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Pursuing a more efficient frontier

Constant pressure on the bottom line and a desire to do more with less have resulted in a number of SMSF businesses investigating offshoring opportunities as a viable way to cut costs, improve efficiency and increase their profit margins. Elizabeth Somerville examines this growing trend to discover where the benefits and pitfalls lie and what offshoring means for SMSF businesses.

The practice of offshoring – where a company bases some or all of its processes or services overseas in a bid to lower costs – is increasing in popularity and visibility across the SMSF sector with more and more groups now choosing to offshore SMSF administration functions.

The Navigator Network chief executive Paul Gorrie started exploring offshoring options two years ago after hearing of the success other industry participants were having with the model.

“We investigated and decided to look into the Philippines,” Gorrie recalls of how his company came to offshore administration practices to an office in Manila.

“There’s only about three offshoring locations that Australia would consider – Vietnam, the Philippines and India.”

According to Gorrie, India proves challenging due to the differences in time zones and the poor experiences people have had over the years with telecommunications companies that offshored their call centres to this part of the world.

Communicating with potential staff in Vietnam is also difficult, so he made the decision to offshore to the Philippines, which is only two hours behind Queensland, where The Navigator Network is based.

“We decided to use our office in the Philippines initially for accounting services and we actually set up an office over there, which we offered to our clients,” he reveals.

“We’ve been set up over there for about 12 to 18 months now.”

Currently, Gorrie outsources super administration tasks to the Filipino office, but is looking at the possibility of transferring over business administration and marketing responsibilities in the future.

Staff in the Philippines are able to access the necessary documents remotely via the group’s file server in Australia, however, a number of security measures have been put in place to protect client confidentiality.

“Staff are unable to save things to their computers and have to store their phones in a separate area when they come to work to protect client privacy,” Gorrie explains.

There’s also no direct contact between Filipino accountants and Australian clients, and the group’s accountants based in Australia double check all completed work before passing this back to clients as part of a quality control practice that Gorrie declares is essential for offshoring to be successful and to continue.

“Offshoring has been scarily successful just in terms of being able to do the work we’ve been able to do in the past and at a much lower cost,” he says.

“When you enter into these things you never really know if it’s all going to work out.

“There were a few technical issues initially around the internet and access to documents, but from a human resources perspective, the staff have been fantastic.”

David Carter of Odyssey Resources, which is an Australian offshore services provider based in Vietnam, echoes Gorrie’s sentiments, and says he expects more businesses to turn to offshoring in the near future for the fiscal benefits and convenience it provides.

The group, which started a decade ago and is the largest offshore services provider to Australia, now has around 250 staff and completes about 25,000 jobs a year.

“About 7500 to 8000 of these are for super funds,” Carter says.

“We’re also running at about 30 per cent growth on the prior year, so we expect to do about 10,000 SMSF jobs this year.”

Odyssey Resources has built an extensive client base since its inception and now services around 750 accountancy and financial planning firms in Australia, as well as assisting some bookkeeping businesses. “Several years ago we became the first foreign company to become an Australian registered tax agent,” Carter says.

“We have ended up with a service offering that ticks all the boxes.

“We have Australian professional indemnity insurance, we’re a CPA Australia partner, it doesn’t matter what software our clients work in, we do the whole thing – tax, accounting, we can do SMSF audits – whatever they give us, we can do.”

He points out Odyssey is currently the seventh largest foreign accounting firm in Vietnam and is very well recognised, which gives the group an advantage when it comes to hiring quality staff.

Staff who wish to join the business have to first pass a stringent entry exam, before they go on to do a two-month training course that focuses on Australian taxation laws and bookkeeping. This is then followed by a formal evaluation process.

“We push people to become Australian CPAs (certified practising accountants) and have around 12 staff members with this qualification at present,” Carter says.

“We have another good dozen-plus going through the process at the moment.”

As it takes a couple of years for staff to become CPA qualified, he says his business prefers individuals to be in the role for at least a year before the group encourages them to pursue this designation.

However, he remains adamant the longevity of this training process is necessary for the success of the business and to meet the growing demand for offshoring services.

“About three years ago the industry woke up and accepted the practices of outsourcing and offshoring,” he says.

“People are now comfortable with the concept of sending stuff overseas, they’re taking it up and talking about it.

“There’s also a generalised experience of sending work overseas and instructions and guidance on how to do it from industry bodies and the ATO.”

As the acceptance of offshoring continues to grow, Australian businesses have become more comfortable talking about their own practices in this space or testing the waters with regards to their administration functions.

However, it hasn’t been smooth sailing for everyone. NowInfinity principal Grant Abbott says although outsourcing and offshoring add efficiency and improve the bottom line, his group typically fixes up about six or seven SMSF documents every day that have been through the processes but arenot up to scratch.

Most of these are around trust deeds and, in particular, limited recourse borrowing arrangements (LRBA) or estate planning, Abbott says.

He believes this highlights the importance of thorough review practices to ensure documents are correct and meet the right standards and requirements before they are returned to clients.

However, these mistakes are unlikely to dampen continued interest in offshoring, which he predicts will be the way of the future.

“If you look at how much administration is done offshore, that’s the first trend, and the second is what we’re doing, which is automating a lot of the administration and documentation processes,” he says.

“In the future, a lot of advisory firms will be using offshoring services or combining them with some onshore facilities.”

HLB Mann Judd director of wealth management Andrew Yee agrees the number of companies offshoring administration functions will only increase with time, but warns it’s not for everyone.

“I imagine a lot of firms won’t want to have anything to do with it and will keep their processes onshore and use existing or improved technology to work better,” Yee says.

“It’s not that simple to offshore; it requires a lot of planning a proper selection of an offshore partner to get sufficient results.

“It’s a big decision and not a straightforward process and this could put some people off.”

A drop in quality of administration documents could also negatively impact on relationships firms have with clients, he says.

“If the work’s been done by someone else overseas, it’s often more difficult to ask questions,” he says.

“Although there should be an Australian contact, some things can get lost in translation as the Australian contact may not know the job intimately as they are not doing it themselves.

“Also, as offshoring works by mass processing funds, it’s much more difficult to provide a personalised service.”

Yee is convinced administrators have to check that their clients are comfortable with having their sensitive financial information sent overseas prior to conducting any offshoring activities. “Administrators need to be sensitive to client issues around offshoring as they may not be in favour of it,” he says.

“They really need to plan out the whole process of how it’s going to work as clients may experience delays in service while they’re getting all of this bedded down. “The other issue is, if work’s being offshored, do clients expect a reduction in their fees?

“I imagine they wouldn’t go up or come down, but firms would just improve their profit margins.”

To manage the quality of work conducted overseas, it would be preferable if firms only offshore the simpler “out-of-the-box” jobs, he suggests.

While it is likely more complicated jobs involving LRBAs and SMSFs with options trading will be serviced overseas, he says current anecdotal evidence indicates efficiencies are not being achieved in these situations due to constant back-and-forth communication with advisers and the need to review and correct errors back in Australia.

“That’s why you have to have review processes in Australia to make sure the quality is up to scratch,” he says.

“Work can’t just come back here and go straight to the client; it has to be checked.”

Resilient quality assurance processes do assist in this domain by providing staff with guidelines and templates to follow to reduce the margin for error, however, according to Yee, these could be boosted if administration businesses increased their staff training and employing activities.

“Providers that have offshoring capabilities need to actually go over there to recruit and interview staff and try to replicate what they currently have onshore,” he says.

“If they can do this that would be ideal, rather than just finding an intermediary and relying on the intermediary to make sure the issues are up to scratch.”

Although offshoring doesn’t change the obligations of the client, who is ultimately responsible for the administration of the fund, Yee envisages it could potentially lead to administrators or auditors being sued for errors or negligence in the future as the practice becomes more widespread.

“Offshoring is still in relatively early days of being used in the industry, so I haven’t seen any examples of administrators being sued,” he says.

“I think there is a danger or risk that this will happen once the industry begins to use offshoring more often as there will be pressure to reduce costs all the time, pressure to deliver product within key performance indicators and time frames.

“Things will be missed and corners will be cut; it’s probably going to happen.

“It already happens without offshoring.”

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