Business Opportunities & Financial Outsourcing in Pakistan: Communication Gap A thesis submitted by Salman Danish to Department of Business Administration

In partial fulfillment of the requirement for the degree of MASTER OF BUSINESS ADMINISTRATION in Finance This thesis has been accepted for the FACULTY OF BUSINESS ADMINISTRATION by:

Name of Chair Chair

Name of Advisor Advisor

Business Opportunities & Financial Outsourcing in Pakistan: Communication Gap

CHAPTER 1 INTRODUCTION Nowadays, there is a recession in almost every economy. There are many reasons behind it including bad economic situation of Pakistan, but the most important is the financial crises of the world due to Sub Prime Crises. Due to the same, organizations now emphasizing on developing an active sourcing strategy, making a combination of internal team having assistance from external workforce, via outsourcing and developing a relationship as helping each others. This step of tactical advancement is made expedite by making cutthroat pressures and indistinctness. This paper is to examine the outline of sourcing strategy, which has been grown by making various societies, groups or forums, and the forms of strategic advantage that have been realized so far by those sourcing strategies. Despite the advantages realized, in the most of the societal strategy supervision are found to be casual and the traditions of these societies, groups of forums found opposing to further outsourcing. In previous era, Volks Wagon also decided to outsource a few of its operations, as mentioned by Horngren, Foster (Datar; 386), VW has completely outsource manufacturing to a team of carefully selected supplier-partner in a radical experiment in production operations. But the future growth and success of outsourcing, is mostly in the services of firms, and not completely in the products. Those service providers are commonly based on Non-Producing Operations of the Organization, and cover various departments within an organization. Non-productive operations that are usually outsourced to third party service providers may include;

Business Opportunities & Financial Outsourcing in Pakistan: Communication Gap

HR Operations: Recruitment process Appraisals Counseling, Coaching & Mentoring Training and Development

Selling & Distribution: Marketing Selling Distributors Agencies

I.T. Operations: Hardware Maintenance Software Maintenance Database Backups Data Compliance, Confidentiality & Security Disaster Management & Recovery Plans

Accounting & Finance: Taxation Audit Controls

Business Opportunities & Financial Outsourcing in Pakistan: Communication Gap

Planning & Reviews Book Keeping & Account Finalization Looking towards the Financial Institutions providing a vide range of services to their clients. There are following various modes of outsourcing and is carried in variety of areas that include:

1. Tax Advisors a. Tax Deductions b. Tax Appeals c. Tax Hearings

2. Filing of Returns a. Income Tax b. Sales Tax c. Federal Excise Duty (FED) d. Custom Duty

3. Audit coordination 4. Internal Audit 5. Basic book keeping 6. Accounts finalization These are the ground outsourcing areas in financial sector of an economy. And in order to maintain a balance between the financial operations and outsourced

Business Opportunities & Financial Outsourcing in Pakistan: Communication Gap

entities, organization must review the operational framework (Terms of Reference) to avoid a Communication Gap.

1.1 Background
This dissertation endeavors for identification if there is a communication gap between, what an organization expects from an external firm and what an external firm believes in providing the services to the outsourcing organization.

1.1.1 Contextual Frame Despite some negative perceptions regarding the outsourcing industry in Pakistan, various organizations are now looking towards finding a way thru which they can minimize their expenses and can have an expert view over to their non-operational divisions, with high concentration over to the core operational activities. Based on the current economical situation, organizations tend to hire the external accounting & financing service providers, which can only provide organizations what they are looking for, having an expert view on accounting & financing operations as well as saving time and money of the principal organization, which results in relaxation for principal organizations for concentrating in their core activities.

1.1.2

Problem Identification/ Statement

The basic problem faced when a corporate is outsourcing a division to a third party, especially when it is finance division, is when third party restricts itself from engaging into various activities through signing a specific Term Of Reference (TOR) for the 4

Business Opportunities & Financial Outsourcing in Pakistan: Communication Gap

assignment. However the Organizations that are outsourcing their departments to third party service providers, assume that all the obligations of department or division are held upon the third party service provider.

1.2 Purpose of the Research/study The objective of this dissertation is to identify the business opportunities and financial outsourcing in Pakistan with overview of the communication gap. 1.3 Research Questions The current dissertation is going to focus over below mentioned questions: Is the proposal of outsourcing gaining the same results as required when starting the relationship? Is your leading team for outsourcing fully employing the tools in the workplace that are required for an effective management of the relationship? Is there any change of regulatory environment that has brought your organization at stake for the outsourcing efforts? Is there any surety for the integrity of the operations of your firm from the service providers? 1.4 Justification/ Significance To identify and govern the policies that can effectively work in the favor of both organizations. And to create a balanced link between the outsourcing operations within the scope as agreed between the two. 1.5 Scope (1.4 and 1.5 can be combined as one heading) 1.6 Delimitation of research 5

Business Opportunities & Financial Outsourcing in Pakistan: Communication Gap

1.7 Definition of key words

Business Opportunities & Financial Outsourcing in Pakistan: Communication Gap

CHAPTER 2 LITERATURE REVIEW Outsourcing is defined as the process of getting goods manufactured or getting services from an external party rather than producing the goods or getting services from within the same Organization. Today outsourcing is considered as the best mean for both reducing costs and achieving strategic aims. Outsourcing has various benefits despite to the fact that there are also some demerits attached to it. The main risk involved in outsourcing is that in outsourcing, organizations have to share their products, services or any other confidential data with the outsourcing agencies and have to leave them in the hands of someone who is beyond their control. Various ethical issues and general practices are at hand here, like trust worthiness. In the past few years, outsourcing has become more popular in small and medium business and organizations. "Outsourcing is becoming popular even in small and midsize companies. Nowadays, a small business may not have staff members such as Human Resources recruit. As the Internet transforms the way businesses communicate with their clients, vendors, and employees, many of these functions are being handled by outsourcers." Because of the popularity in small and medium sized businesses, and even large corporations, the popularity graph of outsourcing is on upward trend. Now market giants are also emphasizing on outsourcing tactics for various divisions of their core operational or non-operational activities. As an example, IBM and Compaq are the two giants in computer manufacturer & assembler, and are drawing attention to use outsourcing to overcome the storage problems. "IBM

Business Opportunities & Financial Outsourcing in Pakistan: Communication Gap

and Compaq are offering distinctly different models, however. Compaq rents storage hardware and software that are kept on the customers' premises. The service is tailored to IT managers wary about giving up control of their storage," (Lelii). Another example for market giants is of Volkswagen Company. "VW has completely outsourced manufacturing to a team of carefully selected supplier-partner in a radical experiment in production operations." The future of outsourcing is mostly in the services of firms, and not completely in the productive operations. Another way of outsourcing that is showing a fast growing energy is offshoring, i.e., getting products or services from producers or service providers residing in any other country and not where the outsourcing firm is located. Many giant corporations are tending to achieve strategic efficiency by offshoring basic transaction processing or call centers like service help lines. For example, Deloitte estimates that US Financial services industry will offshore US$356 billion in the next five years after 2003. The Financial Institutions are providing a vide range of services to their clients not only in Pakistan but in other countries around the world. There are following various modes of outsourcing and is carried in variety of areas that include: 1. Tax Advisory a. Tax Deductions b. Tax Appeals c. Tax Hearings 2. Filing of Returns a. Income Tax b. Sales Tax 8

Business Opportunities & Financial Outsourcing in Pakistan: Communication Gap

c. Federal Excise Duty (FED) d. Special Excise Duty (SED) e. Central Excise Duty (CED) f. Custom Duty 3. Audit coordination 4. Internal Audit 5. Basic book keeping 6. Accounts finalization These are the few sectors of Pakistan economy that are highly emphasizing on the outsourcing of their financial & other operations:

Textiles and Garments In the Textile and Garment sector of Pakistan, outsourcing is seen to be an active part of business processes. Textile & Garment sector of Pakistan is now heavily emphasizing on outsourcing their financial operations to well known and reputable third party service providers, resulting in highly cost control due to this outsourcing as well as getting higher level of expertise in routine tasks of the organization. Due to the outsourcing of financial operations, Organizations are now at ease to emphasize their expertise in their production or development area.

Cement Sector In the Cement sector of Pakistan, outsourcing is seen to be an active part of business processes. Cement sector of Pakistan is now emphasizing on outsourcing their financial operations to well known and reputable third party service providers,

Business Opportunities & Financial Outsourcing in Pakistan: Communication Gap

resulting in highly cost control due to this outsourcing as well as getting higher level of expertise in routine tasks of the organization. Various Cement producing Organizations are now saving huge amount through reduction in layers in hierarchy of Finance / Account Division, and are now moving towards better profitability. Due to the outsourcing of financial operations, Organizations are working for the enhancement of their production capacity and their production activities. New researches are also carried out in the area of Cement sector, coming up with a variety of new products that include Grey Cement, White Cement, Hi-Bonds, Tile Adhesives, Sealers, Sealer Cements and many more of the same kind.

Financial Institutions Various Financial Institutions including; Non Banking Financial Corporations (NBFC), Commercial Banks, Development Financial Institutions (DFI), Leasing Companies, Saving Institutions, Assets Management Companies, Insurance Companies, and many more are also looking forward for hiring services from third party service providers for their specialized working areas like SOPs, Equity trades, Lending & Borrowings, Asset Management, Projections, Estimations and many more. Currently, Financial Institutions in Pakistan, are hiring various professional organizations, a few of big names providing these services in Pakistan are: A. F. Ferguson, Ford Rhodes Sidat Hyder, KPMG Taseer Hadi, Anjum Asim Shahid Rehman & Co., JSF Consulting Private Limited, TAG Consulting Private Limited, and many more.

10

Business Opportunities & Financial Outsourcing in Pakistan: Communication Gap

IT Based Service Centers (Call Centers, Service Centers, Software Houses & etc.) It is a surprising but a ground reality that I.T. based services sector has not shown a remarkable progress in Pakistan, particularly when it is compared with India. Currently there is an un-established industry in Pakistan, a few call centers are still working in Pakistan, opened by financial institutions or some overseas Pakistanis, and almost all of them are contributing towards the outsourcing factors of financial sector.

Foreign investment in Pakistan A large number of Multinational organizations are operating their businesses in Pakistan for around thirty years or some more. But no any new or remarkable entry has been reported in Pakistans market. These Multinationals are currently covering these industries: Cement industry, Textile sector, Oil & Gas exploration / refinery / marketing, Electrical equipments, FMCG, & other consumables, Medicines & Medical equipments, and Chemicals etc. These Multinationals are also now trying to remain in competition by emphasizing on their core operations, after outsourcing the non-operational activities considered as fat of the organizations.

11

Business Opportunities & Financial Outsourcing in Pakistan: Communication Gap

CHAPTER 3 METHODOLOGY Chapter 3 portrays the assurance of the methodology exercised for collection of data for investigation and ensures the pursuance of proper procedure thereon. This chapter is systemized with the help of nine headings arranged as: Introduction, objective, research design, research purpose, and selection of sample, research instrument, validity and reliability, process of data collection, data analysis technique.

3.1 Introduction The aim of this chapter is the provision of an overview for the methodological approaches and research design that can be selected for relating to a study on the factors of Financial Outsourcing in Pakistan (Communication Gap). In the exploration of the phenomenon of these outsourcing, the dissertation shall investigate the effect of Communication Gap on the Financial Outsourcing, in the various sector contributing towards the economic growth of Pakistan and seek to answer whether or not the communication gap discussed herein, can be overcome. In the light of different literatures reviewed, the market leaders are capable of overcoming the above cited gap, and there is a possibility of joint efforts contributing towards the economical growth as One Nation. A proposal for implementation of the guidelines and rules & regulations for the service providers of Pakistan shall be proposed, followed by the analysis of secondary data extracted by conducting Group Discussions, Interviews, Open Forums and working with the Chartered Accountants of Pakistan, and then the proposal shall be defended through empirical evidence.

12

Business Opportunities & Financial Outsourcing in Pakistan: Communication Gap

3.2 Objective The objective set for the present paper is to classify the Business Opportunities & Financial Outsourcing in Pakistan (Communication Gap).

3.3 Research Design According to Beiger and Gail (1996) the research design is the systematic fine points of the dissertation with the help of which, data collection is carried, and its aim is to define the set of methods and procedures that assists in testing the research hypothesis and with a degree of confidence. In this study the data collected from various sources was used as substantiation in decision making and testing hypothesis. Gay and Peter (2000) had provided four types of research design mentioned below: Descriptive Research Design Correlational Research Design Causal-comparative Research Design Experimental Research Design

3.3.1 Descriptive Research Design It involves collecting data in order to test hypothesis or to answer questions about the opinions of people on particular issue. It is also called Survey design.

3.3.2 Co-relational Research Design Involves collecting data to determine whether and to what degree a relationship exists between two or more variables. The degree of expression is expressed as co relation coefficient.

13

Business Opportunities & Financial Outsourcing in Pakistan: Communication Gap

3.3.3 Causal-comparative Research Design This involves selecting two groups differing on some independent variable and comparing them on some dependant variable. These two groups are known as experimental and control groups.

3.3.4 Experimental Research Design Involves an experimental study in which at least one independent variable is manipulated and other relevant variables are controlled and effect is observed on one or more dependant variables. The research design used in the current dissertation belongs to the co-relational research category. The variable types are dependant and independent. Different tests were use to measure the relationship between the dependant and the independent variables. The research design aimed to ensure that the obtained results were due to the factors under study and not to extraneous or irrelevant factors. It helped in achieving greater accuracy in the results and increased confidence in outcome of the research.

3.4 Research Purpose Research scholars have identified three main purposes to the research activity. These are the exploratory, the descriptive and the explanatory purposes (Saunders et al., 2000).

3.4.1 Exploratory Exploratory research unfolds through focus group interviews, structured or semistructured interviews with experts and a search of the relevant literature (Saunders et 14

Business Opportunities & Financial Outsourcing in Pakistan: Communication Gap

al., 2000). Its primary purpose is the exploration of a complex research problem or phenomenon, with the objective being the clarification of the identified complexities and the exposition of the underlying nature of the selected phenomenon. In other words, and as Robson (2002) explains, exploratory research investigates a specified problem/phenomenon for the purpose of shedding new light upon it and, consequently, uncovering new knowledge.

3.4.2 Descriptive Punch (2000) explains the purpose of the descriptive research as the collection, organization and summarization of information about the research problem and issues identified therein. Similar to the descriptive research, it renders complicated phenomenon and issues more understandable. Danes (1990) definition of the descriptive research and its purposes coincides with the stated. Descriptive research entails the thorough examination of the research problem, for the specified purpose of describing the phenomenon, as in defining, measuring and clarifying it (Dane, 1990). Jackson (1994) contends that all research is partly descriptive in nature. The descriptive aspect of a research is, simply stated, the (1) who, (2) what, (3) when, (4) where, (5) why, and (6) how of the study.

3.4.3 Explanatory Miles and Huberman (1994) define the function of explanatory research as the clarification of relationship between variables and the componential elements of the research problem. Explanatory research, in other words, functions to highlight the complex interrelationships existent within, and around, a particular phenomenon and contained within the research problem (Miles and Huberman, 1994). Expounding 15

Business Opportunities & Financial Outsourcing in Pakistan: Communication Gap

upon this, Punch (2000) asserts that explanatory, or causal research, elucidates upon the nature of the problem under investigation and explains the basis for the proposed solution. It is an explanation of the complex web of interrelated variables identified and follows directly from a clearly stated central research hypothesis and research question. The research purpose of current dissertation is explanatory as the primary goal is to identify the impact the relationship of dependant and independent variables. 3.5 Selecting a Sample Selection of sample is a very important step in conducting a study because the quality of the sample determines the generalizability of the results. A primary characteristic of good sample is the degree to which it is true representative of the population from which it was selected Gay & Diehl (1992). Sampling technique can be classified into two types Probability Sampling Non-Probability Sampling

3.5.1 Probability sampling In probability sampling, selection of the sample is based in a way that each individual in the population has an equal chance of being selected. It is this concept of "known chance" that allows for the statistical projection of characteristics based on the sample to the population Gay & Diehl (1992). As an advantage of probability sampling, sampling error can be calculated easily. Sampling error is the degree to which a sample may differ from the population. Probability method includes. Random sampling 16

Business Opportunities & Financial Outsourcing in Pakistan: Communication Gap

Stratified sampling Cluster sampling Systematic sampling 3.5.2 Non-Probability Sampling In non-probability sampling, the selection of the sample carried in a way that the chance of being selected for each individual from the population is unknown. Indeed, the selection of the subjects is random or subjective, as the researcher relies on his/her experience and judgment. Resulting in, no statistical techniques for the measurement of sampling error, and the degree to which the sample differs from the population remains unknown and therefore it is not appropriate to project the sample characteristics to the population (Saunders, 2000). Non-probability includes: Convenience sampling Judgment sampling Quota sampling Snowball sampling

3.5.1.1 Random Sampling In the process of sample selection, the sample is drawn in a way that all the individuals are from defined population and have an equal and independent chance of being selected. It is the best single way to obtain a representative sample. In the current dissertation the random sampling method is obtained and is employed over the various organization representing different sectors of Pakistan.

17

Business Opportunities & Financial Outsourcing in Pakistan: Communication Gap

3.6 Measuring the validity and reliability In order to reduce the possibility of getting incorrect answers, attention needs to be paid to validity and reliability (Saunders et al., 2003).

3.6.1 Validity Validity is concerned with whether the findings are really about what they appear to be about (Saunders et al., 2003). Validity defined as the extent to which data collection method or methods accurately measure what they were intended to measure (Saunders et al. 2003) (Yin, 1994) states, no single source has a complete advantage over all others

3.6.2 Reliability According to Saunders et al. (2003), reliability means the degree to which the methods of collecting data will provide steady findings, consistent observations would be found or end results reached by other researchers or there is precision in how sense was made from the raw data. The role of reliability is to minimize the errors and biases in a study [Yin (1994)]. This means that reliability is to ensure that during the operations of the study, all the times the data collection is processed; it will be repeated with the same result. Saunders et al. (2003) asserts that there may be four threats to reliability. The first of these is subject of participant error, which means that a questionnaire may generate a different result at different times of the week. The second threat to reliability is subject or participant bias, which is when interviewees may have been saying what they thought their bosses, wanted them to say. Third, there may have been observed error that different interviewer may approach the questions in different ways. Finally, 18

Business Opportunities & Financial Outsourcing in Pakistan: Communication Gap

there may have been observer bias, which means that there may have been different approaches to interpreting the replies. The work on this thesis started with a considerable literature study. The literature came across (research papers) was from several authors and most of them covered the Financial Outsourcing and had a great coverage for the communication gap mentioned in the Thesis Paper, which meant that the covered area of the topic has been taken in the lights of these papers. It is therefore suggested that bias, form reading only one author and reading only about one topic, assured and held at a minimum level.

3.7 Data Selection The data selection is the significant part of the methodology, in current dissertation the data of various organization involved in the business of third party accounting service provider as well as from various organizations who outsourced their functions and had variety of experiences based on to these outsourcing.

3.8 Data Collection The data collection is based on the interviews with third party service providers (especially Chartered Accountants), Heads of different Organizations (who have outsourced their operations), Group discussions, Counseling sessions with working in outsourcing.

19

Business Opportunities & Financial Outsourcing in Pakistan: Communication Gap

3.9 Statistical Technique From the analysis of data the pattern shows that Linear Regression statistical method can be adopted for analysis and interpretation can be made for drawing conclusion of dissertation.

20