salman danish 1457 (thesis proposal)
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Business Opportunities & Financial Outsourcing in Pakistan:
Communication Gap
A thesis submitted
by
Salman Danish
to
Department of Business Administration
In partial fulfillment of the requirement for the
degree of
MASTER OF BUSINESS ADMINISTRATIONin
Finance
This thesis has beenaccepted for the
FACULTY OF BUSINESS ADMINISTRATION
by:
Name of Chair Chair
Name of Advisor Advisor
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CHAPTER 1
INTRODUCTION
Nowadays, there is a recession in almost every economy. There are many reasons
behind it including bad economic situation of Pakistan, but the most important is the
financial crises of the world due to Sub Prime Crises. Due to the same, organizations
now emphasizing on developing an active sourcing strategy, making a combination of
internal team having assistance from external workforce, via outsourcing and
developing a relationship as helping each others. This step of tactical advancement is
made expedite by making cutthroat pressures and indistinctness. This paper is to
examine the outline of sourcing strategy, which has been grown by making various
societies, groups or forums, and the forms of strategic advantage that have been
realized so far by those sourcing strategies. Despite the advantages realized, in the
most of the societal strategy supervision are found to be casual and the traditions of
these societies, groups of forums found opposing to further outsourcing. In previous
era, Volks Wagon also decided to outsource a few of its operations, as mentioned by
Horngren, Foster (Datar; 386), VW has completely outsource manufacturing to a
team of carefully selected supplier-partner in a radical experiment in production
operations. But the future growth and success of outsourcing, is mostly in the
services of firms, and not completely in the products. Those service providers are
commonly based on Non-Producing Operations of the Organization, and cover
various departments within an organization. Non-productive operations that are
usually outsourced to third party service providers may include;
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HR Operations:
Recruitment process
Appraisals
Counseling, Coaching & Mentoring
Training and Development
Selling & Distribution:
Marketing
Selling
Distributors
Agencies
I.T. Operations:
Hardware Maintenance
Software Maintenance
Database Backups
Data Compliance, Confidentiality & Security
Disaster Management & Recovery Plans
Accounting & Finance:
Taxation
Audit
Controls
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Planning & Reviews
Book Keeping & Account Finalization
Looking towards the Financial Institutions providing a vide range of services to their
clients. There are following various modes of outsourcing and is carried in variety of
areas that include:
1. Tax Advisors
a. Tax Deductions
b. Tax Appeals
c. Tax Hearings
2. Filing of Returns
a. Income Tax
b. Sales Tax
c. Federal Excise Duty (FED)
d. Custom Duty
3. Audit coordination
4. Internal Audit
5. Basic book keeping
6. Accounts finalization
These are the ground outsourcing areas in financial sector of an economy. And in
order to maintain a balance between the financial operations and outsourced
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entities, organization must review the operational framework (Terms of Reference)
to avoid a Communication Gap.
1.1 Background
This dissertation endeavors for identification if there is a communication gap between, what
an organization expects from an external firm and what an external firm believes in providing
the services to the outsourcing organization.
1.1.1 Contextual Frame
Despite some negative perceptions regarding the outsourcing industry in Pakistan,
various organizations are now looking towards finding a way thru which they can
minimize their expenses and can have an expert view over to their non-operational
divisions, with high concentration over to the core operational activities. Based on the
current economical situation, organizations tend to hire the external accounting &
financing service providers, which can only provide organizations what they are
looking for, having an expert view on accounting & financing operations as well as
saving time and money of the principal organization, which results in relaxation for
principal organizations for concentrating in their core activities.
1.1.2 Problem Identification/ Statement
The basic problem faced when a corporate is outsourcing a division to a third party,
especially when it is finance division, is when third party restricts itself from engaging
into various activities through signing a specific Term Of Reference (TOR) for the
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assignment. However the Organizations that are outsourcing their departments to third
party service providers, assume that all the obligations of department or division are
held upon the third party service provider.
1.2 Purpose of the Research/study
The objective of this dissertation is to identify the business opportunities and financial
outsourcing in Pakistan with overview of the communication gap.
1.3 Research Questions
The current dissertation is going to focus over below mentioned questions:
Is the proposal of outsourcing gaining the same results as required when
starting the relationship?
Is your leading team for outsourcing fully employing the tools in the
workplace that are required for an effective management of the relationship?Is there any change of regulatory environment that has brought your
organization at stake for the outsourcing efforts?
Is there any surety for the integrity of the operations of your firm from the
service providers?
1.4 Justification/ Significance
To identify and govern the policies that can effectively work in the favor of both
organizations. And to create a balanced link between the outsourcing operations
within the scope as agreed between the two.
1.5 Scope
(1.4 and 1.5 can be combined as one heading)
1.6 Delimitation of research
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1.7 Definition of key words
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CHAPTER 2
LITERATURE REVIEW
Outsourcing is defined as the process of getting goods manufactured or getting
services from an external party rather than producing the goods or getting services
from within the same Organization. Today outsourcing is considered as the best mean
for both reducing costs and achieving strategic aims.
Outsourcing has various benefits despite to the fact that there are also some demerits
attached to it. The main risk involved in outsourcing is that in outsourcing,
organizations have to share their products, services or any other confidential data with
the outsourcing agencies and have to leave them in the hands of someone who is
beyond their control. Various ethical issues and general practices are at hand here,
like trust worthiness.
In the past few years, outsourcing has become more popular in small and medium
business and organizations. "Outsourcing is becoming popular even in small and
midsize companies. Nowadays, a small business may not have staff members such as
Human Resources recruit. As the Internet transforms the way businesses
communicate with their clients, vendors, and employees, many of these functions are
being handled by outsourcers." Because of the popularity in small and medium sized
businesses, and even large corporations, the popularity graph of outsourcing is on
upward trend. Now market giants are also emphasizing on outsourcing tactics for
various divisions of their core operational or non-operational activities. As an
example, IBM and Compaq are the two giants in computer manufacturer & assembler,
and are drawing attention to use outsourcing to overcome the storage problems. "IBM
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and Compaq are offering distinctly different models, however. Compaq rents storage
hardware and software that are kept on the customers' premises. The service is
tailored to IT managers wary about giving up control of their storage," (Lelii).
Another example for market giants is of Volkswagen Company. "VW has completely
outsourced manufacturing to a team of carefully selected supplier-partner in a radical
experiment in production operations."
The future of outsourcing is mostly in the services of firms, and not completely in the
productive operations. Another way of outsourcing that is showing a fast growing
energy is offshoring, i.e., getting products or services from producers or service
providers residing in any other country and not where the outsourcing firm is located.
Many giant corporations are tending to achieve strategic efficiency by offshoring
basic transaction processing or call centers like service help lines. For example,
Deloitte estimates that US Financial services industry will offshore US$356 billion inthe next five years after 2003. The Financial Institutions are providing a vide range of
services to their clients not only in Pakistan but in other countries around the world.
There are following various modes of outsourcing and is carried in variety of areas
that include:
1. Tax Advisory
a. Tax Deductions
b. Tax Appeals
c. Tax Hearings
2. Filing of Returns
a. Income Tax
b. Sales Tax
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c. Federal Excise Duty (FED)
d. Special Excise Duty (SED)
e. Central Excise Duty (CED)
f. Custom Duty
3. Audit coordination
4. Internal Audit
5. Basic book keeping
6. Accounts finalization
These are the few sectors of Pakistan economy that are highly emphasizing on the
outsourcing of their financial & other operations:
Textiles and Garments
In the Textile and Garment sector of Pakistan, outsourcing is seen to be an active part
of business processes. Textile & Garment sector of Pakistan is now heavily
emphasizing on outsourcing their financial operations to well known and reputable
third party service providers, resulting in highly cost control due to this outsourcing as
well as getting higher level of expertise in routine tasks of the organization. Due to
the outsourcing of financial operations, Organizations are now at ease to emphasize
their expertise in their production or development area.
Cement Sector
In the Cement sector of Pakistan, outsourcing is seen to be an active part of business
processes. Cement sector of Pakistan is now emphasizing on outsourcing their
financial operations to well known and reputable third party service providers,
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resulting in highly cost control due to this outsourcing as well as getting higher level
of expertise in routine tasks of the organization. Various Cement producing
Organizations are now saving huge amount through reduction in layers in hierarchy of
Finance / Account Division, and are now moving towards better profitability.
Due to the outsourcing of financial operations, Organizations are working for the
enhancement of their production capacity and their production activities. New
researches are also carried out in the area of Cement sector, coming up with a variety
of new products that include Grey Cement, White Cement, Hi-Bonds, Tile Adhesives,
Sealers, Sealer Cements and many more of the same kind.
Financial Institutions
Various Financial Institutions including; Non Banking Financial Corporations
(NBFC), Commercial Banks, Development Financial Institutions (DFI), Leasing
Companies, Saving Institutions, Assets Management Companies, Insurance
Companies, and many more are also looking forward for hiring services from third
party service providers for their specialized working areas like SOPs, Equity trades,
Lending & Borrowings, Asset Management, Projections, Estimations and many more.
Currently, Financial Institutions in Pakistan, are hiring various professional
organizations, a few of big names providing these services in Pakistan are: A. F.
Ferguson, Ford Rhodes Sidat Hyder, KPMG Taseer Hadi, Anjum Asim Shahid
Rehman & Co., JSF Consulting Private Limited, TAG Consulting Private Limited,
and many more.
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IT Based Service Centers (Call Centers, Service Centers, Software Houses &
etc.)
It is a surprising but a ground reality that I.T. based services sector has not shown a
remarkable progress in Pakistan, particularly when it is compared with India.
Currently there is an un-established industry in Pakistan, a few call centers are still
working in Pakistan, opened by financial institutions or some overseas Pakistanis, and
almost all of them are contributing towards the outsourcing factors of financial sector.
Foreign investment in Pakistan
A large number of Multinational organizations are operating their businesses in
Pakistan for around thirty years or some more. But no any new or remarkable entry
has been reported in Pakistans market. These Multinationals are currently covering
these industries: Cement industry, Textile sector, Oil & Gas exploration / refinery /
marketing, Electrical equipments, FMCG, & other consumables, Medicines &
Medical equipments, and Chemicals etc. These Multinationals are also now trying to
remain in competition by emphasizing on their core operations, after outsourcing the
non-operational activities considered as fat of the organizations.
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CHAPTER 3
METHODOLOGY
Chapter 3 portrays the assurance of the methodology exercised for collection of data
for investigation and ensures the pursuance of proper procedure thereon. This chapter
is systemized with the help of nine headings arranged as: Introduction, objective,
research design, research purpose, and selection of sample, research instrument,
validity and reliability, process of data collection, data analysis technique.
3.1 Introduction
The aim of this chapter is the provision of an overview for the methodological
approaches and research design that can be selected for relating to a study on the
factors of Financial Outsourcing in Pakistan (Communication Gap). In the exploration
of the phenomenon of these outsourcing, the dissertation shall investigate the effect of
Communication Gap on the Financial Outsourcing, in the various sector contributing
towards the economic growth of Pakistan and seek to answer whether or not the
communication gap discussed herein, can be overcome. In the light of different
literatures reviewed, the market leaders are capable of overcoming the above cited
gap, and there is a possibility of joint efforts contributing towards the economical
growth as One Nation. A proposal for implementation of the guidelines and rules &
regulations for the service providers of Pakistan shall be proposed, followed by the
analysis of secondary data extracted by conducting Group Discussions, Interviews,
Open Forums and working with the Chartered Accountants of Pakistan, and then the
proposal shall be defended through empirical evidence.
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3.2 Objective
The objective set for the present paper is to classify the Business Opportunities &
Financial Outsourcing in Pakistan (Communication Gap).
3.3 Research Design
According to Beiger and Gail (1996) the research design is the systematic fine points
of the dissertation with the help of which, data collection is carried, and its aim is to
define the set of methods and procedures that assists in testing the research hypothesis
and with a degree of confidence. In this study the data collected from various sources
was used as substantiation in decision making and testing hypothesis. Gay and Peter
(2000) had provided four types of research design mentioned below:
Descriptive Research Design
Correlational Research Design
Causal-comparative Research Design
Experimental Research Design
3.3.1 Descriptive Research Design
It involves collecting data in order to test hypothesis or to answer questions about the
opinions of people on particular issue. It is also called Survey design.
3.3.2 Co-relational Research Design
Involves collecting data to determine whether and to what degree a relationship exists
between two or more variables. The degree of expression is expressed as co relation
coefficient.
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3.3.3 Causal-comparative Research Design
This involves selecting two groups differing on some independent variable and
comparing them on some dependant variable. These two groups are known as
experimental and control groups.
3.3.4 Experimental Research Design
Involves an experimental study in which at least one independent variable is
manipulated and other relevant variables are controlled and effect is observed on one
or more dependant variables.
The research design used in the current dissertation belongs to the co-relational
research category. The variable types are dependant and independent. Different tests
were use to measure the relationship between the dependant and the independent
variables.
The research design aimed to ensure that the obtained results were due to the factors
under study and not to extraneous or irrelevant factors. It helped in achieving greater
accuracy in the results and increased confidence in outcome of the research.
3.4 Research Purpose
Research scholars have identified three main purposes to the research activity. These
are the exploratory, the descriptive and the explanatory purposes (Saunders et al.,
2000).
3.4.1 Exploratory
Exploratory research unfolds through focus group interviews, structured or semi-
structured interviews with experts and a search of the relevant literature (Saunders et
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al., 2000). Its primary purpose is the exploration of a complex research problem or
phenomenon, with the objective being the clarification of the identified complexities
and the exposition of the underlying nature of the selected phenomenon. In other
words, and as Robson (2002) explains, exploratory research investigates a specified
problem/phenomenon for the purpose of shedding new light upon it and,
consequently, uncovering new knowledge.
3.4.2 Descriptive
Punch (2000) explains the purpose of the descriptive research as the collection,
organization and summarization of information about the research problem and issues
identified therein. Similar to the descriptive research, it renders complicated
phenomenon and issues more understandable. Danes (1990) definition of the
descriptive research and its purposes coincides with the stated. Descriptive research
entails the thorough examination of the research problem, for the specified purpose of
describing the phenomenon, as in defining, measuring and clarifying it (Dane, 1990).
Jackson (1994) contends that all research is partly descriptive in nature. The
descriptive aspect of a research is, simply stated, the (1) who, (2) what, (3) when, (4)
where, (5) why, and (6) how of the study.
3.4.3 Explanatory
Miles and Huberman (1994) define the function of explanatory research as the
clarification of relationship between variables and the componential elements of the
research problem. Explanatory research, in other words, functions to highlight the
complex interrelationships existent within, and around, a particular phenomenon and
contained within the research problem (Miles and Huberman, 1994). Expounding
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upon this, Punch (2000) asserts that explanatory, or causal research, elucidates upon
the nature of the problem under investigation and explains the basis for the proposed
solution. It is an explanation of the complex web of interrelated variables identified
and follows directly from a clearly stated central research hypothesis and research
question.
The research purpose of current dissertation is explanatory as the primary goal is to
identify the impact the relationship of dependant and independent variables.
3.5 Selecting a Sample
Selection of sample is a very important step in conducting a study because the quality
of the sample determines the generalizability of the results. A primary characteristic
of good sample is the degree to which it is true representative of the population from
which it was selected Gay & Diehl (1992).
Sampling technique can be classified into two types
Probability Sampling
Non-Probability Sampling
3.5.1 Probability sampling
In probability sampling, selection of the sample is based in a way that each individual
in the population has an equal chance of being selected. It is this concept of "known
chance" that allows for the statistical projection of characteristics based on the sample
to the population Gay & Diehl (1992). As an advantage of probability sampling,
sampling error can be calculated easily. Sampling error is the degree to which a
sample may differ from the population. Probability method includes.
Random sampling
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Stratified sampling
Cluster sampling
Systematic sampling
3.5.2 Non-Probability Sampling
In non-probability sampling, the selection of the sample carried in a way that the
chance of being selected for each individual from the population is unknown. Indeed,
the selection of the subjects is random or subjective, as the researcher relies on his/her
experience and judgment. Resulting in, no statistical techniques for the measurement
of sampling error, and the degree to which the sample differs from the population
remains unknown and therefore it is not appropriate to project the sample
characteristics to the population (Saunders, 2000). Non-probability includes:
Convenience sampling
Judgment sampling
Quota sampling
Snowball sampling
3.5.1.1 Random Sampling
In the process of sample selection, the sample is drawn in a way that all the
individuals are from defined population and have an equal and independent chance of
being selected. It is the best single way to obtain a representative sample.
In the current dissertation the random sampling method is obtained and is employed
over the various organization representing different sectors of Pakistan.
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3.6 Measuring the validity and reliability
In order to reduce the possibility of getting incorrect answers, attention needs to be
paid to validity and reliability (Saunders et al., 2003).
3.6.1 Validity
Validity is concerned with whether the findings are really about what they appear to
be about (Saunders et al., 2003).
Validity defined as the extent to which data collection method or methods accurately
measure what they were intended to measure (Saunders et al. 2003)
(Yin, 1994) states, no single source has a complete advantage over all others
3.6.2 Reliability
According to Saunders et al. (2003), reliability means the degree to which the
methods of collecting data will provide steady findings, consistent observations would
be found or end results reached by other researchers or there is precision in how sense
was made from the raw data.
The role of reliability is to minimize the errors and biases in a study [Yin (1994)].
This means that reliability is to ensure that during the operations of the study, all the
times the data collection is processed; it will be repeated with the same result.
Saunders et al. (2003) asserts that there may be four threats to reliability. The first of
these is subject of participant error, which means that a questionnaire may generate a
different result at different times of the week. The second threat to reliability is
subject or participant bias, which is when interviewees may have been saying what
they thought their bosses, wanted them to say. Third, there may have been observed
error that different interviewer may approach the questions in different ways. Finally,
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there may have been observer bias, which means that there may have been different
approaches to interpreting the replies.
The work on this thesis started with a considerable literature study. The literature
came across (research papers) was from several authors and most of them covered the
Financial Outsourcing and had a great coverage for the communication gap
mentioned in the Thesis Paper, which meant that the covered area of the topic has
been taken in the lights of these papers. It is therefore suggested that bias, form
reading only one author and reading only about one topic, assured and held at a
minimum level.
3.7 Data Selection
The data selection is the significant part of the methodology, in current dissertation
the data of various organization involved in the business of third party accounting
service provider as well as from various organizations who outsourced their functions
and had variety of experiences based on to these outsourcing.
3.8 Data Collection
The data collection is based on the interviews with third party service providers
(especially Chartered Accountants), Heads of different Organizations (who have
outsourced their operations), Group discussions, Counseling sessions with working in
outsourcing.
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