Outsourcing FP&A and Tax: When Does It Make Sense?

Tata Consultancy Services (TCS) is one of the world’s leading providers of business process outsourcing and IT managed services. So does it drink its own champagne? In other words, does the finance function outsource some of its processes to the business, for example? Is it all transactional or is financial planning and analysis and other value-added functions also outsourced?
To find the answer, CFO Innovation’s Cesar Bacani spoke to TCS CFO S Mahalingam, who was honoured by CFO Innovation as CFO of the Year in 2012. Below is the final part of a two-part interview:
I’m curious. Because TCS’s business is in outsourcing, does the company’s own finance department outsource as well?
Yes we do, because if you’re doing it for customers, you might as well do it [yourself].
We have some done the normal areas. There’s the payroll, accounts payable, accounts receivable, -- all those processing [tasks] right across the world end up [in our Shared Services Centre.]
But that’s shared services, not business process outsourcing.
We run it like a BPO, in the sense that we have created another outfit. But you’re right, I’m not combining it with whatever [the consultancy side] might be doing with the customers.
We have two [SSC] locations, Chennai and Mumbai, depending on the functions. They run it exactly as they would run for a customer.
Why can’t you just hire the BPO side to do all these?
Actually some of them have moved. In fact, the head of shared services in Chennai moved from the BPO side. I would say that it [the SSC] is exactly operating that way for the simple reason that they are not in the control of the geography finance, of anyone. They operate exactly [like the BPO].
The only thing is that I have not introduced a transfer pricing mechanism. I’m not treating it as a profit centre, which I’m doing with the BPO operations.
It’s not the same people in the shared services doing the BPO? These are two separate organisations?
But the capabilities are the same.
I was just thinking, if you would have outsourced to the BPO side of the business, then you would not need to have the captive shared services there, because it seems like a duplication of effort, because they can easily do it for you as well as they do for other customers.
Let me just make one small distinction. Even for TCS customers, they say I’ve got “my BPO” running at Bangalore, but they would be part of a large BPO organisation. But they still see it as physical space. They still see it as a certain number of people and so on. The customer walks in there and he will see his poster there.
Even though they’re not his employees, they are your employees.
So I don’t think I’m doing any different because I also brought in people.
Because it’s all dedicated; this particular part of the BPO is for this particular company. So if you would have outsourced to the BPO side, one unit would be serving you in a dedicated way, exactly as an SSC would do.
That’s right.
Except that, then your headcount would fall even further, because they would not be TCS finance and so your .037% cost of the finance function as a percentage of revenues would even be lower.
Yes, [but they would still be TCS headcount].
I have got dual purpose. If I develop a lot of expertise in one area, I would like to give it off to business to solve their customers’ problems.
I understand. Does the SSC also do financial planning & analysis?
You know there’s an on-going debate. We recommend for our clients FP&A as [an outsourced function] in some industries, for instance, in banking. There is a very large amount of knowledge process outsourcing that we do which gets to analytics and which also gets to financial planning.
But internally what we felt was that we put [FP&A] it into the corporate finance MIS [Management Information System] team to do a lot of that. At some point in time we’ll test take it out and let it go into BPO.
That’s interesting. I just finished an outsourcing study and one of the questions I asked the CFO-respondents is about the processes they are outsourcing, either to an SSC or a BPO provider. Interestingly, 22% said they were outsourcing FP&A or farming it out to their SSC.
In fact even in our business we find a slowly increasing amount [of FP&A outsourcing demand] that is coming up.
So it’s climbing up the value chain from transactional processes?
And also getting used to it in a way. If I can separate the decision making from analytics, I have no problem outsourcing. Obviously decision-making, I want to keep it close to me.
What about tax matters? Is there a Centre of Excellence for global taxation, including transfer pricing?
I would still call it a work in progress. The business model of TCS is that we have branches abroad and we have subsidiary companies abroad. I do some part of the work there, and some part of the work in India [with regard to tax issues].
For the subsidiary company, there is a physical contract; if it’s a branch, there is only a virtual contract. They contract out to TCS and finance performs some part of [taxation work] on site and some part of it offshore. That’s because Brazil nuances are very different from US nuances, for example.
What we have now constructed is the team each country, typically, the geography finance head, will have someone [who’s a specialist in local and global tax issues]. But quite often, the complexities might be very high, so he might go ahead and consult with one of the consultants [in headquarters or other places] and so on. We ensure that there is a very close relationship between them in terms of understanding the tax issues.
We keep track of all the inland revenue and income tax assessments, making sure that everything is going all right. If there are any issues, we learn from those issues.
For instance, transfer pricing has been a continuously changing game. all over the world people are really grappling with it for the first time; certainly the emerging parts of the world. The developed countries have done [so earlier], but they keep on refining.
Every government needs money these days.
That’s true. Therefore there is a lot of knowledge that we need. So what I did was, I have one of my very senior guys who is a taxation expert look after Europe for a period of time. He was the chief financial officer of Europe and lived in Amsterdam. I brought him back about three years ago. I said: Look after the whole of taxation, domestic as well as international. So we have created the central guidance, but the works is done locally.
Do you foresee that global taxation as a BPO offering going forward?
I think some of it will happen. Taxation for us is two levels. One the employee taxation because there is a phenomenal amount of movement open to people. Then there’s business taxation. That is also where transfer pricing comes in.
We’re an organisation of 250,000 people, so that whole issue in terms of what the actual tax production and source for the employees are and what we have to do. There are totalisation agreements, the Social Security issue, there are all kinds of complexities when you come to employee taxation.
Employee taxation is something that will move to shared services as quickly as possible. As far as business taxation is concerned, what we will attempt to do as we go along is to create a complete knowledge base, so that people can look at it rather than have it done for them.
I’m not too sure how we will be moving it into a shared service in the near future [for business tax]. That’s what will be very difficult. But the knowledge base will be used by everyone – it will contain all the kinds of issues that we have come across in different parts of the world.
Let me go back to the SSC. It would be all transactional at the moment?
At the moment all the transactional stuff. The goal of everyone, all the senior managers of TCS, is to see how we can push a lot more into shared services. At one level there is this cost improvement. At another level, there is phenomenal amount of capability in process and knowledge that exist in shared services.
For instance, five, six years back, my US guy said that he wanted to push a lot of employee services into shared services. If you have an expense to be reimbursed . . .  there are all kinds of transactions that take place with an employee, such as reimbursing expenses, so we said ok. And then we asked everyone else, “If he is doing it, why aren’t you doing it?”
What we are trying to do is essentially create a pilot whenever we can, and once that’s done, push it all the others so there are no pockets of inefficiency and so on.
How does automation fit into all this?
Basically one of the critical things when I took over [as CFO in 2005] was I asked: Why are we not automating [finance]? We have our own home-grown system, but we had started some work in terms of putting it in Oracle. I speeded that up.
We selected Oracle ERP to digitise; we call it the digitisation process of TCS. When we took Oracle, we essentially said: how do I go from project quoting delivery to financial accounting to reporting and so on?
At that time, a lot of analytics was done on Excel sheets. We had Cognos come in; to some extent, we also used Hyperion for the purpose of some of the analytics. Hyperion became very critical for us because we have to consolidate.
We have all kinds of subsidiaries all over the world. We operate about 58 subsidiaries, and each of them is audited. When I gave my quarterly accounts recently, the June quarter [was reported] on 12th of July. Last quarter, it was 17th of October.
That’s very fast – less than two working weeks.
And it’s an audited one. On the quarterly level, about 80% of it goes through detailed audit. The year-end, of course, it’s complete 100%.
There is only one version of truth. And therefore anyone who says that I have performed this can only take it from there. He cannot come up with his own MIS numbers.
So is it 100% automated now?
By the time I have automated all that I want to do, I need to do something more. We have a finance leadership and we keep meeting to look at all the issues that we have gotten, whether it’s a systems issue, development people issue.
I’ve been looking at “how do I make it a lot more real time and under control?” If you look at any organisation, certainly TCS, once I enter into a commitment, I control up my accounts. After that, I can control some travel expenses here and there, but on a US$10-billion company, what can I really do? You know 55% of my revenue goes to manpower cost. Once I have recruited people, I can’t do anything to that and therefore I need to worry about the capacity and so on.
How do I get to the kind of a system that will ensure that I have an exceedingly good view of what kind of structure I have created for the organisation and how that is going to perform? This leads to a lot of questions, real-time accounting and so on. By the time TCS completes that, I’m sure there’ll be other requirements for automation.
Then there’s M&A.
We bought Citi’s captive shared services for half a billion [US dollars] in 2008. The latest deal we did was last September, for US$26 million.
Big or small, they all have to be integrated into your systems.
We are trying to move faster on that. We are trying to see if it can do that within a hundred days – the accounting, the financial systems.  It’s a tough task, but we have set that up as a target.

Click here to read Part 1 of this interview.