The economic crisis affecting much of the Western world has led many businesses to look to the fast-growing economies of Brazil, Russia, India and China (BRICs) as areas in which to expand. But operating in a BRIC country can mean dealing with unfamiliar and often complicated tax and financial legislation, which can pose governance challenges for parent companies.

As subsidiaries are usually led and manned by local staff, companies must guard themselves against improper commercial dealings which may be considered fraudulent or even embroil the parent company in regulatory violation in their home country. The fraud case recently brought against the former CEO of Reebok India acts as a reminder of the difficulties faced by companies investing abroad.

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Under the Foreign Corrupt Practices Act (FCPA), a parent company is responsible for corrupt practices by subsidiaries, so how does a CFO ensure adequate oversight of a subsidiary? One solution is to outsource financial functions such as payroll, book-keeping or management accounting to a local firm.

Flexible approach

In some cases, companies may outsource dealings with the local tax authority, and specialist functions such as VAT returns, pensions administration, transaction processing and even internal audit and risk management. In recent years, an increasing number of companies have started outsourcing their invoicing, while outsourcing firms have evolved to offer general ledger management and management reporting based on business intelligence tools.

Some companies outsource the entire CFO function of a subsidiary to firms that provide full accountancy and ledger management services, as well as control and business support.

For small and medium-sized companies that are expanding into the BRICs, financial outsourcing can significantly reduce both the cost and time required to set up. Many entrepreneurs have recognised that they can gain a competitive advantage by delegating financial processes through a fully outsourced solution package, allowing them to focus on the main business.

Large companies and multinational subsidiaries have tended to co-source, transferring some financial activities to external providers who liaise with the central finance function in the home country, and doing the rest within their own finance teams. But the range and extent of the services outsourced by larger players is growing, partly as a result of growing familiarity with the shared service centre model adopted by many multinational corporations.

India leads the way

India has emerged as one of the leading locations for outsourcing, with its large pool of English-speaking, technically trained graduates making it a formidable player in the market. The business process outsourcing industry is one of the main drivers of its growth, but the country also has a well-established financial outsourcing industry, which boasts companies with more than a decade of experience in all aspects of tax, book-keeping, payroll and financial services.

Book-keeping and large-volume transaction processing – such as expense claims and accounts payable – are in high demand in India, while payroll, tax-return processing, pensions administration and dealings with the tax authorities are considered major ‘pain points’ for companies of all sizes and are increasingly being outsourced. 

Start-up Indian subsidiaries of overseas companies usually outsource their entire finance function initially, bringing it in house only once they have grown. There are fewer instances of large companies outsourcing their finance function completely, though processes such as accounts payable and accounts receivable are commonly outsourced.

In Brazil, the market for outsourced financial services has taken off in recent years. In the past, outsourced services tended to be provided by small accounting firms, which often lacked proper structures and specialist employees, but now there are numerous highly skilled service providers. The country's complex tax legislation and labour laws mean that a finance function operating in the country must have specialist expertise and professionals with such expertise are rare and expensive. But outsourcing companies are able to provide them by diluting their costs through their client base.

The outsourcing of payroll, accounting and tax support are popular with foreign companies operating in Russia, mainly as a way to reduce costs and avoid complications with the authorities. However, many companies are discouraged from outsourcing their finance function because of the difficulty in finding a reliable provider in the country.

In China, it is rarer for an overseas-owned business to outsource its entire finance function, as legislation requires businesses to have an in-house professional for tasks such as lodging documents with government authorities. However, there has been some growth in demand in the past few years, particularly by smaller start-ups and newly established subsidiaries of overseas companies.

Reaping the benefits

The benefits of outsourcing depend on the volume of financial transactions undertaken by a company on a daily basis. Some companies prefer to keep rank-and-file book-keepers on their staff, while outsourcing the functions of the chief accountant. Minor issues may be better dealt with in house.

The main benefit of the outsourcing model is to allow the BRIC-based start-ups or subsidiaries to focus on key issues in their core businesses without the need to involve management in local accounting or tax issues. The company avoids the hassle and expense of recruiting staff, as well as setting up and upgrading systems and software locally.

Beyond the obvious benefits of outsourcing, providers can also offer a company business support. A provider's robust and reliable reporting platforms, as well as relevant local knowledge and expertise, can allow the business to be more agile and to focus on important business issues. Working with the right local service provider can also help a company deal with the unfamiliar regulatory environment, as well as bridge the cultural divide.

Some companies believe that their complex, industry-specific financial accounting systems mean that outsourcing is not an option for them, but good financial outsourcing firms offer flexibility. They are also able to provide professionals with niche skills or expertise. In addition to book-keeping and accountancy professionals, the outsourced function can provide access to legal experts, tax consultants and other specialists – often drawn from an international network – who can help the company address more complex issues, anticipate upcoming issues and respond appropriately to matters that need to be addressed.

Not all responsibility should lie with the provider, however. A firm should ensure that financial processes are continually refined and improved once they have been outsourced, and that they keep pace with changing needs and new technology. Systems and software also need to be upgraded to take account of any regulatory or tax changes.

Selection process

The fear of losing control of a company’s finances to a third party is, understandably, a major obstacle preventing businesses from utilising financial outsourcers. Therefore the choice of provider and senior level buy-in at the initial stage is critical, and can make or break a fledgling operation in the BRIC countries.

To ensure that an outsourced function delivers the benefits outlined above, a company must have its own criteria – in terms of access and communication, quality of service, response times, flexibility, continuity of service and reliability – when selecting an outsourcer. Quality of service measures and key performance indicators should ideally be linked to remuneration. The parent company must pay as much attention to setting up its accounting, compliance and local CFO function as it does to sales, operations and human resources. It should look for a service provider that has the maturity and character to grow into a partner, and should not be driven only by price.

It is also important to consider local issues – which may arise due to differences in the country’s infrastructure, culture and language – and whether the outsourcing provider can clearly demonstrate that it understands the contractor’s business. The provider should meet regulatory standards and provide evidence of compliance with relevant certificates and documents.

As sharing data with outsiders always has security and confidentiality ramifications, it is also crucial to look at the safeguards in place. It is advisable to obtain references from other clients and find out about their experience of the provider’s structure and the specific team who will work on the project.

It is critical to ensure that the local service provider is independent and has an open channel to the parent CFO. Companies will need to invest in building a relationship with the local service provider so that it can be relied upon to be the company’s eyes and ears as the local operation grows.

Contingency plan

When outsourcing, it is essential to draw up a formal contract, detailing clear terms and conditions, deliverables and an extensive service level agreement. Particular attention should be paid to potential additional costs; for example, whether the services of specialists are included in the fee. Companies should constantly evaluate the service provided, both in terms of structure and personnel, and immediately correct any problems if the provider is cutting corners. In the event of any major service issues, the provider should have contingency plans in place.

Companies should be particularly careful not to outsource a ‘corrupted’ process before fixing it in house. The finance function is a dynamic process and the provider must be able to make continuous improvements once they take over and keep pace with changing needs and technology, rather than rectifying problems with existing systems.

Firms also need to have measures in place to avoid becoming excessively reliant on the contractor. It is important to be wary of losing control over financial matters and be mindful of the impact on the company culture. The cost of maintaining control over the outsourced function will increase with the size and complexity of the business.

Above all, outsourcing requires careful management. All companies should continuously monitor their relationship with the outsourced function and react quickly in the event of any disagreement.

Sapan Parekh is CEO of SKP Group in India and E Camillo Pachikoski is partner-director at PP&C Auditores Independentes in Brazil. Both firms are members of Nexia International, a worldwide network of independent accounting and consulting firms.

Other contributors: Henry Tan of Nexia TS in Singapore, Avnish Arora of Chaturvedi & Shah in India and Elena Yuzhakova of ICLC in Russia.