The third-party solution

Executives are discovering that offshoring is not just about cost savings, it’s also about freeing staff from the drudge work

By Paul Brent
Photographs : George Whiteside

Outsourcing pioneer:  Paul Dunnett remembers  initial concerns from  staff that people here  might lose their jobs

Paul Dunnett remembers when he first seriously thought about outsourcing some of his firm’s accounting work to India. It was fall 2002 and he was meeting with a US efficiency consultant who was discussing off-shoring. Dunnett, the former CEO of Horwath Orenstein, was intrigued. While not completely convinced, he brought the subject up at the firm, where, he says, they all laughed at him. Undaunted, he decided to give it a shot.

That December 2002, the firm sent in a trial batch of 20 personal tax returns with names and personal information blacked out for processing. And with this initiative, he believes, Horwath Orenstein became the first accounting firm in the country to outsource to India. “They had never seen a Canadian tax return before, and they did a great job,” says Dunnett. The following tax season, the firm sent off 15% to 20% of its individual tax returns for processing, the next year it sent 100% of its individual returns and the following year it began sending over the simplest corporate returns.

The practice of using outside resources to perform activities traditionally handled by internal staff and resources is not new. Companies have hired contractors for particular jobs or to level off peaks and troughs in their workloads for years. In its current form outsourcing has been employed with great success by companies such as General Electric and Procter & Gamble. While the most common reasons to outsource used to be costs or head-count reduction, today the drivers are more strategic and focus on keeping value-added activities in house where an organization can better utilize its own core competencies. Many executives are discovering offshoring is about corporate growth, making better use of skilled staff and even job creation, not just cheap wages abroad. Labour savings from global sourcing may still be substantial, but it’s minor compared to the enormous gains in efficiency and productivity.

For Dunnett and other proponents of offshoring, the benefits of sending work to a place like India are easy to grasp: cost savings, lengthening of the workday by having tasks accomplished while North America is sleeping and, perhaps most compelling, eliminating the need to staff up for the two or three months of year-end or burning out key staff during tax season. But those firms that have resisted the urge to join the offshoring revolution should ask what the risks are to practices that outsource. Are jobs lost? Is staff nervous and unhappy? Do security-conscious clients bolt?

Proponents say that while these questions are legitimate, the challenges can be quickly overcome. “When we started five or six years ago, there was a bit of initial concern from staff in the sense of ‘Am I going to lose my job?’ ” says Dunnett, now Ontario region managing partner of Meyers Norris Penny since Horwath Orenstein merged in 2008 with the Calgary-based company. While cost savings seem the most immediate benefit of sending work to a lower-cost country such as India, the biggest win is that staff is freed from the annual drudge work and long hours of data preparation that come with tax season. “It means that they are not sitting here doing data input,” says Dunnett. “Staff is not working the same hours during the busy season that friends in other firms do because the work is done for it.”

One of Dunnett’s projects now is to duplicate the successful Horwath experience with outsourcing to the Meyers Norris Penny part of the 2,000-person-strong company. “We laugh about it now that we have done it, but we remember the big mind change. You can’t just walk across your office and see your work being done,” he says. “The sheer fact that your work is being done on the other side of the world is a big mind-set change for accountants.”

Because Dunnett’s company was an outsourcing pioneer and today sends off thousands of personal and corporate returns to India annually, he has had a front-row seat as competitors have tried — and often failed — to follow Horwath’s lead. “A lot of firms will try it, but then because of some little technical challenge will bail out of the whole process,” he says. “I don’t know if that is really because of the technical challenge or because they couldn’t conceptualize the whole thing in the first place.”

Todd Trowbridge’s firm took the plunge offshore a few years ago and has outsourced bookkeeping since 2007

MSCM LLP tried and abandoned outsourcing after two tax seasons of sending out a portion of its T1 returns. “I think it was mainly on our end that it didn’t work,” says Rosario Suppa, a partner with the Toronto firm. He found MSCM did not have the volume of returns to make the process worthwhile, and although the firm was impressed by the level of knowledge of the Indian preparers, they asked too many nuisance questions. “Inputting of slips is not the major part of the return,” he says. “What we find we encounter a lot here is followup with the client, followup with brokers on investment accounts, and followup with the individual partners. None of that stuff can be handled over there. India would make sense if we had straightforward returns with a lot of slips,” says Suppa.

One large hurdle firms have to overcome is going digital and running a paperless practice. To successfully offshore work to an accounting hub such as India, returns have to come in a digital form or a system has to be in place to convert them to an electronic format as they come in the door. It’s such technical details that trip up some firms. One accounting practice that Dunnett advised began outsourcing only to balk at the cost of converting to an all-digital environment. In another case, one accounting firm that was excited about offshoring backed away after realizing its newly purchased $20,000 photocopier would have to be replaced with a high-tech scanner capable of digitizing the office. “It just shows they are not really committed to change,” Dunnett says.

Where cost-cutting was once the driving force behind outsourcing, in today’s world the shortage of skilled workers in Canada and the US is driving the adoption of outsourcing to India. The Toronto Financial Services Alliance, an association representing the financial services industry, government and academic institutions that was created to promote Toronto as a premier financial services centre, warned in 2007 that the financial services sector faces a growing lack of critical talent. While that is partly due to the aging of baby boomers, there is also the fact that the hours in corporate tax work have increased in the post-Sarbanes-Oxley world. The recent economic downturn might ease that pressure, however, as merger and acquisition-related work dries up and some accountants consider delaying retirement plans.

Admittedly there is a cost-reduction aspect to outsourcing, says Dunnett, but there are other benefits. “Clearly, there is money to be saved, and it seems odd coming from an accounting firm, but for us this is not a money thing. We see it as something we need to do to be an employer of choice. We are not doing it for the money.” So how does outsourcing make Dunnett’s firm a coveted place to work? Simple. As tedious tasks such as data input and reconciling are offshored, staff gets to handle challenging, value-added work such as consulting and strategy.

While the drive to outsource accounting is at its heart a people issue — not enough people willing or able to do much of the tax-preparation work in Canada and the US — technology is providing the solution by allowing digital data streams to make time and distance irrelevant. At first the idea that all incoming tax information from clients needs to be converted from paper to electronic versions so it can be accessed by accountants halfway around the world may seem daunting and insecure. But in fact that step can add additional security, says Glen Keenan, president of third-party outsourcing firm Xpitax, which has about 15 Canadian CA firms as clients as well as 300 US accounting firms.

How Xpitax’s service works is simple: all tax files are stored at its ultrasecure, Boston-area data centre. Accountants in India “handle” tax returns only in the most virtual sense. They work on files from screenshots in a sterile setting on the other side of the world and can only access the Boston server from their office’s unique IP address. That keeps out information thieves, no matter where they are located, while it is all but impossible for someone in the Indian outsourcing facility to do anything with the data even if he or she wanted to.

“There is no paper, there are no pencils — it is a completely paperless environment,” says Keenan. “All the security is here. I can say with confidence that the security of our data centre will dwarf any CA firm in the country right up to the big four,” he says. Compared with the security of most CA firms on both sides of the border where offices can be less than secure and people routinely tote around confidential financial information on laptop computers, says Keenan, “we are decreasing risk in more situations than we are not.”

While the issue of security trumps the list of reasons people say that they are wary of outsourcing, Keenan says others include quality concerns, loss of control (and jobs) and potentially unhappy clients.

Keenan, a veteran Deloitte & Touche CPA, started with Xpitaxsix years ago when it was the experimental side venture of Bos-ton-area firm Kirkland Albrecht & Fredrickson. “It went from a pet project to a business,” he says. Xpitax’s former parent firm retains a minority stake in the outsourcer and is one of its best clients. “They outsource bookkeeping work, corporate tax work, and they have done some back-office audit work. This is a firm that made it a mission to be successful and to do things a little bit more cutting-edge than most.” And Kirkland Albrecht & Fredrickson claims its revenue has grown by about 50% to about US$9 million today — with the same physical space and the same number of people — by using Xpitax for outsourcing over the past six years.

India has become the go-to destination to outsource accounting work from countries such as the UK and the US because it represents a huge pool of English-speaking top talent. With 140,000 practising chartered accountants and another 350,000 pursuing the designation, according to the Institute of Chartered Accountants of India, a trip to the eastern office will mean a flight to the subcontinent for an increasing number of firms. (By comparison, membership of the Canadian Institute of Chartered Accountants totals about 74,000 chartered accountants and 10,000 students.)

While a comparison of CAs in India to western CAs is like comparing apples to oranges, Dunnett has no complaints with the quality of his Indian partner’s work. “They do better input than we do,” he says. But his endorsement comes with a caveat. India has to be involved at the start of the process, not midway through. “If I can send them a trial balance and have them produce the financial statement tax return for me, then I see a benefit. But if I can’t give them the trial balance, if I was giving them the actual corporate tax return, then the real benefit of what they are doing starts to break down. The real benefit is just the input, not the actual output. Even if they mess up, we still have the value of the input.”

2020 Canada, a volunteer membership group for accountants that provides training and services to small and mid-sized accounting firms, has found that those outsourcing to India are largely the mid-sized accounting firms. Most Canadian sole practitioners, meanwhile, just don’t want to give up control, says Richard Latimer, 2020 Canada’s chief visionary officer. He acknowledges that firms have to be committed to the concept of outsourcing if it is going to be successful. “There is a bit of a process change that you need to do at your firm to accommodate the methodology. If they are not willing to make those accommodations in their process, they may have a difficult time in doing it,” Latimer says. “Those that do buy into it would never go back.” 2020 Canada advises firms experimenting with outsourcing work to India to do at least 100 tax returns before deciding on the merits of the process.

Like some fine wines, not all accounting functions travel well. The list of what not to outsource includes anything that falls under the definition of high-value, high-touch client service. That includes new business consulting, strategic forecasting and budgeting, business valuations, tax planning, corporate financing, business succession, estate planning and wealth management.

Todd Trowbridge, a principal with the 10-person Toronto firm of Trowbridge Professional Corp., has outsourced bookkeeping since late 2007 and is in its third tax season having returns done by Indian accountants. The firm took the plunge following a presentation on the potential benefits of offshoring.

“It’s worked out quite well, and more so on the bookkeeping side,” says Trowbridge. He has found that the regular contact and reporting required in its bookkeeping practice is ideal for outsourcing. “Because they are involved throughout the year, I think they have a much better idea of what is happening with a client, whereas with a tax return they are doing that once a year and it may not necessarily be the same person working on the file.”

Trowbridge is cautiously embracing tax outsourcing: about 20% of his clients’ returns were processed by the firm’s Indian partners last year and there is no hard target for the current tax year. What remains in Canada is the complex tax work that the firm is reluctant to have done by a third party. “We do a lot of Canada-US and expat returns, which some of them may struggle with. They are quite a bit more complex,” says Trowbridge. “With a straight Canadian or US return, they would generally be pretty good.”

The firm does not advertise that it is sending work overseas, but it does make clients aware that it engages in third-party outsourcing either locally or overseas in its engagement letter. “You get the odd client who will ask or be curious. But for the most part they trust you are looking after their best interests.”

Outsourcing experts do advise firms, however, to tell clients they engage in outsourcing. “You want to disclose it to your clients,” advises Keenan. He encourages firms to explain to their clients either verbally or in writing that outsourcing of lower-level work is being done so that the firm can focus on higher-value tasks such as consulting and tax planning.

“You will have a handful of people who for some reason say no. That’s fine, you won’t send those returns.”

In Canada, firms are not required to tell clients that they are outsourcing their accounting work. “But we strongly suggest it,” says Peggy Tyers, president of 2020 Canada, which organized a seminar on outsourcing with Keenan.

“We have always been very open about it — it is in all of our engagement letters,” says Dunnett. “Clients are very supportive. It’s something they know is common in other industries and it helps to change their view of the firm — they see us as being a very progressive enterprise.”

For Trowbridge, the most obvious benefit of outsourcing is time. “Going back to the bookkeeping side, we had a lot of trouble finding qualified bookkeepers to service our clients,” he says. “If we could not find anybody, we were stuck doing it ourselves and we just didn’t find we could do it very efficiently. Any good bookkeepers we found were completely booked because they were good.”

When it came to adding bookkeeping clients the firm was constrained, but now through India it is able to offer book-keeping to its current roster of clients. “We had only one bookkeeper we were happy with and there were too many clients for one person to handle all the data entry,” Trowbridge says. “I felt she could manage many more clients if she was only required to review and respond to questions from the outsource team, and this has turned out very well with outsourcing.” It has transformed bookkeeping from a service the firm was reluctant to offer to more clients to a modest money-maker.

Trowbridge had made the shift to a digital operating environment shortly before its linkup with India. “We had converted to a paperless environment just before we started outsourcing the first tax returns, so we were ahead of the game,” he says. “By the time we had started bookkeeping we were already completely paperless, at least from our clients’ point of view. We were already scanning everything, although going paperless is a big process and it’s somewhat costly.”

The big four accounting firms also looked to India as a place to alleviate the shortage of qualified accounting and advisory people in North America and Europe. They have established their own offices on the subcontinent.

For firms looking offshore, the ability to bulk up at peak season and the cost savings from skilled people willing to work for less than North American wages may have been two of the drivers to India and other low-cost countries. While the savings are not as great as many firms might have expected, firms such as Horwath Orenstein and Trowbridge Professional Corp. have found that the benefits are readily apparent in the efficiency of their operations.

Paul Brent is a Toronto-based writer