Offshoring Series

By Karan Gupta | 10 min read

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Shared Services Centre

Part 1:

Offshoring to India - Genisis & Rationale

The world has moved towards a shared economy leveraging technology and remote working capabilities. The COVID Pandemic has been debilitating for business, but this is the time to rethink and reorganize to plan for resilience, competitiveness, and profitability.

About SPC Group India :

Operating for over 70 years, SPC Group is a technology-focused accounting and advisory firm. Consistently ranked amongst the top Accounting firms in India, SPC is an Indian member form of PrimeGlobal- An award-winning association of independent accounting firms, comprised of approximately 300 highly successful independent public accounting firms in over 90 countries.

A. Off-shoring to India: Genesis and Business Rationale

Outsourcing of services to India started in the 1980s and rapidly accelerated in the ’90s. Initially, global airlines began outsourcing their back-office work to India and eventually IT companies followed. Some of the earliest players in the Indian outsourcing market were Texas Instruments, American Express, Swissair, British Airways and GE, who started captive units in India; today world’s largest companies have back-offices in India including McKinsey, Honeywell, Tesco, JP Morgan, Deloitte, PwC, KPMG etc.

It is pertinent to note that companies often overlook the additional benefit of generating higher customer retention rates with a combination of innovative practices, intelligent and talented subject matter experts, and speedy execution.

B. India’s History & Attractiveness as a preferred offshore Destination:

A brief history of Indian business service providers demonstrates that the nation has progressed from data processing and data entry services to high value consulting, development, testing, virtualization and other convergent services.

Today, India dominates the global outsourcing market with a 67% share; valued at more than $150-billion, having a growth rate of 10-15% per year; has now become a support system for most of the software companies in the west. Over the last 30 years, India has put itself on the international business map by offering and scaling low-cost, low-end IT services to global enterprises.

As per the A.T. Kearney’s 2019 Global Services Location Index – India is ranked one in terms of attractiveness for outsourcing. There are over 500 companies in India that are catering to the varying requirements of the western countries.

  • Human Capital: India has the 2nd largest – over 350 million, English-speaking people in the world, and ranks 3rd in Asia on English proficiency.

The engagement execution cost in India is 30-40% lower as compared to the US and Europe. While the blended average hourly cost of CPA professionals in India ranges from $20 – $40/hour, in comparison the cost in US comes $60 – $150/hour.

  • Time-Zone Difference: India gives an option of 24 hour client service due to the 12-hour time difference between India and the USA providing companies with opportunities for engagements to be delivered with 40% faster turnaround time (TAT) leading to greater efficiency, increased productivity, and more time to focus on other crucial tasks.
  • Data Security & Privacy: India takes data security very seriously and the Data Protection Bill, 2019 was introduced by the Minister of Electronics and Information Technology in December 2019; Information Technology Act (2000) (“IT Act”) to include Section 43A and Section 72A, which give a right to compensation for improper disclosure of personal information.

C. CPA firms taking a leaf from the IT playbook for disruption

The IT industry may have possibly benefited half a Trillion USD in cost savings through the offshore model. The remote working culture and technology facilitation promulgated by the COVID Pandemic has catapulted forward thinking organizations to evaluate an offshore Service Delivery Model. In the pre-COVID era many CPA firms may have believed that:

  • Teams must be put under the same roof as the camaraderie and the sharing of ideas that can take place within the same environment cannot be done when the teams are oceans apart.
  • Corporate and cultural fitment are a necessity for an organization to grow
  • Face to Face communication is easier with than through virtual channels.

But all the above has drastically changed now – The COVID pandemic realization has sunk on many CPA firms and unlocked potential of remote working capabilities.

Since the last 5 years CPA firms have consciously been making efforts to increase their revenue share in areas of Advisory, Technology solutions, and Consulting – leading to shrinkage of focus traditional practices like accounting, tax, and auditing. By contracting out testing, research and data entry work to an offshore centre with demonstrated expertise in US GAAP & IFRS for Accounting, US Tax Returns and Transfer Pricing, SOX Compliance and SOC for Cybersecurity, CPA firm’s focus can be redirected to emerging practice areas and facilitate growth in size and operations.

Further, time consuming tasks such as sanitation of raw data in excel, PowerPoint presentations, data entry, checklist-based testing, Transfer Pricing comparatives etc. can effectively and efficiently be managed externally with no extra risk to the business. In doing so, companies can turn fixed costs into variable ones whilst simultaneously reducing the burden of managing, maintaining, and extending benefits to a large workforce. Additionally, outsourced services provide a certain amount of flexibility in slow periods and economic downturns.

Part 2:

Decoding the Big-4 Offshore Services in India

The world has moved towards a shared economy leveraging technology and remote working capabilities. The COVID Pandemic has been debilitating for business, but this is the time to rethink and reorganize to plan for resilience, competitiveness, and profitability.

DECODING THE 'BIG 4' OFFSHORE SERVICES MODEL BETWEEN INDIA & USA

Today, India dominates the global outsourcing market with a 67% share; valued at more than $150-billion, having a growth rate of 10-15% per year; has now become a support system for most of the software companies in the west. Over the last 30 years,India has put itself on the international business map by offering and scaling low-cost,low-end IT services to global enterprises.

Global Outsourcing Market

As per a Deloitte study
Over 59% businesses are already outsourcing to India. Not just that, 22% of those that are not currently outsourcing to India are planning to do the same in the coming times.

Global Companies are outsourcing to India

Perhaps as much as 10 percent of U.S. audit work is presently done in India up from an estimated 3 to 4 percent about ten years ago when the firms launched offshoring pilot projects.

Attracted by wage savings and Indians’ command over English language, the U.S. arms of the Big Four have opened offices or joint ventures in India and hired thousands of local workers to do a range of tasks, including tax, consulting and audit work. The work performed at these delivery centres is limited to specified standardized tasks, none of which involves auditor judgment, and is reviewed and supervised by U.S. firm employees.

PwC SDC about 5 percent of its U.S. corporate audit work is conducted at alternate delivery centres, located outside the United States. PwC’s goal is to send about 20 percent of audit work to the delivery centers.

Offshoring in US auditing industries

Deloitte’s USI offshore audit staff in India receive training consistent with their U.S.colleagues, and their work is reviewed and supervised by professionals in the United States.


KPMG’s KGS offshore centres in India handle audit, tax and advisory work giving the firm’s clients low-cost access to a digitized, smart and affordable talent.

 

The Big Four started offshoring work to India about a decade ago, at first primarily to prepare tax returns; Today, their India KPO centres together employ over 30,000 people
in India for offshore operations, mostly in tax and consulting. No country hosts more U.S. auditing work than India.

 

No audit failures have been traced to offshore work there, and audit work done in India is routinely sent back to the United States where the PCAOB can review it. There is no formal agreement on offshoring with India, which allows the PCAOB unfettered access to inspect audit firms. The PCAOB’s Indian counterpart, the Institute of Chartered Accountants of India (ICAI), has no oversight of the Indian offshore centres doing audit work on U.S. companies’ books. Like other U.S. companies, audit firms are not required by law to publicly disclose offshore hiring. Audit firms may disclose offshoring in engagement letters – essentially contracts with their clients – but those letters are private.

PCAOB Deputy Chief Auditor Greg Scates mentioned to Reuters in 2012:

“There are no standards that limit what you can do in the area of Indian offshoring”.

Pros of Offshoring in india

Part 3:

Setting up an offshore Services Delivery Model in India

As per Tholons 2015 Top 100 Outsourcing Destinations – India is the leader in outsourcing worldwide, with 6 out of the top 10 outsourcing destinations.

The two main reasons why companies outsource are to reduce fixed costs while being able to focus on strategy and business development. With the increase in competition and emergence of technologies such as Robotic Process Automation (RPA) and BOTs, forward looking organizations are increasingly turning towards a combination of outsourcing and automation as a strategic move – to get an edge on their competitors in engagement pricing, shoring up engagement margins and maintain an On-tap workforce (turn fixed costs into variable ones whilst simultaneously reducing the burden of managing, maintaining, and extending benefits to a large workforce). By contracting out non-essential processes to a third-party with proven expertise in the field, focus can be redirected to a company’s core activities so as not to interfere with growth in size and operations.

Just as the Big 4 accounting and select forward thinking super-regional firms have leveraged off-shore centres to shore up margins and reduce charge-out fees, the super-regional firms and other mid to large sized firms can avail themselves similar enterprise level planning and strategic offshoring of tasks. Here is a high-level playbook for setting up an offshore Services Delivery Model

Step I: Define offshore delivery capability roadmap and vision

Assess your current margins and manpower heavy services such that Outsourcing should be a strategic partnership, not a simple hand-off of duties to a third-party. Getting that right requires smart preparation. By bringing in outside minds, it’s possible to innovate and drive your product to levels beyond what your internal team might have accomplished. New ideas can come from anywhere.

A proper planning phase is important. It’s not only about thinking ahead but also about being on the same page with your outsourcing provider every day and benefiting from their expertise, as opposed to viewing outsourcing merely as an easy way to offload commodity work. You need to select the proper engagement model that is transparent to both parties and provides a strong governance for all aspects of the relationship.

To accomplish that, it’s useful to understand the various outsourcing engagement models and how to best apply them to your situation—in the case discussed here – a brief overview of the most popular models grouped into Tactical and Strategic engagements.

A. Staff Augmentation Engagements

What it means Offshore team works as an extended arm of the existing on-roll/ in-house team.

Why do it? This is typically the starting point of any off-shore arrangement. The typical client’s business driver for such a model is cost reduction but it requires high involvement of Manager level staff to supervise the augmented staff; and can be used to offset cost of on-field resources below Manager level.

Project Management and Reviews remain on the client’s side while routine repetitive tasks like Audit  testing, data entry, MS Excel and PowerPoint sanitization, and formatting can be augmented with offshore resources provided by an outsourcing vendor.

Limitations and Drawback The level of innovation from outsourced vendors with this model will be quite low in most cases. In fact, the less span of responsibility, the fewer drivers to innovate exist. With the Staff Augmentation model the span of responsibility usually is quite narrow. It may include checklist based testing as well as data entry. It is important to set proper expectations and establish alignment between a client and outsourcing vendor on which party is responsible for which steps offshore Lifecycle – it helps avoid solving unpleasant issues in the future.

Suggested Services for Staff Augmentation

  • Audit testing & workpaper documentation (For SOX, SOC 1 Type 2, External Audit and Internal Audit)
  • Tax Returns Preparation
  • Accounting & Book-Keeping
  • Data sanitization and formatting for MS Excel and PowerPoint

B. Project-Based Engagements

What it means A time bound engagement model effective for expansive one-time consulting and advisory projects where offshoring allows reducing cost and turnaround time of deliverables by leveraging an outsourced vendor with the required technical and domain expertise

Why do it? Large complex one-time advisory and consulting engagements typically require a lot of planning before kick-off. Having pre-identified offshoring capabilities with a trusted partner not only significantly reduces cost but also enhances the turnaround and delivery with the 12-hour time difference between North America & India.

Limitations and Drawback The first few assignments may have teething problems; Effective and precise communication of requirements from the Client and receptiveness of the offshore partner will be critical for successful offshoring.

Suggested Services for Project Based

  • Due diligence
  • Forensic Accounting & Investigation
  • Data Analysis & Dashboards
  • Valuation of Securities & Financial Assets
  • Transfer Pricing Study

C. Value-Added Tactical Engagements

What it means Task specific engagement model useful for a number of value-add services which are not productive but essential for any engagement. research and data gathering & data entry work. It is usually provided by an outsourcing vendor as a fixed price time bound activity allowing tactical cost and time reduction.

Why do it? All engagements require a series of tasks to be completed before analytical and logical work starts. Tasks like data gathering, research, data entry, data sanitization and formatting takes up a good chunk of time. partner not only significantly reduces cost but also enhances the turnaround and delivery with the 12-hour time difference between North America & India.

Limitations and Drawback The first few assignments may have teething problems; Effective and precise communication of requirements from the Client and receptiveness of the offshore partner will be critical for successful offshoring.

Suggested Services for Tactical Engagements

  • Wireframing & UX Design
  • Research work for planning documents
  • Preparation of lead sheets from Trial Balance
  • Background research & Template Fill-up
  • Preparing Deliverables in Powerpoint Formats

D. Strategic Consultancy

is a value-driven consulting engagement aimed to improve process efficiency and the Delivery quality and TAT of a CPA organization. Usually it includes all aspects of the People/Process/Technology triangle with a high impact on a Firm’s transformation and strategic decision making

The key takeaway is selecting a proper engagement model and ensuring that your tactical and strategic plans are shared with your partner will help you set up a solid foundation for further innovation. There is no need to stop at one or another level—continue evolving through engagement models over time to receive more value from long-lasting and fruitful partnerships.

Step II: Assess Off-Shore Partner’s Human Capital and Technology Capabilities:

A few critical aspects of the Off-shore partner’s Human Capital to keep in mind, while assessing delivery capabilities and quality assurance –

  • Leadership team with prior experience, deep knowledge and technical capabilities for setting up Shared Services Centre
  • Off-shore service delivery model set up expert with proven track-record
  • Rapid scale up capabilities
  • Robust employee on-boarding, screening and background check policies
  • Training is a core part of the work life

The Off-shore Partner’s Information Technology team and the extent of in-house/ existing data security maturity is an important aspect to evaluate –

  • Physical Security Central Access control system, Alarm Systems, Security guards and visitor access controls & CCTV monitoring
  • Devices & Systems: Secure Workstations allocated to all staff with Windows 10 64 Bit with Active Directory for document management, password policy and data access/ extraction restricted permissions
  • Communication & Network Access: All communications over secure and licensed applications. Firewalled servers. SSO and End Point Encryption. Dedicated file sharing services using internationally accepted tools and SAAS platforms

Step III : Draft & Execute Service Level Agreements (SLA) –

SLAs define the broad expectations from the Off-shore partner for scope of engagement; proprietary or co-developed workflow and communication software. Further a Non Disclosure and use of IT tools and data security controls are important aspects to be addressed.

The SLA will also define and aide in structuring the business model between the firms and delivery turnaround expectations. A critical aspects is quality assurance and the benchamarking for the same can be done in the pilot stage.

Step IV: Run a Pilot Engagement

Remote working and monitoring of resources through virtual management tools and SAAS platforms has become the new normal for all CPA firms, more out of compulsion, than choice. Whereas your in-house resource sits in North America and cost what they cost your organization, the off-shore resources are deployable as on tap workforce at nearly 1/3rd the variable cost.

Typically the off-shore partner will demonstrate previous success stories and workflow guidelines and template to the CPA firm to enable them to pick and choose the best model. However, CPA firms have their own tools and SAAS platforms for planning and executing engagements. In such case a co-developed hybrid workflow can be created at low to zero cost and a commitment of 100-500 hours of offshore arrangement as a pilot project. Alternatively, the CPA firm can draw out their own workflow playbook and invest time in training the off-shore partner in their proprietary planning and execution methodology.

Case Study – SOX Offshoring

From the Desk of SPC Group – SOX & SOX Shared Services Centre

SOX and SOC planning and testing used to be a specialist area, but now it is outsourceable and offshorable. SOX has been outsourced from day one, but usually by one of the big four accountancy firms.

Today an agile CPA firm can evaluate several reasons for handing SOX & SOC compliance to an external provider that can offer best practice, effective testing, more efficient financial reporting and significant cost savings. As enterprises see SOX compliance as a repeatable process, they understand that it has the profile of a process that fits with offshoring.

They key is to achieve a sustainable year-on-year process – Starting with the documentation process and assessment of risks associated with financial reporting, offshore services extend to identifying and designing controls to mitigate those risks, through to the operational level, where SOX processes are regularly tested.

Offshore partners don’t sign off on the figures – Client Relation & Financial control remains with the CPA Firm.

In this time at the front line of offshore SDM implementation our Shared Service Centre has seen CPA firms save 30-40% on SOX & SOC compliance costs through outsourcing, much of it in the early stages. Savings derive partly, though not exclusively, from offshoring. There was a time when SOX was handled 100% on-site and treated in a risk-averse manner, but companies are now willing to offshore.

Tasks like building documentation and transcribing it into process documents needs on-site interviews, but the results can be processed offshore. Building the test processes can also be done offshore, and as testing steadily becomes more rules-based it can also be done offshore.

Cost also falls because of process improvement. With our team’s deep decade long experience in the global SOC/ SOX and the Indian IFC/ ICoFR we can cite several examples of clients that witnessed notable reduction in year on year manhour requirements due to short learning curve, communication efficiencies and leveraging our knowledge base. 400 man-weeks for SOX compliance in year one to 280 man-weeks before stabilising at around 210 man-weeks, with one-third of the work handled offshore.

That translates into big dollar savings. We see offshoring as a trend, though SOX/ SOC compliance can never be fully offshored. What we can offer is centralised programme management for SOX/ SOC, using offshore centres India. We can embed processes, and make them less costly and more efficient.

SOX compliance is just one of our many KPO services, and our experience in finance and accounting gives us a heritage in KPO and a library of best practice. Furthermore, we use our flexible framework for SOX/ SOC process industrialisation, or use any components of its clients’ existing systems.

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