiently, inevitably increasing their client base.

The top 5 Off-Shore companies for accounting services in India are Tata Consultancy Services BPO, Serco Global Services Ltd, Aegis Limited, and WNS Global Services. (Vishno) “In a recent survey, 80% of European and US outsourcing firms ranked India as their number one outsourcing destination.” (Why Outsource) The top 5 Off-Shore companies for accounting services in Philippians are Infinit-O (Infinit-O), Sison Corillo Parone & Co., Deloitte, and PriceWaterHouseCoopers/Isla Lipana & Co.

The top 5 Off-Shore companies for accounting services in Costa Rica are Crowe Horwath, Costa Rica ABC, Saenz Aguilar & Asociados, Rule Financial, and Uthos. “The international business consultant Tholons revealed in its most recent study; The 100 best destinations for outsourced operations by 2012, that San Jose, Costa Rica is considered one of the top 10 emerging cities and ranks number 18 among the best in the world to outsource operations, business and information technology.” (Rosenberger) Clearly Costa Rica provides many opportunities for outsourcing.

The top 5 Off-Shore companies for accounting services in Ecuador are TMF Group, Negocios Internacional LTD.,Mazars, Deloitte, and Tohmatsu. “The recent investment in building a skilled software development workforce are already paying off as Ecuador is quickly improving to become a competitive technology player in the region” (Viteri). The top 5 Off-Shore companies for accounting services in Dominican Republic are DBO, Plunkett’s, RSM Dominicana, Tohmatsu, and CatoJisa. The top 5 Off-Shore companies for accounting services in Canada are Actuit, Canada Bookkeepers, Renuka Outsourcing, Xero, and Deloitte. “Canada is a leading global sourcing nation, and one of the largest providers for sourcing support to the United States; employing an estimated 150,000 for the U.S. alone. Canada provides resources for 30 percent of the United States’ sourcing market and its total outsourcing sector produces $14 billion in annual revenue.” (Canada)

There are many advantages and disadvantages of outsourcing onshore and offshore accounting services, and each individual company needs to look at the options in order to adequately choose which is best for them. Depending on the nature of the business, it may prove to be more profitable to handle the accounting services in house. However, many companies have turned to outsourcing their accounting needs because it is more cost effective for them in the long run. It is important for any company to consider all aspects and potential ramifications from utilizing such services. On paper it can prove to be better, but when all factors are weighed it could be more cost extensive than originally calculated. It is important to understand all factors in order to make the best decision for one’s specific company. This will ensure that the most advantages are gained, and the disadvantages avoided.

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