Outsourcing and Offshoring of Finance Activities
Terjesen, Siri A. (2006) Outsourcing and Offshoring of Finance Activities. In Kehal, H. & Singh, V. (Eds.) Outsourcing and Offshoring in the 21st Century. Idea Group Publishing, Hershey, Pa., pp. 209-228.
This chapter focuses on the outsourcing and offshoring of finance activities in the firm from firm, host country and home country perspectives.
Globalisation, technology, regulation changes, stakeholder pressures, and firm re-organisation changes present challenges and opportunities to firm finance functions to improve their contributions to the business. One of these opportunities is the outsourcing and offshoring of finance services. Finance services comprise ten percent of the nearly $250 billion worldwide Business Process Outsourcing (BPO) market (Gartner, 2003) and the total number of finance service outsourcing is expected to increase 71% over the next few years (Accenture & EIU, 2004). Firms are also offshoring these finance activities. A survey of 275 finance executives revealed that 21% send finance and accounting activities offshore (CFO Magazine, 2003). Finance services offshoring is more commonplace among firms based in the U.S. and Europe than those in Asia Pacific. While the offshoring of finance activities has key implications for firms, there are also socioeconomic issues at the home and host country level.
The chapter begins with an introduction to the hierarchy of firm finance activities, from strategic finance decisions such as corporate risk management, budgeting and forecasting to business partnering activities, group finance, tax and treasury, and transaction activities include credit, control, payroll, general ledger, accounts payable, and accounts receivable. We report findings from the author’s structured in-depth interviews with 37 managers at 25 U.S. and European headquartered multinational firms. This study was undertaken by the author and her team: Anne Evison (Organisational Edge), Julian Birkinshaw (London Business School) and Roy Barden (Catalise) in 2003 and 2004 (Evison et al., 2004). The study identified five drivers of finance activity outsourcing and offshoring: automation, disaggregation, consolidation, commercialization, and relocation. A theoretical framework for evaluating location choice based on the codifiability and interdependence of finance activities is put forward and five location options are reviewed: co-location, virtual centre of excellence, nearshoring, offshoring and automation ‘lights out’ processing. Case studies illustrate both successes and failures. Next, managers’ perceptions of the costs and benefits of outsourcing and offshoring are reported. We then turn to issues regarding the implementation of a finance services offshoring model, exploring four key elements of change: disaggregated jobs, loss of control, compromise and business interaction. The critical role of senior management commitment and the organisation’s overall appetite for change are highlighted. The research identifies three important trends among the more sophisticated firms in the study: disaggregation, shifting and monitoring of finance activities.
We then turn our attention away from the firm and to the country environment, exploring the socioeconomic issues faced by countries where firm finance activities have been relocated and to where they have been traditionally housed: India and the U.S. The increase in offshoring of finance and other BPO activities has led to fundamental changes across in the economy, education, social, cultural and political environment in both host and home countries. We review key transformations in national and regional economic growth, education and training programmes, government initiatives and legislation, and career models.
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