Identifying Constraints in the Value Chain of Knowledge Based Services in Canada:
Case Study of Canadian Accounting Firms

Sabi Bining

Project Submitted in Partial Fulfillment of
The Requirements for the Degree of
Masters of Business Administration

The University of Northern British Columbia
April2009

© Sabi Bining, 2009

UNIVERSITY OF NORTHERN
BRITISH COLUMBIA
LIBRARY
\. ;.~";;..

Prince George, BC

Acknowledgement
The credit for my having been able to accomplish my task and complete this project,
should go, without reservation to my supervisor,
Dr. Ajit Dayanandan,

Assistant Professor in Economics, University of Northern British Columbia,
Prince George, British Columbia
Canada
For his ample support, valuable systematic guidance, comments extended and
encouragement given to me throughout the duration of this work. I will be failing in my
morale duty if I do not gratefully mention here that his insistence on a research method at
the very beginning of this exercise and the unfading interest shown by him throughout the
entire duration of my effort and above all his admiration and appreciation of hard work
where it deserved was a source of inspiration to me which, made the preparation of this
project an enthusiastic and explorative experience. Thanks to my untiring supervisor a
humble feeling of self confidence and accomplishment in my limited capacity run
through me on completing this assignment which was a new challenge to me.
I am also grateful to Dr. Balwinder Deol, Dr. Kamaljeet Sandhu, Judy Mason, Dean
Mason, Dr. Xin Ge, Mike Cuthbertson and Dr. Elizabeth Croft for their highly admirable
contribution to the completion of this research with giving me encouragement and
instructions showing their humble qualities and wide knowledge and for valuable support
extended at various stages.
Last but not the least my loving wife Sunny, and my daughter Saaya for the immense
sacrifices they made during this period for the sake of the preparation of this endeavor.
They were very understanding and bore all troubles and challenging as part of their duty
byrne.

ABSTRACT
With the digital revolution and dramatic fall in the international
telecommunication costs, the world has become 'flat' - the levelling of playing field
between developed and developing countries. This study was cast in the in the
background of increasing trend globally among firms in manufacturing and service sector
areas to fragment their production across firms and geographical locations. In Canada
too, substantial work in the manufacturing sector as well as service sector especially in
knowledge based areas like customer support, information systems, software
programmmg, accounting, medical technicians etc., IS outsourced to other
firms/countries.
The present study examines the prospects of value addition of a knowledge based
industry - accounting industry in Canada. The study uses accounting firms in Prince
George, BC as a case study. Accounting firms in Prince George represent small, medium
and large firms and as such represents a cross-section of accounting firms in Canada. Our
investigation found that there is considerable constraints in the form of skill shortages,
timeliness in delivery of accounts, employee retention and other cost overrun issues
among accounting firms in Prince George, British Columbia.
Our empirical analysis of the back and front-office tasks of accounting industry
found that there exists considerable leeway for value creation especially in the backoffice tasks (like transactions processing, generation of financial accounts etc). The
empirical analysis of back-office tasks of accounting firms , based on the costs structure
of Canada and India shows that there is approximately 83 per cent cost saving if one
undertakes outsourcing of accounting tasks (excluding transmission cost of inputs
globally). These cost saving could add considerable value to the accounting firms in
Canada. Besides consumers of accounting tasks in Canada could also benefit in the lower
price for their accounting tasks.
The risks associated with fragmentation of production are: (a) risk of dependence
on the service provider, (b) risk linked to the service provider' s deficient capabilities, (c)
the suppliers directly attacking the firms market. One of the major risks faced by
accounting firms in Canada in adopting the outsourcing model is the concern that client
information (in Canada) could be potentially shared by the service provider (outside
Canada) to their potential rivals. This is a major concern that faces the credibility of the
firms in the supply chain. To protect sensitive customer information, proper procedures
and secured infrastructure need to be put into place. Customers need to be educated about
which country and how the information is processed. Once again, the credibility,
professionalism and ethical conduct of the firms in the value chain are crucial to this
business model.

11

Table of Contents
Acknowledgement
Abstract

ll

Table of Contents

III

List of Charts and Tables

IV

Chapter I

Introduction ................................................................... .

1-4

Chapter II

The fragmentation of Production: A Brief Review of
Literature.......................................................................

05-10

Chapter III

Data Base and Methodology.........................................

11-13

Chapter IV

Empirical Analysis.........................................................

14-28

2.1 Theoreticalliterature....... ............................ ...................................
2.2 Empirical Literature........................................................................
2.3 Summary.........................................................................................

3.2 Database..........................................................................................
3.3 Methodology...................................................................................

4.1 Accounting Profession in Canada............................... ....................
4.2 Overview of accounting information in Prince George, BC,
Canada........ ......... .. ...... ... ....... ...... .. ..... ............. ................ .... .. ..... .....
a. Employees............................. .. .................... .. ............ .... ..... ............ .
b. Customers...... ....... .................................. ..... .... ...............................
4.3 Wage Structure................................................................................
4.4 Accounting Process Flow...............................................................
4.5 Workload and Market Value...........................................................
4.6 Cost Savings....................................................................................

Chapter V

Conclusions.....................................................................

05
09
10

11
13

14

16
17
19
20
21
24
28

29-31

Bibliography .......................................................................................... 32-35

Ill

List of Charts
Chart 2.1

Dimensions of Fragmentation of Production

6

Chart 4.1

Number of Accounting Firms in Canada

14

Chart 4.2

Number of Accounting Firms in British Columbia

15

Chart 4.3

Number of Employees

17

Chart 4.4

Number of Customers

19

Chart 4.5

Hourly Wages

20

Chart 4.6

Process Flow of an Canadian Accounting Firm

21

List of Tables
Table 4.1

Brief Description of Accounting Designations in Canada

18

Table 4.2

Workload Assessment

24

Table 4.3

Cost per hour in India

26

Table 4.4

Workload Assessment (India)

27

Table 4.5

Estimates of Value Addition due to Trading of Tasks

28

IV

Chapter I
Introduction

The nature of international business is changing - for centuries cross-border
business consisted of exchange of goods and services. Now cross-border business
increasingly involves substantial value addition in many different firms and locations.
This is called fragmentation of production or trading in tasks. The fragmentation of the
production process has led to more specialized phases performed by independent
contractors. This has substantially increased the cross-border flow of goods and services
world-wide (Economist, 2004). Fragmentation of production or contracting out tasks has
been prevalent in manufacturing sector for many decades. But with the scaling up of the
internet and information and technology (IT) infrastructure globally in the last decade,
service sector tasks especially that of knowledge-based or intellectual tasks such as
customer support, software development, accounting and a host of other associated
tasks have been increasingly outsourced. As compared to ' go-it-alone ' strategies,
alliances with partners within the country and across borders have created more value for
firms and have been the focus of corporate strategy in recent years (Murray, Kotable and
Zhou, 2005). The outsourcing of the production process has become a distinctive feature
of organization production of goods and services and this process is understood in the
literature as the breakdown of vertically-integrated model of production - the so-called
"Fordist" production, exemplified by the automobile industry. Bhagwati and Dehejia
(1994) call this "kaleidoscope comparative advantage" as firms shift location quickly;

Krugman ( 1996) uses the phrase "slicing the value chain"; Leamer ( 1996) prefers
"delocalization" while Antweiler and Trefer (1997) introduce " intra-mediate trade". In
popular language, this distinctive feature of the economic globalization is commonly
referred to as ' flat world ' in the sense in a globally integrated economy, every
commercial transaction between a buyer and seller is contested globally (Friedman, T,
2005) .
The term fragmentation of production process and outsourcing are used
interchangeably which creates some confusion. The term fragmentation of production
refers to splitting of the production process either within the firm (through fully owned
subsidiaries), while outsourcing refers to undertaking of bits of production process
outside (or external) to the firm (either in the form of local partners or independent
firms) .
Recent cover stories in Business Week (Business Week, 2003 , 2005) present a
long-list of upscale jobs and qualified activities like chip design, engineering, medical
transcription, medical diagnostics, accounting, financial analysis, customer support etc.
which are outsourced on a large scale to low-wage countries like India and China. Apple
Inc. , which manufactures the popular iPods carries a text in its products titled "Designed
in California, Made in China". A recent study of iPod's components shows that the final
product contains major intermediate inputs that are sourced from five countries and the
share of China is a small part of the total (Linden, G, Kramer, K and Dedrick, J (2008).
More recently, businesses of all kinds have also exported back-office functions like data
entry, payroll processing, customer support (call centers), financial accounting to
developing countries like India. In Canada too, substantial work in the service sector

2

especially in knowledge based areas like customer support, information systems ,
accounting, medical transcription etc is outsourced to other countries. The natural
question which arises out of this trend is: What are the areas which firms naturally
outsource? The literature refers to firms contracting non-core tasks as compared with core
tasks (Sousa and Voss, 2007).
Most observers and recent research reports state value addition (cost saving on
account of lower labor cost) as the reason for outsourcing (Amiti and Wei, 2004).
Outsourcing is also a tool for top managers of corporations to spread risk in a more
optimal manner, and to avoid large often irreversible investments (Quelin and Duhamel,
2003). On the negative side, the most important risks that emerge from the literature are:
(a) risk of dependence on the service provider, (b) risk linked to the service provider's
deficient capabilities, (c) the suppliers directly attacking the firms market (Quinn, 1999).
The present study contributes to the literature by looking at the prospects of Canadian
companies gaining value addition and competitive advantage through outsourcing in
knowledge-based industries like accounting. In this endeavor, the study examines
accounting industry in Prince George, BC as part of the investigation. The study proposes
to examine the structure of production process of accounting firms in Prince George. The
main objective of the study is as follows:
1.

To examine the structure and determinants of the production
process of accounting industry and identify the feasibility of
increasing value through fragmented production process.

3

2.

Identify costs and benefits of fragmented production process in the
accounting industry as compared with the in-house production
process.

3.

To identify the public policy issues associated with fragmented
production process (like security, confidentiality of information)
etc.

The study is organized as follows : Chapter II reviews the literature on the subject.
Chapter III discusses the data base and methodology used in the study. Chapter IV is
devoted to empirical analysis and Chapter V summarizes the conclusions.

4

Chapter II
The Fragmentation of Production: A Brief Review of Literature

This chapter briefly reviews both the theoretical and empirical literature on the
fragmentation of production. Section 2.1 reviews the theoretical literature and section 2.2
summarizes the major findings of empirical literature and Section 2.3 summarizes the
conclusions.

2.1: Theoretical literature
There is considerable literature on the global fragmentation of production process
(Campa and Goldberg, 1997; Hummels, Rapoport and Yi, 1998; Yeats, 2001; Hummels,
Ishii and Yi, 2001; Hanson, Mataloni and Slaughter, 2001, 2005; Grossman and RossiHansberg, 2008). Outsourcing implies a business relationship between two parties: the
outsourcing subject (also called principal or the client) who makes the decision whether
to outsource or not, and an external outsourcing firm (also called the supplier or
subcontractor). The objects of outsourcing are manufactured products or services
(business processes). This can include core functions such as design and R&D, as well as
non-core functions such as maintenance, accounting, logistics etc.

5

Chart 2.1: Dimensions of Fragmentation of Production

•

Independent outs ide supplier

Frontlet"

I
I

Independent
outside supplier

I) lntra-fi m national fragmmtation
2 ) Inter- fir m O{ltional frngmootat ion ( o tiona! OUimUroin
3 ) lnter- fi m inlernatiooal fra mentation iJI!emalional outsourcing

4) lntra-rrrm international fragmentat:ion FDI is required).

Source: Di az-Mora (2008), p.25 10.

The literature distinguishes four dimensions of fragmentation of production
(Chart 2.1). The first dimension is the intra-firm national fragmentation (e.g., Boeing
manufactures two components for its aircraft from its two locations within the country).
The second dimension is the inter-firm national fragmentation referred to as national
outsourcing (e.g., General Motors sourcing the engine for its cars/trucks from an
independent outside supplier). The third dimension refers to a national enterprise
sourcing some parts from an independent outside supplier (e.g., Apple outsourcing its
chip production to an independent supplier located in Taiwan). The fourth dimension is
the intra-firm international fragmentation (e.g., Caterpillar sourcing some components of
its heavy industry from its subsidiary in China). This normally takes place through
foreign direct investment in an international location but operates as its subsidiary).
6

Outsourcing comprises dimensions 2 and 3 of fragmentation of production in Chart 2.1 .
Apart from these four dimensions one can also examine fragmentation of production
process from an ownership and a geographic perspective (Kimura and Ando, 2005;
Curzon Price, 2001). The ownership dimension refers to the controllability of the firm
over fragmented production and the geographic dimension refers to geographical location
of the segmented production/process. Outsourcing lies in between total ownership and
arm's length transactions. A segment of the production can be outsourced
Vertical disintegration of production in the form of outsourcing of production to
contractors in proximate locations have been going on for decades, outsourcing across
borders has been facilitated by information technology developments and trade
liberalisation in recent years (Tomiura, 2007, 2009). The initial debate was with regards
to the motivations for shifting production locations. The product life cycle theory,
originated in V emon (1966) suggests that the production location shifts from developed
countries to developing countries because of low wages in developing countries. Antras
(2005) adds organizational dimension to this hypothesis by stating that outsourcing
occurs first in manufacturing and that too within the firm (through subsidiaries) and later
to independent (foreign) firms.
The standard international business frameworks such as Porter's diamond model
do not adequately explain the motivation for firms to outsource production. Porter's wellknown study on the competitive advantage of nations describes factors that have
promoted higher rates of innovation in certain industries in certain countries (Porter,
1990). Porter's diamond framework shows how factor conditions, related and supporting
industries, demand conditions and strategy, structure and rivalry of other local firms can

7

1

force continual improvements in productivity and new production developments • The
fragmentation of production and its outsourcing to countries like India does not fit the
Porter's diamond framework: there were no local demand; related and supporting
industries such as telecoms and computing were relatively underdeveloped; the national
communications infrastructure was among the worst in the world. The main factor of
production, the skills and knowledge of software programmers and related skills were not
homegrown. The industry began with Indians returning from higher education, IT
training and often work experience in the US and Europe. The revolution in digital
technology, the dramatic fall in international communication costs, and the decline in
transportation costs contributed to the increasing fragmentation of production in the
1990s (Baily and Farell, 2004). These developments have generally weakened the link
between labor specialization and geographic concentration.
The motivation for fragmentation of production is not simply cost savmg
otherwise a simple internal reorganization of firm can achieve this type of objective. One
of the conditions for outsourcing to be successful is that the external provider must have
access to economies of scale which outsourcer does not have. Moreover, if firms of the
same industry choose the same type of solution (outsourcing), all firms will converge to
the same business model. The motivation for fragmentation of production is not only
savings in labor costs; but also, the prospects of generating new revenues, increase in
capital productivity, managing risks in ways that would be unaffordable in home markets
and accelerating their entry into adjacent product markets (Daga and Kaka, 2006;
Agarwal, Fareell and Remes, 2003). Apart from these, it was found that offshore workers
are often more highly motivated than US workers and perform better, particularly in low1

For a survey on literature on the subject, see Rugman and Collinson (2006), pp.443-47 .
8

skilled jobs that lack prestige and suffer from higher turnover in U.S. All the more, the
consumers benefit as companies pass on the savings in the form of lower prices. Thus
offshoring to be successful and meaningful it has to create value for the firm and value
appropriation for the consumers.
The literature on 'strategic outsourcing' is also rich on the motivations of contract
production (Quinn and Hilmer, 1994). It has been argued that firms in North (Triad
regions) use strategic alliance with suppliers in south (like China and India) because of
resource complementarity (Harrison et al, 1991) and resource dependency (Pfeffer and
Salancik, 1978).

The logic of resource complementarity perspective explains the

importance of sourcing from alliance partners as an opportunity to capitalize on the
strengths of firm's suppliers, while resource dependency theory stresses the importance
of alleviating threats in a transitional economy by managing uncertainties.

2.2: Empirical Literature
There is substantial literature on the economic and commercial gams of
outsourcing. According to estimates by McKinsey an airline with $10 billion in annual
revenues could save about $100 million by offshoring labour-intensive tasks (such as
reservations, the administration of loyalty programs and customer caret Similarly,
software developers, who cost $60 an hour in United States, cost only $6 an hour in

The benefits of offshoring jobs outside the country include large savmgs on
account of labor costs. According to estimates by Baily and Farrell (2004) for every one

2
3

See Agrawal and Farrell (2004), p. l .
See Agrawal, Farell and Remes (2003),pp.24-35 .
9

dollar of US corporate spending abroad on account of offshoring, the gams to US
economy is 67 per cent and the remaining 33 per cent is captured by the country where
the activity has been moved.
The estimates of potential number of jobs outsourced vary: one of the earlier
estimates was 14 million by Bardhan and Kroll. Jensen and Keltzer (2005) estimated that
theoretically 70 per cent of the professional and business service employment could be
offshored. According to McKinsey, as of July 2003, around 400,000 US jobs have been
outsourced and is expected to grow at an annual rate of 30 to 40 per cent reaching 3.3
million jobs by 2015 (Agrawal and Farell, 2004). Critics warn that free trade and
globalization has made countries like US jobless. The response from the US Congress has
been to include in a fiscal 2004 spending bill a provision prohibiting federal agencies
from outsourcing some kinds of work to private companies that use workers in foreign
countries.

2.3. Summary
The above survey clearly points to the benefits of fragmented production which
include not only cost savings but also generating new revenues, increase in capital
productivity, managing risks in ways that would be unaffordable in home markets and
accelerate their entry into adjacent product markets. For outsourcing to be successful, it
should create value for the firm and consumer. The major risks associated with
outsourcing include risk of dependence on the service provider, risk linked to the service
provider's deficient capabilities and the prospects of the suppliers directly attacking the
firms' market (Quinn, 1999). Chapter 3 discusses the data base used in the study.

10

Chapter III
Data base and Methodology

This chapter discusses the data base and methodology used in this study. The
chapter is divided into two sections. Section 3.1 is devoted to a close analysis of the data
base and the methodology on accounting firms in Prince George. Section 3.2 discusses
the methodology used in this study.

3.1

Database
The focus of this study is on accounting firms in Prince George, BC (including

two large firms) . These accounting firms in Prince George have employees ranging
between 10- 30 employees and have 200- 1500 clients (refer to chapter IV for details) .
All the accounting firms in the Prince George area were approached for this study. The
population of the accounting firms in Prince George is relatively modest (around 10) and
hence no random sampling procedure was adopted. Out of 10 accounting firms , 8 of them
responded to request for this study.
In order to standardize the workload in accounting profession in Canada, a pilot
survey of the workload of accounting firms in Prince George was conducted before the
interview process. This pilot survey revealed that on average 50 transactions could be
performed in an 8 hour work schedule.
Interviews were conducted through a structured questionnaire and pnmary
information was obtained from the firm's principles (owner/partners). For the purpose of
the interview a systematic workflow diagram of an accounting firm was used (based on
II

the data flow diagram). The attempt of this study was to examine the work flow at each
stage of the accounting firm so that a market assessment could be undertaken. This
market assessment (market value) can be used to facilitate comparative analysis of other
geographical models of delivery.
The main endeavor of the interviews was to understand the input-output process
in the accounting firms. An operations flow chart was used to identify the accounting
firms' processes because a typical flow chart is a graphical or symbolic representation of
a process. Each step in the process is represented by a different symbol and contains a
short description of the process step. The flow chart symbols are linked together with
arrows showing the process flow direction. Symbols are used to represent such things as
operations, data, flow direction, and equipment.

In the undertaking of this investigation, only the firm principals (owners/partners)
were relied on for the information. Firm principals have a much better understanding of
not only the internal processes of their firms; but also, the market conditions, business
environment, and financial capabilities of the firm. These individuals were also the key
decision makers of the firm and they had the budgetary authority. The employees and
external stakeholders such as customers or consultants only a partial view of the process;
therefore, they were not approached to partake in the study. Employees and external
stakeholders could have deviated the outcomes of this study from the actual reality that
the firm principals face on a day to day basis.

12

3.2

Methodology
Standard descriptive statistics were used in this study such as measures of central

tendency, measures of variation etc. Information collected from the accounting firms was
aggregated and measures of averages etc were derived. In the choice of averages, median
values were relied on as they are less influenced by extreme values.
The market value of accounting firms in Canada and outside Canada is based on
work load (per hour basis) times the current market price (obtained through survey).

13

Chapter IV
Empirical Analysis

This chapter is devoted to the empirical analysis of the data collected. It has been
divided into six sections. Section 4.1 is devoted to the analysis of the accounting
profession in Canada and British Columbia. Section 4.2 is devoted to a general overview
of accounting firms in Prince George, BC, Canada. Section 4.3 examines the basic
characteristics of the data such as employees, customers, hourly wages, workload, etc.
Section 4.4 examines the workflow (accounting tasks) of the accounting firms. Sections
4.5 and 4.6 represent the market valuation of the workflow of accounting tasks.

4.1

Accounting Profession in Canada
The accounting profession in Canada provides Canadian companies with a unique

blend of expertise in accounting, management and strategy. According to Statistics
Canada the number of accounting firms has been growing steadily (Chart 4.1 ). There are
26,844 firms registered in Canada in 2006, and this is a 38% increase from 19,356 firms
that were registered in 1998. This indicates that the accounting profession in Canada is
growing with the growth in the economy.
-------

<'hart 4 . .1.
29000
27000
25000
23000
21000
19000
17000
15000
1998

1999

2000

2001

2002

Source: Statistics Canada

14

2003

2004

2005

2006

Accounting is a study of how businesses track their income and assets over time.
Accountants engage in a wide variety of tasks besides preparing financial statements.
These range from computing costs and efficiency gains from new technologies,
participating in strategies for mergers and acquisitions, developing and using information
systems to track financial performance, tax strategy and quality management. The
numbers of accounting firms in British Columbia are also on the rise. According to the
Statistics Canada there are 4,736 firms registered in British Columbia in 2006, and this is
a 46% increase from 3,248 firms that were reported in 1998 (Chart 4.2).

C" h <-.rt" 4 .2 - -- N unabe r of" ~

F lrna s in B C"

5 000
473 6

4 5 00

_9_7_

_

"-z.-=n
~

4 3 84

4000
35 00
3 000

32 48

25 00
2000
1 998

1 999

2 000

2 001

2 00 2

2 003

2 004

2 005

2006

Source: Statistics Canada

Accounting Professional Bodies
In Canada, there are three main governing bodies that oversee and maintain the
regulations in the accounting profession. These are (a) The Certified General Accountant
Association of Canada (CGA), (b) The Canadian Institute of Chartered Accountants
(CICA), and (c) The Society of Management Accountants of Canada (CMA). These
governing bodies have thousands of accounting firms as clients all across Canada. For
purpose of this study, it was not realistic to cover all accounting firms across Canada or

15

British Columbia. As a representation of Canadian accounting firms , this study was
conducted on accounting firms in the Prince George region of British Columbia.

4.2

Overview of accounting information in Prince George, BC, Canada
The city of Prince George is located in the north central part of British Columbia.

The economic and commercial activities in this area are predominantly commodity based
activities such as forestry, mining, reforestation and some gas exploration. Reflecting the
close adoration between commodity cycles there has been a large variation in the total
number of companies located in Prince George area over the last five years, with an
upward trend between 2002 and 2007 (Initiatives Prince George, 2008a). The number of
companies in Prince George in December 2007 was 5,314 which is a 1.8 per cent more
than in December 2002. Services-producing industries provide the majority of
employment in Prince George. (74.5 per cent, compared with 25 .5 per cent in goodsproducing industries). As of December 2007, there were 488 companies recorded in the
professional, scientific and technical services category in Prince George. The types of
companies in this category include Legal, Accounting, Architectural, Information
Technology, Consulting and Research services. Only 4.3 percent of the companies in this
sector have more than 20 employees (Initiatives Prince George, 2008a). While there was
little change between 2002 and 2007 in the number of companies in this sector, it is
worth noting that 2 out of 3 new firms over that period were companies with more than
20 employees (Initiatives Prince George, 2008a).
There are about ten accounting firms operating in Prince George area of which
two are large multinational firms with global network of offices. Based on the contact

16

information obtained through Prince George Chamber of Commerce, all the accounting
firms were approached for this study: out of the 10 firms that were originally contacted 8
responded for meeting and interviews and data/information collected from the interviews
will be discussed in this chapter. These firms have the following characteristics:
•

Firms were located within city of Prince George.

•

Firms had been operating for a minimum of three years.

The following paragraphs are devoted to discussing the main characteristics of the data
that was collected through the structured interviews from these firms.

(a) Employees
The range of full-time employees among accounting firms in Prince George
varied between 4 and 30 and the median was 12 employees (Chart 4.3). Tasks of these
employees typically range from administration, book-keeping, accounts reconciliation,
preparations of financial accounts and related tax and financial tasks.

<:"hart" 4 .3 --- N un-ab er of"
30

30

~

1:"'

10

-

_
0

9

4_

Finn " 1

~ Finu 'R' 3 Finn F-4-

I

~

li-

~ Finn 1r6 Finn # 7 Finn # 8

S;;uuple Sruup l e
1\/Iean 1\ledian

The corporate ladder of an accounting firm starts with students being recruited
from the university and colleges with accounting and finance majors. Students start their
17

accounting careers by taking on internship roles with the accounting firms (which could
last from 8 months to two year assignments). If these students show genuine passion and
commitment for accounting profession, the firms encourage these students to pursue the
accounting designations like CGA (Certified General Accountant), CMA (Certified
Management Accountant), and CA (Chartered Accountant). The following is a brief
description of the tasks performed by an individual with each of these designations.

Table 4.1: BriefDescri

I Chartered

Chartered Accountant (CA)

I Management

i Accountant CMA

• Corporate accounting and planning
I • Financial planning
• Start-up consulting
Tax planning, preparing income tax
Purchase and sale of businesses
Finance
Operations
Business valuations
'I returns
Management controls
• Sales and marketing
, • Business plans and financial projections
• Auditing
j • Information
Developing strategies for securing
technology
' financing
'I •
Management consulting services
• Financial planning
Corporate and personal income tax
, • Human resources
planning
Start-up consulting services
Information technology needs analysis
Consulting and systems implementation
• Assurance (audits and reviews)
, • Retirement planning
•, • Preparation & analysis of financial info
II •
Succession planning
1 • Acting as trustee in the event of
receivership, insolvency or bankruptcy
• Developing management controls
Management consulting
I • Forensic accounting and litigation support
I

I•

•
I
I•
•
I' •

I

'
I
I•

I•
•
I

I•

I

•

I
I

I•
•
I

I.

E•t"' .,,,;,,

I

Source: http://www.jobwings.com/finance-job/canadian-accounting-financial-designations-accreditationsa86.html (Accessed on April 08, 2009)

The firms normally provide the necessary work experience/training/mentoring and
will normally absorb the costs associated with accounting professional designations.
Students who complete professional designations either work as employees or are offered
partnerships in the accounting firms. Employee retention is major area of concern for all
the firms in this study. There is considerable turnover of accounting professionals in
Prince George. These firms believe that they invest time and money into the candidates

18

but few years into the process or upon completion they leave for larger cities for better
lifestyle choices. In other cases these prime candidates are solicited and recruited by other
accounting firms. The bookkeeper and administration staff is usually hired locally and
had generally very low turnover.

(b) Customers
The range of customers among the accounting firms in Prince George ranged
from 200 to 1,100 customers, with a median of 325 customers (Chart 4.4). These
customers consist of companies ranging from household (home based business) to large
corporations. The clientele base is not limited to Prince George area and is spread over
geographically over northern British Columbia. Customers require services such as bookkeeping, preparation of financial statements, tax planning, and revenue forecasting.
Accounting firms also provide the personal tax services through their bookkeeping staff.
However, the personal services such as individual tax fillings/planning are not included
in the scope of this study.

C h art 4 .4 -

N u u tber of C u :o.-ton1.ers

1200

1100

10 0 0
8 00

GOO
400
200
0

800

-

469

200

Finn=l

~

Finnr=3 Finn#-t

~

Finn=6 Fu1.n?T7

19

~

Srunple Smnple
l\Iean l\Iediru1

4.3

Wage Structure
From the firms interviewed in this study, the hourly wages ranges from $18

dollars to $35 (Chart 4.5). From chart 4.5 it is evident that, the smaller firms generally
paid their employees relatively lower wages than the larger firms. The factors that
determine the hourly wage include size of the firm, number of employees in the firm and
most importantly employee's skills set, experience, etc. These factors were common in
all firms that participated in this study. The entry-level employees were generally
students, and these students along with administration staff were at the lower end of the
pay scale.
Students with the accounting background started at lower pay but their tuition
fees and book costs were usually covered by the firm. As students learn the skills and
gain experiences more incentives were offered by firm to retain these students. These
incentives may include full fee coverage of the accounting designations, paid study-time,
paid travel and accommodations during exam time and guarantee of employment upon
completion. Generally, the hourly pay varies with the accounting tasks: back-office data
entry types of functions generally yield lower wages ($12 -$18) and front-office
consultative customer interaction types of tasks commanded higher hourly wages ($60 +).

$40.00

$35 00

$3:" .00

$3:" 00

$30. 00
$::!:" . 00
$::!0. 00
$1:" . 00
$10. 00
$:" .00

$Finn # l

~ Finu=3

Finn ;!:::-I.

~

20

~ Finn #7

Finn F S

Smnp le Smnp le
!Hean IVledian

4. 4

Accounting Process Flow
Chart 4.6 outlines the work flow of the accounting firms in Prince George. The

workflow has been charted based on inputs and outputs generated in a typical accounting
firm in Prince George area.
Process

Chart 4.6

....

~

of" an Canadian Accounting Firm

Cuatomer/Cielnt

c
u

s
T

--

Teohnloa.n
Into Aoaoundng aottw-.
(SA.CW)

R

----

Into ADooun*'o tloftw-.
(SA. CW)

F

E
E
D

B
A

c
K

As evident from chart 4.6, the flow starts with customer providing general
transaction and information to the accounting firms. The administration staff translates
this information into the appropriate files and dispatches for electronic processing. If this
data is already in electronic form then it is directly forwarded to the data/accounting
21

technicians. If the data is not in electronic form, then this information is forwarded to the
internal bookkeeper who does the customization for electronic processing. The data in
electronic form is converted into accounting software such as 'Simply Accounting' or
'CaseWare' by the data technicians. These data technicians are typically accounting
students who have some background in the accounting field. The non-electronic manual
data is reconciled by the bookkeeper and converted into similar accounting software.
Once the customer information is converted into the accounting software and is
reconciled by the bookkeeper and the data technicians, then these files are forwarded to
the office manager/supervisor. At this stage the manager's role is to check the quality of
the work and provide feedback to subordinate staff before further processing. The
manager is also responsible for administering and managing the staff, firm supplies,
technology, employee issues, payroll and succession planning roles among the staff. The
manager is usually a candidate who has spent considerable amount of time at the firm
either as an administrative staff or as a bookkeeper and has good understanding of the
firm's processes and procedures.
The next step in the accounting process involves the junior accountant who
oversees and ensures all work done by junior staff complies with accounting rules and
regulations. In some smaller firms both manager and junior accountant roles are
performed by the same individual. Larger firms may have several individuals engaged in
this task. The individuals performing these tasks generally have considerable accounting
experience. They have either just completed their accounting designations or closer to
attaining it. The process of electronic processing, validation and quality checks is an
iterative process and is generally time consuming.

22

. - - - - - - - - - - - - - - -- - -- ·-·

Once the intermediate member Uunior accountant) is satisfied with the accounts,
then data/information is forward to firm partner(s) for final approval. Generally, the firms
could have multiple partners as principals of the firm. These partners usually each have
their own exclusive client base and they share all the support staff and overhead expenses
of the firm. In the firms that participated in this study only the partners of the firm keep in
close contact with the clients for feedback. Once each partner reviews the file and final
approval is awarded, the customer is then contacted and a meeting is set to deliver or
discuss the final product (accounts). Often firm partners will review each other's files
before the client meetings are set to ensure accuracy and quality.
The entire business process of accounting firm (inputs and outputs) is broadly
divided into two functions which are complementary; (a) back office and (b) front office
(refer to Chart 4.6). The front office is the area of customer interaction and is very value
addition oriented, it has a relatively higher value added component then the back office
functions. The back office is where most of the repetitive work is performed and where
customer interaction is very minimal. Any issues that arise in the back office regarding a
particular customer are normally communicated through front office.

23

4.5

Workload and Market Value
This section is devoted to the financial (market) valuation of accounting work

flow of the accounting firms participated in this study.
Table 4.2: Workload Assessment of Back-office Accounting Tasks (Based on 50
Transactions)
Wage
per hour

Process
Step

Number of
Employees

Hours spent
on this task

A

1

8

$15

$22.50

$ 180.00

B

4

8

$18

$27.00

$864.00

c....-

c

6

8

$22

$33.00

$1,584.00

I<®>

D

2

8

$30

$45 .00

$ 720.00

---..,__

Data Eatey
~

(Teclalllcaa)

DataEDtry

(Bookkeeper)

J. .L

(x 1.5)

TOTAL COST

Total
Cost

~

As evident in table 4.2, workflow is broadly divided into: (a) front office and (b)
back office. It was determined that high value and relatively higher customer interaction
tasks are part of the front office functions, and relatively labour intensive and nonintellectual functions are part of the back office (data capture and data validation). The
back office is considered to be the intermediate production section where low value
added tasks are performed. The front-office tasks are in the nature of consultative
24

services and are considered to be high value creation. The front office is the area where
firm principals (owners/partners) and customers interact on regular basis for analysis and
planning. Therefore, these front office tasks are not candidates for outsourcing due to
consultative nature and regulatory restrictions (e.g. non-recognition of outside
credentials). The analysis in the following section will examine the feasibility of adding
value in the back office tasks. On the basis of the flow diagrams in the accounting firms it
was revealed that this is the task which acts as a constraint in the entire accounting value
chain.
In order to evaluate the analysis, the workload needs to be divided into each step

in the process flow chart and as well as true cost per hour by each employee needs to be
identified. From eight accounting firms that participated in this study it was
acknowledged that cost per hour sample median was at $25. However, entry level task
starting pay per hour was at $18 and the more high value task pay per hour was at $30
(Table 4.2). This was the base pay and it did not include the benefit premiums that occur
to the employers for full time employees. The industry average for benefit premium can
be calculated by hourly wage times one and half times. In this case the true cost per
hourly wage for each employee is at $37.50. ($25x1.5). Furthermore for comparison
purposes, the workflow process needs to be standardized on a per transactions basis and
the number of employees it takes to complete transactions.
Table 4.2 illustrates the number of employees and the number of hours it takes to
complete 50 transactions at each step. It also indicates that back office production section
costs to the firm are about $3,348 per normal eight hour day. The number of employees
needed to complete a particular task is an approximation that was collected from the

25

interview process. The four steps at the back office confines the majority of the back
office tasks and it is these tasks which are labour intensive and often acts as a constraint
in the accounting value chain. One can add value and remove these constraints through
strategic outsourcing without increasing the tasks.
As discussed in chapter II, increasingly firms are adopting outsourcing as a
strategy to add value in the supply chain. Outsourcing allows principal firms to focus on
value added tasks while non-core tasks could be performed at lower costs at other firms
or geographical locations, which gives the firm a competitive advantage in the market.
The time consuming tasks, especially the back office tasks are ideal candidates for
outsourcing.
There are many leading outsourcing countries in the world providing services to
global clientele, and one of these leading countries is India. For comparison purposes
India was chosen and the data was obtained from two firms located in Chennai, India.
Table 4.3 presents the cost per hour for a highly valued chartered accountant in India.
Chartered accountants in India are trained and adhere by the IFRS international
standards. However, over last decade through working with American firms the Indian
accountants have become very familiar with the US GAAP standards as well.

..

. I n d"Ia
Ta bl e 4 3 Cos t per hour m
Average Salary of Chartered account per month
Days per month (6days/wk x 4 wks)
Hours per day
Rate per hour in India in Rupees
Rate per hour in India in CAD (I CAD = 40 Rs)

Rs. 50,000
24
8

Rs. 260.42

$

6.51

Based on the cost information derived from table 4.3, the same model can be used
to have the production outsourced to India. Table 4.4 represents the same number of

26

employees and hours used to accomplish the same tasks in India in companson to
Canada. The wages per hour is based on the average salary of the Indian chartered
accountant (Table 4.3) and one standard rate ($6.51 per hour) is used for comparison
purposes. Table 4.4 illustrates the number of employees and the number of hours it will
take to complete 50 transactions at each step in India. It also indicates that back office
production section costs to the firm (based in India) will be approximately $677.04 per
normal eight hour day. For the entry level tasks, services of chartered account are not
required and other junior staff can be used and therefore this $677.04 per day cost will be
reduced even further.

Table 4.4: Workload Assessment
Process
Step

ased on 50 Transaction

Number of
Employees

Hours spent
on this task

A

DataEatry
DataiAccell•..

c--.

(Techalcaa)

Data Eatry

c-.....-

Dalal"--lo

(Bookkeeper)

Wage
per hour

Total
Cost

8

$

6.51

$ 52.08

B

4

8

$

6.51

$208.32

c

6

8

$

6.51

$312.48

2

8

$

6.51

$ 104.16

TOTAL COST

27

Other costs associated with the transportation of data are not considered at this
point. These costs will include the IT structure needed to be able to move the electronic
information virtually via internet for each transaction. From industry resources it is
determined that these costs are approximately 5 percent to 10 percent excess of the total
cost per each transaction.

4.6

Cost Savings (net)

Ta bl e 4 5 - E sf1ma tes ofV a Iue Add"f
I IOn d ue t o T ra d"mgo fT as k s
Cost Valuation in Canada based on the 50 transaction model
Cost Valuation in India based on the 50 transaction model
Savings
Memo Item:
Savings as a % of Cost of Production (in Canada)

$ 3,348.00
$ 677.04

$ 2,670.96

79.8

It is evident from the calculation above (Table 4.5) that by outsourcing the back

office activities to India a cost savings of $2,670.96 daily or per 50 transactions can take
place. These savings can be substantial over time and could really improve accoutring
firm's bottom line. Even considering the virtual transportation of data and IT
infrastructure costs at 5 percent to 10 percent, this is still very cost effective and attractive
solution.

28

Chapter V
Conclusions

This study was cast in the in the background of an increasing trend globally
among firms to fragment their production across firms and geographical locations. The
main motivation for this increasing trend of fragmentation of production of goods and
services is (a) the potential value addition (cost saving on account of lower labor cost) (b)
the prospects of generating new revenues, (c) increase in capital productivity, (d)
managing risks in ways that would be unaffordable in home markets, (e) accelerate the
entry into adjacent product/service markets, (f) a tool for top managers of corporations to
spread risk in a more optimal manner and (g) to avoid large often irreversible
investments.

In Canada too, substantial work in the manufacturing sector as well as

service sector especially in knowledge based areas like customer support, information
systems, accounting, medical transcription etc., is outsourced to other firms/countries.
The present study examines the prospects of value addition of a knowledge based
industry - accounting industry in Canada. The study uses accounting firms in Prince
George, British Columbia as a case study. Accounting firms in Prince George area in the
province of British Columbia represent small, medium and large firms and as such
represents a cross-section of accounting firms in Canada. Out of the 10 accounting firms
approached, eight of them responded to the questionnaire and the request for interviews.
The investigation found that there is considerable constraints in the form of skill

29

shortages, timeliness in delivery of accounts, employee retention and other cost overrun
issues among accounting firms in Prince George, British Columbia.
The empirical analysis of the back and front-office tasks of accounting industry
found that there exists considerable leeway for value creation especially in the backoffice tasks (like transactions processing, generation of financial accounts etc). The
empirical analysis of back-office tasks of accounting firms, based on the costs structure
of Canada and India shows that there is approximately 80 per cent cost saving if one
undertakes outsourcing of accounting tasks (excluding transmission cost of inputs
globally). These cost saving could add considerable value to the accounting firms in
Canada. Besides, consumers of accounting tasks in Canada could also benefit in the
lower price for their accounting tasks.
Outsourcing does not necessary means job elimination; rather, it allows the front
and back offices free time to focus on more value creation services such as consulting
services and providing more value-added service to the customer. This model enables
firms to focus on high value and high margin activities and source out the low value and
low margin activities; ultimately improving the firm's bottom line. Off-shore workers are
generally more motivated than workers in Canada especially in undertaking low-skilled
jobs that lack prestige and suffer from high turnover.
The risks associated with fragmentation of production are: (a) risk of dependence
on the service provider, (b) risk linked to the service provider's deficient capabilities, (c)
the suppliers directly attacking the firms market.
If there is considerable value in trading of accounting tasks, why are firms not
adopting this model? This model is widely adopted by larger accounting firms through

30

their low cost subsidiaries. Small and medium accounting firms do not have client
relationships and there exists considerable asymmetry of information about the quality of
firms (service provider). Secondly, accounting firms in Canada are considerably
concerned that client information (in Canada) could be potentially shared by the service
provider (outside Canada) to their potential rivals. This is a major concern that faces the
credibility of the firms in the supply chain. To protect sensitive customer information,
proper procedures and secured infrastructure need to be put into place. Customers need to
be educated about the country and how the information is processed. Once again, the
credibility, professionalism and ethical conduct of the firms in the value chain are crucial
to this business model.
A limitation of this study is that it was based on accounting firm only in the
Prince George, British Columbia area and this is a very small cohort of accounting firms
compared to the total population of accounting firms in Canada. The findings of this
study could be treated as initial results and more comprehensive study is required to
validate or invalidate the results of this study.

31

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35