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BRIAN NICHOLSON, JULIAN JONES, SUSANNE ESPENLAUB

Manchester School of Accounting and Finance The University of Manchester Oxford Road Manchester M13 9PL UK +44 161 275 4010

brian.nicholson@man.ac.uk

julian.jones@man.ac.uk

susanne.espenlaub@man.ac.uk

TRANSACTION MITIGATING STRATEGIES: THE CASE

OF OFFSHORE ACCOUNTING

ABSTRACT

Purpose The paper seeks to improve our understanding of offshoring to India of all or part of the

accounting & finance function.

Methodology

Qualitative

research

instruments

including

interviews

with

client

and

vendor

organisations involved in offshore sourcing were undertaken in India and UK.

Findings

Three offshore relationships were evident in the sample including fully owned and

operated offshore facilities (category I), vendors servicing former parents (category II)

and conventional, third party outsourcing (category III). As ownership is relinquished

from hierarchy to market-based transactions, the adoption of transaction cost mitigating

strategies was shown to increase, thus providing the necessary safeguards to control for

uncertainty and opportunism from a small number of vendors.

Originality / value of the paper

The paper is novel in that it explores offshore accounting outsourcing, an area which is

under researched and currently not well understood. The paper thus has a practical

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contribution to accountants, managers, consultants etc. The paper applies the transaction

cost frame to a hitherto unexplored area that is of value to other researchers interested in

studying the area.

The findings offer a contribution to transaction cost theory itself in

that the transaction cost mitigating strategies we identify act as powerful influences in

enabling the decoupling of strategically important activities hitherto constrained within

hierarchies that now become subject to market transactions in essentially failing

markets.

Keywords

Offshore, Outsourcing, Transaction Cost Economics, Accounting, Finance, India

Conceptual Paper

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1. INTRODUCTION

Despite the growing prevalence of Accounting and Finance (hereinafter referred to as

AF) outsourcing, the literature is limited to a handful of studies (Widener and Selto,

1999; Wood et al., 2001; Jones et al., 2003), concerned with the delegation of AF

functions and related activities such as internal audit to outsourcing providers. With the

exception of Jones et al. (2003), these studies consider only outsourcing in the same

country, viz. “onshore” outsourcing. There is a growing trend towards offshore

outsourcing of AF activities. General Electric (GE), Dresdner Bank, Ford; Swissair,

American Express, HSBC, Citibank, Standard Chartered, EXL (part of Conseco) and

Hewlett Packard have all outsourced parts of the AF function offshore to third-party

providers, shared service centres and fully owned offshore subsidiaries based in India

and other countries.

The process of AF offshore outsourcing is part of a wider trend towards the relocation

of business processes to offshore call centres and “back office” transaction processing

units located in India, the Philippines, China and Eastern Europe with India being the

clear leader in the field (Petre 2001; Morstead and Blount 2003, Sahay et al., 2003).

Over the last decade there has been a dramatic decline in the costs and increase in the

capacity of computing and international telecommunications. 1 The resulting global

interconnectivity has provided US and Western European companies in particular with

access

to

offshore

suppliers

at

relatively

low-cost.

The

international

offshore

‘Information Technology Enabled Services’ sector (hereinafter referred to as ITES) is

set to become one of the fastest growing international business sectors, predicted to

1 See for instance Dicken (2003) and Jones et al (2003) for a review of the virtual drivers and enablers and their impact on the deintegration of business processes and the global redistribution of work to remote locations

3

reach $142 billion by 2008, a 41% compound growth rate from 2000.

International

Data Corporation (IDC) has predicted ITES revenues of US$1.2 trillion by 2006

(Nasscom 2004) with growth projections of 11 percent annually. India in particular has

firmly established itself as a leading ITES outsourcing provider in customer-contact

centres and back office transaction processing (see Table I). Despite the adverse global

economic conditions following the 2001 US recession, Indian ITES vendors have

experienced high growth rates of over 65 percent with revenue increases from $1.564bn

in 2001-02 to $2.578bn in 2002-03 (Nasscom 2004).

<Insert table I about here>

According to India’s software and ITES trade association Nasscom, in 2001–02 there

were 15,000 people employed in the Indian ITES AF sector generating revenues of

$300 million. In just over 12 months, 24,000 were employed, generating revenues of

$510 million.

By 2008, revenue is predicted to reach between $2.5 to $3bn (Nasscom

2003).

A major reason given for outsourcing various categories of accounting and finance

activities are the substantial labour cost differentials available in remote locations such

as India, where wages for some activities shown in table I can be up to 70% below

those of comparable staff in the US or Western Europe. The accessibility of

international IT enabled services presents options for organisational strategists to re-

think conventional hierarchical structures which often act as ‘defective monopolies’

(Drucker 1954) with little incentive to improve.

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Accounting is no different, but

offshore outsourcing often presents unacceptable levels of coordination costs that can

erode

any

production

cost

savings

offered

by

remote

vendors.

For

example,

communication between the client and the offshore vendor may be problematic due to

relatively poor telecommunications, cultural differences, accents and language ability.

Time zone differences accentuate coordination and communication difficulties. The

offshore team may lack domain knowledge in the client’s business application, and the

transfer of such knowledge is hampered by distance. Different legal institutions too

complicate the monitoring of outsourcing contracts and frustrate attempts at conflict

resolution (Apte, 1990; Carmel, 1999; Sahay et al 2003).

Despite

higher

co-ordination

costs

in

the

transition

offshore,

prior

research

has

suggested that assumptions, depicting the strict relationship between transaction cost

levels and consequent governance form are, in reality, rarely this strict. In the onshore

accounting outsourcing context, exceptionally high levels of coordination (transaction)

costs need not always preclude outsourcing in what are essentially underdeveloped or

predatory supply markets.

Here, outsourcing is achieved via the creation of a market

through the formation of joint venture and joint-development arrangements with

vendors possessing broad and internationally recognised skills, but often, no direct AF

outsourcing experience. The positive externalities created by the desire to gain contract

renewal and a ‘foot in the door’ of accounting outsourcing provision in onshore

arrangements are sufficient to constrain behaviour and overcome preclusive co-

ordination costs.

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Improving our understanding of offshore outsourcing of all or part of the accounting

function and the strategies underpinning such transfers are therefore of considerable

practical and theoretical importance.

This is especially so given that idiosyncratic and

standardised activities are increasingly transferred within comprehensive outsourcing

arrangements; a trend which contradicts theory which would prescribe hierarchical

management in the face of market failure.

This paper is a first step in locating and

studying empirical examples of offshore AF outsourcing and to rationalise such practice

by:

1. Examining the source of transaction costs in the process of offshoring AF

activities, and

2. Investigating the transaction cost mitigating strategies that allow for such

outsourcing in markets characterised by ‘failure’.

The remainder of the paper is organised as follows. Section 2 presents the transaction

cost framework previously deployed to examine onshore AF outsourcing (Wood et al.,

2001, Jones 2001) and applied here in the offshore context to predict organisational

form. Section 3 outlines the methodology and sample description. Section 4 reports the

particular sources of transaction costs as framed through transaction cost lenses

(information asymmetry, opportunism, asset specificity and uncertainty) together with

the mitigating strategies (including governance form, use of intermediaries, onshore

vendor presence; contractual arrangements; monitoring, standardisation; security and

migration processes) that facilitate different modes of AF outsourcing to remote

locations. Conclusions on the extent of market failure exhibited in the Indian context,

the viability of offshoring different AF activity groups and the likely implications for

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Accounting & Finance governance structures and its close network participants are

drawn in section 5.

2. THEORETICAL FRAME

Building on the seminal insights of Coase (1937), Williamson (1975, 1986) developed

transaction-cost economics (hereinafter referred to as TCE) to expla in the boundaries of

the firm in terms of the optimal choice between market and hierarchical provision based

on the trade-off between production and co-ordination (transaction) costs. This paper

draws on TCE for two reasons.

First, Transaction Cost Theory has often formed the

unit of analysis in past research concerning generic outsourcing processes (Lacity and

Hirschheim 1993, Lacity and Willcocks 1995, Aubert

et al 1998, Wang 2002).

Elements of the framework have also been deployed in rationalising the outsourcing of

the

internal

audit

function

(Widener

and

Selto

1999)

and

in

conjunction

with

benchmarking studies seeking to depict efficient firm boundaries and market-based

possibilities (Wood et al., 2001; Jones 2001).

Secondly, TCE provides a framework

through which the impact of risk management or ‘transaction cost mitigating strategies’

on exchange (Jones 2001, Jones et al., 2003) understood.

For completeness, the paper refers to delegation of activities that are normally, but not

always, performed in-house to an outside supplier as outsourcing.

This reflects the

managerial delegation aspect of spot-market transactions and the long-term character of

subcontracting. It also allows for the possibility of outsourced provision from the outset

without firm ever having conducted the activity in-house.

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2.1 Transaction Cost Economics and Outsourcing

‘Costs’ in the transaction cost framework consist of production and transaction costs.

Williamson defines transaction costs as those associated with an economic exchange

that vary independently of the competitive market price of the goods or services

exchanged. These include all search and information costs as well as the costs of

monitoring (Robins, 1987, p.69). Transaction costs are therefore a natural occurrence in

markets that fail to meet the requirements of perfect markets, for example, perfect

information, homogeneous products, large numbers of atomistic buyers and suppliers

and free mobility of resources. The reverse of this is that in perfect markets, the costs of

a transaction in terms of the costs of coordinating and controlling external market

transactions would be negligible.

In certain circumstances, market failure is extreme, thus precluding external market-

based transactions, even if markets can offer lower production costs due to the vendor’s

ability to exploit economies of scale and scope. If the sum of transaction costs incurred

in the switch from in-house to external provision exceeds the total production-cost

savings of a market exchange, transaction cost theory prescribes that firms will organise

activity

within

a

hierarchy

rather

than

engage

with

vendors

in

market-based

transactions. The relative magnitudes of transaction and production costs are therefore

critical in governance choices for different activity groups.

Asset specificity refers to the degree of customisation of the transaction in terms of site,

physical and human asset specificity. The relationship between specificity and governance may

be understood by the nature of the transaction.

Non-specific transactions such as purchase or

sales ledger or treasury do not require tailoring to a particular client, and therefore can be

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provided using standard equipment and non-specialised knowledge. Idiosyncratic transactions

on the other hand require specialised equipment or knowledge of the business or accounting

processes and are therefore best served within a hierarchy on the basis of control and risk.

Frequency of transaction is the second variable associated with transaction type and influencing

governance choices in the Williamson framework.

Processing of payroll, a non-specific AF

activity occurs frequently.

Many Indian outsourcers use comparable payroll packages and

devote particular staff to customer accounts giving economies of scale.

Management

Accounting resources on the other hand, an idiosyncratic activity are also called upon frequently

in most organisations, and according to Williamson, is therefore best served within a hierarchy.

In essence, Williamson suggests that markets are more efficient than hierarchies except for

recurrent idiosyncratic transactions; asset specific transactions with high uncertainty and where

a small number of suppliers exist. These predictions and associated governance structures are

illustrated in Table II below:

Table II

Transaction Cost Governance Predictions

   

Asset specificity

Frequency

Non specific

Mixed

Idiosyncratic

Occasional

Market governance

Market governance with trilateral contract

transaction

with classical contract

equivalent to a sale

Recurrent / Frequent

Market governance

Hierarchical

transaction

with bilateral contract

governance

(Source: Williamson 1986)

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Nooteboom (1992, 1993) extended what is often considered a static transaction-cost

framework at any particular point and recognised that a transaction is an event

occurring during three stages: contact, contract and control. At each stage, buyers and

suppliers face different magnitudes of transaction costs, deriving from the sources of

market failure identified by Williamson. At the contact stage, a buyer incurs search

costs and the seller, marketing costs. At the contract stage, costs are incurred in

preparing an agreement to transact where the vendor and client attempt to anticipate

possible issues during execution.

stage

costs

litigation.

include

monitoring,

After a commitment to transact is secured, control

settling

disputes,

renegotiation,

arbitration

and

2.2 Transaction Costs in Offshore Outsourcing

In this section, we will highlight the particular source of transaction costs in offshore

AF arrangements as viewed through transaction cost lenses, before considering the

transaction cost mitigating strategies of offshore vendors (section 4) and drawing

conclusions on the nature and significance of offshore outsourcing (section 5).

2.2.1 Contact Stage

Transaction costs at the contract stage comprise of client-based search costs and vendor-

based marketing costs. Direct search costs include gathering requests for information

and proposals together with references for potential vendors, the employment of

consultants to locate, vet and certify vendors, site visits including travel costs and

opportunity costs of management time. In evolving supply markets, such as the case in

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the AF domain, small numbers of suppliers accentuate uncertainty and information

asymmetries.

This is because the absence of alternatives with which to benchmark

against increases in the risk of accepting suboptimal outcomes in terms of price and

quality.

While the Internet has greatly reduced clie nt-based search costs and finance

directors

frequently

receive

promotional

material

from

vendors,

the

information

asymmetry problem remains, making it difficult for clients to objectively validate those

vendors.

In India, supply varies across the range of AF activities; for lower value added AF

functions (such as payroll processing) there is a plentiful supply of offshore vendors.

However, for higher value added functions such as management accounting and

financial reporting, there are a plentiful supply of vendors offering offshore services,

even in India who lead the offshore ITES industry (

2.2.2 Contract Stage

The purpose of the contract is to specify the required actions and payoffs of contracting

parties with a view to aligning their interests. TCE recognises that the cost of complete

contracting is prohibitive in the case of transactions characterised by comp lexity and

environmental uncertainty. In an uncertain world, it is impossible to anticipate all future

eventualities and to set out in a comprehensive contract the terms of the exchange

relation across all potential future states.

There are biological limits on the human capacity to identify, absorb and process

information (‘bounded rationality’). As a result, the costs of attempting to write a

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complete contract would quickly become prohibitive for transfers involving both

standardised and idiosyncratic activities, rendering complete contracting impossible.

The problem is aggravated by the degree of complexity, susceptibility to uncertainty,

and the lack of observable and verifiable performance measures across the range of AF

activities.

Given

these

uncertainties,

transaction

cost

theorists

would

predict

that

highly

idiosyncratic activities 2 would be internalised, or else accomplished through relational

contracting, where the existence of repeated interaction and long-term relations between

the exchange parties facilitates efficient external exchanges, even in the absence of

complete contracts. Research in the onshore AF context (Wood et al., 2001) surveying

4000 firms (with a 19.5% response rate) supports such a conventional TCE prediction.

UK companies were most likely to outsource frequently occurring, non- idiosyncratic

accounting work with easily verifiable outputs. By contrast, complex functions, such as

financial and management accounting were least likely to be outsourced, unless

accompanied as part of a comprehensive outsourcing package of the entire facility.

Offshore vendors are separated from their clients not only by substantial geographical

distances, but are also embedded in differing social structures (Walsham 2002),

telecommunications

infrastructures,

educational,

legal

and

political

institutions

(Grannovetter 1985, Lam 1997). These give rise to significant uncertainties and

information asymmetries relating to the impact of cross-cultural differences, political

stability, legal status of the vendor and protection afforded to clients by the offshore

2 Requiring specialised personnel and equipment because specific skills and knowledge are required to perform the activities

12

legal system. Differences in infrastructural standards and legal institutions in particular

raise issues of reliability of connections and security of AF data against hacking and

other forms of intellectual property theft.

At the contract stage, the vendor and client also need to institute mechanisms to

effectively facilitate communication and transfer knowledge in order to establish and

verify performance, plan for future contingencies and build-in scope for flexibility and

the fine-tuning of long-term service agreements.

Prior research has indicated that the

costs of communication and information production are likely to be greater in offshore

than domestic outsourcing.

Communication and knowledge transfer problems may

arise between clients and offshore providers due to a range of linguistic, cultural,

institutional and technical reasons (Carmel 1999, Sahay et al 2003). “Information

impactedness”

concerns

the

opportunistic

refusal

of

existing

internal

providers

(employees) to disclose information relevant to the new external provider. Performance

measurement difficulties may arise from the vendor’s failure to establish a “baseline” of

the

client’s

existing

performance

level.

Furthermore,

planning

and

managing

contingencies is difficult in situations of high uncertainty inherent in the offshore

context.

At the macro-level of detail, there have been several near conflicts between India and

Pakistan since the partition of both countries, raising concerns about disaster recovery

procedures in particular. There is also considerable uncertainty over Indian government

policy with regards to incentives for setting up subsidiaries and tax-breaks for Indian

firms. Proposed protectionist measures on US companies taking employment to India

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may also stall offshore AF activity. At the micro-level, there have been periods of high

staff attrition in the Indian ITES industry such as in 1999 in the run up to Y2k and this

presents the need for contingencies associated with knowledge transfer, retention and

training.

Other contingencies should cover vendor bankruptcy, particularly since the

Indian ITES industry is still in an early phase of development, experiencing significant

consolidation 3 .

2.2.3 Control Stage

After a commitment to transact has been made, the costs of monitoring, settling

disputes, renegotiation, arbitration, litigation are all relevant transaction costs at the

control stage. From the clients’ perspective, control may involve:

Monitoring

vendor

performance,

define

and

agree

performance

reporting

mechanisms, process/outcome measures

 

Regular information provision to the client (to reduce monitoring costs)

Quality accreditation (a way in which vendors demonstrate perceived attention

to qualit y)

The vendors’ staff or representative co-locating (or near locating i.e. onshore)

 

Differentiating

between

alternative

governance

arrangements

(choice

of

subsidiary model over third-party provider)

Drafting tight privacy clauses and data/document security and disaster recovery

plans,

3 The Economist, “Business: Growing up; Outsourcing in India, May 22, Vol.371, Iss: 8376, p.72

14

A requirement for the vendor to provide staff training (e.g. knowledge of VAT

and other accounting principles)

A large part of the control process is concerned with controlling opportunism and

uncertainty. Vendor opportunism is common in onshore and offshore arrangements that

include the possibility of poor-quality provision, unauthorised subcontracting (resulting

in lower quality), delays and renegotiation of contractual terms. Clients may also act

opportunistically by renegotiating contract terms (e.g. reductions in fee, etc.) or refuse

to

pay or accept delivery or modify tasks (e.g. greater complexity, increased workload

to

vendor). Offshore outsourcing however presents some unique heightened levels of

uncertainty:

will

the

offshore

vendor

comply

with

laws,

accounting

rules

and

regulations and ethical standards that are not legally enforceable?

Without legal

restraint, fraud, error, capacity or technology failure are all possible contingencies not

covered by law and which ma y well damage the client’s reputation and result in

litigation and loss of business.

Previous research has advanced our understanding of controlling offshore relationships

and the complexities these present. As mentioned in the discussion on contracting,

communication between clients and the offshore vendors’ staff may be problematic,

accentuated by time zone differences and occasional ‘down time’ errors caused by

ineffective and/or unreliable electricity and telecommunications infrastructures (Apte,

1990; Carmel, 1999). Where sensitive financial data is concerned, tightly controlled

processes are required.

This incurs coordination costs in devising and implementing

security standards, preventing undetected errors and documentation losses.

In India,

15

enforcing contractual clauses is problematic due to limited legislation governing

privacy and data protection.

There is also considerable evidence to suggest that

international accounting variation persists (Choi and Levich, 1991; Weetman and Gray,

1991) 4 and even if full harmonisation were achieved, the potential for error still persists

due to cultural diversity. Gray (1988) in particular notes that the force of accounting

values 5 and consequences vary across nations with consequences on financial reporting

practices. Although the level and quality of educational pools in India is high, US or

UK GAAP is not widely taught in Indian Universities, providing relatively few

assurances that accounting standards will be adhered to.

Table

III

summarises

the

transaction

cost

framework

and

potential

sources

of

transaction costs associated with offshore provision as indicated through the contact,

contract and control stages.

<Insert Table III about here>

3. METHODOLOGY

The research catches offshore accounting & finance outsourcing very much at the

beginning of an innovative process, reshaping the governance provision of one of the

oldest and trusted professions.

4 For example, differences in profit impact upon standard indicators of performance (EPS, ROE, ROCE) and others impact on gearing and liquidity, thus rendering standard financial analysis at the international level problematic.

5 Professionalism vs. statutory control, Uniformity vs. flexibility, Conservatism vs. optimism, and Secrecy vs. transparency.

16

In India, the market is services by few established vendors and new entrants keen to

accept the support functions of the business operations of Western corporations.

Securing the participation of such vendors into the study was not straightforward as the

processes and methodologies adopted by some vendors were viewed as proprietary and

a source of (imitable) advantage.

Interviews were conducted in client and vendor organisations involved in offshore

sourcing of accounting services from India in 2001 and 2002.

Details are shown in

table two. Three field trips to India were undertaken in January, June and November

2002. The sample is comprised of seven outsourcing vendors and one client.

A qualitative research method was adopted using multiple semi structured interviews to

expose as many relationship types and practices associated with offshore outsourcing.

Thirteen semi-structured

interviews

were

conducted

with

accountants

and

senior

managers in the UK and in India. In addition, we interviewed two representatives of a

consulting firm, SKP, a division of an established accounting firm in Mumbai, who act

as intermediaries matching outsourcing vendors with clients 6 . Finally, we conducted an

interview with a key policymaker; the IT advisor to the Chief Minister in the Indian

state of Andhra Pradesh, a centre of India’s offshore outsourcing industry.

The interview questions presented to vendor and client companies focused on the

extent, motivation and management of offshore AF outsourcing. Questions included

6 They also offer their services to firms wishing to set up subsidiaries in India, ranging from advice on all aspects of setting up (taxation, rental or acquisition of premises, hiring of staff, etc.) to comprehensive “build-operate-transfer” arrangements where SKP act on behalf of the client in establishing the subsidiary, manage the operation for a specified period and finally transfer management to the client.

17

the use of information technology for managing the process, whether client systems

were standardised prior to the migration, and whether such systems were transferred

onto the providers’ proprietary systems or else, on a generic and easily transferable

platform. Interviews would typically last for around an hour and a half, usually

involving a tour of the accounting facility and in some cases an opportunity to meet

employees involved in the operation for informal questioning.

Themes from the interview data were grouped into transaction cost categories using a

data

display

matrix

(Miles

and

Huberman,

1994)

enabling

cross-case

analysis.

Newspaper and magazine articles together with outsourcing contracts, where available

corroborated the interviews. Further information on offshore ITES outsourcing was

obtained from three commercial conferences attended in the UK.

3.1 Sample Description

Table IV outlines organisational details of the case companies, grouped into three broad

categories of provision based on the interview data.

The three categories depict the

source and effect of transaction costs on the exchange of offshore AF services.

Category I is comprised of multinationals setting up a dedicated subsidiary in India in

order to centralise global accounting needs.

In this category were HSBC and GE; the

GE subsidiary also offers accounting and transaction processing services to external

organisations sold at a set-price per person or skill (often referred to as a ‘seat’). Also

in this category were a number of global financial services organisations with an Indian

operation and planning to diversity into AF out sourcing.

These companies were

interviewed with a view to identify the transaction costs and mitigating strategies in

18

terms of processes and methodologies they too faced in setting up an Indian operation,

and

to

identify

new

governance

mechanism

for

AF

offshore outsourcing.

The

companies are not mentioned by name owing to confidentiality.

Category II is comprised of multinationals with a shared-service centre in India. The

category is comprised of E-funds, servicing the accounting needs of its former parent,

Deluxe, and World Network Services (WNS) servicing British Airways and several

other

airlines.

Category

III

includes

specialist

accounting

vendors

with

Indian

operations. Inaltus (UK), Global Infosys (UK) and Outsource Partners International

(OPI) (US) were included in this category. Inaltus is a UK and US registered firms with

an Indian subsidiary. Global Infosys is comprised of a joint venture between a UK

registered company and an Indian accounting company. Client A, who wish to remain

anonymous, are a small UK based chartered accounting firm based in the North of

England, a client of Global Infosys.

<Insert table IV about here>

World Network Services (WNS), a spin off from British Airways (BA) undertake

passenger revenue accounting, payroll, purchasing, banking and treasury for clients

including their former BA parent and ‘new’ clients such as Royal Sun Alliance as well

as limited ad-hoc work such as reconciliation of invoices against suspense accounts.

Typically documents are scanned at the client site (in the UK) and processed in India.

Efunds, a shared service spin-off from the Deluxe Corporation operates on similar lines

19

and scale to WNS. Clients include financial institutions such as American Express but

accounting services were, at the time of interview, limited to servicing Deluxe in ‘real-

time’ through remote access to its SAP enterprise system. Documents are scanned and

processed at the Efunds Delhi accounting center.

In contrast, OPI and Inaltus are dedicated offshore accounting outsources and have no

ties, nor priorities with any other organization. Outsource Partners International (OPI)

were formed by a group of practicing accountants who opened an Indian subsidiary in

2001 to encourage existing (US) clients to transfer accounting processes to India.

Documents are scanned in the US and accessed in India, where records are updated

remotely via a standardized Enterprise Resource Planning (ERP) platform.

US clients

then liaise with a dedicated accounts manger in the US and have no contact with the

Indian center. UK based Inaltus, however, do not service client accounts via standard

technological platforms. Instead they hire a large team of programmers to design pro-

forma processes in India to match each clients’ systems, reporting to clients via a web

interface.

The final case company, Global Infosys (GI) opened in 1999 with five people primarily

engaged in accounting outsourcing. This vendor offers transaction processing services

to UK based Chartered Accountancy practices who themselves are outsourcing large

parts of transaction processing work to India. If the provision of accounting services is

considered within an outsourcing supply chain, the UK Chartered Accountancy practice

are the primary outsourcers, who themselves outsource to GI, the secondary offshore

outsourcer.

Clients

send

physical

batches

20

of

accounting

information,

primarily

consisting of the original hard copies of receipts and invoices to GI in India by courier.

Once data is inputted into the accounting package, GI prepares cash flow statements

and balance sheets on the accounts of the clients of UK Chartered Accountants,

dispatched to them via email or courier.

invoices.

4. FINDINGS AND DISCUSSION

A courier returns physical receipts and

This section explores the cases through transaction cost lenses reporting on the

transaction cost mitigating strategies. These are the strategies that allow outsourcing in

markets in which conventional transaction cost theory would characterise as ‘failing’.

4.1 Contact Stage

At the contact stage, the reputation of vendor, references and site visits and a ‘proof of

concept’ are necessary contact costs that must be borne by both client and vendor. In

the offshore context however, contact costs are invariably accentuated. Intermediaries

such as DTI Tradepartners organize visits by UK companies in trade delegations and

others such as SKP intervene to match clients with vendors and continue to monitor

relationships thereafter. Such intermediaries are increasingly prevalent in offshore

arrangements and are an important element in controlling initial stage contact costs.

Contracts

may

contain

clauses

for

dispute

resolution

via

the

London

Court

of

International Arbitration 7 . There are also an increasing number of conferences on

offshoring where potential suppliers convene to reduce contact and information costs.

7 Details can be found at http://www.lcia-arbitration.com/lcia/lcia/

21

This is in stark contrast to the position in the mid 1990s when very few, if any, trade

conferences on offshore AF processing were held.

Client A (of Global Infosys) informed us that they had cut contact costs following the

advice of an influential contact within a local accounting trade association with links

with an Indian vendor.

This significantly cut contact costs and the client explored no

further options. International accreditation standards such as ISO obtained by OPI also

reduce information costs, as does a web presence documenting outsourcing processes;

all of which are easily accessible via any web search engine or from India’s software

and services association, Nasscom.

The onshore presence of offshore vendors such as OPI, Efunds and WNS allows these

vendors to become increasingly involved in a competitive tendering process. Efunds

reported that having an onshore (legal) presence had facilitated their participation in

‘beauty contests’ in a competitive tendering process against other vendors.

Other

contact-stage opportunities exist for clients, for instance, EDS, Accenture, Unisys, and

PwC are the main providers of AF outsourcing to FTSE 100 companies and with the

exception of PwC, these vendors were established information technology outsourcers

before diversifying into AF outsourcing.

Clients may outsource to companies with

offshore processing centres, such as Accenture, therefore benefiting from offshore

service

provision

using

a

vendor

within

the

same

institutional

framework

and

consequently, less uncertainty.

A similar development is taking place in India, where

an

increasing

number

of

large,

established

software

outsourcing

providers

with

significant resource and

reputation such as HCL e-Serve (a subsidiary of HCL

22

technologies), GTL (formerly global telesystems) and Tata Consultancy Services’ joint

venture with HDFC “Intelenet Global Services” are diversifying into ITES including

various categories of AF outsourcing (Gupta, 2002). Entry by such firms has the effect

of normalising offshore activity and further reduces contact-stage transaction costs for

potential outsourcers.

4.2 Contract

All of the sample companies instituted service level agreements (SLA), which differed

in complexity. Global Infosys merely provided clients with a one-page letter outlining

promises on timescales and detail about process. The larger firms however included

more comprehensive SLA’s, extending in WNS to daily outputs, with provision

for

rewards should performance exceed expectations and sanctions should it not. A contract

with Efunds may even include a lease and sale-back option. This would involve Efunds

setting up, running and, at a later stage selling the offshore operation to the client

(Manager Efunds).

Service Level Agreement (SLA) schedules designed to incentivise the vendor were

reported, and found to be unique to offshore AF arrangements.

WNS for example

devise a gain-sharing formula on transaction checks. The MD explains: Getting back

to the old ways concerns a situation where companies will not check invoices etc below

a certain amount. In the old days half a pence would be important.

Today, an invoice

for £24 for example would just be paid because it might cost £40 to check. We say to

customers “pay us a percentage of what we find”. If we find a pound and we take 20p

then you are 80p richer, which is becoming standard. One client estimated we are going

23

to be paid £3.5 million from this reward mechanism alone! This type of checking can’t

be done in the UK because of the cost of resource”.

To control information asymmetries in offshore contracting, vendors were obliged to

produce regular summative financial information at regular intervals. At OPI and

Efunds, regular progress reporting was produced on an Internet ‘dashboard’, accessible

to the client (Efunds, OPI). Performance benchmarks and measures were derived from

ISO9000 quality assurance and control measures (OPI). The OPI quality control officer

explained how the specific measures comprising the content of the Internet dashboard

would be negotiated with the customer prior to migrating. To counter the absence of

lack of appropriate IP and privacy legislation in India, OPI include within their SLA an

option for clients to interview any staff who may come in contact with its accounts.

Also, contracts stipulate that frosted glass screens would prevent staff viewing other

client accounts and visitors would not be allowed access to work areas. All staff writing

materials and telephones are removed.

Staff can be searched and must sign non-

disclosure agreements.

During the fieldwork, the researchers were not allowed to tour

the OPI work area, which is protected by an armed guard and glass window. Measures

designed to counter transaction costs in one market failure theme may however

inadvertently impact another.

For example, the provision of sophisticated Internet

dashboards

to

counteract

information

asymmetries

in

offshore

relationships

may

increase uncertainty surrounding the security of data.

OPI contractually stipulate that they will not hold any client data on the India server.

Computers in India are disabled from Internet access and have no disk drives.

24

Inaltus

by contrast hold data on the Indian server and share offices with another company,

presenting possible security and intellectual property breaches. The Managing Director

of OPI described how his company’s legal presence as a New York accounting

company with an Indian subsidiary allows clients to pursue actio n in the clients’ own

judiciary. Sensitive financial documents including tax, mortgage loans, medical claims,

credit-card payments and auto leases were handled by vendors. In the case of Efunds,

WNS and OPI, this issue of data sensitivity was mitigated by holding all client specific

information on a server in the US and allowing real time access. Thus no physical

documents are ever held offshore. A manager at Efunds explained: “We don’t bring the

entire client database here (India). We’re sitting here and there’s the host company in

the US. We’re just tapping into it and processing data on it”. WNS and OPI used a

similar approach to Efunds, retaining data on the client’s network and having secure

firewalls to ensure data integrity post transition. As the data is accessed in real-time, in

the event of a disaster, the data is available on the onshore server. While all vendors

apart from Global Infosys reported they had a disaster recovery plan, the level varied

significantly, from a mirror site arrangement (OPI) to a general policy of moving laptop

computers between sites (Inaltus). Global Infosys have no disaster plan, as all accounts

are analogue.

Client A (of GI), themselves Chartered Accountants, mitigated the

potential for data loss by outsourcing only the accounts of low priority “category C”

clients whose loss as clients would not be considered disastrous.

Difficulties of bounded rationality in managing contingencies of offshore accounting

were stressed by Client A who were dissatisfied with the Indian providers’ knowledge

of VAT and considered this a potential contractual difficulty. Efunds explained how

25

offshore outsourcing is currently not subject to UK Transfer Undertaking and Protection

of Employment (TUPE) legislation, with the implication that

unlike their European

counterparts, Indian outsourcing companies are not currently obliged to employ the

clients’ existing staff. Thus the potential for internal resistance and information

impactedness is unknown at the outset, but was stressed by the Director of WNS: “In

any company you always have two camps; one at the senior level who wants to push

outsourcing and the internal saboteurs who are reluctant because their jobs are on the

line”.

External accreditation by vendors such as OPI to security standard ISO7799 also

reduces the cost on clients in devising and imposing security standards. The managers

at OPI and Efunds suggested that such accreditation reduces client uncertainties with

respect to the information available on the measures imposed by accreditation

procedures and standards. Capability maturity model standards (CMM) 8 have been

important in the Indian software outsourcing industry and are widely regarded as

important in facilitating trust 9 . The emerging E-services Capability Model (ECM), if

adopted, may also provide important process standards for the ITES industry, though

these are at present limited in their widespread adoption in offshore AF outsourcing.

8 Carnegie Mellon Software Engineering Institute www.sei.com

9 The majority (around 20 out of 37) of the world’s CMM level 5 (the highest level) are in the Indian software industry http://www.sei.com

26

4.3 Control

Prior studies have shown that loss of control of information is a major barrier to AF

outsourcing 10 and it comes as no surprise that transaction cost mitigating strategies were

particularly pertinent at the control stage.

The first area of consideration is migration of the clients’ AF products, process and

practices to the ve ndor. Secondly, the sample exhibited varying practices to control for

specificity of accounting processes.

Thirdly, monitoring costs are determined by

various operational strategies including an onshore presence.

4.3.1 Migration Processes

In accounting, products to be transferred are the AF software packages, processes are

the AF mechanisms and practices are the informal, undocumented or informal aspects

of the AF system 11 . The high cost of ensuring effective migration has led vendors to

adopt comprehensive migration plans.

OPI and Efunds map client processes and re-

engineer with minimal customisation onto the vendor’s enterprise resource planning

system. At OPI, clients are expected to use the Lawson ERP. AF processes are

reengineered and mapped by the account manager in the US onto an ERP user-

interface, modified and tested. In contrast, Inaltus work from products and processes

inherited from the client on migration, and therefore result in very low client migration

costs.

This is achieved by replicating client processes, systems and practices in India

10 A survey by the ICAEW revealed that the top three deterrents to financial outsourcing included: the potential for loss of control over information, undermining the management of the function and an expected increase in operating costs (Wood et al., 2001). A later survey by PriceWaterhouseCoopers of 81 CEOs or CFOs in 2002 revealed the top three concerns associated with financial outsourcing as loss of control (56%), confidentiality (56%) and security breaches (53%).

11 Many organisations will have informal systems to provide information required beyond the formal accounting system. Examples are excel spreadsheets, ma nual charts of casual staff, together with informal political routes to decision making that are rarely formalized.

which are sustained by regular telephone and web chat communication together with

structured rotation of staff between on and offshore.

With regard to informal AF practices, when AF is performed in-house, users and

providers are co-located and informal practices and tacit knowledge that is difficult to

transfer is often shared in the course of practice and socialization (Brown and Duguid

1991). Attempting to model these informal activities using formal methods such as

deployment matrices may be problematic in situations of resistance and information

impactedness. Decoupling accounting and transferring it offshore across distance and

time zones will inevitably disrupt this process of information sharing. Inaltus attempt to

counteract such migration costs by enabling informal contact between clients and the

India

based

staff.

However

such

interactions

require

lengthy

prearrangement,

complicated by the fact that the difference in time zones means that only a small part of

the working day in India and the UK overlap. In the offshore context, “same-time-same-

place interaction” requires long-distance travel, costly not only in direct travel costs but

also in terms of opportunity costs of managerial time. OPI on the other hand engage in

three months of parallel processing, both on and offshore, in the expectation of

capturing these informal aspects of accounting prior to ‘going live’. A manager at

Efunds explained their process: “The client relationship manager based in the UK

understands

client

needs

and

reports

on

service

levels.

We

bring

over

Indian

accountants to do the analysis. They shadow the processes for one or two months,

compare resources, prepare plans for telecommunications, processes and systems to link

adequately. They then return and train the rest of India staff” (Manager, Efunds).

28

4.3.2 Asset specificity and standardisation

OPI’s

model

of

customization

contradicts

sharply

with

Inaltus’s

who

impose

customisation to squeeze out all potential scale economies from accounting processing.

In refusing to impose standard or proprietary systems on clients, the Inaltus model

counteract concerns clients may have over lock-in arrangements using proprietary

platforms and also removes significant retraining and

restructuring costs should

accounting be brought back in-house or transferred to another vendor.

While clients

benefit from reduced transaction costs, Inaltus lose economies of scale. In many

respects, the transaction cost disadvantage is then biased towards Inaltus in acquiring

multiple proprietary client systems, in learning to use them, and in managing accounts

off different systems. A similar approach is adopted at GI who also avoid imposing

standard systems on clients, preferring instead to continue

working off the clients’

current system. As was the case in Inaltus, this practice imposes high set-up costs on GI

in terms of developmental and training costs. As expressed by a GI manager “The main

investment by us is training on the software to produce the records according to their

particular standards” (GI Manager, India).

At OPI, standardization of operations is centred on ISO9000 quality processes and a

Lawson enterprise resource planning system (ERP). An OPI manager reported, “This

provides secure, repeatable accounting services where clients approve the release of

daily work in progress into the general ledger system, and therefore retain a degree of

control over the activity”. While the model is clearly beneficial to the vendor, it carries

with it the disadvantage of imposing heavy transaction costs on clients as they prepare

for and migrate to the vendor’s proprietary ERP system in India, and in doing so,

29

burdening clients with high exit costs.

Recognizing this as a barrier to offshore

outsourcing, there are instances of clients of OPI negotiating to not use the Lawson ERP

system. OPI regard this as undesirable, contrary to their strategy of standardization in

order to reap scale economies in the Indian centre.

Opposing standardisation would

increase costs, increase the specificity of accounting skills and frustrate efforts to

replace staff during times of high attrition.

Prior to being spun-off as Efunds, the products, processes and practices of the Deluxe

accounting system were internalized and therefore highly specific.

After the spin-off,

potentially hazardous levels of transaction costs were mitigated in two ways. A notable

characteristic is that the client (Deluxe) is completely dependent on Efunds for all

accounting services and the vendor is dependent on revenue through continuation of the

relationship.

Both

are

therefore

exceptionally

dependent

on

one-another,

counterbalancing power in the relationship and leveling out opportunism.

At the start

of the relationship, Efunds was over-reliant on one client.

In common with onshore

arrangements between equally large clients and vendors, the potential threat of hold-ups

(Klein, 1996) in offshore relationships are constrained as it pursues its mandate to offer

third party work, thus claiming a share of the reputation externalities created by the

clients’ endorsement of the service (Jones, 2001).

OPI’s standardized approach helps reduce the specificity of processes and skills in India

and the amount of vendor side relationship-specific investments. Inaltus must however

retrain staff each time a new client is acquired and thus experience infinite levels of

human specificity.

Accounting labour at Inaltus becomes a heterogeneous input,

30

difficult to substitute between tasks.

Conversely, OPIs’ proprietary systems suggest

higher switching costs for clients than Inaltus. Small numbers of suppliers and a small

numbers of suppliers and a proprietary ERP system may locked-in clients creating high

exit costs and exacerbating opportunism 12 .

It is also however noteworthy that there

have been many reported difficulties in implementing business process reengineering

and

ERP

in

multinational

corporations.

OPI’s

approach

of

standardization

and

minimum software changes was attempted by the Dow Corning Corporation (Ross

1999) who encountered many organisational problems resulting from a ‘one-size fits

all’ approach to process change. Potential operational efficiencies from standardization

must be traded-off against increased client-side transfer costs.

4.3.3 Monitoring

Offshore vendors suffer asymmetries if clients withhold information pertaining to

transaction

demand,

satisfaction

levels

and

the

probability

of

contract

renewal.

However the asymmetry balance favors distant vendors who may withhold more

sensitive information from clients such as the sub-contracting of accounting to

alternative vendors who may fail the clients’ original selection criteria. The asymmetry

balance is an issue as it leads to mitigating strategies involving monitoring, onshore

presence and travel to India that add to transaction costs.

To mitigate client side costs associated with monitoring, vendors in the sample adopted

varying

configurations

of

onshore

presence.

GI

has

in

place

three

Chartered

12 Lawson ERP has 2,200 users as opposed to the top major international vendors such as SAP and Oracle with a larger global user base.

31

Accountants located in a UK office.

A GI manager explains the benefits of such an

arrangement: “Being there (in the UK), they will be able to know what the UK

companies or end-clients want. They (clients) get some level of comfort when dealing

with local vendors”. During the busy lead into the tax period, OPI dispatch US

accountants to India to supervise US tax returns and check for accuracy in process. OPI

also employ a local client manager, specified in the contract to be an American citizen

who works in close proximity to the client’s operations. The manager acts as a

‘straddler’, monitoring evolving client needs, performance and feeding back vital

control information to clients as required. Since clients of OPI have no direct contact

with the Indian centre, the client manager and the web-based dashboard provide the

mitigating strategies for control that would otherwise be costly for clients to ensure

open, transparent and symmetrical communication lines. Furthermore, a manager at

Efunds reported that an onshore presence is crucial to clients increasing volumes of

accounting work offshore: “You give the client a dedicated off-site/on-site manager. If

clients’ become comfortable, volumes move up” (Manager Efunds, India).

While

contractual exchanges may never be complete, there are few incent ives at Efunds to

withhold information from Deluxe, the client, owing to the mutual dependence between

both.

This is further reinforced via contractual gain sharing arrangements in the India

center that promote goal congruence.

Three features characterize and influence Inaltus’s approach to monitoring: high levels

of

process

specificity,

involvement

in

high

value

accounting

process

such

as

management accounting and non-standarised client processes. To accommodate these,

Inaltus’s strategy contrasts with OPI as they enable direct lines of communication

32

between client and the India centre using telephone and an online discussion forum. In

addition, the vendor’s staff have regular same time same-place contact with clients

informed by structured rotation of staff to the client site for training. We were informed

that Inaltus’s staff in India develop relationships with clients in the UK, and often know

them well by name and will be likely to have met.

5. CONCLUSIONS & IMPLICATIONS

Despite the appeal of outsourcing, offshoring, particularly in the accounting and finance

domain is particularly under-researched. This paper is a first step seeking to rationalise

the practice of offshore AF outsourcing.

A

transaction

cost

framework

applied

to

identify

outsourcing was extended to the offshore context.

the

viability

of

onshore

AF

Under this framework, classic

market or hierarchy decisions are defined by the trade-off between the costs of servicing

accounting in-house and the ensuing transaction costs in attempting to migrate and

manage the activity within market-based structures, increasingly located offshore.

Therefore, the first contribution of this paper is taking the TCE framework into the

domain of offshore AF outsourcing. As demonstrated in this paper, transaction cost

themes,

depicting

the

small

numbers

problem

from

insufficient

supply-side

competition, uncertainty and information impactedness between customers and vendors

are very relevant market failure themes rationalising offshore AF activity. Guided by a

transaction cost framework, the study systematically sought to identify the sources of

transaction costs in the offshore context and the accompanying transaction cost

33

mitigating strategies which underpin the outsourcing of activities otherwise precluded

by conventional transaction cost theory.

These may be equally relevant in other

practical

and

research

scenarios

governance models.

concerned

with

transaction

costs

and

adaptive

A further theoretical contribution of this paper relates to contemporary governance

models for AF outsourcing that are clearly adaptive to the offshore context.

Three

modes of management were in operation: a fully owned and operated offshore facility

(category I), vendors servicing former parents (category II) and conventional third-party

outsourcing (category III).

Associated with each were a series of transaction cost

mitigating strategies; which increase as ownership is divested from the hierarchy to

market (see Table V).

Category I, wholly owned offshore subsidiaries counterbalance transaction costs from a

small pool of vendors by effectively creating their own offshore market. Fully owned

offshore subsidiaries therefore demand few, transaction cost mitigating strategies.

Dedicated offshore facilities are often split from parent organisations in the drive to

focus on core capabilities (Prahalad and Hamel, 1990). Such arrangements are unique

for agency relationships, whereby both client and provider are exceptionally dependent

on one another: the client for service, the provider on continuing revenue ensuring

efficient, non-opportunistic outcomes. Tangible commitments including assets that are

non-transferable and have no salvage value outside the direct relationship together with

tightly defined service level-agreements between two trusted parties further bring down

transaction costs to levels that make offshoring viable in this category.

34

At the other end of the spectrum, as ownership and control diminishes in third party

offshore outsourcing arrangements (category III), such outsourcing is accompanied by

an array of innovative transaction cost mitigating strategies, which together provide the

requisite control mechanisms relinquished through ownership.

Site visits, process

mapping, periods of parallel processing, web-based based dashboards and an onshore

presence accompanied outsourcing to independent, third-parties.

Within this category however, vendors differed on the basis of standardisation or

customisation of client processes. This had a direct bearing on the specificity of assets

employed, transaction costs and the viability of third-party outsourcing. Customisation

as employed by category III providers, Inaltus and Global Infosys involves low levels

of transaction costs for clients at all three stages contact, contract and control. With

clients not tied into a particular accounting process or system and retaining mobility and

the

possibility

of

transfer

in

the

event

of

contractual

dispute,

the

set- up

cost

disadvantage is borne by vendors who face repeat costs with each new assignment from

inheriting and accommodating client idiosyncrasies without industry standards nor

generic

servicing

platforms.

Conventional

market

exchanges

therefore

appear

economical and rational by the standards set by conventional transaction cost theory

with respect to customised vendor practices.

Another contribution of this paper has been to present an additional insight into

governance choices in failing markets. The OPI case is perhaps revelatory precisely

because it presents a case of third-party

market

transactions

involving

frequent,

idiosyncratic accounting cycles under conditions of much uncertainty and potential for

35

loss of control. Under such conditions, conventional transaction cost assumptions would

predict hierarchical or trust-based contracts.

The transaction cost mitigating strategies

adopted by OPI and described in this paper are powerful influences in overcoming

market

failure

meaning

that

the

activities

that

were

hitherto

constrained

within

hierarchies can now also become subject to market transactions.

Outsource Partners International (OPI) demand clients standardise AF products onto a

‘one size fits all’ Enterprise Resource Planning System (ERP) which while successful in

removing idiosyncrasies of practices, reduces client uncertainties and allows vendors to

reap scale economies in accounting, increases the specificity of accounting, the risk of

‘hold-up’ (Klein 1996) and subsequent opportunism.

As for the category II type transactions that sit between the two governa nce models of

full control (I) and third party (III), our findings are consistent with onshore outsourcing

research where resource capabilities of large firms has enabled them to create their own

outsourcing possibilities (Jones 2001). In the sample of category II cases involving

former parent and outsourcing spin off, comprehensive outsourcing was enabled by

relational type contracts stemming from trust and minimum transaction specific

investments.

A further contribution of this paper is to examine some outsourcing relationships from

small and medium sized firms who have fewer resources to devote to creating

subsidiaries or creating their own market as large firms have been shown to be able to

do. Research has shown that it is precisely this size of firm who has most to gain from

36

outsourcing (Wood et al 2001), and in outlining the types of relationships pursued by

Small to Medium Sized (SME) enterprises, chartered accountants and offshore vendors,

this paper is a first attempt at depicting alternative governance choices and offshore

opportunities for the smaller, scale- inefficient firm. Future developments in the small

firm are likely to centre on category III relationships and shared service centres that

draw together cooperative ventures between smaller firms and network participants.

The role of industry associations, professional institutes and offshore vendors will be

instrumental in creating appropriate structures for the smaller firms to engage in

offshore opportunities.

In essence, this paper contributes a facet of transaction cost theory in the context of

market failure and globalisation.

The area is clearly ripe for continuing research into

practical strategies and the validity and utility of transaction cost economics depicting

make or buy governance choices for activities involving high managerial staff input

typically precluded from conventional make or buy decisions.

37

Acknowledgments:

This research was funded by a grant from the University of

Manchester for which we are grateful. We are also grateful to the interviewees in the

various case companies for their generous time and cooperation. Thanks also go to

Bob Scapens and Trevor Hopper for comments on an earlier draft.

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Table I

Main ITES Activities in India (Source: Nasscom)

Customer care : database marketing, customer analytics, telesales / telemarketing, inbound call centers, sales and marketing administration.

Accounting and Finance : billing services, accounting transactions, tax consulting and compliance, financial reporting and financial analysis.

Human resources : administration, education and training, payroll services.

Payment services : credit/debit card services, cheque processing, transaction processing.

Administration : claims processing, transcription and translation

Content development : design, animation, network consultancy and management

Table III

Transaction Costs in Offshore AF Outsourcing

 

TCE concept

Potential sources of transaction costs

Contact

Small numbers

Small numbers of suppliers for high value chain activity presents high search and switching costs. Vendor quality assurance.

Information

asymmetries

Contract

Bounded rationality

Communication and knowledge transfer. Impact of contingencies difficult to forecast due to high uncertainty in the offshore environment. Potential for resistance. Lack of compatible laws on privacy, intellectual property and security

Uncertainty

Control

Opportunism

Protecting against opportunism across time, space and country boundary. Communication and cross cultural difficulties. Lack of compatible laws on privacy, intellectual property and security.

Uncertainty

Table IV

Sample Description

 

Category of

Geographical

Use of

Service range

IS09000

Onshore

Use

Target

Number of

provision 13

spread

accounting

compliant

presence

of IT

clients

employees

software

OPI

3

New York and Indian office

Standardised

All AF cycles:

Yes

Yes

ERP Dedicated data links Scanning Dashboard

All types

50

USA

on Lawson

Total

30

India

 

ERP

outsourcing

 

Efunds

2

USA, India, UK

ERP mainly

Total accounting outsourcing Also call centre

Yes

Yes

ERP. Dedicated links, scanning Dashboard performance.

Large “Blue

1300 in total

SAP

chip”

 

50

accounting staff in Delhi

Inaltus

3

India, UK

Any

Total

No

Yes

Scanning of documents. Preparation in India. Reporting on a web site. Some ERP

Small-

15

in India

accounting

medium

5

in UK

outsourcing

 

Transaction

processing

 

Global

3

UK, India

Any

Total

No

Yes

Physical movement of documents via courier

Accounting

15

in India

Infosys

accounting

companies

3

in UK

outsourcing

   

WNS

2

India

Any

Transactions

Yes?

Yes

Scanning, dedicated

Airlines

900 in India

Speedwing

links

primarily

13 Governance: subsidiary (category 1), former subsidiary servicing parent (category 2), outsourcing (category 3).

Table V

Sources of Market Failure and Transaction Cost Mitigating Strategies in Offshore AF Outsourcing

Governance

Market Failure

Transaction Cost Mitigating Strategies

model

Category I:

Small numbers of offshore suppliers

? Full ownership enables systemic offshore innovation otherwise precluded by transaction cost theory in failing markets

Offshore

subsidiary

 

(GE, HSBC)

 

Category II:

Information

? Builds on already transferred products , processes, practices and trust developed in the previous in-house relationship

? Capital intensive investment, highly specific to single user (former parent) demonstrates credible commitment by provider and increases client’s power

? Both are exceptionally dependent: client for service, provider on revenue

Servicing

asymmetry

former parent

(WNS, Efunds)

Specificity

Uncertainty

? Provider claims share of reputation and endorsement by client

? SLA defines and monitors expectations including gain sharing

Category III

Information

? Prior to contracting: references, site-visits, matchmakers.

Offshore

asymmetry

outsourcing

(GI, OPI,

Efunds, WNS)

Specificity

? Client processes are mapped onto vendor ERP system and processes are shadowed during transition

? Parallel processing prior to going ‘live’

? Encouragement of contact with offshore centre facilitates trust

? Web based control facilities e.g. dashboard

Uncertainty

? Rotation of offshore staff to client site

? No requirement for standardisation: low set-up costs

? Standardisation creates high (provider) set-up costs & high (client) exist costs

? Disaster recovery plan

? Due diligence: fire walls, security procedures

? Privacy and intellectual property measures e.g. clients’ interview providers’ staff etc.

? Onshore presence in client country