Build or Buy? Considerations for Off-Shoring Finance and Tax Functions
Not surprisingly, the slow economic recovery is keeping most businesses today under pressure to do more with less. As a result, many CFOs and tax directors are looking at off-shoring parts of their finance and tax organizations to help manage costs and improve performance.
Off-shoring can positively impact your bottom line, but also add overall value.
For example, improved process efficiencies, improved process quality, access to highly educated talent, the ability to scale up and down as needed, and the opportunity to focus on core competencies are some of the other benefits of off-shoring select financial functions.
In this light, off-shoring should be viewed as a catalyst to change – change that can support broader finance transformation to improve performance.
A number of sourcing models are available, and the processes we see being off-shored most frequently include procure to pay, order to cash, record to report, tax planning and compliance and — most recently — decision support. However, before making a final decision about off-shoring any finance or tax process, we believe it’s important to be clear about objectives and develop an aligned offshoring model.
Different business models for different needs
Although pioneers of off-shoring tended to establish shared services sourcing models for financial and tax functions, over the last five or six years other models have emerged and steadily grown in popularity. Today, CFOs have three main categories of sourcing models:
- Shared services. This traditional off-shoring model consists of a “captive” source of services that is wholly owned by the business. Typically, captives are built from scratch and take a considerable amount of investment and time before they produce expected savings. Although a captive service center can be located on-shore, near-shore, or off-shore, today such captive operations tend to be located off-shore in places like India, China, or Eastern Europe. They work best for larger organizations that face regulatory challenges with the management and protection of data or intellectual property, or those with concerns about cultural compatibility.
- Outsourcing. This model involves a business contracting out the operation to an external service provider for defined outcomes, service levels, and fees. Over the past five years, the outsourcing market has rapidly matured, starting with accounts payable and moving through accounts receivable, to record-to-report closing processes, and even beyond. With several leading service providers in the game, many businesses are choosing to go this route because of the speed with which they can execute an offshore model and capture economies of scale by sharing infrastructure costs across a number of clients to the outsourcer.
- Hybrid. There are many possible combinations of models involving joint ownership. In such hybrid shared services and outsourcing models, a company establishes contracts with a vendor to build an operations center in which both parties have an ownership stake. Two of the most common are Build-Operate-Transfer (BOT) and Joint Venture (JV). With BOT, the company contracts with an outsourcing provider to build a facility, operate it for a designated period of time — for example, five years — and then transfer ownership back to the business so it becomes a captive operation. In a JV, the outsourcer and the business set up the facility together and run it as a joint venture.
To Outsource or Not to Outsource: Build versus Buy
With the evolution of the outsourcing industry, CFOs have a greater range of options for offshoring finance operations. The benefits of captive and outsourcing approaches should be considered in the light of the overarching purpose of an offshoring initiative and specific factors such as future finance transformation and security and privacy issues.
Following are advantages of each approach:
Build (captive operations)
- Retain direct control of operations
- Retain knowledge of critical operations internally
- Ability to realize cost savings from process improvements
- Sustain and improve service quality as markets or delivery models shift
- Ensure strong internal controls aligned with internal governance and risk priorities
- Match company cultural fit more easily
- Speed to an offshoring arrangement
- Flexibility to scale up or downsize workforce based on market conditions or seasonal needs
- Align management focus on core business
- Reap cost advantages due to vendor’s scale of operations
- Speed technology and process solutions
- Ease HR management
Outsourcing with a take-back option provides CFOs with greater security to shift models back to captive operations if market conditions require the change.
The benefits of shared services appear to be somewhat different from those of outsourcing.
For example, according to Deloitte’s 2009 Shared Services Survey, the number one benefit for going with a captive model is process efficiency, followed by process quality. Cost reduction comes in third; developing new talent doesn’t show up until number nine.
On the other hand, cost-reduction is the top driver of outsourcing initiatives, according to Deloitte’s 2008 Outsourcing Report. The ability to leverage technology expertise, access less expensive labor, and add to in-house talent resources are also important criteria.
Thus, what drives shared services versus outsourcing models tends to differ, with the former emphasizing control and improvements in processes, the latter emphasizing cost control, speed, and access to talent. In either case, businesses can potentially reap savings from off-shoring, with both full-time equivalent (FTE) and transaction pricing models delivering value.
Off-shoring: What are the Opportunities for CFOs?
Transaction processing is the most commonly off-shored portion of the finance and accounting function.
Historically, procure to pay was the first process to be off-shored and outsourced, but today most aspects of record to report and purchase to payment are outsourced, as well.
The savings in these areas can be potentially significant. And, increasingly, CFOs are willing to move from outsourcing transaction-processing activities in finance to outsourcing business decision-support activities such as planning, control, and management reporting.
Tax planning and compliance is emerging as an important opportunity for offshoring.
Tax is a technical area that splits processes between high-value activities and baseline compliance and data management tasks. Local differences in tax compliance can be very significant. The technical knowledge, the number and type of returns, the frequency of reporting requirements, the data required, and the timing of the filings can make it appear difficult for tax compliance to be anything but a locally-based process.
However, many activities — such as data management at an enterprise level, chart of account maintenance, and management reporting on specific tax attributes — can all be centrally managed.
Furthermore, off-shoring a portion of the statutory accounting and reporting processes in support of indirect tax filings, GAAP conversions, and reconciliations – especially in the European Union — is not only possible, but desirable under the right circumstances.
Whether captive or outsourced, careful consideration should be given to offshore tax talent. We have observed a notable lack of professionals who are trained or at least experienced in U.S. taxation in off-shore locations. There should be enough available offshore professionals who have the basic accounting and analytical skills that can be trained for U.S. tax requirements – or at least standards of – data and information management; internal controls and management reporting; and process redesign.
CFOs and tax directors should carefully consider the availability and competition for talent, and the need for continuous training programs on communication, and technical training on U.S. taxation to be viewed as providing long-term viable career opportunities outside the United States. This means creating structured learning paths for the continuous growth of professionals who are willing to acquire new competencies in the local employment market.
Where Will You Offshore?
The number of geographic areas that are considered viable for off-shoring finance is growing. A number of different factors drive this choice such as labor factors including quality, availability, cost, language skills, and access to talent. Other drivers include proximity to operations, the country risk profile, regulatory issues, and tax impacts.
In Eastern Europe, historically, Prague was a center for accounting services, although increasingly the Czech Republic, Poland, and Romania are coming to the fore.
In India, the pursuit for competitive labor costs and talent is driving businesses from Mumbai and Delhi to second- and even third-tier cities.
The Philippines are an alternative to India for an increasing number of U.S. companies, primarily because of cost and the prevalence of English-speaking population.
China is beginning to serve much of Asia, including Japan, and Latin America is an up-and-coming location for U.S. firms, primarily because of cost, time zone affinity, and language, with many shared services and off-shoring centers being set up in places like Brazil, Chile, Guatemala, and Costa Rica.
The Only Right Answer is the One that Works for You
With the variety of off-shoring and outsourcing models available to CFOs and tax directors today, the only right answer is the one that works for you. As you weigh your options, keep in mind that although cost-reduction is an important driver, many of the above factors must be considered.
Different models and locations will suit different objectives from cost reduction, to longer term finance transformation.
As used in this document, ‘Deloitte’ means Deloitte LLP (and its subsidiaries). Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries.