April 17, 2003

Comparative Advantage Creeps Into the White-Collar Service-Sector World

Comparative Advantage Creeps Into the White-Collar Service-Sector World

The invention of the iron-hulled steam-powered ocean-going freighter in the mid-nineteenth century transformed transoceanic international trade from an exchange of low-weight high-value manufactures and agricultural products with interesting flavor or neurological properties into an exchange of nearly all goods--even high-weight low-value ones. As the price of ocean transport dropped through the floor, even small differences in nation-specific prices could drive large amounts of trade. Today we are going through something similar, but this time it is the price of sending bits--information--around the world that is dropping through the floor. This means that tomorrow's international trade may well be about performing information-processing tasks in whatever country, far from the ultimate client, the task can be performed most cheaply.

Here (sent to me via Dave Farber's IP mail list) Chidanand Rajghatta looks at India's growing potential comparative advantage in the preparation of U.S. IRS Forms 1040.

Every industry facing foreign competition finds some reason that the presumption in favor of free trade does not apply to them, and international trade in tax preparation is no exception. Mr. Rajghatta finds Lloyd Caroll, who claims that the "very notion of transmitting confidential tax data... to any foreign country... reprehensible at best, and is treasonous at worst": privacy concerns deployed in the interest of blocking off international trade.

CHIDANAND RAJGHATTA | TIMES NEWS NETWORK [ WEDNESDAY, APRIL 16, 2003 08:28:39 PM ]

WASHINGTON: Millions of Americans sweated it out on Tuesday, struggling to meet the deadline - April 15 - for filing their annual tax returns as accountants and post offices stayed open late to accommodate the laggards. Many will be hoping the Indians have lived up to their reputation for sound number-crunching.

In keeping with the great outsourcing trend that has swept across American businesses, thousands of US tax returns are now being processed in India, a development that has led to quite a stir in the accounting community. Numbers are hard to pin down, but according to Kishore Mirchandani, president of Outsource Partners International, the firm that claims to have triggered the development, more than 10,000 returns went to India for scrutiny this year. The accounting firm Ernst and Young alone is believed to have forwarded 7500 American tax returns to its subsidiary in India after transferring a tax partner familiar with US tax laws there. Scores of other smaller accounting firms have also sent returns numbering hundreds to India after a pilot study last year showed encouraging results. "The business is still in its infancy, but we are looking at over 100,000 returns going to India this coming year," says Mirchandani, whose firm has a 300-person operation in Bangalore and is looking to expand because of the growing demand. Several traditional American firms are also lining up to send returns to India, after pilot projects showed significant reductions in costs and turn-around times.

"More and more firms are jumping on the bandwagon after seeing the results. They seem very satisfied with the quality, not to speak of the speed and cost factors," says Bill Carlino, Editor-in-Chief of the journal Accounting Today, which has tracked the trend over the past year.

Expectedly, not everyone is thrilled with the outsourcing of what some regard as sensitive financial information. In the latest issue, the magazine Practical Accountant ran a column by a New York accounting professor questioning the trend on grounds of security and job loss to Americans. "If you were to stop by any downtown skyscraper where Ernst & Young has an office, I guarantee that you could not just walk to the elevators and go up to the company's offices. You would be stopped by at least one security officer before you got anywhere near the elevator bank," wrote Prof Lloyd Caroll, head of the accounting department at Manhattan Borough Community College. "Yet the company does not appear to be troubled by the notion of putting taxpayer security in peril by sending returns out of the United States. The very notion of transmitting confidential tax data - from Social Security and employer identification numbers to financial information - to any foreign country, even Canada, borders on the reprehensible at best, and is treasonous at worst," Caroll fumed.

But accounting firms say security is a non-issue. What they are moving to India are only images and the original data remains with the US firm. The software used by the firms is also web-enabled and is accessed by the Indian subsidiary through a server in US.

Firms also reported a 50 to 60 per cent cost reduction, besides improved scrutiny because they are able to hire better qualified people. In the US, simple returns are often viewed by junior staff who are not CPAs.

Although the pilot studies of last year involved sending simple low end returns, some firms such as Toronto's Horwath Ornstein are now said to be sending high-end returns. In turn, firms are also posting Indian-American CPAs qualified in US tax laws to India to oversee the work. "The accounting profession in India itself has improved a great deal and quality should not be a problem," says Ram Ganesan, a Maryland-based CPA, who practices in the United States but sees outsourcing as an encouraging trend.


http://timesofindia.indiatimes.com/cms.dll/xml/uncomp/articleshow?msid=43584938
http://seattletimes.nwsource.com/html/businesstechnology/134676517_taxtoindia16.html

Posted by DeLong at April 17, 2003 11:17 AM | TrackBack

Comments

Now that it's happening, hindsight would say it's obvious this is where it would start. Tax return processing is a highly seasonal business, with all the attendant workload management problems that brings; and CPAs don't (yet?) think of themselves as casual labour. The article said, "[i]n the US, simple returns are often viewed by junior staff who are not CPAs." When the crunch time comes you don't waste your CPAs on the small stuff. So one of the benefits of moving some of the processing offshore is to level off the peak in the workload. Which probably has implications for year-round staffing levels, too. (Though I'd be interested in how the Indian firms are doing workload/staffing management; are they picking up work from several countries with different tax calendars? or are they simply hiring qualified accountants for four months and then laying them off?)

What other white-collar service-sector work has this sort of seasonality? That's the next place we'll see work moving offshore.

Posted by: jam on April 17, 2003 02:52 PM

Jam, I gotta say I don't think seasonality has much to do with it. The real key is portability: Can all the information required to do a given job be pushed down a wire? If so, you can bet that that job is going to go offshore. I work in software (not as a programmer, thank god), and I've seen the future, and I can tell you its scary. The technology profession has been taking it on the chin from H1B's and offshoring for years now, its nice to see some other professions like CPAs and architects getting their oxes gored for a change. Now you know what we've been suffering through.

Posted by: db on April 17, 2003 03:08 PM

The real story here is why we have to pay millions (billions?) of dollars each year to have professionals complete our tax returns. We _should_ have a tax code simple enough that the average person can fill out the required form in 30 minutes, an hour max.

Maybe now that vested interests in the US will have less of a stake in keeping the arcana of tax law understandable only to a select, ,highly remunerated brotherhood, we'll begin to see some changes in this regard.

Posted by: AJM on April 17, 2003 04:21 PM

The real story here is why we have to pay millions (billions?) of dollars each year to have professionals complete our tax returns. We _should_ have a tax code simple enough that the average person can fill out the required form in 30 minutes, an hour max.

Maybe now that vested interests in the US will have less of a stake in keeping the arcana of tax law understandable only to a select, ,highly remunerated brotherhood, we'll begin to see some changes in this regard.

Posted by: AJM on April 17, 2003 04:22 PM

Last year New York City was sending traffic tickets electronically to Ghana for processing. Of course, local unions were furious. The work was moved back to the US, but I think that's a small reversal on the way to white-collar globalization.

Posted by: Henry on April 17, 2003 08:04 PM

From the article you quote:

>"Yet the company does not appear to be troubled by the
>notion of putting taxpayer security in peril by sending
>returns out of the United States. The very notion of
>transmitting confidential tax data - from Social Security
>and employer identification numbers to financial
>information - to any foreign country, even Canada,
>borders on the reprehensible at best, and is treasonous at
>worst," Caroll fumed.

I don't have an Inner Child, but my Inner Ugly American wants to cry out "Hey; when did Canada become a foreign country?" More seriously, it just occurred to me that while I hear Canadians grousing about a lot of things (lining up for elective surgery, US imperialism, bleak economic prospects at home, high housing prices...) the one thing I weirdly could not remember hearing was anything like the piercing whine about how horrible the tax forms are. Does anybody know of a literature on why or how tax forms (or the tax code) differ in their effectiveness at enraging or confusing the populace? You would think that for all of the billions that are spent on this in the US, that some decent academic research would have been done, but I honestly wouldn't know where to look for it.

Posted by: Jonathan King on April 17, 2003 09:58 PM

A friend of mine in the Philippines has started a business doing book-keeping for small-to-medium size US companies. He sources employees who have been trained using American accounting texts from local schools; he advertises his services using the internet; his costs are a quarter of his revenue and his billing rates are less than one-third those in the U.S.

He is now bidding on an insurance company contract which will enable him to hire another 200 employees and significantly increase his business. He thinks this is just the beginning...

Posted by: rgv on April 18, 2003 12:15 AM
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