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Figures in the distance

FDs are used to taking the long view - but sending the finance function half way round the world may still seem a little over the top. Nevertheless, Indian outsourcers claim they can cut clients' back-office costs, speed up invoice turnaround and boost your share price.

Outsourcing is befuddled by terminology. But, whether it is “on-shore” or “offshore”, “complete” or “selective”, one thing is clear – the need to farm out non-core competencies such as invoice processing is at the heart of the development of the finance function.

Outsourcing the finance back office is not a new idea and even the external audit function can be considered outsourcing, albeit mandatory. But it was a decade ago, when BP’s exploration division outsourced the processing of its payables to Andersen Consulting (Accenture) that managed services became the in-vogue vehicle for strategy-minded FDs.

Now, with the rise of internet technology and increased globalisation, the Big Five firms such as PwC, and outsourcing service companies, such as GE Capital, believe many more FDs should be looking to make a radical leap in outsourcing – by using overseas hubs for the processing of receivables and payables.

Traditionally, back-office functions have been outsourced on-shore, through service companies based in the same country or even the same building as the client. But cheap labour rates in developing countries mean more companies are outsourcing back-office finance and accounts to the likes of India and the Philippines. But the context for deciding to move operations to these countries is not just built on cost – benefits such as the growth of skilled workforces overseas and improved operational efficiencies are also helping.

David Narrow, partner in charge of finance and accounting architecture at PwC, believes FDs currently thinking about outsourcing need to consider new offshore options. “The battle for outsourcing is going to be fought on the question, ‘Why should I pay to have my outsourced finance function on-shore?'” he says. “Now, when outsourcing the finance and accounting function, the first initiative to undertake is the physical delivery of information. This involves the establishment of first, a global processing hub, second, regional spokes and, thirdly, a small on-site operation.”

Narrow’s offshore model rests on the premise that a minimum of 70% of a company’s finance and accounting operations can be located in a global centre. But, if you need expertise in Belgian VAT, for instance, a global hub is unlikely to be able to keep track of the 70 tax changes made there every month, so regional centres are also required. A small, on-site, client-facing department is also needed to coordinate operations, but both the on-site and regional hubs are made as small as possible, with a bias towards moving nearly all processing up the ladder to the global hub.

PwC’s offshore outsourcing operations are currently focused in India, and the firm is still debating whether India should be the future global hub for all its large- and medium-size UK clients’ operations. Although it has not yet come to a decision, Narrow sings the sub-continent’s praises.

“India just knocks the socks off everywhere else,” he says. “The skill levels available are extremely important to the future of outsourcing the finance function. We ran a pilot there that was very successful, where we got chartered accountants to process invoices.”

It is this ability to use highly-skilled, yet cost-effective, staff that has driven companies such as BP and British Airways to farm-out their back office to India – and UK and US demand for the Indian workforce is growing steadily. Research company IDC estimates that the Indian outsourcing market will grow from $188m in 2000 to $1bn in 2005, and several large service companies are moving in to compete with PwC. For example, in October 2001, Bangalore-based Wipro acquired a 20% stake in Spectramind e-Services, a Delhi-based payroll processing company, giving Wipro access to an 850-person strong outsourcing workforce and clients including BT and Dell.

Another player in the market is Arizona-based eFunds, which took Financial Director to India so we could see for ourselves the level of service that can be achieved.

Like PwC, eFunds employs chartered accountants to oversee, and sometimes undertake, data entry of receivables and payables. Using qualified staff means that eFunds has the ideal workforce to draw from when a client requires data-entry staff to chase up invoices and settle outstanding bills. Accountants can spot mistakes quickly, contact suppliers and reduce outstandings by up to 40%. The staff are also given voice coaching to create an accent-neutral environment – a technique that outsourcers have already applied in the many US call centres operational in India.

Raju Bhatnager, eFunds’ head of Indian outsourcing operations, admits that cost is an important factor in winning outsourcing contracts, but it is added-value services that keep the customers satisfied. “The first thing we have to demonstrate is the monetary benefits of outsourcing to India. Once we have done that they will appreciate the non-monetary benefits.

Outsourcing delivers added-value that is difficult to quantify. If we can knock two days off a five-day invoice turnaround then our client will have more room to change strategic direction if necessary,” he says.

Paul Hitchen, eFunds manager of strategic business processes, deliberately underplays the cost issue. He argues that FDs of large companies are more interested in operational efficiency – and will actually pay to achieve it. “We are never going to be the cheapest outsourcing company,” he says.

“We target those FTSE-350 companies which can pay for decent UK account management.”

While the cost advantages and staffing reductions available provide the initial impetus for offshore business process outsourcing (BPO), the tangible and intangible benefits can be far reaching. Latest figures from PwC suggest that offshore BPO can increase economic value added by up to 15% and cashflow by up to 25%. eFunds claims that companies which outsource their back-office accounts gain an increase in share price of 5% above companies in the same sector that do not outsource.

Technology is the enabler for offshore outsourcing, and eFunds management was keen to show-off its facilities – and the fact that it is the second-largest user of bandwidth in India after GE Capital. In the case of its largest US client, West Teleservices, the client’s IT hardware and infrastructure has been replicated exactly in India to ensure continuity of service.

“It’s the client’s process, I shouldn’t be tampering with it,” says Bhatnager.

Currently, eFunds has no UK clients for finance and accounts processing, but the theory is sound. Once a deal is struck for invoice processing, Consignia is licensed to intercept the client’s mail. It then pulls the invoices, scans them and sends them electronically to eFunds in India, where staff enter the details onto the client’s accounting software. The originals can be kept or destroyed as required.

If data cannot be held abroad, or if the client is reluctant for an Indian company to hold its information, eFunds leases encrypted private networks so the data resides on the client’s servers and is accessed securely from India. Built-in redundancies and direct satellite data links to client’s offices are also used in case of power and network failures – a problem that has hampered Indian companies in the past. eFunds is also six sigma accredited, meaning that it complies with stringent quality of service criteria. For one of its Fortune 1000 clients, eFunds has reduced the error rate for data entry from hundreds per million to four.

Yet Indian outsourcers face an uphill struggle to attract UK clients.

For a start, venture capitalists and institutional investors are risk averse and don’t like to do business with companies based in India. Having the outsourcer headquartered in the US or UK helps, but after 11 September and with racial tension a worry (India has the third largest Muslim population in the world) businesses think twice about moving operations to the sub-continent.

Bhatnager appreciates the problem. “Whereas the first reaction a potential client has is ‘I will lose control of my process’, the second is always that India is a third-world country,” he says. And while Bhatnager says it really doesn’t matter if a client is a block or a continent away, and technology and global presence means that data will always be secure and service will be continuous, political and social factors will always be important in an FD’s choice of outsourcing location.

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