RS In our opinion Financial outsourcing in Russia – a prospective market or just a bit on the side for auditors?

Financial outsourcing in Russia – a prospective market or just a bit on the side for auditors?

June 2011

Financial outsourcing continues to develop rapidly in Russia. But this market is also still far from being as successful and problem-free as both customers and providers of such services would like to see it. Mistrust of the business sector regarding outsourced employees, low awareness of the opportunities related to outsourcing effectively reduce the development rates for this market in the country.

It was probably the economic recession that had given a real impetus to outsourcing development. Many companies became seriously concerned with the reduction of staffing costs. However, having lost the bulk of their clientele in voluntary audit and consulting, some smaller auditing companies were forced to close down. In 2009 Russia’s financial outsourcing market came to a standstill (1). But as early as in 2010 some of the former market participants began to return and financial outsourcing again found not only demand but also a fairly diverse offer. Yet, if over the period of 2006-2007 the financial outsourcing market would demonstrate an annual growth rate of approximately 30%, such pace of development is nowhere near realistic expectation today.

The majority of financial outsourcers are located in Moscow and St Petersburg where their number is on average twice higher than in the other regions

The majority of financial outsourcers are located in Moscow and St Petersburg where their number is on average twice higher (2) than in the other regions. The key branches using the services of outsourcers are trading companies. They account for over a half of all customers in financial outsourcing (3). The bulk of the remaining half is represented by production, transport and service companies. Outsourcing is also particularly popular with foreign companies operating in Russia. The reasons for this are obvious – economising on staff, as well as avoiding possible complications with the Russian authorities.

What kind of services do outsourcers offer?

Using outsourcing may bring you considerable economy as far as labour compensations to staff, finance, accounting and personnel specialists are concerned. Staff salary costs account for an average of 1/3 of the total costs incurred by an average Russian company (4) . That is why, according to different experts, economy resulting from the use of financial outsourcing may amount to 45 to 75% as compared to employing your own staff. At the same time, outsourcers themselves often warn customers that expected economy might not exactly come out as a result. The bigger the name of the outsourcing company, the less hope it leaves as to that using outsourcing will indeed help the customer save a lot of money.

Several years back what customer companies mainly needed was payroll accounting. Nowadays such services are part of the package offered by companies specialising in financial outsourcing. Full accounting and tax support of all operations are also among the most popularly sought services. Outsourcers create a set of primary documents, draw up accounting and staff rotation documents, take stock of the assets and liabilities, carry out the reconciliation of settlements with counter agents and supervise the internal company documents movement. If the company’s plans and goals are to adopt the IFRS or is already using them, outsourcers may also take up this line.

Several years back what customer companies mainly needed was payroll accounting. Nowadays such services are part of the package offered by companies specialising in financial outsourcing

Outsourcing of staff records management is closely interrelated with financial management. In many small and midsized Russian companies the duties of staff managers are often the charge of accountants. That is why the tasks normally assigned to personnel departments are also often done by outsourcers. In addition to work under accounting and personnel records automation programmes, customers can also order an outsourcer to take upon itself dealings with the Pension Fund and the Social Security Fund. This includes obtaining pension insurance cards for the employees, reconciliations, and resolution of issues related to refunding sick leave benefits. All information required by the authorities can also be compiled and submitted by outsourcers.

Who are the players?

According to the results of a telephone survey of 15 Russian auditing and consulting companies randomly selected on the Internet, they were all open to provide services in financial outsourcing. Even those on whose websites this type of services was not even listed as a separate category. Experts of such auditing companies suggest that the cost of these services be determined “through negotiations”. It is obvious that such companies that are in need of customers, are ready to take up any activity outside of their profile field. The quality of their work in such fields is a matter of wild guessing then.

Such calculators not infrequently turn out to be a fake which reward a user’s inquiry with something like “You are entitled to a discount” or “The cost of services under your inquiry can only be determined after more specific calculations”

Some companies that treat financial outsourcing as a separate service clearly realise that. To foster confidence on the part of potential customers they pretend to help them with estimating the cost of services through their websites. They set up a so-called “service calculator” on their website. The programme offers to specify the company’s monthly turnover, the total staffing and documents processed per month, the taxation system, the number of counter agents.

Such calculators not infrequently turn out to be a fake which reward a user’s inquiry with something like “You are entitled to a discount” or “The cost of services under your inquiry can only be determined after more specific calculations”.

What about the rates?

Auditing companies not featuring among the Top 100 request an average price for services in outsourcing: from RUR 20,000 to 45,000 (USD 733-1,648) for companies whose staff is less than 15 people and who accomplish about 200 transactions a month. This figure multiplies by 2,5 – 3 for companies with staff numbering over 100 people and the number of transactions ranging between 2,000 and 3,000 a month.

Many companies define three areas of outsourcing: “Complete support in maintaining accounting and tax records”, “Accountant” and “Chief Accountant”. Service packages are given in cost increasing order. The first option suggests that the customer has an accounting department of his own, the second provides only for a staff chief accountant, while the third envisages giving away the entire bulk of financial, accounting and, optionally, personnel services. The responsibility for the accuracy of accounting and tax records will at any rate be with the customer’s director general.

Taxation or accounting counselling is usually not included in service packages. Consulting costs an average of RUR 2,000 (USD 73) an hour, although it remains slightly unclear why would a company using outsourcing for its accounting operations need consulting at all.

The cost of outsourcing “package” also normally does not include support during tax and other inspections. The price of the experts’ work is normally estimated at about RUR 1,500 (USD 55) an hour. Considering that tax inspections of companies may last for six months or even an entire year, it appears quite logical that outsourcers only need to be invited for the actual communication with tax inspectors.

Former state corporations enjoy particularly good prospects. The confidence they inspire stems from the traditional confidence in structures and organisations, which are in some way or another linked to the state sector. The cost of services offered by such companies is approximately in line with the rates given above.

Some companies, which are listed among the top 20 of the rating compiled by EXPERT Rating Agency, are ready to offer outsourcing services for an average of RUR 1,500-2,000 (USD 55-73) per hour if the company’s staff is less than 100 people.

There are also totally “low-end” offers. Smaller companies are ready to charge you only RUR 3,000-5,000 (USD 110-183) a month for document support and preparation of financial statements. But this means that they will only arrive once to pick up those documents from you. The quality of outsourcing naturally leaves a lot to be desired in such cases.

The companies of the Big Four offer financial outsourcing services in Russia. Certain specialized packages are not promoted by these companies referring services in financial outsourcing to the consulting services. Unfortunately, representatives of the Big Four absolutely refuse to disclose the price of outsourcing services over the phone to those companies that are not yet among their customers.

The drawback of specialist providers lies in the overpricing of additional services

In private conversations with me the chief accountants of several major Russian companies expressed their concern with that fact that even audit performed by renowned foreign players often falls short of their expectations. The excuses to the effect that the Russian law is so deficient that identification of all possible tax risks that the company might run is simply impossible, does not cut much ice with such chief accountants. What they need are practical recommendations from the companies who enjoy wide public confidence because of big names. At the same time, companies who need auditor’s reports from renowned auditors to show to foreign investors willingly choose to depend on the Big Four. However, when it comes to financial outsourcing, they might on the contrary be willing to choose companies who are better acquainted with the Russian realities and offer much more affordable prices.

In Moscow alone there are, according to various estimates, approximately 100 companies (5) specialising precisely in financial outsourcing. The drawback of specialist providers lies in the overpricing of additional services: drawing up contracts, support during tax inspections, and legal proceedings with tax inspections. One hour of consultations provided by such companies costs about 20% more than with audit companies for whom outsourcing is just one on the list of services.

What stands in outsourcers’ way and what are customers so afraid of?

Heads of many Russian companies, though fully aware of possible benefits related to employing financial outsourcing, nevertheless decide against it because of the certain specifics of tax regulation. Tax planning schemes, which often almost verge on tax evasion, and general directors feel that they can only trust their chief accountants with stuff like this. Businessmen realise that only official accounting records can be given away for outsourcing processing. But even if the company abides by the letter of the law, the psychological barrier prevents many directors from availing of outsourcers’ services. The peculiarity of the Russian mentality lies in its habit to trust mostly insiders only.

Customers do not appreciate the seeming “sluggishness” in the work of outsourcers with whom it takes longer for the documents to arrive from the customer than it takes in the case of companies. Another thing that effectively puts off the customers is the fact that they are not going to take direct part in the selection of people who will perform the duties of financial service and accounting. This generates fear of work being done below the required quality. In such cases it would not come amiss just to remind customers that the auditor and the accounting outsourcer may not be represented by the same company.

Commercial secret is yet another aspect that arouses doubts with customers. The already existing lack of confidence is particularly aggravated by the fact that the bulk of work is traditionally done on the outsourcer’s territory. The fear of raiding is still pervasive among the Russian business market, despite all the efforts of the authorities to eradicate this unfortunate phenomenon.

Yana Muradova
Exclusively for Russian Survey RS

1,2,3,5 According to research estimates by Express-obzor
4 According to estimates by Ernst & Young