The impacts of the tax preparation offshoring on the work efficiency of the onshore associate level employees : a case study at a Big Four accounting firm

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Name: Yuan,Wenying

Thesis Supervisor: Dr. E.G. van de Mortel Student Number: 11723173

Date: 22 June 2018 Word Count: 17,123

MSc Accountancy & Control, specialization Control

Faculty of Economics and Business, University of Amsterdam

The impacts of the tax preparation offshoring on the

work efficiency of the onshore associate level employees:

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Statement of Originality

This document is written by student Wenying Yuan who declares to take full responsibility for the contents of this document.

I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it.

The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.

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Abstract

Outsourcing has been a popular way for a company to run its business in order to be more efficient and cost-effective. As a form of outsourcing, offshoring refers to the geographical relocation of specific business activities to foreign countries regardless of whether or not those activities continue to be performed by the parent firm (Levy, 2005). Tax preparation offshoring is widely adopted by Big Four accounting firms to minimize their labour costs and improve efficiency. This paper is going to investigate how the work efficiency of the onshore associate level employees is affected by the tax preparation offshoring. A theoretical framework developed based on the transaction cost economics and communication theory is used to analyse the research question. Through a case study conducted at KPMG Hong Kong, this article finds out that the work efficiency of onshore associate level employees is negatively impacted by tax preparation offshoring when the complexity of the tax returns and the level of uncertainty are high. In addition, the additional communications and procedures incidental to tax preparation offshoring also create negative impacts on the work efficiency of onshore associate level employees. Contributions are made to the application of the theory of transaction cost economics from an academic perspective and to the management of the companies from a social perspective.

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Outsourcing has been a popular way of running business for a long time, which refers to contracting-out part of an organization’s internal activity to an outside service provider. As a form of outsourcing, offshoring is the geographical relocation of specific business activities to foreign countries regardless of whether or not those activities continue to be performed by the parent firm (Levy, 2005). Based on previous research, offshoring can bring positive effects to an organization’s productivity through compositional changes (Mitra & Ranjan, 2007). By relocating part of its administrative and basic working process to another place with lower costs, the organization can focus on its more value-added procedures. The average productivity of the remaining employees can be improved due to the change in the composition of the workforce. As a result, the impacts of offshoring have drawn the researchers’ much attention in recent years. In the paper written by Amiti & Wei (2009), it has been concluded that service offshoring helps increase the productivity of onshore firms in the manufacturing sector. In addition to the traditional manufacturing sector, new information technologies make offshoring become more possible and popular in the service industry (Amiti & Wei, 2006). As an important sector of service industry, offshoring in accounting industry is definitely worthy of attention.

In recent years, Big Four accounting firms offshore some of their low-value added procedures to get more cost savings. Among the services offshored, tax preparation is a common and typical one. Employees working in the tax department face tight schedules and huge workload during tax seasons. Shamis et al. (2005) claimed that through offshoring, onshore accounting firms benefit from several aspects. First, offshoring makes the management of onshore accounting firms more efficient. It allows the firms to relocate relatively inefficient parts of production processes to other places (Amiti et al., 2009). Instead of hiring full-time onshore employees, the accounting firms can enjoy cost savings from the offshore seasonal labor. Second, due to the increase in labor force, offshoring allows the accounting firms deal with more work especially during peak seasons. Robertson et al. (2004) also pointed out that offshoring tax preparation can improve client service by speeding up the delivery of completed returns. More importantly, offshoring frees tax professionals’ time from data entry and other administrative works, thus allowing the professionals to direct more attention to higher margin services (Robertson et al., 2004).

It is quite common in the United States that the firms offshore the tax preparation process to the service providers in India to benefit from the lower labor costs there. Different from the

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firms in other regions, Big Four firms in Hong Kong have a unique situation due to its geographical location. Instead of cooperating with outside service providers, Big Four accounting firms in Hong Kong have set up their own offshore service centers in mainland China, where the wage level is much lower than that in Hong Kong. The case study will be conducted in a Big Four accounting firm in Hong Kong. Details of the case context will be discussed in next chapter.

1.1.2 Associate Level Employees in Tax Preparation Process

Further to the process of tax preparation offshoring mentioned in previous paragraphs, among all of the players in the tax preparation offshoring, the associate level employees have a critical role and bear the largest amount of workload. Offshoring is originally targeted to free tax professionals, who are actually the associate level employees, from time-consuming administrative works.

Associate level employees working in the tax department face tight schedules and huge workload during tax seasons. Take the preparation for individual tax returns as an example, they should first collect information regarding the income, personal status and other related aspects from the clients. Meanwhile, the wage details should also be collected from the employers. After that, the associate employees should scan the documents into the system and draft the tax returns. By implementing offshoring, the onshore team scan the documents, including income details, previous income tax returns and other personal information of the clients, to the offshore service provider in order for them to prepare tax returns. After that, the offshore team send the prepared draft tax returns to the onshore team for the onshore associate employees’ reviews (Shamis et al., 2005). Thus, it is obvious that, associate level employees are affected a lot by the tax preparation offshoring.

Incidental to the offshoring, new working processes and additional communication may have negative effects on the work efficiency of the onshore associate level employees. The time used by the onshore employees on the incidental processes might be possible to outweigh the time saved by the offshore team. Hence, it is important to investigate what effects have been brought to the onshore associate level employees by the tax preparation offshoring.

Based on what have been mentioned above, this paper is going to investigate the following research question by conducting a case study at the tax department of KPMG Hong Kong: Research Question: How does the offshoring of tax preparation impact the work efficiency of the onshore associate level employees?

As the employees are evaluated based on how many returns they can prepare every day, the work efficiency of the onshore associate level employees will be defined as the number of

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returns completed per day per employee. Propositions will be made based on the research question and the factors affecting the offshoring relationship. A theoretical framework will be constructed in the third chapter. Details will also be discussed in the following sections. 1.2 Expected Contributions

1.2.1 Scientific Contributions

In order to answer the research question, transaction cost economics and communication theories will be applied, which will be discussed in detail in Chapter 3. Williamson (1975) pointed out that there are three critical dimensions of a contractual relationships, which are the degree to which investments are idiosyncratic, uncertainty and the frequency of the transactions. Whether an outsourcing activity is beneficial or not is based on the characteristics of these three factors. Williamson (1975, 1981, 1985) has pointed out that the more specific assets required, the more uncertainty exists in the contractual relationship and the less frequent the transactions are, the less likely that the firm is to outsource that activity. The existing literature and research are about the contractual relationships, where the service provider is an external party.

However, different from the existing research, this article is going to apply the transaction cost economics and communication theories in a different context. As it is mentioned in section 1.1.1, KPMG Delivery Center (KDC), the offshore service center founded by KPMG in mainland China, is also part of KPMG Hong Kong, which makes it an internal service provider instead of an external one. Thus, different from the contractual relationship with outsiders, the offshoring relationship in the case study is more stable and long-term, which allows adjustments to be made over the process. Hence, this article is going to provide a practical example of to what extent these theories are applicable to the outsource/offshore relationships happening internally.

1.2.2 Social Contributions

As it has been mentioned in the previous sections, research regarding the impacts of offshoring has been conducted over the years. However, the existing studies are mainly related to the impacts of the offshoring on the accounting industry as a whole.

Robertson et al. (2004), Shamis et al. (2005) and Daley (2008) pointed out the benefits and concerns about offshoring. They shared the views that offshoring creates value for the accounting firms by increasing efficiency and reducing labor costs. They also all agreed that offshoring may induce potential threat to the accounting profession and client information security. However, there is little literature investigating the effects of offshoring on associate level employees, which is an important group of players in the offshoring process. Different

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from the above-mentioned literature, this article will focus on the impacts on the associate level employees of the onshore team specifically.

By answering the research question mentioned above, this thesis may make the following social contributions. First, it will be important to provide the Big Four firms with more information about how offshoring may affect onshore associate level employees regarding their working processes and efficiency. According to Table 1, duties of the onshore associate level employees have changed dramatically because of offshoring. Offshoring is originally targeted to help them improve work efficiency. As the starting point of the tax preparation process, work efficiency of the associate level employees affects the whole working process directly. Thus, through the case study of an accounting firm, this paper will bring more insights about how offshoring impacts the work of onshore associate level employees and the problems incurred in practice. This paper is expected to bring some inspirations to the practitioners and firms in optimizing the offshoring relationship and maximize the value of offshoring.

Second, as this paper is going to focus on the associate level employees, it is expected that more attention can be drawn from the firms to this level of employees. As the largest group of staff in accounting firms, associate level employees receive little attention due to their relatively low positions and high turnover rate, yet they play important roles in the value chain. Thus, this paper is going to raise the attention of the firms regarding associate employees and provide them with insights about how to improve the work efficiency of associate level employees, which in turn benefits the firm as a whole.

1.3 Outline

This paper will consist of six chapters. In Chapter 2, the case context of this paper will be discussed. Followed by Chapter 2, applicable theories and a theoretical framework together with propositions made based on the research question will be discussed in Chapter 3. Chapter 4 will be about the methodology adopted to investigate the research question. This paper is going to conduct a case study with interviews with both the onshore and offshore employees from KPMG Hong Kong. Followed is Chapter 5 to introduce the results of the research. Finally, in Chapter 6, conclusions will be drawn and discussions and future research possibilities will be included.

2 Case Context and Background

2.1 Global Mobility Services Department, KPMG Hong Kong

Global Mobility Services department (GMS) of KPMG Hong Kong offers an extensive range of tax compliance and advisory services to the employers to help them meet their tax filing requirements both in Hong Kong and internationally (KPMG). There are around 90 employees

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in total in the department. At the same time, employers engage GMS to help them deal with their employees’ annual tax filings in Hong Kong. Even though GMS also provides US tax services to clients, its focus is more on providing services for Hong Kong individual tax filings. The tax year in Hong Kong starts from 1 April to 31 March of the next year. Normally, all of the returns should be delivered to the clients by the end of August each year. Thus, the busy season for GMS Hong Kong is normally from early April to late August every year.

In order to improve productivity and save costs, GMS has started offshoring its Hong Kong tax preparation processes to KPMG’s service center, KDC, in mainland China since early 2016. KPMG set up KDC as a shared service center for KPMG China in Foshan, Guangdong Province. KDC center provides audit, tax and advisory service supports to onshore teams. In terms of tax service, KDC helps tax professionals in main offices to retrieve salary and tax related information from clients and prepare tax statements and tax information entry (KPMG, 2017).

2.2 Onshore Associate Level Employees

As it has been mentioned above, GMS has a relatively small size with only around 90 employees in total. Among them, about 30 employees are at associate level. The associate level employees were previously the starting point of the tax preparation process, who were responsible for drafting the returns. After the offshoring, in order for the KDC team to prepare the tax information entry, the onshore associate level employees should first collect the whole package information from the clients, scan the documents into the shared system and complete a detailed information checklist to guide the offshore team’s work. However, previously, the associate level onshore employees input the data into the system and generate the tax returns directly. In addition, after the completion of the draft returns, the offshore team send the returns back to onshore team for their review. If corrections are required, the onshore team should communicate with the KDC employees through internal system to revise the returns.

Table 1 provides the details of the role and duties of the onshore and offshore associate level employees before and after offshoring. Details about the changes caused by offshoring are displayed in red in the table.

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Table 1: Onshore and Offshore Associate Level Employees’ Role & Duties Before and After Offshoring

Onshore Offshore

Before After After

Role Preparer Reviewer (Level 1) Preparer

Duties 1. Collect income details and personal information from the clients 2. Draft tax returns based on the

information collected

3. Send the drafted tax returns for the managers’ reviews

4. Revise or amend the returns directly based on the managers’ instruction

1. Collect income details and personal information from the clients

2. Complete information checklist to provide detailed guidance to offshore team

3. Upload documents and client related information into shared system for the offshore team’s preparation 4. Keep communicating with offshore team if further

information or clarification is requested

5. Review the tax returns drafted by offshore employees 6. Send the returns back to offshore team if corrections are

required

7. Communicate with the offshore team continuously until the drafted returns are qualified for the manager’s further review

8. Send the drafted returns for managers’ reviews 9. Communicate with the offshore team if further

amendments should be made after the managers’ reviews

1. Receive the request from onshore associate level employees

2. Download the information and checklist uploaded by onshore associate level employees from shared system

3. Input the information into the system

4. Draft tax returns and send them for the onshore associate level

employees’ reviews

5. Revise and amend the returns based on the onshore associate level employees’ instruction

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2.3 Critical Factors Incorporated in the Tax Preparation Offshoring

2.3.1 Complexity and the Number of Tax Returns

Tax preparation service is a kind of professional service provided by the Big Four firms to clients to help them fulfill their tax compliance requirements both locally and internationally. The most important duties of the selected department, GMS of KPMG Hong Kong, are collecting client information, preparing the Hong Kong Individual Tax Returns accordingly and sending the completed returns to clients for their approvals. Clients of the department are normally multinational companies, investment banks or other famous corporations. They engage the department to handle the Hong Kong tax issues for their expatriates or some local employees. Thus, the portfolio of each client often consists of hundreds of employees, which means that during the tax season starting from early April and ending in September, the department should prepare thousands of tax returns within limited time and strict requirement for quality. Due to the limited personnel in the department and huge volume of tax returns to be delivered, associate level employees always worked overtime during the peak seasons to achieve the allocated target. Thus, offshoring is regarded by the firm as a good way to improve the work efficiency of associate employees and their work-life balances.

However, based on Hong Kong tax laws, some of the taxpayers can incorporate different exemption claims in their annual tax returns, which include partial and full exemption claims. Thus, the level of complexity of the tax returns are different. When dealing with the tax returns with exemption claims, analysis and decisions should be made based on the specific situation of each case, which means that additional information is needed and more complex process is incurred, especially for partial exemption claims. Generally speaking, over half of the returns are incorporated with partial exemption claims and are not the simple ones. Table 2 below summarizes the major differences between simple and complex returns. Hence, even though the volume of the tax returns is quite high and offshoring is expected to create economies of scale for the firm, the different levels of complexity of the returns may also play an important role in deciding whether the work done by the offshore team is efficient or not, as the offshore employees are lack of professional knowledge about Hong Kong tax regulations.

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Table 2: Differences between simple and complex returns

Simple Returns Complex Returns

1. Clients holding Hong Kong employments. 2. All of the income generated during the year

of assessment is taxable (Inland Revenue Department, 2007).

3. For people visiting Hong Kong fewer than a certain number of days in the year of assessment, full exemption claim can be incorporated to exclude all of the income generated during the year of assessment from the salaries tax (Inland Revenue Department, 2007).

4. For existing clients, the prepares only need to input current year’s income details and generate returns.

1. Clients holding non-Hong Kong employments.

2. Partial exemption claims might be

incorporated in the returns to exclude part of the income generated during the year of assessment from the salaries tax (Inland Revenue Department, 2007).

3. For partial exemption claims, judgements regarding the employment and travel details should be made.

2.3.2 Relationship Between Onshore and Offshore Team

Different from other outsourcing relationships, which engage service providers outside the firm, KPMG Hong Kong has its own KDC center in mainland China, which can provide the offshore services directly. Different from contracting with an external party, KPMG Hong Kong can supervise the performance of KDC constantly and make adjustments if needed. In addition, the possibility of terminating the relationship due to external uncertainties is rare. Thus, this offshoring relationship is more stable and long-term than others. As a newly established service center, KDC recruited employees directly from mainland China. Due to the difference in education background between mainland China and Hong Kong, employees hired by offshore team are often lack of Hong Kong tax professional knowledge and not used to use English. Even though the part of the process offshored is the most basic and standard one, the offshore employees still need basic understanding of Hong Kong tax regulations and the standard working process. Thus, tailored trainings should be provided to the offshore employees to equip them with adequate knowledge and skills and ensure the success of offshoring, which is indicated by Williamson (1975) as a human capital investment.

In addition, based on Table 1, compared with the previous process, associate level employees are more engaged in the communication with others, especially with the offshore employees nowadays. Since the adoption of offshoring, continuous communications between onshore and offshore teams are required throughout the tax preparation processes. Even though the offshore team is not an outside service provider, due to the its location in mainland China and the professional background of the employees, it may share different cultures with the onshore team. The way of thinking and working may be different from the Hong Kong team. Thus,

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communications become more complicated and time-consuming in the offshoring relationship. In this regard, inefficiency might occur.

Previously, onshore associate level employees drafted the returns by themselves and there was no need for them to cooperate with other parties in the early stage. However, additional efforts and time are incurred currently by the onshore team when they communicate with the offshore employees. Communication with the offshore team is required both in the preparation period and at a later stage.

3 Theoretical Framework 3.1 Selection of Theories

Several theories have been used in the existing literature to investigate the outsourcing relationship. One of the influential theories in the study of outsourcing has been transaction cost economics (TCE) (McIvor, 2009). TCE is considered to be a well-established theory to explain the reasons for a company whether to outsource certain operations or not and to analyse the attributes of an outsourcing relationship (Ellram et al., 2008; Murray & Kotabe, 1999; McCarthy & Anagnostou, 2004; Noordewier et al., 1990; Ulrich & Ellison, 2005; Odagiri, 2003). Through evaluating governance structure of the firm and market conditions, TCE helps the company to determine to make or buy and to economize the transaction costs during the process. According to Perunović and Pederson (2007), TCE is often applied by the scholars to

study the preparation and management stages of outsourcing decisions.

Concluded from the sections above, factors including complexity and the number of returns play important roles in the success of the offshoring. These factors can also be related to the dimensions of the TCE discussed above. Thus, TCE will be applied in this paper to investigate the research question. In addition, communication between onshore and offshore team has also been indicated in the previous parts as an important factor in order to investigate the impacts of the tax preparation offshoring on the onshore associate level employees. Hence, transaction cost economics and communication theory will be used in this research. Details of the theories and propositions will be further discussed in the following chapter.

3.2 Transaction Cost Economics

Outsourcing provides a potential way for the companies to reduce price and increase flexibility, which helps the firms to convert fixed costs into variable expenses, and increase their economies of scope (Ellram et al., 2008). TCE has been the most widely-used outsourcing theory (Vaxevanou & Konstantopoulos, 2015). Suggested by Williamson (1981), economic approaches to the study of organization generally focus on efficiency (Williamson, 1981). Williamson (1981) pointed out that transaction costs are like the frictions in mechanical systems,

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which are incurred when the parties to exchange cannot operate harmoniously, and when misunderstandings and conflicts happen. Transaction-cost economics is an interdisciplinary undertaking that joins economics with aspects of organization theory and overlaps extensively with contract law (Williamson, 1979).

Transaction cost theory indicates that the outsourcing is desirable only when the costs of related asset specific investments and other efforts are lower than the expected cost advantage (Olsen, 2006). Compared with other approaches to study economic organizations, transaction cost economics is more micro-analytic, more conscious about its behavioural assumptions and introduces and develops the economic importance of asset specificity (Williamson, 1985). According to Williamson (1975), three critical dimensions can describe the contractual relationships, which are the degree to which investments are idiosyncratic, uncertainty and the frequency of the transactions. These three factors play important roles in deciding whether the company chooses to outsource or offshore their activities or not.

3.2.1 Level of Specific Investment

The level of specific investment, also known as the degree to which investments are idiosyncratic (Williamson, 1975), can be divided into three categories, which are nonspecific, mixed and idiosyncratic (Williamson, 1975). Williamson (1975, 1981, 1985) has pointed out that the more specific assets required to support an activity, the less likely that the firm is to outsource that activity. The reason for this assumption is that the company may develop a high level of dependence on the supplier and opportunism problems may arise in this regard (Ellram et al., 2008). Thus, there has been evidence showing that the higher the level of asset-specific investment required, the less likely the professional service category is to be offshore outsourced (Ellram et al., 2008; Masten et al., 1991; Klein et al., 1978). The asset-specific investment includes both human and physical capital (Gottschalk & Solli-Sæther, 2005). Services and products with high specificity are hardly to be used in other transactions without huge additional costs (Arnold, 2000). As it has been mentioned previously, TCE is widely used in both the preparation and management stages of the outsourcing period. Regarding the research question of this paper, the tax preparation offshoring relationship has already been established. Thus, this article is going to focus on how the level of specific investment impacts the costs of the offshoring, which can be reflected by the work efficiency of the onshore associate employees.

According to Arnold (2000), when dealing with transactions with low specificity, the company only needs to exchange little information with the transaction partner. The service provider can exploit economies of scale easily. However, for the transactions requiring high level of specific investment, much information has to be exchanged before, during and after the outsourcing

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process and results in high transaction costs. This leads to a longer time for the company to reach the economies of scale. In terms of the economies of scale, simply speaking, it refers that the company can do things efficiently with increasing size or speed of operation (Chandler Jr, 1993). Thus, with higher level of specific investment, as the economies of scale is harder to achieve, the efficiency of the production will be negatively affected as well.

As it is mentioned above, tax preparation offshoring should be relatively idiosyncratic and the efforts needed to establish a successful and efficient relationship between the onshore and offshore team might be time-consuming. Economies of scale should be realized only when the offshore employees have received proper trainings and familiarity of the tasks has been formed. According to the details discussed in the previous chapter, among the tax returns handled by the department, they are with different degrees of complexities, which are mainly divided into simple and complex returns. For simple returns, the rationale behind is more straight-forward and the professional knowledge required is more basic. Thus, the human capital invested should be less. However, based the Table 2 presented in Chapter 2, in order to draft complex returns, the employees are required to have a higher level of professional knowledge, as each of the returns contains specific conditions and judgements are needed, which also indicates that a higher level of specific investment is requested in this regard. Thus, the complexity of the tax returns will be treated as the indication of the level of specific investment in this article. Hence, the following proposition is developed:

Proposition 1: The work efficiency of onshore associate level employees is more likely to be negatively affected by the tax offshoring when dealing with more complex tax returns.

3.2.2 Level of Uncertainty

The uncertainty included in the offshoring relationship consists of the external environment uncertainty and the internal uncertainty in requirements (Ellram et al., 2008). It is widely conceded as a critical attribute (Williamson, 1979). Uncertainty in the external environment deals with the degree of volatility and unpredictability in the market place with regard to changes in availability, technology, price, key players, and any other significant disruptions to the market (Ellram et al., 2008). According to the theory, firms prefer to perform tasks internally than buying from outside when they are in highly uncertain markets (Ellram et al., 2008; Williamson, 1985).

In terms of the internal uncertainty, there two types, which are the internal uncertainty in requirements and uncertainty regarding the performance of the contract (Ellram et al., 2008). Internal uncertainty in requirements means that there is a risk of being wrong that not getting what was required in the offshoring relationship. Thus, companies often may have more flexibility if choose not to offshore. Outsourcing requires the firm to specify what is and is not

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part of the contract and to accurately define levels of service. There is a risk of not getting what was required and lack of flexibility (Ellram et al., 2008). On the other hand, Williamson (1975) states that learning-by-doing economies in production operations can only be realized when the relationship between buyer and seller is well established (Williamson, 1975). Williamson (1975) has also pointed out that familiarity permits communication economies to be realized when specialized language develops as experience accumulates and nuances are signalled and received in a sensitive way.

Uncertainty regarding the performance of the contract refers to the situation that the contracting parties have no assurance that the other party has actually fulfilled its obligation and performed as specified (Williamson, 1975, 1985). Under this circumstance, a firm may suffer losses from getting the products from the suppliers different from what it has expected (Amaral, et al., 2006; Ellram et al., 2008; Kaufmann & Carter, 2006; Vidal and Goetschalckx, 2000).

As it has been discussed in Chapter 2, as the offshoring relationship to be discussed in this article does not include any external suppliers, the external uncertainty will not be taken into consideration in this regard. Regarding the case to be analysed in the article, even though the offshoring relationship has been formed, internal uncertainty in requirements might also exist. In order to ensure the quality of the tax returns delivered to the clients, the firm has set up several criteria for the onshore associate employees. However, the offshore employees are lack of experience and knowledge of Hong Kong tax issues, which means that there is a risk that the offshore team cannot meet or understand the requirements proposed by onshore team and affect the productivity especially in the early stage, as the communication economies have not been established yet. Hence, it is suggested that the level of uncertainty in the offshoring relationship is not the same in respect of different stages of the offshoring. Thus, this can also be concluded with the following propositions.

Proposition 2a: Offshoring of tax preparation affects the work efficiency of the onshore associate level employees negatively at the early stage.

Proposition 2b: Offshoring of tax preparation improves the work efficiency of the onshore associate level employees at the later stage.

3.2.3 Frequency of Transactions

Williamson (1975) has divided the frequency of transactions into 2 dimensions, which are occasional and recurrent activities. The frequency dimension strictly related to buyer activity in the market (Williamson, 1979). The number of transactions is the surrogate of the total cost of transactions, which means that the more frequent the transaction is, the more the costs will be (Maltz, 1994; Williamson, 1985). Together with the dimension of level of specific investment, frequency of transactions is one of the factors to determine what type of contracting

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the firm should establish when doing transactions (Williamson, 1979). For nonspecific occasional or nonspecific recurrent activities, classical contracting (Macneil, 1977) should be used, in which market governance is the main governance structure (Williamson, 1979). Neoclassical contracting (Macneil, 1977) should be adopted when dealing with mixed or idiosyncratic occasional transactions. For recurrent mixed or recurrent idiosyncratic transactions, companies should adopt the relational contracting, which includes the form of vertical integration (Williamson, 1979).

As it has been discussed in section 3.1.1, tax preparation offshoring involves handling tax returns with different level of complexities, which have various level of specific investment. The volume of tax returns is large, which should be classified as recurrent activities. Considering the abovementioned two factors, vertical integration should be the most suitable contracting form for the firm, which makes the offshoring within the firm reasonable compared with outsourcing the preparation stage to outside providers. The advantage of this method is that there is no need to revise the interfirm contracts and both onshore and offshore teams share the same ultimate goal of making profits for the firm. Hence, the dimension of frequency of transactions is related to the reasonableness of the establishment of the offshoring relationship within the firm instead of the management of the offshoring process, which is connected to the research question of this article. Thus, this factor will not be involved in the conceptual framework to answer the research question.

3.3 Communication

Defined by Edgar Schein (2010), the organizational culture is the basic assumptions and beliefs that are shared by members of an organization, that operate unconsciously, and that define in a basic "taken-for-granted" fashion an organization's view of itself and its environment. Culture serves as the medium for the communication of values in an outsourcing relationship (Hendry, 1995). The efficiency of communication critically related to the sharing of experience and circumstances (Hendry, 1995). Risks will arise when the participants in the outsourcing relationship don’t have a shared culture and background (Hendry, 1995). Information gap incurred in the communication process also results in inefficiency.

3.3.1 Additional Procedures

The information of the clients is collected by the onshore team due to the information security concerns, which indicates that the offshore team have no access to the client details directly. In addition, as the offshore team doesn’t share the same level of professional knowledge and experience as the onshore team, an information checklist should be completed by the onshore associate level employees to guide the work of the offshore employees. As a result, additional procedures are done by the onshore associate employees when they communicate with offshore

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employees in order to guide their work. Table 1 in Chapter 2 have summarized the changes in the work procedures of the onshore associate level employees, of which the points in red are additional procedures. Thus, even though they are not drafting the returns anymore, additional time is spent when they collect the information and transfer the whole package of client details through several additional procedures to the offshore team. Hence, the following proposition is developed.

Proposition 3: Time spent on additional procedures outweighs the time saved by tax preparation offshoring and negatively impact the work efficiency of onshore associate level employees.

If the above proposition is true, a negative effect on the work efficiency of onshore associate level employees is expected by the additional procedures incidental to the offshoring.

3.3.2 Additional Communications

As it is mentioned above, differences in culture and background result in risks in the outsourcing relationship (Hendry, 1995). Communications between onshore and offshore employees occur at different stages. During the preparation stage, the onshore employees first communicate with the offshore employees using the information checklist. During the process, it is possible that further communication happens. When the tax returns are drafted, onshore associate level employees are the first-level reviewers to detect any errors. If anything needs to be corrected and revised in the drafted tax returns, the onshore employees are expected to communicate with the offshore team instead of amending it by themselves. Thus, the effectiveness of the communication between the two parties may significantly influence the work efficiency of the onshore associate level employees.

As it has been mentioned above, due to the lack of shared background and professional knowledge, it might be time-consuming for the onshore employees to let the offshore employees know their requirements and errors to be amended. Thus, in order to complete one tax return with required quality, the onshore employees invest much more time in communicating with others compared with the previous practice, which may influence the work efficiency in a negative way.

Proposition 4: Differences in culture and background result in inefficiency in communication between onshore and offshore teams and have negative impacts on the work efficiency of onshore associate level employees.

To conclude the theories and propositions discussed above, a theoretical framework is displayed below and will be used to guide the research process.

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4 Methodology

There are several types of research methods available, which include experiment, survey, archival analysis, case study and history (Yin, 1994). In order to distinguish these methods and choose the most suitable one, three conditions, which are 1) the type of research question post, 2) the extent of control an investigator has over actual behavioral events and 3) the degree of focus on contemporary as opposed to historical events, should be applied (Yin, 1994). First, among the aforementioned three conditions, the type of research question is the most important one (Yin, 1994). Regarding the research question of this article, according to Yin (1994) and Baxter & Jack (2008), “how” question is more explanatory than the “what”, “why”, “where” and “who” questions and always leads to the use of case study, experiment and history, which are classified as qualitative research methods.

Second, the second and third conditions should be further analysed to choose a suitable research method for the paper. When history is used, it usually indicates that the investigator has no access or control over the activities (Yin, 1994). Experiments are done when an investigator can manipulate behaviour directly, precisely, and systematically and conducted under a laboratory setting (Yin, 1994). Different from the abovementioned two methods, case study is adopted when the research is about contemporary events and the relevant behaviours cannot be manipulated (Yin, 1994). It can deal with a full variety of evidence, such as documents, interviews, observations and so on. Considering the research question is about the tax preparation offshoring, which is a contemporary event, and the process cannot be manipulated directly and systematically in a lab, case study should be chosen for this paper.

By conducting case study, the information will be mainly collected through interviews. Details of the interviews are discussed below.

4.1 Interview

The interview remains the most common method of data gathering in qualitative research (Cassell & Symon, 2004). Interviews provide researchers with rich and detailed qualitative data for understanding participants’ experiences, how they describe those experiences, and the meaning they make of those experiences (Rubin & Rubin, 2012). Semi-structured interviews will be the main research method used in this thesis. 8 onshore associate level employees and 4 offshore associate level employees will be selected for the interviews. As all of the interviewees are located in China, the interviews will be conducted through phone conversations. All of the interviews will be taped and transcribed

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In addition, in order to let the interviewees better express their opinions, the conversations will be in Cantonese or Mandarin. The scripts of the interviews are recorded in English in order to analyse the results.

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The following sections are going to explain how the interviewees are selected and how the questions are designed for both onshore and offshore employees. Lists of the questions for onshore and offshore teams respectively are provided in the appendix.

4.1.1 Selection of Interviewees

GMS Hong Kong has a relatively small size with only around 90 employees in total, among whom 30 are associate level employees. The offshoring of tax preparation processes started from early 2016 and is still under progress. As the research question focuses on the impacts of the offshoring on the work efficiency of onshore associate level employees, the onshore interviewees selected should experience both the pre-offshoring and post-offshoring periods in order to illustrate the differences between these two periods and indicate the influences brought by offshoring. Thus, only the onshore associate level employees joined the firm before early 2016 are targeted as the interviewees.

Even though the work efficiency of onshore associate level employees is the focus of the research question, offshore employees who prepare the tax returns nowadays are also involved in this relationship as a key part. As it is mentioned in Chapter 3, communication between these two parties is expected to play an essential role. Thus, in order to ensure the triangulation of the research and internal validity of the paper, 4 employees from the offshore team are also interviewed to provide more information about the offshoring and corroborate the conclusions. 4.1.2 Interview Questions

Questions for Onshore Associate Level Employees

Based on the propositions listed in Chapter 3, four factors related to the offshoring are expected to have impacts, either positive or negative, on the work efficiency of onshore associate level employees. Questions to be asked in the interviews should be aligned with the research questions in order to increase the utility of interview questions in the research process (Castillo-Montoya, 2016). Hence, the questions for onshore associate level employees are divided into parts corresponding to each of the propositions of the conceptual framework, which has been discussed in Chapter 3. A list of the interview questions is provided in appendix A.

Questions for Offshore Associate Level Employees

As an important source of information to corroborate the conclusions drawn from the interviews with onshore employees, interviews with offshore associate level employees aim to verify the information collected from the onshore employees and get more details from the other side of the bilateral relationship. The interview questions are developed correspondent to the questions to onshore employees and are also closely connected to the theoretical framework.

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In addition, questions regarding the performance measures will be asked to investigate whether the offshore employees are motivated and given sufficient time to accomplish their tasks. The work efficiency of the onshore associate level employees is significantly influenced by the efficiency of offshore associate level employees. Thus, the conditions affecting the efficiency of offshore employees are also important for this research. In this section, two questions regarding the performance measures, which in particular is the turnover time, of the offshore employees are developed to investigate how the quality of the works done by offshore employees are impacted by the way they are evaluated. Details of the interview questions can be found in appendix B.

5 Results

In this chapter, the results of the interviews will be analysed and discussed to verify the conceptual framework presented in Chapter 3. Eight interviews with the onshore associate employees and four interviews with the offshore employees have been conducted. Each of the proposition is related to a group of interview questions for both onshore and offshore employees. According to the framework, the impacts of the tax preparation offshoring are related to two theories, which are transaction cost economics and communication. First part of this chapter will focus on the questions related to the elements of transaction cost economics, which are the level of specific investment and level of. Second part is going to discuss the aspects related to the communication between the onshore and offshore teams.

5.1 General Information

Table 3: General information of interviewees

Interviewee Title Year of Joining the Firm

Experienced the whole offshoring process or not? / Has Hong Kong tax background or not?

Onshore 01 Senior associate 2012 Yes

02 Senior associate 2014 Yes

04 Senior associate 2015 Yes

07 Associate 2015 Yes

08 Associate 2016 Yes

Offshore 01 Senior assistant 2016 No

02 Assistant 2016 No

The general information of both onshore and offshore interviewees are presented in Table 3 above. In total, eight onshore and four offshore associate level employees have been interviewed. Among the onshore interviewees, seven of them are senior associates and all of

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them have experienced the whole offshoring process. In terms of the offshore side, all of the four interviewees joined the firm in the year 2016, which is the year the offshore team was founded. Moreover, none of them has Hong Kong tax background before joining the firm.

5.2 Transaction Cost Economics

5.2.1 The Level of Specific Investment

The level of specific investment refers to how idiosyncratic the investment is. In terms of the preparation of tax returns, as it is mentioned in section 3.1.1, the level of complexity is regarded as an indication of the level of specific investment. The more complicated the return is, the more specific or idiosyncratic experience and knowledge is required. The results of the questions regarding this factor are summarized in Table 4 presented below.

Table 4: Level of specific investment findings

Row Question Number (Onshore / Offshore) & Description Onshore Offshore 1 6 / 5 Classification of tax returns based on complexity

1) Simple returns with no exemption claims or full exemption claims. (8/8) 2) Complex returns with partial

exemption claims. The returns may also include stock option sourcing. (8/8)

3) Two of the interviewees make the tax returns with double tax issues a separate category because of its uniqueness and relatively small number. (2/8)

1) Simple returns with no exemption claims or full exemption claims. (4/4) 2) Complex returns. (4/4)

2 7 / 6

The proportion of each type

1) Average: simple returns (30%) : complex returns (70%). (5/8) 2) Three interviewees state that more

simple returns are offshored than complex returns. (3/8)

1) Average: simple returns (30%) : complex returns (70%). (3/4)

2) One interview points out that the ratio should be simple returns (80%) : complex returns (20%). (1/4) 3 8 / 7 Differences in quality / Procedures to draft a tax return

1) There is an obvious difference between the quality of simple returns and complex returns.（8/8）

2) Simple returns are with good quality in general. (8/8)

3) Offshore employees make more mistakes when drafting complex returns. (8/8)

4) One interviewee points out that the quality of the returns for complex returns varies among offshore employees. Some more experienced offshore employees can draft complex returns with good quality. (1/8)

1) Same procedures apply to both types of the returns. (4/4)

2) Offshore employees just follow the information checklist provided by the onshore team to input the details and generate returns. (4/4)

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5.2.1.1 Interviews Onshore Employees

Based on the results summarized in row 1, all of the onshore interviewees agree that the returns should be roughly divided into two types, which are simple / standard returns and complicated returns. According to the interviewees, the rationale behind the classification is the level of judgement and professional knowledge involved in the tax preparation process. One of the interviewees explain that “For simple ones, you don’t need to think too much, just like no or full exemption claims (Interviewee 07).” However, for the complex returns, employees should make judgements during the preparation process and higher level of experience is required. One interviewee explains that “For complex returns, judgements should be made by the preparers in addition to only following standard procedures (Interviewee 04).” Returns with partial exemption claims are more complicated than the simple returns. For this kind of cases, they should ask for the details of the travel schedule from the clients and indicate the purpose (personal/business) of each trip outside Hong Kong clearly, as only the income generated during business trips outside Hong Kong can be fully exempt. When the purpose of the trip is mixed, ambiguity often happens and judgement by the preparer is required. Row 2 of Table 4 displays the results for the proportion of each type of returns mentioned above. To explain the point 1), five of the eight onshore employees claim that more complex returns are offshored, which is around 70% of the total.

Four employees share similar opinions that the reason for offshoring more complex returns is mainly because of the type of clients handled by their teams. As for the point 2) of row 2, the remaining three interviewees claim that they offshore more simple returns compared with the complex returns. However, during the interviews, all of interviewees point out that, as a requirement of the firm, nearly 90% of the returns nowadays are offshored. The remaining 10% are the most complicated returns, which the onshore employees handle by themselves. In general, based on the results, the firm offshore most of their tax returns and among which complex returns are little bit more than simple returns.

Row 3 is about the question for the difference in the quality of the returns drafted by offshore team. All of the onshore interviewees hold the same opinion that the quality for simple returns is apparently better than complex returns. One employee mentions that “For simple returns, they are always with good quality. Offshore employees only make some minor mistakes, such as typos. But for complex returns, when they need to make more judgements, they make more errors and the draft returns are with worse quality (Interviewee 02).” In addition, as it is stated in point 4) of row 3, the quality also varies among the offshore employees based on their experience level.

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With the poorer quality of the complex returns drafted by offshore team, all of the onshore interviewees point out that they should spend quite a lot of time on amending the draft returns, which even makes the whole process slower than previous. During the interviews, almost all of the interviewees mention that when amendments are required for the draft returns, they often choose to correct them by themselves instead of sending them back to offshore team, which actually is suggested by the firm, as they find it very inefficient to explain the errors to offshore employees. For simple returns, all of the onshore interviewees share the view that offshoring helps them save time as they the information checklist is easy to complete and the offshore employees draft the returns with good quality. However, for complex returns, they spend more time on providing the information to the offshore team but always receive poor quality drafts, which in turn costs them more time to revise the returns.

Offshore Employees

In the row 1 of Table 4, the results collected from onshore employees are proved by the responses of offshore interviewees. All of the offshore interviewees divide the returns into two categories (simple and complex), which are the same as the onshore interviewees. However, the offshore employees categorize the returns mainly based on the amount of time they use to draft one return, instead of the professional knowledge and judgement incorporated, which is different from the onshore employees.

For row 2, the results also support the onshore employees’ responses. Three of them share the same ratios with most of the onshore employees, which indicates that they handle more complex returns than simple returns. One of employees explains that “For me, I handle more complex returns compared with simple returns, as I am a more experienced employee now compared with others (Interviewee 02).” This might be the reason for point 2) of row 2 for offshore employees.

In the row 3 of Table 4, the results are related to the question about whether the procedures for drafting simple and complex returns are the same or not for offshore employees. All of the four offshore interviewees agree that the procedures are totally the same for both types of returns. 5.2.1.2 Conclusion

Concluding the results generated from the interviews discussed above, the onshore interviewees share the opinion that the quality of simple tax turns drafted by offshore team is better than that for complex returns. It is reflected by the interviews that onshore employees spend more time on providing the information to the offshore team but at the same time they also spend much time to revise the returns due to the poor quality for complex returns. For simple returns, the offshoring does help them improve work efficiency. In the end, it can be concluded that they find their work efficiency for preparing complex returns is negatively impacted by offshoring,

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especially for complex returns. Proposition 1 claims that the work efficiency of onshore associate level employees is more likely to be negatively affected by the tax offshoring when dealing with more complex tax returns. Based on the results of the interviews, proposition 1 is supported.

Moreover, even though complex returns require higher level of professional knowledge and more judgements, no additional attention is paid to complex returns by the offshore employees and the firm, which might be one of the reasons for the relatively poor quality of complex returns. In addition, as some of the onshore interviewees point out that the quality of returns is varied among the offshore employees based on their level of experience, the variances in experience level might be another reason for the unstable quality for different types of returns. 5.2.2 Level of uncertainty

Questions regarding this factor are asked for both early stage and later stage. Table 5 presented below displays the results of the interviews from both sides of the interviewees. Further discussions will be followed in later parts.

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Table 5: Level of uncertainty findings Row Question (onshore/ offshore) & Description Onshore Offshore 1 9 / 11

Pros and cons in the first half year

Things not going well in the first half year:

1) They were not familiar with the process in the beginning, which makes completing the information checklist very time-consuming. (8/8)

2) Lack of guidance. (8/8)

3) Offshore employees were not familiar with the tax preparation process, which cost onshore employees plenty of time to explain some issues to them. (8/8)

4) The quality of the draft returns in the beginning was bad. （8/8)

Things not going well in the first half year:

1) They were not familiar with the process and Hong Kong tax knowledge. (4/4)

2) They sometimes misunderstood the information provided by onshore employees. (4/4)

2

Things going well in the first half year: 1) Nothing went well in the beginning. (4/8)

2) The offshore team helped take over a large part of workload and administrative issues during the peak season. (2/8)

Things going well in the first half year:

1) They have fewer concerns when dealing with simple returns. (2/4)

2) Two of the interviewees didn’t mention any thing they were satisfied with in the early stage. (2/4) 3

10 / 8&12 Improvements in the later stage

1) The quality of the returns has improved apparently, especially for complex returns. The offshore employees are more experienced and make fewer mistakes. (7/8)

2) They are more familiar with the procedures. The process has been more standardized. (7/8)

3) Four interviewees mention that some mistakes happen many times due to the high turnover rate of offshore team. The quality also depends on whom the preparer is. (7/8)

1) Early stage: 2 returns / day 2) Later stage: 8 returns/ day 4

1) They believe they are more experienced. (4/4) 2) They believe they make much fewer mistakes than the

early stage. (4/4)

5

11 / 9&10 Competence of offshore employees

1) Offshore employees don’t have any Hong Kong tax background. (8/8)

2) Offshore employees received trainings before they started working, but they were mainly taught the steps to generate return instead of the rationale behind. (7/8) 3) Most of the offshore employees don’t have the ability to make judgements when

preparing complex returns, especially in the beginning. (7/8)

1) The first batch of them received a one-month training in the beginning which was very abstract. (4/4) 2) Three of them claim that they were not provided

enough practices before the commencement of their work. (3/4)

6

12 /13

Changes over the process

1) The quality of tax returns has improved a lot, especially for complex returns. (8/8) 2) The offshore employees draft the returns more quickly than it was in the beginning.

(8/8)

1) They receive comments about their performance from their manger constantly. (4/4)

2) There is a one-and-half day training every year. (4/4) 7

20 KPI

N/A 1) The KPI for completing one tax return: 5 days. (4/4)

2) It is the same for all types of returns. (4/4) 8

21

Sufficient or not

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5.2.2.1 Interviews Onshore Employees

Row 1 and 2 of Table summarize the results for the question regarding what the difficulties and benefits are brought by offshoring in the beginning stage. In respect of the difficulties faced by the onshore employees in the first half year, all of the onshore interviewees share similar thoughts. Regrading point 1) of row 1, one interviewee explains that “The biggest problem I faced in the beginning was that the offshore team could not produce what I expected from them based on the information I provided, especially for complex returns. As the checklist is very complex, some of information is hard to be expressed in the checklist. In the beginning, I really thought the process was very complicated and time-consuming and cost me more time than previous (Interview 02).”

Point 2) of row 1 in Table 5 refers to the lack of guidance in the beginning stage. One interviewees points out that “There was no clear guidance about the process, which made me confused in the beginning. Even though there are still no written guidelines by the firm now, I am familiar with the procedures, which doesn’t bother me that much (Interviewee 06).” Thus, most of the interviewees complain that in the beginning they really find the tax preparation time-consuming, which also made their daily work even more complicated.

In addition, as it is stated in point 4) of row 1, due to the unfamiliarity, the quality of the returns drafted by the offshore team was not good enough, especially for complex returns. Moreover, based on the results of the question regarding the competence of offshore employees stated in row 5 of Table 5, most of the onshore interviewees mention that they don’t think the offshore employees were well prepared for the work and were lack of the ability to make judgements in the beginning.

Offshore Employees

The results of the interviews with onshore employees are supported by the results presented in Table 5 for offshore employees. All of them admit that they were unfamiliar with the process in the beginning and sometimes misunderstood the information provided by onshore team. Referring to the results displayed in row 5 of Table 5, three of the four offshore interviewees admit that they were not prepared enough before they started their job, even though they received a one-month training.

5.2.2.2 Conclusion

Based on the opinions of the onshore employees, it is clear that in the beginning, as both onshore and offshore employees were new to the system, the onshore employees find the offshoring time consuming and inefficient. Especially for the offshore employees, as they were

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lack of professional knowledge, they didn’t have sufficient skills in the beginning and could not draft the returns with good quality. The offshore employees only followed the steps to generate returns without understanding the rules or rationale behind, which made them cannot draft the returns meeting the onshore team’s standards, especially for complex returns. It has also been revealed by the onshore interviewees that in the early stage, the offshore employees sometimes could not draft the returns to meet their expectations, as they didn’t really understand their requirements and the information they provided.

Thus, based on the results generated from both the onshore and offshore employees, it can be concluded that in the early stage, offshoring team was not familiar and well trained for tax preparation, which results in an uncertainty of misunderstanding the requirements and standards of onshore team. As a result, the quality of draft returns was not satisfying in the beginning. Thus, the onshore associate level employees find the tax preparation offshoring time consuming and negatively impacts their work efficiency in the beginning. This provides support to the proposition 2a discussed in Chapter 3.

5.2.2.3 Interviews Onshore Employee

Row 3 and 4 summarize the results of the question regarding the whether the problems mentioned in row 1 have been solved. Row 6 refers to the question about if there is any change in quality of the tax returns over the process. The improvements listed in row 3 and 4 of Table 5 are shared by seven of the eight interviewees. Regarding the quality of the returns, one employee states that “Yes, it has been improved. No matter what, they have been working on this for such a long time, even though the training was not enough. They have gained a lot from the daily experience (Interviewee 03).” According to the interviewees, the accuracy for simple returns is really good nowadays. Points 1) of both rows 3 and 6 suggest that for complex returns, the offshore team make much fewer mistakes than that in the early stage, which makes them spend less time on amending the returns. In addition, most of the onshore interviewees point out that due to the better quality of the draft returns and more efficient process because of better familiarity, they find offshoring help them improve work efficiency, especially during peak seasons, as the offshore employees take away a large part of their workload. It also can be reflected by the interviews that in the later stage, less internal uncertainty exists in the offshoring relationship.

However, as it is stated in point 5) of row 4, among the eight onshore interviewees, half of them also figure out that even though the quality on average has improved a lot over the process, it also depends on whom the offshore employee is. They mention that the turnover rate of the offshore team is high, which means that the new joiners may make similar mistakes as the

The impacts of the tax preparation offshoring on the work efficiency of the onshore associate level employees : a case study at a Big Four accounting firm

The impacts of the tax preparation offshoring on the

work efficiency of the onshore associate level employees:

Abstract

Table of Contents

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