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

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

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

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 Indias software and ITES trade association Nasscom, in 200102 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 rethink conventional hierarchical structures which often act as defective monopolies
(Drucker 1954) with little incentive to improve.

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 clients 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 coordination costs.

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

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.

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 marketbased transactions, even if markets can offer lower production costs due to the vendors
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

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

Occasional

Market governance

Market governance with trilateral contract

transaction

with classical contract

Idiosyncratic

equivalent to a sale
Recurrent / Frequent

Market governance

transaction

with bilateral contract governance

(Source: Williamson 1986)

Hierarchical

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. After a commitment to transact is secured, control
stage costs include monitoring, settling disputes, renegotiation, arbitration and
litigation.

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 vendorbased 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

10

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

11

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

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 vendors failure to establish a baseline of
the clients 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

13

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
consolidation3 .

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 quality)

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,

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 clients 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.

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 clients6 . 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 Indias 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

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 realtime 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 proforma 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 of accounting information, primarily

20

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.

A courier returns physical receipts and

invoices.

4. FINDINGS AND DISCUSSION

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 Arbitration7 . There are also an increasing number of conferences on
offshoring where potential suppliers convene to reduce contact and information costs.

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 Indias 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 SLAs, 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 cant
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 nondisclosure 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. Inaltus

24

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 companys 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 dont bring the
entire client database here (India). Were sitting here and theres the host company in
the US. Were just tapping into it and processing data on it. WNS and OPI used a
similar approach to Efunds, retaining data on the clients 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 trust9 . 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.

Carnegie Mellon Software Engineering Institute www.sei.com

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

26

4.3 Control
Prior studies have shown that loss of control of information is a major barrier to AF
outsourcing10 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 system11 . The high cost of ensuring effective migration has led vendors to
adopt comprehensive migration plans. OPI and Efunds map client processes and reengineer with minimal customisation onto the vendors 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 userinterface, 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, manual 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-sameplace 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

OPIs model of customization contradicts sharply with Inaltuss 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 vendors 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).

OPIs 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 opportunism12 . It is also however noteworthy that there
have been many reported difficulties in implementing business process reengineering
and ERP in multinational corporations. OPIs 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 clients 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 Inaltuss 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,
Inaltuss 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 vendors 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 Inaltuss 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 the viability of onshore AF

outsourcing was extended to the offshore context. 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 concerned with transaction costs and adaptive
governance models.

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
Contact

Contract

Control

Transaction Costs in Offshore AF Outsourcing

TCE concept
Small numbers
Information
asymmetries
Bounded rationality
Uncertainty

Opportunism
Uncertainty

Potential sources of transaction costs

Small numbers of suppliers for high value chain activity presents high
search and switching costs.
Vendor quality assurance.
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
Protecting against opportunism across time, space and country
boundary.
Communication and cross cultural difficulties.
Lack of compatible laws on privacy, intellectual property and
security.

Table IV

Sample Description
Category of
provision13

Geographical
spread

Use of
accounting
software
Standardised
on Lawson
ERP

Service range

IS09000
compliant

Onshore
presence

Use
of IT

Target
clients

Number of
employees

OPI

New York and

Indian office

All AF cycles:
Total
outsourcing

Yes

Yes

All types

50 USA
30 India

USA, India, UK

ERP mainly
SAP

Total
accounting
outsourcing
Also call centre

Yes

Yes

ERP
Dedicated data links
Scanning
Dashboard
ERP. Dedicated links,
scanning
Dashboard
performance.

Efunds

Large Blue
chip

1300 in total
50
accounting
staff in Delhi

Inaltus

India, UK

Any

No

Yes

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

Smallmedium

15 in India
5 in UK

Global
Infosys

UK, India

Any

No

Yes

Physical movement of
documents via courier

Accounting
companies

15 in India
3 in UK

WNS
Speedwing

India

Any

Total
accounting
outsourcing
Transaction
processing
Total
accounting
outsourcing
Transactions

Yes?

Yes

Scanning, dedicated
links

Airlines
primarily

900 in India

13

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

Table V

Governance
model

Sources of Market Failure and Transaction Cost Mitigating Strategies

in Offshore AF Outsourcing
Market Failure

Category I:
Offshore
subsidiary
(GE, HSBC)

Small numbers of
offshore suppliers

Category II:
Servicing
former parent
(WNS, Efunds)

Information
asymmetry
Specificity
Uncertainty

Transaction Cost Mitigating Strategies

Full ownership enables systemic offshore innovation

otherwise precluded by transaction cost theory in failing
markets

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 clients power
Both are exceptionally dependent: client for service,
provider on revenue
Provider claims share of reputation and endorsement by
client
SLA defines and monitors expectations including gain
sharing

?
?
?

Category III
Offshore
outsourcing
(GI, OPI,
Efunds, WNS)

Information
asymmetry
Specificity
Uncertainty

?
?
?
?
?
?
?
?
?
?
?
?

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

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
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