The relationship between outsourcing finance activities and the involvement of finance in strategic decision- making

The relationship between outsourcing finance activities and the involvement

of finance in strategic decision- making

Name: Alex Groenewold Student number: 12487384 Thesis supervisor: Razvan Ghita Date: May 31, 2021

Word count: 13.333

MSc Accountancy & Control Specialization: Control

EBEC code: EC 20210317080345

Faculty of Economics and Business, University of Amsterdam

Statement of Originality

This document is written by student Alex Groenewold 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.

Abstract

This study focuses on the consequences of outsourcing a part of the finance function to external parties. Existing literature suggests that outsourcing finance activities are driven by cost savings and increases the finance organization's effectiveness. On the other hand, it brings risks such as role ambiguity and a longer external audit. In this study, I focus on the positive effect of outsourcing finance activities on the involvement of finance in strategic decision-making.

To test the hypotheses, I use data from survey responses of 70 finance professionals such as CFOs, group controllers, and business controllers. As predicted, I find evidence of a positive relationship between company size and the involvement of finance in strategic decision- making. Besides, I find some evidence of a positive relationship between company size and outsourcing finance activities. However, no evidence has been found to support a direct positive correlation between outsourcing finance activities and the involvement of finance in strategic decision-making. This means that outsourcing finance activities cannot be used to increase the involvement of finance in strategic decision-making.

Keywords: Outsourcing finance activities, business controllers, strategic decision-making Data availability: Data used in this study are not publicly available because of agreements with the respondents participating in the questionnaire

Content

1. Introduction ... 6

2. Literature Review ... 10

2.1 Outsourcing ... 10

2.2 Outsourcing finance processes and activities ... 10

2.3 Firm size and outsourcing of finance activities ... 12

2.4 The roles of the finance function ... 13

2.5 The involvement of finance in strategic decision-making ... 14

2.6 Hypothesis development ... 15

3. Research Design ... 18

3.1 Sample Selection and Survey Procedures ... 18

3.2 Variable Measurement ... 20

3.3 Control Variables... 24

Results ... 28

4.1 Descriptive Statistics ... 28

4.2 Hypotheses Tests ... 34

4. Conclusion and discussion ... 36

References ... 38

Appendix A: Survey Finance Pulse Check ... 41

Table of figures

Table 1: Sample Distribution of respondents ... 19

Table 2: Reliability analysis on Items measuring outsourcing ... 21

Table 3: Reliability analysis on Items measuring involvement in strategic decision... 23

Table 4: Sample distribution of control and moderator variable ... 27

Table 5: Descriptive Statistics on Items Measuring Outsourcing of finance activities ... 29

Table 6: Descriptive Statistics on Items Measuring involvement in strategic decision-making ... 30

Table 7: Descriptive statistics main variables... 31

Table 8: Comparing means between organizations with low and high levels of outsourcing ... 32

Table 9: Bivariate Associations Main variables ... 33

Table 10: Regression analysis testing hypothesis 1 and 3 ... 34

Figure 1: Theoretical Model ... 17

Figure 2: Survey questions regarding outsourcing a part of the finance function ... 20

Figure 3: Survey questions regarding the involvement of finance in strategic decision-making ... 22

Figure 4: Survey questions regarding the organization’s size by the number of employees ... 24

Figure 5: Survey question regarding the entity’s industry... 25

Figure 6: Survey question regarding the entity's maturity ... 26

1. Introduction

Outsourcing parts of the organization were a topic of discussion last years. Statistics show that the global market size of outsourced services increased from 45.6 billion US dollars in 2000 to 92.5 billion US dollars in 2019 (Statista.com, 2021). According to a survey held by Statista, the main reasons for outsourcing business processes are cost-cutting, enabling focus on core processes, and solving capacity issues. Besides, Deloitte's research shows that the Covid-19 pandemic crisis impacts the outsourcing industry because external parties also have to adapt to the changing circumstances. Nevertheless, the outsourcing industry is still growing and will be a strategic topic in a post-pandemic world. The trend of outsourcing business activities to external suppliers is still ongoing. However, the reasons why organizations outsource their business activities shifted from enabling speed to market and achieving competitive advantage to cost savings. The uncertain economic environment caused by the Covid-19 pandemic crisis is switching the focus back to cost savings. During uncertain economic times, organizations focus more on their costs than organizations do in times of economic growth and stability (Deloitte, 2020).

This paper aims to provide empirical evidence concerning the relationship between outsourcing, a part of the finance function, and the involvement of finance in strategic decision- making. The paper examines if the level of outsourcing a part of the finance function changes the level of involvement of finance in strategic decision-making. Therefore the research question of this paper is as follows: Does outsourcing a part of the finance function influence the involvement of finance in strategic decision-making?

Answering this question is essential, because as prior literature shows, the outsourcing industry is growing, and many organizations are looking for opportunities to outsource parts of their organization. On the other hand, it is crucial to understand if there are any unintended consequences of outsourcing business processes and activities. There has been written a lot about outsourcing and why companies decide to outsource a part of the organization. One of the researched topics often is the relationship between the results of an outsourcing decision and the value of a company or achieved competitive advantage (Alexander and Young, 1996;

Quelin and Duhamel, 2003). Besides, previous research has shown that without a positive business case, the outsourcing decision is very often negative (Deloitte, 2020; Hayes et al., 2000). However, very little is known about the consequences for the internal finance

organization when a part of this function is outsourced to an external party. In other words, does outsourcing a part of the finance organization enable the finance organization to focus more on involvement in strategic decision-making. Currently, outsourcing is seen as a strategic decision to create a competitive advantage and to achieve cost savings. Therefore it is essential to understand all consequences of the decision to outsource a part of the organization. Mainly, it is important to fully understand what it means for the finance organization and their involvement in strategic decision-making when a part of the finance organization will be outsourced.

To give empirical evidence, Prof. dr. F.H.M. Verbeeten MBT set up a research project:

Finance Pulse Check, which contains a survey with various topics related to the finance organization and is held at 83 financial and business controllers, finance managers, group controllers, and CFOs of different organizations. The survey covers eight topics: Strategy and leadership, Operations and reporting, Business skills and transformation, People skills and technological competencies, Ethics, values and culture, Finance function outcomes, Organizational design, and demographics. Business controllers, finance managers, group controllers, and CFOs are the critical functions in the strategic business partnering role of a finance organization. Therefore, this respondent group is the perfect sample group to investigate the research question: Does outsourcing a part of the finance function influence the involvement of finance in strategic decision-making?

To investigate the relationship between outsourcing a part of the finance organization and the involvement of finance in strategic decision-making, I have established three hypotheses. The first hypothesis is: Outsourcing a part of the finance function is positively related to the involvement of finance in strategic decision-making. Prior literature investigates outsourcing of finance activities, and different results have been found. Outsourcing finance activities can lead to more effectiveness of the control department (Vakalfotis et al., 2011).

Besides, previous literature shows that organizations use outsourcing to increase the quality of financial reporting by outsourcing more complex activities to external experts (Mishina et al., 2020; Widener and Selto 1999; Speklé et al. 2007). Although Seal and Herbert mention that outsourcing certain finance activities allow firms to allocate more resources to a business support role, there is not much evidence available supporting the claim that finance organizations are more involved in strategic decision-making (Seal and Herbert, 2011). On the other hand, outsourcing finance activities can have disadvantages such as blurring responsibilities (Liakhovych et al., 2019) and increasing the duration of the external audit

Cullinan and Zheng (2017). The first hypothesis explains a relationship between outsourcing finance activities and the involvement of finance in strategic decision-making, which has not been investigated before. It is important to understand all consequences of outsourcing finance activities, and evidence supporting this hypothesis can lead to new insights regarding the consequences of outsourcing finance activities.

The second hypothesis is: The involvement of finance in strategic decision-making is higher in larger organizations. From previous literature, it is clear that large organizations ask for more finance coordination than smaller organizations, and therefore finance is involved more heavily in strategic decision-making (Chenhall, 2003; Zhang and Lee, 2012). By finding evidence supporting hypothesis 2, I contribute to prior research and strengthen the theory of finance involvement in small and big organizations. Replication of previous research is important because it will verify previous knowledge and therefore protect the integrity of the developed theory (Rosenthal and Rosnow, 1984; Helfat, 2007).

The third hypothesis is: The positive effect of outsourcing on the involvement of finance in strategic decision-making is bigger for larger than for smaller organizations. Outsourcing of finance activities in small and big organizations is investigated before. For example, Averaerts et al., show that small organizations more often decide to outsource non-routine activities, while big organizations are outsourcing routine activities such as Accounts Payable (Averaerts et al., 2010; Isaksson and Lantz, 2015). However, these research papers primarily focus on the types of outsourced activities in small and large organizations and not on the consequences of outsourcing finance activities in these organizations. Nevertheless, empirical evidence supporting the third hypothesis leads to understanding the different impacts of outsourcing for small and large organizations.

This study contributes in three ways to already existing literature. Firstly, this research contributes to the management accounting literature since this study gives empirical evidence regarding the relationship between outsourcing finance activities and the involvement of finance in strategic decision-making. Previous literature already finds some motivations for outsourcing finance activities, such as cost savings, increasing knowledge, or mitigating risks (Averaerts et al., 2010; Asatiani et al., 2018; Mishina et al.,2020). This paper can introduce another motivation for outsourcing finance activities. This new motivation is enabling the finance organization to be involved in strategic decision-making which is not considered in existing research yet. Because of this, conclusions can be drawn concerning changes in the role of the finance function and enabling finance organizations to be involved in strategic decision-

making. This evidence can change the way we look at outsourcing finance activities and can support the existence of a new motivation to implement outsourcing finance activities.

Secondly, this research contributes to the theory regarding differences in finance organizations of small and large organizations. Existing research concludes that larger organizations require more financial steering and more involvement of finance in strategic decision-making than smaller organizations (Zhang and Lee, 2012; Chenhall, 2003).

Replication of prior research (Zhang and Lee, 2012; Chenhall, 2003) is crucial for the developed theory because it will strengthen our knowledge regarding the working of finance departments in small and big organizations. As stated before, replication of prior research is vital to the developed theory (Rosenthal and Rosnow, 1984; Helfat, 2007). Therefore, giving evidence of the differences in the involvement of finance in strategic decision-making for small and large organizations can support and contribute to the already existing theory.

Thirdly, investigating the third hypothesis will increase the existing knowledge of the consequences of outsourcing finance activities for small and large organizations and the impact on the involvement of finance in strategic decision-making. This research will build on previous literature related to the implications of outsourcing finance activities in small and large organizations (Averaerts et al., 2010; Isaksson and Lantz, 2015).

Besides contributing to existing theory, this research paper also has a practical implication. The results of this paper can support senior management of organizations in their decision to outsource certain finance activities or to increase the involvement of finance in strategic decision-making by providing evidence that these two topics are interlinked and support each other.

This thesis is structured as follows. After the introduction, chapter 2 provides relevant literature regarding the main topics of this paper: Outsourcing, Firm size and outsourcing, the role of finance, and the involvement of finance in strategic decision-making. Next, chapter 3 describes the research method. Afterward, chapter 4 lays out the descriptive analysis and the results. Lastly, chapter 5 outlines the conclusions and discussions of this paper.

2. Literature Review

2.1 Outsourcing

Feenstra (1998) describes outsourcing as replacing a part of the internal manufacturing process with buying products that only need to be assembled to the final product. In other words, the company outsources a part of the manufacturing process to an external company.

Over time the term outsourcing is changed from only outsourcing manufacturing processes to outsourcing any part of an organization. Outsourcing means more than replacing a part of the internal manufacturing process for intermediate goods. It means finding a partner to produce goods or deliver services that match the organization's strategy and replace certain parts of the organization (Grossman and Helpman, 2005).

Queen and Duhamel describe the term and explain the strategic motivations behind outsourcing and the motives and risks of outsourcing. Outsourcing is the operation of shifting a transaction or process which was governed internally to an external organization. Quality and Duhamel refer to transferring internal staff to the external supplier as a critical part of the definition of Outsourcing (Qualin and Duhamel, 2003). Based on the research of Alexander and Young, we can distinguish two types of outsourcing. The first type of outsourcing concerns activities critical to performance, such as Finance, IT, and logistics. The second type of outsourcing refers to activities that create a competitive advantage for the firm (Alexander and Young, 1996).

Bringing value to the organization by outsourcing is another crucial aspect of outsourcing. Bringing value can be achieved by creating a competitive advantage, generating savings and cost benefits, or gaining specific knowledge and skills (Quelin and Duhamel, 2003). Hayes et al. (2000) confirm the value-adding of outsourcing in their research about outsourcing information systems.

2.2 Outsourcing finance processes and activities

To have a clear understanding of outsourcing in the context of the finance function, I zoom in to what outsourcing a part of the finance function means. Previous research already shows some definitions and consequences of outsourcing as a part of the finance function. Liakhovych et al. perform a very detailed analysis of outsourcing accounting activities by executing a SWOT analysis. In this research, the consequences of outsourcing accounting activities are

viewed from the short and long-term perspectives separately. For example, the effectiveness of control can have a positive value in the short term. However, in the long term, it can change to a disadvantage like blurring responsibilities. This means that companies that aim to introduce outsourcing of accounting activities always need to ask themselves which term the use of outsourcing is planned and what the corresponding advantages and disadvantages are (Liakhovych et al., 2019).

Besides the risk blurring of responsibilities, outsourcing a part of the finance function also impacts the duration of the external audit. According to Cullinan and Zheng (2017), the audit lag of companies with outsourced accounting departments has a two to three days longer audit lag than companies that do not outsource their accounting departments.

Averaerts et al. (2010) investigated the outsourcing of accounting in small and medium enterprises in Belgium, performing a survey to research routine and non-routine accounting activities. Routine accounting activities refer to accounts payable activities, and non-routine activities include period-end accounting. They found that non-routine accounting activities are more often outsourced than routine accounting activities. Non-routine accounting activities require more skills and knowledge, so more SMEs decide to outsource these activities to a capable external partner. This is in line with previous research for outsourcing other activities which require a lot of skills and knowledge, such as Human Resources and internal auditing (Widener and Selto 1999; Speklé et al. 2007).

According to Asatiani et al., the decision on outsourcing a business process depends on process characteristics such as the frequency of the process, human asset specificity, uncertainty, information intensity, and need for customer contact. The results show that processes with a lower frequency are more often outsourced, and processes that require more specific assets are more likely to be outsourced. Besides this, Asatiani et al. found that small and medium-sized companies often transfer the riskier processes to external suppliers such as accountants to mitigate the risks of this process to the external party. They also found a positive relationship between information intensity and outsourcing, which means that high information-intensive accounting processes are more often outsourced because these processes can be easier isolated from other accounting processes. Their last finding is that processes with a higher need for customer contact are less likely to be transferred to a third-party supplier (Asatiani et al., 2018).

Mishina et al. (2020) concluded in their research within the Russian market that small businesses need to outsource the more complex accounting tasks such as external reporting, how to administrate fixed assets, and salary administration. Small businesses do not have the expertise within their organizations to set up and maintain these accounting topics in such a way that they are compliant with IFRS and other legislation. On the other hand, many firms are not ready to transfer their accounting activities to an external supplier. Third-party suppliers are not yet trusted, and managers of small businesses want to control everything on their own (Mishina et al., 2020).

Chang et al. refer to earlier research of Vakalfotis et al. on the risks of losing control over data collection and delivery when a part of the finance function is outsourced. In other words, the outsourcing of data collection and delivery to an external party might free up resources within the finance organization to function as strategic business advisors, but it can limit its effectiveness due to the loss of control by finance over information (Vakalfotis et al., 2011).

Although Seal and Herbert investigate the use of shared service centers for finance activities, there are links between using a shared service center or outsourcing finance activities to a third party. The use of shared service centers for certain financial activities, together with implementing an ERP system, enables the finance organization to focus their activities on business support (Seal and Herbert, 2011). Vakalfotis et al. and Chang et al. confirm that this also applies to organizations that outsource finance activities to an external supplier. In the case of outsourcing finance activities, organizations attempt to create extra resources for business support and supporting strategic decisions (Vakalfotis et al., 2011 and Chang et al., 2014).

2.3 Firm size and outsourcing of finance activities

According to Chang et al., firm size is next to globalization and organizational structure, one of the firm characteristics that are expected to have a significant impact on the roles of the finance organization (Chang et al., 2014). Larger firms ask for more coordination and therefore ask for more extensive management control systems (Chenhall, 2003). Finance departments of larger firms are more likely to give the strategy a higher priority and to focus more on strategic decisions like organizational growth and to raise capital (Zhang and Lee, 2012). Due to the size of the finance departments within larger organizations, it is less challenging to implement changes in finance roles without lacking quality on the traditional financial reporting activities (Cooper and Dart, 2009).

From previous research, it is already clear that the consequences of outsourcing finance activities are different for small enterprises and big corporate organizations. Averaerts et al.

(2010) show that small and midsized enterprises often choose for the outsourcing of non- routine work, while Isaksson and Lantz conclude that larger organizations have difficulties outsourcing the more complex finance activities and often start with outsourcing the routine accounting activities such as Accounts Payable (Isaksson and Lantz, 2015).ar

The reason why outsourcing more complex activities are difficult to implement in larger organizations is often found in the structure of the organization. First, smaller organizations have a lower degree of structural complexity and bureaucracy than larger firms, which lower the flexibility of the information processing activities of larger organizations (Chen and Hambrick, 1995). Secondly, small organizations are often more uncertain about the market and technological developments because these companies do not always have access to these crucial resources. This can lead to outsourcing more complex activities, which benefits smaller organizations more than larger organizations (Isaksson, 2006). Thirdly, information asymmetry between the owners and managers of a firm can explain why the decision to outsource or not deviate from expected profit-maximizing choices (Schmidt and Buell, 2014). Finally, transaction costs for outsourcing more complex activities are much lower for small and midsized enterprises than for larger firms (Gilley et al., 2004).

2.4 The roles of the finance function

It is essential to understand what is the purpose of the finance function and which roles the finance function has in an organization. Traditionally the Finance organization’s tasks are described as transaction processing, statutory reporting, and financial management (Burns and Baldvinsdottir, 2005). Research by Carr and Tomkins led to the conclusion that financial analysis did not have much impact on strategic decision-making and strategic investments at that time. Besides that, most organizations did not use very advanced techniques to judge investments and were relying on CEO’s vision and leadership (Carr and Tomkins, 1998). In other words, finance organizations were mainly occupied with processing transactions and performing external reporting and were not yet involved in strategic decision-making.

Over the years, the roles of the finance organization have changed. Chang et al. tell us that the finance organization has three different roles: reporting, compliance and internal control/risk management; performance management; and strategic partner (Chang et al., 2014).

Widely held surveys from Ernst & Young, Oracle, and Accenture show that although finance organizations face many changes in the business environment such as innovations, globalization, and changing organizations structures, most organizations did not expand their finance departments. These surveys also show that the attention of the finance organization shift from financial reporting to performance management and strategic partner roles (Ernst &

Young, 2010; Oracle and Accenture, 2013; Accenture, 2011). Changes in the business environment have asked finance organizations to change their focus to more value-added activities such as process improvement, performance measurement, and strategic decision support (Rouwelaar, 2007).

Also, Cooper and Dart concluded that the role of the finance organization has changed from interpreting information to providing business advice, however they did not find sufficient evidence that CFOs and finance managers already moved to a strategic business partner role.

This change is a much bigger step and requires other types of skills such as leadership and require sufficient resources (Cooper and Dart, 2009). Outsourcing parts of the finance organization which are focused on reporting, compliance, and internal control/risk management may help firms to successfully implement the shift of attention to performance management and strategic partner roles (Vakalfotis et al., 2011 and Chang et al., 2014).

2.5 The involvement of finance in strategic decision-making

Previous literature already proved that the finance role is changing towards a strategic business partner (Cooper and Dart, 2009; Rouwelaar, 2007; Chang et al., 2014), but what does this exactly mean for the finance organization and the performance of the firm as a whole?

Zoni and Merchant further research the benefits of involving finance in the management decision-making processes and concluded that finance involvement in management decision- making processes is positively related to capital intensity, operating interdependency, and formalization of strategic planning and budgeting processes (Zoni and Merchant, 2007). In other words, it is desirable to change the role of the finance organization from a transaction processing and reporting role towards a role as a strategic business partner. Deloitte (2008) also concluded that business performance is very strongly linked with the role of finance as a strategist.

Although the involvement of finance within strategic decision-making is positively related to business performance, there are also risks regarding this change. Delegating too much

authority to the management accountants can increase the risk of managers lowering innovations and moving towards a more risk-averse approach (Lambert and Sponem, 2012).

Besides this, it is hard for management accountants to combine independence and involvement in strategic decision-making. The finance business partner either chooses to adopt their traditional role as risk-averse bookkeeper slowing down innovation, or the finance business partner joins operational managers to achieve their goals and to manipulate bottom-line results (Lambert and Sponem, 2005).

Also, Maas and Matejka concluded from their research that controllers are confronted with role conflict and role ambiguity. Their research shows that controllers view their role to support decision-making as their primary role over their role as safeguards of the integrity of financial reporting. This conflict of roles is associated with data misreporting, poor productivity, or lying (Maas and Matejka, 2009; Lau et al., 2003).

2.6 Hypothesis development

Traditionally the finance organization was not involved in strategic decision-making on a big scale, and the finance organization mainly focused on transaction processing, external reporting, and financial management (Burns and Baldvinsdottir, 2005). Research has shown that involving finance in strategic decision-making can have a positive influence on achieving the organization’s strategy (Zoni and Merchant, 2007). This means that organizations should try to enable their finance function in this strategic business partner role. Outsourcing parts of the finance function to an external supplier can help the finance organization to increase its focus on specific activities. When an organization outsources its recurring finance activities such as Accounts Payable and Financial Accounting to an external supplier, it has the possibility to allocate its financial resources to business advising and strategic business partnering functions (Seal and Herbert, 2011; Vakalfotis et al., 2011; Chang et al., 2014). On the other hand, an organization can also decide to let go of finance employees instead of increasing focus on strategic decision-making following the cost savings strategy (Deloitte, 2020; Hayes et al., 2000). However, given that importance of finance involvement in strategic decision-making increased (Chang et al.,2014), I expect that organizations are searching for a way to improve their strategic decision-making by involving finance. Therefore I do expect that outsourcing finance activities to an external party have an influence on how the finance roles within an organization are executed. To be more precise, I expect that outsourcing finance

activities have a positive relationship with the level of involvement of finance in an organization's strategic decision-making. Based on this, the first hypothesis is:

H1: Outsourcing a part of the finance function is positively related to the involvement of finance in strategic decision-making

As explained in the research of Chenhall (2003) and Zhang and Lee (2012), there are many differences between the finance organizations of small and large organizations. One of the differences is the level of involvement of finance in strategic decision-making (Chenhall, 2003;

Zhang and Lee, 2012). Chenhall (2003) explains that larger organizations require more financial steering than smaller organizations, and therefore the involvement of finance in strategic decision-making is higher. As this statement is already substantiated by Chenhall (2003), I would like to test this theory in another dataset. Accordingly, the empirical evidence following this research will strengthen previous research. Besides, understanding the differences in the involvement of finance in strategic decision-making between small and large organizations before applying outsourcing is vital regarding the third hypothesis. So, the second hypothesis is:

H2: The involvement of finance in strategic decision-making is higher in larger organizations

Previous literature shows that small and medium enterprises have a different outsourcing strategy than big corporate organizations. Where bigger organizations apply outsourcing to gain competitive advantage, obtain cost savings and increase their focus on core business activities, small organizations have other needs (Quelin and Duhamel, 2003). The reason why small and medium enterprises outsource parts of their finance function is to obtain skills and experience these organizations do not have themselves. Small organizations often outsource activities like external reporting, fixed assets administration, and salary administration (Mishina et al., 2020). This means that the consequences of outsourcing parts of the finance organizations can be different within small and large organizations. I expect that the size of organizations measured by the number of employees makes a significant difference in the influence outsourcing parts of the finance organization have on the involvement of finance in strategic decision-making. As small and large organizations have different reasons for outsourcing finance activities, I expect that these organizations also make different decisions after applying outsourcing within their finance department. As small organizations often outsource to compensate for the lack of expertise and knowledge, they will not free up

resources to focus on strategic decision-making (Cooper and Dart, 2009). Besides, as earlier mentioned, small organizations often do not have the ambition to involve finance in strategic decision-making (Chenhall, 2003; Zhang and Lee, 2012). Therefore, the third hypothesis is formulated as follows:

H3: The positive effect of outsourcing a part of the finance function on the involvement of finance in strategic decision-making is bigger for larger than for smaller organizations

Figure 1: Theoretical Model

H1: Outsourcing a part of the finance function (OUTSOURCING) is positively related to the involvement of finance in strategic decision-making (INVOLVEMENT)

H2: The involvement of finance in strategic decision-making (INVOLVEMENT) is higher in larger organizations (SIZE)

H3: The positive effect of outsourcing a part of the finance function (OUTSOURCING) on the involvement of finance in strategic decision-making (INVOLVEMENT) is bigger for larger than for smaller organizations (SIZE)

3. Research Design

3.1 Sample Selection and Survey Procedures

To collect the data needed to test the hypothesis of the research paper, I have joined the research project: Finance Pulse Check managed by Prof. dr. F.H.M. Verbeeten MBA. This research project contains a survey that covers the topics of the research paper: Outsourcing a part of the finance function, involvement in strategic decision-making, and company size measured by the number of employees.

As a first step in selecting the correct sample for the survey, the target sample (Van der Stede et al. 2005) has been defined. The suitable respondents are finance professionals in separate entities or business units who have substantial responsibility regarding activities within the finance department of the organization. Interim finance managers and business controllers might not be suitable respondents as they might not have all insights needed to fill out the survey. The characteristics regarding the entity or business unit the respondents work for are the following: The entity unit has a total staff of at least 50 FTE, and the finance department contains at least 5 FTE. The target sample is not limited by any industry. The questionnaire was pre-tested by Prof. dr. F.H.M. Verbeeten MBA before the start of the actual research. The total survey is included in Appendix A.

Survey participants were found within the network of eight students of the University of Amsterdam who individually approached the participants. Overall guidance on selecting suitable respondents was done by Prof. dr. F.H.M. Verbeeten MBA. If a respondent was approved, the link to the online questionnaire was shared via e-mail by Prof. dr. F.H.M.

Verbeeten MBA. Respondents could only fill out the questionnaire in a safe online environment to prevent fraud and data leakage. The survey sample contains 83 respondents, each working for a different entity or business unit. I removed 13 respondents because of several reasons.

One respondent was removed from the dataset because this respondent was not working in a finance position. Twelve respondents were removed from the dataset due to not answering the questions crucial to this research paper, resulting in a final sample of 70 respondents.

Table 1 reports the distribution of the final survey sample by respondent job position, respondent age, tenure in job position, and tenure in the organization. Job positions have been provided by all respondents, with nearly half of all respondents working in a senior finance role as CFO, Finance Director, or Group controller. Based on the sample medians, the typical

respondent is between 31 and 40 years old, works in their current job position for 1 to 3 years, and works at their organization for 3 to 5 years. The total survey sample of 70 respondents is almost equally divided over the four primary industries, including manufacturing (27,1%), Non-financial services (30,0%), Financial services (20,0%), and the Public sector (22,9%).

Table 1: Sample Distribution of respondents

n Percentage

Respondent job position

Chief Financial Officer 4 5,7

Finance Director 4 5,7

Group Controller 26 37,1

Business Controller 15 21,4

Financial Controller 8 11,4

Other 13 18,6

70 100,0

Respondent age

< 30 26 37,1

31 - 40 15 21,4

41 - 50 15 21,4

51 - 60 14 20,0

70 100,0

Tenure in the job position

Less than a year 16 22,9

1 - 3 years 29 41,4

3 - 5 years 9 12,9

5 - 10 years 9 12,9

10 - 15 years 3 4,3

More than 15 years 4 5,7

70 100,0

Tenure in organization

Less than a year 16 22,9

1 - 3 years 25 35,7

3 - 5 years 13 18,6

5 - 10 years 7 10,0

10 - 15 years 5 7,1

More than 15 years 4 5,7

70 100,0

3.2 Variable Measurement

Outsourcing a part of the finance function (OUTSOURCING)

In this research paper, I adopt an instrument from prior literature (Chang et al., 2014 and ICAEW, 2011) to define the level of outsourced finance activities in an organization. Precisely, I measure the activities outsourced to an external party by addressing four questions to this topic. Figure 2 provides the survey questions regarding activities that have been outsourced or structured in a shared service center. The respondents have been asked to rate (on a scale from 1: no plans to adopt to 5: Organization-wide) the level of outsourcing applied on described finance activities divided into four groups of activities. I measure the level of outsourcing of Transaction processing (question 8-1), Reporting activities (question 8-2), Financial planning and analysis (question 8-3), and Valuations (question 8-4). These types of activities have been ordered by level of recurrence where question 8-1 addresses the routine activities such as accounts payable and receivables, and questions 8-3 and 8-4 address activities like financial planning and valuations of assets which can be defined as non-routine activities (Averaerts et al., 2010). This set of questions is suitable to provide evidence for hypotheses 1 and 3.

Figure 2: Survey questions regarding outsourcing a part of the finance function

Q8

To what extent have the following activities been outsourced or structured in shared service center(s)?

No plans to

adopt (1) Started (2)

Partially achieved (25-50%) (3)

Mostly achieved (50-75%) (4)

Organization- wide (>75%)

(5) Transaction processing

(bookkeeping, accounts payables/receivables, payroll) (1)

o o o o o

Reporting

(management/annual reports, [non]financial performance measures) (2)

o o o o o

Financial planning and analysis (budgeting, forecasting, target setting) (3)

o o o o o

Valuations (asset valuations, M&A

valuations, purchase price allocations) (4)

o o o o o

Reliability analysis has been executed, showing that the questions related to the main variable outsourcing have a strong correlation. The lowest corrected item-total correlation is 0,435, which is higher than the required 0,4. The Item-total statistics are displayed in table 2. The set of questions has a Cronbach’s Alpha of 0,806 which means that the items are closely related as a group.

Table 2: Reliability analysis on Items measuring outsourcing

Corrected Item-

Total Correlation Cronbach's alpha if item deleted Transaction processing (bookkeeping,

accounts payables/receivables, payroll) 0,435 0,863 Reporting (management/annual reports,

[non]financial performance measures) 0,770 0,686

Financial planning and analysis

(budgeting, forecasting, target setting) 0,718 0,717 Valuations (asset valuations, M&A

valuations, purchase price allocations) 0,626 0,755

The involvement of finance in strategic decision-making (INVOLVEMENT)

To define to what extent the finance function is involved in strategic decision-making, I adapt an instrument from existing literature (Maas and Matejka, 2009). Concretely, the respondents have been asked about the importance of the following five tasks: Analyzing product and customer profitability (question 12-1), Development and evaluation of investment opportunities (question 12-2), Developing new entity strategy (question 12-3), Finding new ways to meet entity targets (question 12-4) and Developing cost-saving and revenue-increasing plans for the entity (question 12-5). The respondents have rated the importance of these activities on a scale where 1 is Not at all important, and 5 is extremely important, as displayed in figure 3. Data from this set of questions is suitable to provide empirical evidence for hypotheses 1, 2, and 3.

Figure 3: Survey questions regarding the involvement of finance in strategic decision- making

Q12

What is the importance of the following five tasks for the finance function?

Not at all important (1)

Slightly important (2)

Moderately important (3)

Very important (4)

Extremely important (5)

Analyzing product and

customer profitability (1)

o o o o o

Development and evaluation of investment

opportunities (2)

o o o o o

Developing new entity

strategy (3)

o o o o o

Finding new ways to meet

entity targets (4)

o o o o o

Developing cost-saving and revenue-increasing

plans for the entity (5)

o o o o o

Reliability analysis has been executed, showing that the questions related to the main variable involvement have a strong correlation. The lowest corrected item-total correlation is 0,418, which is higher than the required 0,4. The Item-total statistics are displayed in table 3. The set of questions has a Cronbach’s Alpha of 0,761 which means that the items are closely related as a group.

Table 3: Reliability analysis on Items measuring involvement in strategic decision

Corrected Item-

Total Correlation Cronbach's alpha if item deleted Analyzing product and customer

profitability 0,418 0,756

Development and evaluation of

investment opportunities 0,503 0,729

Developing new entity strategy 0,588 0,696

Finding new ways to meet entity

targets 0,647 0,675

Developing cost-saving and revenue-

increasing plans for the entity 0,504 0,727

Company size by the number of employees (SIZE)

To support hypotheses 2 and 3, respondents have been asked to indicate the number of employees in their entity in the year 2020. The questionnaire contains multiple questions regarding company size, such as total sales of the entity in 2020, number of business segments / operating divisions, and number of employees. To define company size regarding outsourcing and the involvement of finance in strategic decision-making, I chose to define company size by the number of employees in 2020. The respondents can answer question 42 by choosing one of the options as listed in figure 4. Descriptive statistics of this variable can be found in table 4.

Figure 4: Survey questions regarding the organization’s size by the number of employees Q42

What is the number of employees (in full-time equivalents) in your entity at the end of 2020?

o

o

o

o

o

o

o

o

o

3.3 Control Variables Main industry

Previous literature concludes that industry can influence the two main variables of this paper.

On the one hand, it can influence the finance roles of which involvement in strategic decision- making is one role. On the other hand, the industry type can also impact the organizational structure and outsourcing strategy of an organization (Chang et al., 2014 and ICAEW, 2011).

Therefore respondents have been asked to fill out their organization’s main industry by annual sales or total budget. Respondents could choose between 15 different industries as listed in figure 5.

These industries have been categorized into four subcategories to simplify the control variable and to clarify the impact of the control variable. Therefore I have coded the industries according to the following method: Manufacturing 1-6, Non-financial services 7-9 and 11, Financial services 10, and Public sector 12-15. Descriptive statistics of this variable can be found in table 4.

Figure 5: Survey question regarding the entity’s industry Q41

Measured by annual sales (or total budget), what is your entity’s main industry?

▼ Agriculture, hunting, forestry and fishing (1) ... environment, culture, recreation and other service activities (15)

Agriculture, hunting, forestry, and fishing (1) Mining and quarrying (2)

Traditional manufacturing (3)

High-tech manufacturing (including biotech) (4)

Production distribution and sale of electricity, gas, and water (5) Construction and building (6)

Repair of consumer products and retail (7) Hotels, restaurants, and bars (8)

Transport, logistics, warehousing, storage and communications (9) Financial intermediation (10)

Real estate and professional services (11)

Pubic government, defense organizations, and social security (12) Education (13)

Health and social work (14)

Environment, culture, recreation and other service activities (15)

Firm maturity

The variable firm maturity also has an impact on the main variables of this research. Mature firms often have the resources to outsource supporting business processes, however they might encounter challenges regarding their legacy. In other words, mature firms often have systems up and running and an extensive internal workforce which is costly to reduce. (Everaert et al., 2010; Gilley et al., 2004). Therefore, it might slow down their outsourcing ambitions.

Contrastingly, young firms do not have this legacy and often do not have the capacity to internalize all supporting business processes such as Finance (Gilley et al., 2004). Descriptive statistics of this variable can be found in table 4.

In the questionnaire, this question appeared as an open question, as shown in figure 6, which did not always give the required response. To analyze this data, I decided to correct and code the data. Respondents often answered the question with the number of years and the word years. I have removed the word years to make all input equal. In addition, I have coded the outcomes in the following way: <5 years (1), 5-10 years (2), 11-20 years (3), 21-30 years (4), 31-50 years (5), 51-75 years (6), 76-100 years (7), 101-150 years (8), >150 years (9).

Descriptive statistics of this variable can be found in table 4.

Figure 6: Survey question regarding the entity's maturity

Q45

How old is your entity approximately (in years)?

________________________________________________________________

Table 4: Sample distribution of control and moderator variable

n Percentage

Company size by the number of employees

<50 1 1,4

50-99 6 8,6

100-249 9 12,9

250-499 9 12,9

500-999 11 15,7

1.000-2.499 8 11,4

2.500-4.999 7 10,0

5.000-10.000 1 1,4

>10.000 18 25,7

70 100

Company maturity in years

<5 3 4,5

5-10 7 10,4

11-20 10 14,9

21-30 8 11,9

31-50 12 17,9

51-75 3 4,5

76-100 11 16,4

101-150 10 14,9

>150 3 4,5

67 100

Organization's industry

Manufacturing 19 27,1

Non-financial services 21 30,0

Financial services 14 20,0

Public sector 16 22,9

70 100,0

Results

4.1 Descriptive Statistics

Outsourcing of finance activities

Descriptive statistics on the four questions measuring outsourcing finance activities can be found in table 5. I find that more than half of the organizations have mostly achieved or implemented organization-wide outsourcing of transaction processing activities such as accounts payable and accounts receivable (54%). On the opposite, the other three activities have much lower scores on Mostly achieved and Organization-wide. The scores of these activities are Reporting (20%), Financial planning and analysis (16%), and Valuations (19%).

Besides, most organizations do not have plans to outsource activities related to Financial planning and analysis and valuations (69 and 63 percent). This means that organizations are focused on outsourcing their routine activities to external suppliers and tend to keep the non- routine activities such as Financial planning and analysis and Valuations inside their own organization. This is in line with previous literature (Averaerts et al., 2010; Widener and Selto 1999; Speklé et al. 2007). More than 76 percent of the organizations have at least started with outsourcing Transaction processing activities to external suppliers, and more than half of the organizations started with outsourcing reporting activities (56 percent).

To define the variable outsourcing of finance activities, I calculate a proxy for the extent of activities outsourced to an external supplier as an equally weighted average of the scores of all four items.

Table 5: Descriptive Statistics on Items Measuring Outsourcing of finance activities N = 70

Mean 1 2 3 4 5

Transaction processing (bookkeeping,

accounts payables/receivables, payroll) 3,33 24% 16% 6% 11% 43%

Reporting (management/annual reports,

[non]financial performance measures) 2,19 44% 26% 10% 7% 13%

Financial planning and analysis

(budgeting, forecasting, target setting) 1,74 69% 13% 3% 7% 9%

Valuations (asset valuations, M&A

valuations, purchase price allocations) 1,91 63% 11% 7% 9% 10%

Displayed is the frequency of responses to the following question:

To what extent have the following activities been outsourced, or structured in shared service center(s)?

1 = No plans to adopt 2 = Started

3 = Partially achieved (25-50%) 4 = Mostly achieved (50-75%) 5 = Organization-wide (>75%)

The involvement of finance in strategic decision-making

Table 6 presents descriptive statistics on the questions measuring finance involvement in strategic decision-making. I find that the respondents, on average, give high importance to their strategic decision-making support activities. There are some notable differences among the importance of each of the five tasks. Only 33 percent of the respondents consider “developing new entity strategy as very or extremely important, where “Analyzing product and customer profitability” and “developing cost-saving and revenue-increasing plans for the entity” have a combined score of respectively 71 and 76 percent on very and extremely important.

To define the variable finance involvement in strategic decision-making, I calculate a proxy for the importance of five activities related to supporting management in strategic decision-making as an equally weighted average of the scores of all five items.

Table 6: Descriptive Statistics on Items Measuring involvement in strategic decision- making

N = 70

Mean 1 2 3 4 5

Analyzing product and customer

profitability 3,71 3% 14% 11% 51% 20%

Development and evaluation of

investment opportunities 3,43 7% 14% 23% 40% 16%

Developing new entity strategy 3 9% 23% 36% 26% 7%

Finding new ways to meet entity

targets 3,46 6% 11% 26% 46% 11%

Developing cost-saving and revenue-

increasing plans for the entity 3,9 3% 4% 17% 51% 24%

Displayed is the frequency of responses to the following question:

What is the importance of the following five tasks for the finance function?

1 = Not at all important 2 = Slightly important 3 = Moderately important 4 = Very important 5 = Extremely important

Main variables

Table 7 presents the descriptive statistics of the main variables outsourcing of finance activities, Finance involvement in strategic decision-making, and company size by the number of employees. The variable outsourcing of finance activities (OUTSOURCING) has a mean which is lower than the midpoint of the scale partly because of many organizations not having

variable outsourcing of finance activities (OUTSOURCING) has a high standard deviation which suggests a wide variety in responses on outsourcing finance activities. The mean of the variable Finance involvement in strategic decision-making (INVOLVEMENT) is high and the standard deviation relatively low, which suggests that organizations find the involvement of finance in their strategic decision-making important. The moderator variable: Company size by the number of employees (SIZE) shows a high mean and a high standard deviation presenting the significant variation of the organization's sizes in the sample.

Table 7: Descriptive statistics main variables

n Mean SD. Min. Median Max.

Main variables

OUTSOURCING 70 2,29 1,16 1,00 2,00 5,00 INVOLVEMENT 70 3,50 0,74 1,20 3,60 4,80 SIZE 70 5,69 2,45 1,00 5,00 9,00

OUTSOURCING = Outsourcing a part of the finance function

INVOLVEMENT = The involvement of finance in strategic decision-making SIZE = Company size by the number of employees

To understand the relation between the variables outsourcing a part of the finance function and the involvement of finance in strategic decision-making, I have divided the sample into two groups. The first group contains organizations with low levels of outsourcing which are the scores: no plans to adopt and started. The second group contains organizations with higher levels of outsourcing which are the scores above started: partially achieved, mostly achieved, and organization-wide. The results of comparing means of the involvement of finance in strategic decision-making in both groups are shown in table 8. These results show that the means of finance involvement in strategic decision-making are equal in both groups. Also, the other measures like standard deviation and median do not show many differences.

Table 8: Comparing means between organizations with low and high levels of outsourcing

n Mean SD. Min. Median Max.

Low levels of outsourcing 37 3,50 0,73 1,20 3,60 4,80 High levels of Outsourcing 33 3,50 0,77 1,80 3,60 4,80

Descriptive statistics of the variable INVOLVEMENT = The involvement of finance in strategic decision-making are shown for the groups:

Low levels of Outsourcing: No plans to adopt and Started

High levels of Outsourcing: Partially achieved, Mostly achieved and Organization-wide

Correlations

Bivariate correlations tests have been executed among the main variables following the Pearson correlations test and the Spearman’s Rank-order correlations test. The results of these tests can be found in table 9. I chose to execute one-tailed tests because I am looking for a positive correlation between the variable Outsourcing finance activities (OUTSOURCING) and Finance involvement in strategic decision-making (INVOLVEMENT). Looking at the Pearson correlations test results, I do not find any correlation between the main variables, however Spearman's Rank-order correlations test results show correlations between the moderator variable Company size measured by the number of employees (SIZE) and both main variables Outsourcing and Involvement. Spearman's Rank-order correlations test looks at the monotonic relationship between the variables and can be used with ordinal variables. Company size has a positive correlation with Outsourcing finance activities and the involvement of finance in strategic decision-making.

Table 9: Bivariate Associations Main variables N = 70

1. 2. 3.

Main variables

OUTSOURCING -0,10 0,18

INVOLVEMENT 0,02 0,18

SIZE 0,25* 0,24*

*Refers to significance at the 0,05 level (one-tailed). Pearson correlations are reported above the diagonal, Spearman's Rank-Order Correlations are reported below the diagonal.

OUTSOURCING = Outsourcing a part of the finance function

INVOLVEMENT = The involvement of finance in strategic decision-making SIZE = Company size by the number of employees

Besides the bivariate correlations tests, regression analysis has been executed to determine the relationship between the variables following two different models according to hypothesis 1:

Outsourcing a part of the finance function is positively related with the involvement of finance in strategic decision-making and hypothesis 3: The positive effect of outsourcing a part of the finance function on the involvement of finance in strategic decision-making is bigger for larger than for smaller organizations. The first model following hypothesis 1 is INVOLVEMENT = b1 * OUTSOURCING + b2 * SIZE + bi * Controls, where the effect of b1 * OUTSOURCING on INVOLVEMENT is tested. The results of the regression analysis to test the first model are in line with the results of the bivariate correlations tests showing that there is no significant relation between the variables OUTSOURCING and INVOLVEMENT. The results of the regression analysis are displayed in table 10.

The second model following hypothesis 3 is: INVOLVEMENT = b1 * OUTSOURCING + b2 * SIZE + b3 * (SIZE * OUTSOURCING) + bi * controls, where the moderator effect of b3 * (SIZE * OUTSOURCING) on INVOLVEMENT is tested. In the regression analysis, the second model shows a significance of 0,033, which is higher than 0,01.

This means, no significant relationship between the moderator variable and the dependent

variable INVOLVEMENT has been found. The results of the regression analysis are displayed in table 10.

Table 10: Regression analysis testing hypothesis 1 and 3 N = 70

Sig. R Square

Model 1 0,132 4,9%

Model 2 0,033 10,9%

Model 1: INVOLVEMENT = b1 * OUTSOURCING + b2 * SIZE + bi * Controls

Model 2: INVOLVEMENT = b1 * OUTSOURCING + b2 * SIZE + b3 * (SIZE * OUTSOURCING) + bi * controls

OUTSOURCING = Outsourcing a part of the finance function

INVOLVEMENT = The involvement of finance in strategic decision-making SIZE = Company size by the number of employees

Control variables are Main industry and Firm maturity.

4.2 Hypotheses Tests

Following the outcomes of the Pearson correlations test, the Spearman’s Rank-Order Correlations and the regression analysis conclusions can be drawn regarding the hypotheses of this research. First, the first hypothesis assumes a direct positive relationship between the variables Outsourcing finance activities and Finance involvement in strategic decision-making.

The bivariate association tests show that there is no significant correlation between Outsourcing finance activities and Finance involvement in strategic decision-making. Besides, the regression analysis confirms the results of the bivariate correlations tests showing there is no significant relationship between Outsourcing finance activities and Finance involvement in strategic decision-making. Moreover, there is no evidence found that Outsourcing finance activities has a positive effect on the involvement of finance in strategic decision-making, and therefore, the first hypothesis has to be rejected.

Second, as predicted by hypothesis two, company size is positively correlated with the involvement of finance in strategic decision-making. The Spearman's Rank-Order Correlations

test reports a correlation value of 0,25 (p = 0,024), which suggests a small to moderate correlation between the variables company size and the involvement of finance in strategic decision-making. Evidence has been found supporting hypothesis two, The involvement of finance in strategic decision-making is higher in larger organizations. This is in line with prior research of Chenhall (2003) and Zhang and Lee (2012).

Third, the third hypothesis assumes a positive relationship between Outsourcing finance activities and Finance involvement in strategic decision-making moderated by the variable company size. Following the results of the regression analysis, a significant positive relationship between the moderator variable Company size and the dependent variable Finance involvement in strategic decision-making is not found. Therefore the third hypothesis is rejected.

Fourth, Spearman's Rank-Order Correlations test shows a correlation value of 0,24 (p

= 0,18), supporting the direct effect of company size on the level of outsourcing finance activities. This has not been defined in the hypothesis section, however the finding can be exciting and is in line with previous literature. It contributes to prior research regarding the drivers of outsourcing accounting activities (Everaert et al., 2010).

4. Conclusion and discussion

This study investigates the relationship between outsourcing a part of the finance function, and the involvement of finance in strategic decision-making. The main objective of this research was to find empirical evidence to support the direct positive effect of outsourcing finance activities on the involvement of finance in strategic decision-making. Survey data has been gathered via an online questionnaire, and different forms of hypothesis testing have been done to find significant correlations between the main variables.

The outcomes of the hypotheses tests following different methods such as the Pearson correlations test, Spearman’s Rank-order correlations test, and Regression analysis do no provide empirical evidence of a significant positive relationship between outsourcing finance activities and finance involvement in strategic decision-making. Moreover, outsourcing finance activities do not significantly increase the level of finance involvement in strategic decision- making. Therefore it can be concluded that outsourcing finance activities are not a suitable option to enable finance organizations to be more heavily involved in strategic decision- making. As shown in previous research, outsourcing finance activities can deliver positive results in case of cost savings, a more effective finance organization, increasing knowledge, and mitigating risks (Averaerts et al., 2010; Asatiani et al., 2018; Mishina et al.,2020), enabling finance to be more heavily involved in strategic decision-making cannot be added as a motivation to outsource finance activities. This finding contributes to the existing management accounting literature.

Nevertheless, some evidence has been found to support the second hypothesis showing a direct positive effect of an organization's size on the level of involvement of finance in strategic decision-making. This contributes to prior research of Chenhall (2003) and Zhang and Lee (2012). Besides, evidence has been found supporting a positive direct relationship between company size and the level of outsourced finance activities. In other words, larger organizations have outsourced finance activities to external suppliers more often. This supports the findings of Everaert et al. (2010) in previous research.

The conclusions drawn in this research paper are subject to several limitations. First, a larger sample size could have helped to find more empirical evidence for the first hypothesis.

Second, the moderator variable Company size by the number of employees could have been defined by another measure such as total sales or total balance value. This might have led to

different outcomes. Third, the research question and hypotheses are focused on one effect of outsourcing finance activities, while the topic of outsourcing finance activities has not received much attention yet. To fill in the gaps of this study, further research can be done to provide more insights into the effects of outsourcing finance activities in a broader way. Despite the limitations of the study, I believe that this study generates new insights into the effects of the decision to outsource finance activities and can be the reason for further research on this topic.