Russia Is the Next Big Outsourcing Marketplace

Though known for IT, outsourcing accounting, HR, payroll, and other traditionally in-house functions to Russia can drastically reduce overheads

Mon, Dec 5, 2016 | 1911 Comments
Paul Goncharoff is Chairman, Disciplinary Committee, National Association of Corporate Directors, Russia

This past November 29 th attending together with OPKO Russian Market Partners the 6 th All-Russia Forum on Corporate Governance in Moscow, where a few things became apparent. Compared to forums held in 2014 and 2015 the tone of this year’s event was markedly positive. While there were fewer non-Russian participants, far less than in the “boom” days, yet presentations were more topically substantial.

The strengthening of good governance and transparency practices in Russia’s businesses has been steady over these past two ‘sanctioned’ years owing mostly to the fact that the impetus and demand grew from within the Russian market itself, and not (as had been the case in the past) from external, non-Russian NGO-type pressures. The sense of Russian business taking positive ownership of the good governance and transparency field was gratifying to witness.

As I have been involved with issues of transparency and governance in Russia since the late 1990’s, it seems that the market here has reached its “psychological moment”, or perhaps “critical mass” in mandating and expecting implementation of real granular change. One of the topics which came up more and more during the all-important socializing breaks was the very real trend of disappearing “relationship accounting”, a euphemistic way of describing the ago-old unofficial path to settling outstanding financial audit and taxation issues. The changes now operational in Russia’s financial and tax spheres have succeeded in making simplification and therefore transparency more and more bottom-line profitable.

One of the many winners in this key area besides businesses in general are the Business Process Outsourcing firms of Russia. Outsourcing IT programming has been a strong business for Russians since the 1990’s and today is a large mature market. Outsourcing accounting, HR, payroll, and other traditionally in-house functions have lagged for several reasons including regulatory. This has changed, and in several conversations with directors and managers the term ‘outsourcing’ seems newly popular in today’s lexicon of work.

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For businesses both large and small that are planning to start activity in Russia, business process outsourcing (BPO) has become a strong tool to reduce overheads. Since 2015, changes made in Russian regulations today allow companies to operate far leaner, and comply with reporting requirements both in Russia and in their home country.

This is a welcome development as it empowers companies to shift their management focus away from the trend some have half-jokingly referred to as “management by bean counters”, to management focused on the core business of a company, be it manufacturing, sales or services.

Russia has had for many years a byzantine system of financial reporting, which seemed to be in a constant state of flux since the late 1980’s. New clauses, requirements, reporting and complexities seemed to appear and disappear with maddening and costly (for business) irregularity. Many in-house finance departments grew well beyond their contribution to the bottom line, in some cases it even seemed as if some companies existed first to serve financial reporting functions and their opaque relationship accounting traditions, leaving the life dynamics of the core business almost as an afterthought.

The trend to outsource accounting functions in Russia was underscored during the recent crisis, resulting in a priority focus on core business rather than accounting. This has allowed companies to avoid risks caused by changing tax laws and complex mandatory reporting forms; optimizing costs; reducing staff, training, education costs; and the need to guarantee the accounting functions applied are fully in compliance with tax law.

To outsource accounting, HR, payroll and similar activities right from the start of company operations is the optimum path to efficient outcomes. Change, when introducing outsourcing to an established structure is accompanied by short-term costs and pain, especially as it means significant redundancies and dismissals.

Most non-Russian businesses entering this market report in their home countries and to shareholders either using GAAP or IFRS. Operating in Russia means having capabilities and mechanisms to satisfy Russian reporting requirements. The result in many cases have been that the financial departments in Russia developed and grew to comply with staying current to regulatory requirements, not the growth dynamics of business. The costly add-on functions are usually performed through a “big four” or similar names, to translate Russian reporting into GAAP or IFRS as required. This just adds to an already labor intense situation for cross-border reporting and the time/costs of back and forth to be sure all are on the same page. The upside to using outsourced accounting using a service level agreement (SLA) which is liabilit insured, is that these cross-border reporting functions can be built-in seamlessly from the start as part of the outsourced service architecture. It therefore becomes a regular, efficient, manageable package and expense.

Overview of differences between in-house accounting and outsourced:

As business regulations and tax laws continue to simplify, and the need for traditionally opaque private arrangements and their relationships lessen, we should be seeing more and broader applications of outsourced business in Russia, and not just for accounting. There is a case to be made for a range of services, from IT to procurement, logistics and beyond.

Over the years working in Russia I noticed that the larger and older a finance department is, the greater the probability of there are several levels of intriguing non-standard practices. Just about all evolve into incredibly complex Gordian knots of the accounting art, and at the end of the day any decision to roll back and simplify looks to be a daunting, dangerous, risk laden task. Once such departments become ‘institutionalized’ within the corporate culture, it is almost as if their prime directive is to survive at whatever cost and to preserve the web of agreed close relationships. Eventually, even the very best of them will trip up, leading to serious financial and other consequences for the business as a whole.
 
Outsourcing today can be a strong new tool to deploy in protecting the ultimate financial integrity and viability of your business in Russia and is well worth further independent investigation locally.
 

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