India, since 1991, is undergoing revolutionary fiscal and economic reforms and is undoubtedly moving away from the doctrine of State control, towards a free market economy. Permits, sanctions and controls are giving way to de-regulation, de- centralization, de-nationalization and dis-investment. The notorious restrictions of the past are being cleaned up by a popular will driven with logical and legal mechanism. The reform packages having been introduced in the past and as being introduced now appear to be moving away from restrictions on the movement of foreign exchange in and out of the country. The changing investment climate in the region has swept aside the centrally planned and regulated economies. The agenda of privatization in India or for that matter in almost all the South Asian countries now covers a wide spectrum like industries, banks, development financial institutions, telecommunications, airlines, shipping and road construction and power generation. And, in each of these sectors, law is playing an important role, because it is entering to the privatization of each of these units.

India, the world's largest democracy, is the 7th largest country in the world and the 4th largest economy in terms of purchasing power parity. India's richness and diversity of culture, geographic and climatic conditions, natural and mineral resources are matched only by few other countries in the world. The existence of an independent judiciary, strong legal and accounting system, a free and vibrant press, reservoir of highly skilled manpower, and the use of English as the principal language of business and administration are some of the attractive features of the Indian business environment.

A highly regulated business environment, a pervasive license system and high tariff barriers characterized the Indian economy, until 1991. Sweeping reforms, introduced in 1991 and continued by successive governments, have radically changed the course of the Indian economy. Today, a new spirit of economic freedom is stirring India, bringing sweeping changes in its wake and unleashing the vast potential of the Indian economy. The Government's policies are now relatively simple, transparent and geared towards promoting domestic and foreign private investment. There exists a strong political consensus on the economic liberalization policies at the central and state government levels. India since 1991 is undergoing revolutionary fiscal and economic reforms and is undoubtedly moving away from the doctrine of State control, towards a free market economy.

Asia today accounts for 55 per cent of the world's population and an even greater share of the working-age population, and seems poised to become the growth engine for the world over the coming decades. The region is home to the best-performing economies of the post-war era and its companies have now acquired global scale and are steadily populating the list of the world's largest and most profitable corporations.

Most of the Asian countries especially India have had remarkable evolution, from agriculture-dominated local traders to world-leading, technologically sophisticated trading giants leading to transformation of Asia's economic landscape.

Transformation of Services

Change is natural and some people adapt to it smoothly for they foresee the change in advance; while some are caught by surprise and they find it hard to adapt. Some oppose it and get destroyed.

The professional services like legal, medical, accounting, architecture and even journalism are undergoing massive change in terms of approach and execution. These are all being branded as outsourceable.

Way back in 1996, Richard Susskind in his book `The Future of Law’ noted that changes in technology will fundamentally, irreversibly and comprehensively change legal practice, the administration of justice, and the way in which non-lawyers handle their legal and quasi-legal affairs. The same principle applies to accounting professionals as well.

American Express Investors Services is now one of the top 10 Certified Public Accountant firms in the U.S. They have been buying up CPA practices to offer totally integrated planning services. They are a baby step away from hiring in-house lawyers to complete the package. (In-house lawyers may not be necessary; however, since they can find lawyers to do document drafting at such low cost that some services may well stay out-sourced.)

Merrill Lynch now offers a program called Retirement Management Service. For $500 per year, a Merrill customer can have a medical insurance claims service, a 24-hour hot-line on health and retirement issues with an RN available to handle health questions. In addition, consultations on estate planning and insurance are included, along with discounts on prescription drugs and long-term care insurance premiums.

Law and Accounting are today both business and profession. Accounting and law practice are squarely in the midst of this change, as technology and numerous other factors are challenging the initiative and creativity of lawyers and accountants. The good news is that both the legal and accounting profession are adapting quickly and innovatively, creating new patterns of practice, developing detours around regulatory rules that might stifle growth and competition, finding resourceful methods of handling the increasing costs of practice and overheads, and adopting new tools of management as competition from professional service firms increases.

In fact, to better understand the transformation of legal practice from a profession traditionally made up of small independent firms to a multi-billion dollar global business; Harvard Law School has established the Center on Lawyers and the Professional Services Industry, the first program of its kind in the nation.

"Law firms and other professional service providers are now a critical part of the global economy,” said Harvard Law School Professor David Wilkins, director of the new program.

The legal and accounting industry is undergoing rapid change. Increasingly, law and accounting firms are merging into large global enterprises that often also provide ancillary services such as investment advice, consulting services, and venture capital. Simultaneously, accounting firms, law firms, investment banks and consulting firms--have begun to offer services that overlap with those offered by one another.

These and other similar developments blur the boundaries that previously separated professions while at the same time posing new challenges for the professionals who must now manage these diverse global enterprises.

CPA or CA practice is being transformed every day by economic realities in today's global marketplace. It deserves serious academic study so that students, consumers, policymakers and members of the profession themselves can better understand its role in our economy and society, and so that needed improvements can be made thoughtfully.

There was a time when the statement, `goods are traded, but services are produced and consumed at the same place’, held good; but now no more true as you cannot export a haircut but can certainly export the appointment and style of haircut.

Outsourcing

What is a KPO – Knowledge Process Outsourcing?

KPO, simply put, is BPO or Business Process Outsourcing but at a higher level in the intellectual value chain. The crux of KPO is to provide value to the client primarily in their business by providing assistance in various critical and strategic decision making processes.

While KPO is driven by the depth of knowledge, experience and judgment; BPOs in contrast are more about size, volume and efficiency, the report states.

What is a KPO – Knowledge Process Outsourcing in context of fiscal or accounting or legal assignments?

According to me, it’s an act or process by which a customer/client out-sources or contracts out fiscal or accounting or consulting or legal work which in the ordinary course of business practice is capable of being handled/executed in-house by the concerned customer/client or at their own end, as the case may be. Such process has also come to be known as FPO or Financial Process Outsourcing and LPO or Legal Process Outsourcing.

Obviously, legal work like litigation, issuance of legal notices and legal opinions cannot be branded as KPO work because in ordinary parlance or ordinary legal market practice the said kind of work is not handled in-house.

So what work can be branded as outsourceable? Let’s understand this first and later we can categorize as to what is domestically outsourceable and what is trans-nationally outsourceable.

We can split/divide the KPO work (legal context) into two categories –

1. Documentation.
2. Litigation Support Services.

Documentation would include commercial agreements, transactional documents, trans-national agreements, regulatory documents, business advisory services, charters etc. Similarly, proof-reading and transcription of recorded documents, is an area that lends itself to this kind of outsourcing.Documentation would include commercial agreements, transactional documents, trans-national agreements, regulatory documents, business advisory services, charters etc.

Litigation Support Services would include case law research.

For instance, a US based FMCG Corporation engages a KPO to examine packages of 1000 different items manufactured by them. These Packages are scanned and sent in soft copies to the KPO along with a copy of applicable Statute/Rules etc. dealing with declarations to be given on the packages (single, multi-combination, wholesale, retail). KPO examines these (1000) packages in light of the statutory provisions, rules .etc. and wherever required suggests changes in the declarations given thereupon. The assignment is spread over 300 man hours @ cost of US$ 75 per hour as against cost of US$ 175 per hour (if the research was to be done in US).

For instance, a US based tobacco company fighting a legal battle in Australia wants British judgments in support of their contention before an Australian Court. KPO in India having a UK case laws database in its possession does research and furnishes 5 important judgments to the said client. 5 judgments are taken out after a research spread over 2 hours @ cost of US$ 75 per hour as against cost of US$ 175 per hour (if the research was to be done in US or UK or Australia).

Further, outsourcing is of two kinds:

(i) Domestic Outsourcing; and
(ii) Cross Border Outsourcing.

Domestic outsourcing means outsourcing of any assignment legal or financial and/or accounting work by the domestic persons which is otherwise capable of being executed/handled in-house.

Cross border outsourcing means outsourcing of any legal or financial and/or accounting work pertaining to a foreign jurisdiction.

We can split/divide the KPO work (financial context known as FPO) into two categories –

1. Accounting Support Service (ASS)
2. Financial Advisory Services (FAS)

Under 1st head i.e. Accounting Support Services, one could offer and execute the following:

Accounts Management Services

General Ledger Maintenance, Purchase Order and Expense Entering Sales Order Entering, Customer Invoice Preparation, Updating Chart of Accounts, Generating Trial Balance and Closing Accounts, Inventory Maintenance and Reconciliation, Account Reconciliation, Credit Card & Bank Reconciliation etc.

Taxation Services

State Tax, Federal Tax, VAT, Capital gains Tax, Income Tax, Payroll Tax Goods and service tax, Sales Tax, etc.

Payroll Services

Managing Time and Attendance of employees, Generating Weekly/Biweekly/Monthly Payroll reports for review, Calculation of Net Pay, Entering Payroll Transactions from Payroll Journals, Reconciling Payroll Calculation and amounts in Payroll Journal

Financial Analysis Services

Cash Flow Management, Budgeting, Financial Analysis / Ratio Analysis, Preparation of Financial Statements- Income Statement & Balance Sheet, Preparation of Cash Flow Statement, Preparing Monthly, Quarterly and Annual Management Reports, Other customized reports as per client requirements

Under the 2nd head which according to me is more creative and potential i.e. financial advisory services, one could offer the following services:

Credit Analysis, Company Valuation, Financial Due Diligence, Mergers & Acquisition, Private Wealth Management, Financial Research, Tracking Stock Prices, Portfolio Analysis, Strategic Fiscal Advice etc.

For instance, an FPO firm ties up with small and medium sized CPA firms in America. The Accountant based out of America scans the last year’s tax returns plus concerned years financial details, bonuses and stock statements into a computer server, which is physically located in Chicago or Detroit. Even the surname and social security number is masked so that the Accountant in India who is doing the accounts/returns doesn’t know the individual’s personal details for sake of secrecy and privacy. The Accountant in India enters the server with the help of a password and completes the income tax return on the server screen/monitor. He can neither download nor print the information. The room of execution is completely paperless; even one cannot take pen or pencil inside. Data protection and privacy are of utmost importance.

`Is the message to Americans, “Mama, don’t let your kids grow up to be accountants”?………………..In 2003, some 25,000 U.S. tax returns were done in India. In 2004, the number was 100,000. In 2005, it was roughly 400,000.’

Some Indian FPOs try to justify the above by taking an absurd argument that its grunt work and the real quality work is still being handled in America such as designing creative, complex strategies, like tax sheltering, tax avoidance, managing customer relationship.

Trigger Factors

A number of factors are driving corporate bosses' interest in the fiscal or financial process outsourcing (FPO). First, CFOs and finance managers are under colossal stress to reduce costs, increase efficiency, improve internal controls and ensure compliance with external regulations like Sarbanes-Oxley. As they fully utilize conventional cost control and incremental process developments, they are turning towards FPO to achieve their objectives and make their businesses more competitive

In-house Finance and IT managers are both attracted to FPO as a way to avoid the high costs associated with technology solutions, including expensive upgrades and ongoing support.

Unquestionably, FPO is gaining support as a tool to improve customer service and responsiveness.

None of this would matter were it not for the advances in Internet and telephone communications that now enable outsource service providers to deliver paperless solutions from almost anywhere in the world without loss of control for the outsourcing company. This value proposition is gripping enough to convince companies of all shapes and sizes to adjust their processes, something they have resisted doing in the past.

Impact

Globalization brought about a revolution in international trade with increasing participation and contribution of countries and greater access to domestic economies. The repercussion of the same on the legal and accounting service sector has been both qualitative and quantitative. The past decade has been a mini revolution in both these service sectors with the greatest legal impact on the corporate advisory arena. Activities in project finance in intellectual property protection, environmental protection, competition law, corporate taxation, infrastructure contracts, corporate governance and investment law were almost unknown before 90’s. The number of consulting firms in India capable of dealing with such works was very few. According to the BPO Council of the Associated Chambers of Commerce and Industry (ASSOCHAM), more than 200 top US companies alone are looking for offshore locations towards achieving saving of 30-70 per cent.

Indian accounting firms are no longer small and incapable of associating with legal experts from other countries and are therefore not at a disadvantage when compared to firms of U.S. and E.U.

Opening up of services sector has led to a flow of expertise in sectors where accounting firms in India and CAs can compete globally and help people in obtaining advantage of India’s considerable expertise and providing consumers with the opportunity of free and informed choice. The CA firms in India do not limit themselves to tackling just complex corporate and international issues but also help clients tackle issues in all walks of life. Therefore, the emergence of accounting firms has proved to be a big boon for India.

Solo, small, mid-size and large firms all are transforming themselves through technology. Small firms are using technology to become more flexible and to compete on an even playing field. More practice is being conducted at home or at remote locations. Solo practitioners may be admitted and maintain virtual offices in multiple jurisdictions, both domestic and international.

Future of KPO business in India

Although a lot of high end financial work has begun to be outsourced to India, some entities are still skeptical about provisions regarding data privacy, confidentiality of the clients’ information as well as the quality of service provided by non-resident accountants.
 
Data privacy and confidentiality are areas of paramount concern and importance to the legal and financial outsourcing industry. Presently, India does not have codified data protection laws, but various commercial forums and associations, such as NASSCOM, are working in close association with the government to enact data protection laws that are on par with international legislation. It is certain that Indian companies have realized that they need to scale up their security mechanics in order to cater to and allay these concerns.

After achieving success in the business process outsourcing (BPO) segment, India will emerge as a leader in the knowledge process outsourcing; considering its large base of talented and qualified professionals.

''Global Integration through KPO'', a report taken out by Price Waterhouse Coopers (PWC) sates that "India will be a key player on the KPO supply side, as it is a country with a large base of highly qualified professionals. "An ageing workforce in the western world and the consequent shortage of professional skills in the future will be key drivers for the inclusion of Indian talent".  When a mathematical tutor in India can provide tuition to American children over the Internet then one can very well affirm the statement that `India is Software and China is Hardware; India will emerge as a factory of service providers’.

Industry analysts say that though countries like Vietnam, China, Hungary, Czech Republic and Philippines will pitch for business against Indian companies, outsourcing to India will continue to boom due to quality rather than the cost factor.  

Like in the BPO space, India is positioned at the fore front of the KPO revolution too. As it is, thanks to the time zone difference, India can easily help enable 24x7 capabilities for organizations across the globe. India, today, has an additional edge in ‘knowledge’ based services basically because of its large, cost efficient talent pool. India churns out around 75,000 MBA graduates and more than 2,50,000 graduates annually with excellent proficiency in English speaking and writing skills.

The additional ‘secret recipe’ that India seems to possess is made up of rigorous processes, high productivity, confidentiality, sound HR policies and good risk management skills — all in the right quantities. Processes like high level customer interactions, integrated with customer relationship management (CRM) skills, on-time delivery processes, quality checks while ensuring compliance and yet confidentiality to the clients are now very much an ingrained part of our corporate culture.

In the present era, globalization has become the norm and while geographical boundaries are shrinking day by day, the exponential development of the Internet ensures that businesses either evolve to the next level or perish. The direction, supervision, and control of the overseas legal support system has become critical to legal outsourcing. In the contemporary context, the outsourcing of legal work to economically viable destinations has become a practical necessity.
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HEMANT BATRA is the Vice-President SAARCLAW and the Managing Partner of Kaden Boriss.He is also the Chairman of IICLAM.