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George reviews some general information on offshoring and finds that global offshoring has grown rapidly. He finds that accounting processes such as accounts payable, accounts receivable, sales ledger, general ledger, financial reporting, and bank processing are increasingly offshored. 2 George calls Delphi to discuss the services performed at the servicing center in India. Delphi informs George that the service center currently provides some IT support for the insurance operations in the U.K., Belgium, and France; performs some customer service functions; and also recently added a few accounting functions. Delphi emphasized that the service center is just beginning to add staff with accounting expertise and has minimal knowledge of U.S. generally accepted accounting principles (GAAP) state regulatory accounting requirements, and U.S. tax law (the U.S. Internal Revenue Code). George determines that the first step in his analysis is to identify which accounting functions would be the best candidates for offshoring and then analyze the financial and logistical feasibility of doing that. George prepares a matrix to assist him in analyzing which functions would be the most appropriate to offshore (see Table 2). His matrix takes into account required skill levels, local knowledge (of the U.S. Internal Revenue Code, for example), compliance risk, technological support, and the need for direct management oversight which may be difficult due to distance and differences in time zones. He rates the functions on each of the criteria as high, medium, and low. George concludes that the functions that score low or medium on all of the criteria would be the best candidates for outsourcing. Based on the matrix, he believes that the accounts payable and bank reconciliation functions are the best candidates for initial consideration. The accounts payable function has a separate manager while the bank reconciliation function reports to the manager of general accounting. The Bank Reconciliation Department prepares 50 reconciliations per month (600 per year), and the Accounts Payable Department processes 50,000 checks per month (600,000 per year). George reviews the annual expense budgets (provided in Table 3). George sends Delphi an email and requests information on the accounts payable and bank reconciliation service functions. Delphi responds that the charges for outsourced services for accounts payable and bank reconciliation are a base monthly fee of $1,250 for each function ($15,000 per year) plus $0.65 per payment for processing accounts payable and $200 per bank reconciliation. Delphi also informs George that the U.S.-based operations would need to maintain staff to coordinate the transfer of information. Based on a similar project being undertaken by the company's U.K. operations, Delphi estimates that one staff member within the Accounting Department should be sufficient to support both accounts payable and bank reconciliations. Delphi and George discuss the necessary skills. George believes that retaining the accounts payable manager, who likely has the necessary skills, would be a good solution-and he uses that assumption for his analysis. The accounts payable manager's annual salary is $75,000. The allocated benefits charge is $18,750, but actual benefits and taxes are $19,488. George estimates that the cost for a personal computer, supplies, travel, and all other expenses (excluding postage) would total $15,500. He assumes that the salary, benefits and other expenses associated with the manager would be allocated 65% to accounts payable and 35% to bank reconciliations based upon the estimated time requirements to support each function. George does not include the allocation of rent, corporate expenses, or 50% of IT support in his cost-reduction estimate. Delphi also gives George the data transfer and connectivity specifications to discuss with the IT Department. Josephine Young, of the IT Department, analyzes the requirements and informs George that they would need to improve connectivity and alter the time of the batch processing for accounts payable. She estimates there would be a one-time cost of $100,000 plus $2,500 per month for improved connectivity. The change in the batch processing time will also cause an increase in personnel costs of $2,500 per month. But there are no additional technology requirements for offshoring bank reconciliations. 2. Offshoring Analysis: a. Based on George's assumptions that all of the remaining supervisor's costs are split 65% to accounts payable and 35% to bank reconciliation, and all incremental ongoing technology costs and postage costs are charged to accounts payable, calculate the annual savings per function through offshoring. b. What would the impact be on AC-US's costs for the next three years if the two accounting functions are performed in India instead of in the U.S.? (Be sure to include severance in the one-time costs, using information from Table 6 and assume zero inflation). George reviews some general information on offshoring and finds that global offshoring has grown rapidly. He finds that accounting processes such as accounts payable, accounts receivable, sales ledger, general ledger, financial reporting, and bank processing are increasingly offshored. 2 George calls Delphi to discuss the services performed at the servicing center in India. Delphi informs George that the service center currently provides some IT support for the insurance operations in the U.K., Belgium, and France; performs some customer service functions; and also recently added a few accounting functions. Delphi emphasized that the service center is just beginning to add staff with accounting expertise and has minimal knowledge of U.S. generally accepted accounting principles (GAAP) state regulatory accounting requirements, and U.S. tax law (the U.S. Internal Revenue Code). George determines that the first step in his analysis is to identify which accounting functions would be the best candidates for offshoring and then analyze the financial and logistical feasibility of doing that. George prepares a matrix to assist him in analyzing which functions would be the most appropriate to offshore (see Table 2). His matrix takes into account required skill levels, local knowledge (of the U.S. Internal Revenue Code, for example), compliance risk, technological support, and the need for direct management oversight which may be difficult due to distance and differences in time zones. He rates the functions on each of the criteria as high, medium, and low. George concludes that the functions that score low or medium on all of the criteria would be the best candidates for outsourcing. Based on the matrix, he believes that the accounts payable and bank reconciliation functions are the best candidates for initial consideration. The accounts payable function has a separate manager while the bank reconciliation function reports to the manager of general accounting. The Bank Reconciliation Department prepares 50 reconciliations per month (600 per year), and the Accounts Payable Department processes 50,000 checks per month (600,000 per year). George reviews the annual expense budgets (provided in Table 3). George sends Delphi an email and requests information on the accounts payable and bank reconciliation service functions. Delphi responds that the charges for outsourced services for accounts payable and bank reconciliation are a base monthly fee of $1,250 for each function ($15,000 per year) plus $0.65 per payment for processing accounts payable and $200 per bank reconciliation. Delphi also informs George that the U.S.-based operations would need to maintain staff to coordinate the transfer of information. Based on a similar project being undertaken by the company's U.K. operations, Delphi estimates that one staff member within the Accounting Department should be sufficient to support both accounts payable and bank reconciliations. Delphi and George discuss the necessary skills. George believes that retaining the accounts payable manager, who likely has the necessary skills, would be a good solution-and he uses that assumption for his analysis. The accounts payable manager's annual salary is $75,000. The allocated benefits charge is $18,750, but actual benefits and taxes are $19,488. George estimates that the cost for a personal computer, supplies, travel, and all other expenses (excluding postage) would total $15,500. He assumes that the salary, benefits and other expenses associated with the manager would be allocated 65% to accounts payable and 35% to bank reconciliations based upon the estimated time requirements to support each function. George does not include the allocation of rent, corporate expenses, or 50% of IT support in his cost-reduction estimate. Delphi also gives George the data transfer and connectivity specifications to discuss with the IT Department. Josephine Young, of the IT Department, analyzes the requirements and informs George that they would need to improve connectivity and alter the time of the batch processing for accounts payable. She estimates there would be a one-time cost of $100,000 plus $2,500 per month for improved connectivity. The change in the batch processing time will also cause an increase in personnel costs of $2,500 per month. But there are no additional technology requirements for offshoring bank reconciliations. 2. Offshoring Analysis: a. Based on George's assumptions that all of the remaining supervisor's costs are split 65% to accounts payable and 35% to bank reconciliation, and all incremental ongoing technology costs and postage costs are charged to accounts payable, calculate the annual savings per function through offshoring. b. What would the impact be on AC-US's costs for the next three years if the two accounting functions are performed in India instead of in the U.S.? (Be sure to include severance in the one-time costs, using information from Table 6 and assume zero inflation)

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