impact of outsourcing on firm performance in term of transaction cost ..... In addition, item 5 (the accounting software) was included ... Hypotheses Testing.
World Applied Sciences Journal 15 (2): 244-252, 2011 ISSN 1818-4952 © IDOSI Publications, 2011
The Impact of Accounting Outsourcing on Iranian SME Performance: Transaction Cost Economics and Resource-Based Perspectives Yahya Kamyabi and Susela Devi Faculty of Business and Accountancy, University of Malaya, Malaysia Abstract: This paper identifies the factors affecting outsourcing intensity of accounting activities and the impact of outsourcing on firm performance in term of transaction cost economics (TCE) perspective and resource- based view (RBV) in the Iranian manufacturing SMEs. Using 658 questionnaires, our regression analysis shows that asset specificity, trust and degree of competition are key factors influencing outsourcing decision. Interestingly, our findings suggest the outsourcing intensity is significantly and positively associated with SME performance. More importantly, our findings also suggest that outsourcing intensity fully mediates the relationship between trust and firm performance and partially mediates the relationship between degree of competition and firm performance, but it does not mediate the relationship between asset specificity and firm performance. Key words: Outsourcing % Professional accountant % Transaction cost economics (TCE) theory % Resourcebased view (RBV) and performance INTRODUCTION
limited investigation of factors influencing SMEs decision to outsource in the area of accounting [1, 5]. Whilst there has been some investigation of the outsourcing of financial accounting functions using a transaction cost economics perspective [5], a comprehensive investigation of factors (e.g., asset specificity, trust and degree of competition) on the accounting outsourcing using TCE and RBV perspectives is missing. More importantly, the RBV can help to analyse firms' resources and capabilities, which will connect outsourcing to firm performance [7]. Consequently, benefits of outsourcing affect competitive capabilities and competitive capabilities produce returns for companies [8]. While there have been studies of outsourcing effects on performance in general [9-11], an empirical research to examine such factors on outsourcing of accounting activities and their link with firm performance is missing. Therefore, this study aims to examine the factors affecting outsourcing of accounting activities and the impact of such outsourcing on SME performance by applying a combination of RBV and TCE perspectives in the context of an emerging economy. The rest of the discussion is organised as follows: Section 2 provides the background of study and develops hypotheses utilising the RBV and TCE to guide the framework to investigate the outsourcing of accounting activities and its effect on SME performance. Section 3
Business environments are unstable and unpredictable as a result of economic globalization, technological change, customers’ increasing demands and stiffer competition [1]. Hence, business management has become more complicated [2]. In such business environment, the sustainability of many Small and Medium Sized Enterprises (SMEs) is threatened and SMEs face significant challenges due to resource constraints [3]. To overcome such challenges, it is suggested that SMEs should outsource their activities by shifting what they traditionally handled in-house [4] and particularly, their accounting functions. Transaction cost economics (TCE) theory has become a standard framework to explain why some firms choose to organize an accounting function internally, while other firms decide to outsource that function to a professional accountant [5]. TCE explains asset specificity and trust in accountant are critical factors influence accounting outsourcing [5]. Resource-based view (RBV) has been become a useful framework to outsource accounting functions when SMEs face with competitive pressure [6]. Hence, the RBV explains that degree of competition is imperative factor affecting a firm’s decision to outsourcing of accounting functions [6, 3]. There is
Corresponding Author: Yahya Kamyabi, Faculty of Business and Accountancy, University of Malaya, Malaysia. Tel: +60172821350, Fax: +603 79673980.
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explains the research methodology. Section 4 presents the findings and discussions the implications thereon. Section 5 concludes with suggestions for future research.
Theoretical Framework: The transaction cost economics (TCE) theory introduced by Coase [18] and developed by Williamson [19], conjectures that there are costs for a firm to provide an activity internally, which is termed the production cost while the cost of purchasing an activity is termed a transaction cost [20]. The transaction costs associated with any activity depend on key factors associated with the function such as asset specificity and trust in accountant [21, 22]. Resource Based View (RBV) originated by Penrose [23] and has been employed for outsourcing decisions, shifting the attention from transaction costs and opportunism to competitive advantage [24]. However, the central tenet in RBV is that unique organisational resources are the real source of competitive advantage [25]. Hence, the RBV explains that the degree of competition is a vital factor affecting a firm’s decision to outsourcing of their accounting functions [26]. The RBV analyze firm capabilities, which can link outsourcing with performance [25]. Moreover, TCE argues that outsourcing practice is appealing to firms’ managements since it develops some of the metrics used to improve firm performance [27].
Background of Study Outsourcing Intensity: The term of outsourcing was created at the end of the 1980s for contracting out information systems [12, 2]. Outsourcing is usually explained as the contracting with an external service provider to provide a service or function [13]. In accounting, the process of outsourcing involves the ‘external accountant,’ including both the professional accountant and the accounting firm on one hand [5]. On the other hand, the process of internalizing includes the ‘in-house accountant’ who is the business staff member carrying out the accounting functions in the firm [5]. In Iran, the term “professional accountant” refers to members of Iranian Association of Certified Public Accountants (IACPA) and the partners of accounting firms with valid practising certificates who can hold themselves out as CPAs and set up firms providing accounting, audit, tax and other services [1]. Accounting Functions in SMEs: Kirby et al. [14] distinguish statutory services from non-statutory services in the SME environment. They reported that external accountants were the most likely source of “non statutory services. In UK, Sian and Roberts [15] found fifty-five percent of small firms outsourced accounting activities including financial statements, tax or VAT information and accounting system. Interestingly, in Malaysia, Jayabalan et al. [16] revealed most SMEs outsource accounting activities including bookkeeping, financial reporting, management reporting and tax filing to external accountants. Moreover, in Belgium, Everaert et al. [17] found that more than half of SMEs use a combination of outsourcing and insourcing of accounting functions. Moreover, Everaert et al. [17] reported that most SMEs outsource routine and non-routine accounting tasks to professional accountants. In fact, the role of the professional accountants is moving towards more involvement in financial management and strategic planning, management accounting and away from routine transaction work in SME environment [3]. Most professional accountants not only give services to SME sector on matters related to finance and economy but are also expanding into a broader field such as management accounting, financial planning, business strategy and planning, risk management and performance management [3].
Asset Specificity: Two common types of specific assets include physical (tangible) assets (i.e., specific equipment and machinery) and (intangible) human assets (e.g., human capital) describing transaction-specific knowledge and skills [7]. “Human asset specificity encompasses any unique knowledge or skill that an employee develops through training and represents specialised know-how or experience specific to a particular employer/employee relationship, i.e. the knowledge or skill is not transferable as it has limited relevance to other job situations” [28]. Indeed, human assets are specific when accountants need specialised knowledge of the specific characteristics of the firm so as to carry out a specific accounting function [5]. In accordance with TCE, when asset specificity is low and transactions are slightly frequent, such transactions may be subjected to outsourcing [29]. In other words, TCE argues higher levels of asset specificity of activities, the lower the likelihood of being outsourced [30]. To summarize the discussion above, we posit that when asset specificity of the accounting function increases, companies will be more likely to insource (internalize) the function, whilst, low asset specificity would motivate companies to outsource accounting function [5]. Hence, our first hypothesis based on the above discussion is as follows:
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H1: The higher the level of the asset specificity of accounting activities, the lower the intensity of the accounting activity outsourcing.
H3: Outsourcing of accounting activities is positively related to the degree of competition. Firm Performance: “a major concern of the RBV is how an organisation’s capabilities develop and affect its competitive position and performance” [35]. “The main tenets of TCT relate to the effect of governance choice on firm performance given the influence these transaction characteristics exert on the transaction cost- minimizing tendency of the firm [36]. Overall, outsourcing will enhance firm performance for three reasons. Firstly, outsourcing potentially reduces bureaucratic complexity [37]. Secondly, outsourcing allows SMEs to meet production requirements and provides a mechanism for firms to share economies of scale with specialised service provider from outside, transfer risk and reduce uncertainty [37]. For example, outsourcing causes investments in certain facilities and equipment are eradicated, production costs decline and overhead is diminished, which in turn reduces firms’ break-even points and these enhance the firm performance [37]. Finally, when outsourcing is more efficient, SMEs are more likely to integrate and use specialised resources and capacity [3]. Consequently, the earlier arguments are summarized in the following hypothesis:
Trust in Accountant: Trust in the external accountant is defined as the expectation of the owner/manager that the accountant (1) can be relied upon to carry out legal commitments, (2) will act in a predictable way and (3) will take action and negotiate fairly when the possibility for opportunism is present [5]. Many claim that the association between outsourcing and trust in external servicer should be analysed based on TCE perspective [31]. Trust between the firm and external service provider reduces the costs of transaction by diminishing threat of opportunism [31]. For instance, if the professional accountant and the management of the SME sustain a trust-based relationship, opportunism will not be of concern [31, 21]. Accordingly, TCE supports the view that when there is trust, the formal control mechanisms may be reduced and firm tends to outsource their service functions [32, 22]. Overall, the higher the perceived trust in professional accountants, the higher is the likelihood that the owner-managers of SMEs will choose to outsource their management accounting functions [5, 31, 21, 32]. Accordingly, based on the discussion above, our hypothesis is proposed as follows:
H4: Outsourcing of accounting activities is positively associated with firm performance.
H2: Outsourcing of accounting activities is positively associated with the trust in accountant.
Lilly et al. [27] argued for the role of HR outsourcing as a mediator between competition and firm performance in a conceptual study. Furthermore, Cho et al. [9] evidenced the mediator role of logistics outsourcing on the relationship between logistics capability and firm performance. Hence, we hypothesise as follows:
Degree of Competition: Espino Rodríguez and PadrónRobaina [2] explained that firms operating in a competitive environment should consider outsourcing as a consequence of their internal resource gaps. In effect, RBV argues, in competitive circumstance, the firm owner/ managers should learn how to exploit the resources available outside the business to assist their companies for becoming more competitive [33]. For example, in a competitive environment, smaller companies cannot survive because their internal resource gaps do not permit them to adapt their products [6]. In such circumstances, outsourcing is a major managerial method to obtain competitive advantage while competitive pressures intensify [34]. As accounting outsourcing can help greater specialisation, a higher degree of outsourcing is expected for those SMEs that are faced with high levels of competition intensity [28]. Accordingly, the above arguments are summarised in the following hypothesis:
H5: Outsourcing of accounting activities mediates the relationship between asset specificity and firm performance. H6: Outsourcing of accounting activities mediates the relationship between trust in accountant and firm performance. H7: Outsourcing of accounting activities mediates the relationship between degree of competition and firm performance.
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Asset specificity
Trust in accountant
Outsourcing
Performance
Degree of competition
Fig. 1: Research model Based on earlier discussion, the research model is shown in Figure 1.
type ranging from 1-not at all important to 7-very important. Then, respondents were asked to indicate their satisfaction with the seven financial and non-financial performance goals over the previous two financial years on a 7-point Likert type ranging from 1-strongly dissatisfied to 7-very satisfied.
MATERIALS AND METHODS Data Collection: Based on the definition of SMEs in the Iranian context Ale Ebrahim et al. [38], we limit our survey population to companies in terms of number of employees in the range of less than 250 employees. We exclude micro-firms with fewer than 10 employees because they hardly have any option between outsourcing and inhouse accounting tasks [17]. Based prior studies, a questionnaire is developed and utilised to collect the data. Then, we selected a sample of 1750 manufacturing SMEs randomly, using a systematic probability method. The questionnaire survey was sent to each SME owner/manager by post mail. We received 770 questionnaires. However, we finally had only 658 usable answers, representing an effectual response rate of 38 percent. Finally, we compared early and late respondents (non-response bias test) as suggested by Armstrong and Overton [39], but there was not any significant differences between early and late respondents in terms of the main variables.
Mediating Variable: Outsourcing Intensity: In order to achieve the objective of this research, this study identified nine types of accounting functions (Table 1) applicable in the Iranian SME sector [1]. We used the measurement developed by Espino-Rodríguez and Padrón-Robaina [41, 2] and Espino-Rodríguez et al. [42] and respondents were asked to indicate the level of accounting functions outsourcing on a 7-point Likert type scale, with 1= not outsourced and 7= totally outsourced. The variable details are seen in Table 1. Independent Variables Asset Specificity: Accounting functions are particularly people-intensive and the human asset specificity measure was based primarily on human asset [43]. As shown in Table 1, items 1, 2, 3 and 4 are related to human assets and are specific when accountants need specialized knowledge of the specific characteristics of the firm so as to carry out certain management accounting practices [5]. In addition, item 5 (the accounting software) was included to capture the extent to which physical assets were specific to the firm [5]. Hence, based on measurement proxies from prior studies [42, 5], we asked respondents whether the accountant needs to obtain firm-specific information to adequately perform the accounting functions.
Variable Measurement: The dependent, mediating and independent variables were measured and rated on a seven point Likert-type scale and found adequately high Cronbach’s alpha for all variables (above 70%). The details of the variable measurement are presented in Table 1. Dependent Variable: Firm Performance: Firm Performance measurement was previously tested and validated by Sarapaivanich and Kotey [40]. Accordingly, we first asked respondents to indicate the level of the importance attached to the seven financial and nonfinancial performance goals (Table 1) on a 7-point Likert
Trust in Accountant: Trust in accountant was measured by asking respondents to indicate the extent to which they trust the professional accountant with each of statement presented in Table 1 [5, 21].
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World Appl. Sci. J., 15 (2): 244-252, 2011 Table 1: Variable measurement Variables
Items
Performance
1.Profitability 2.Growth in Sales 3.Return on Assets 4.Cash Flow 5.Lifestyle 6.Independence 7. Job Security
Outsourcing intensity
1.Bookkeeping work 2.Preparation of financial statements 3.Payroll accounting 4.Budgeting / forecasting 5.Customer profitability analysis 6.Product costing 7.Financial planning 8.Financial management services 9.Design/review internal control systems
Asset specificity
Source
Cronbach’s alpha
[40]
0.96
[2, 41, 42]
0.97
1.To perform (process) the routine accounting functions (e.g. bookkeeping work and preparation of financial statements) the accountant needs to obtain firm specific information 2.To perform the non-routine accounting functions (i.e. product costing and financial planning) the accountant needs to obtain firm-specific information 3.The way we perform the accounting functions is unique to our firm 4.t would be costly in terms of time and resources to switch to a professional accountant at the end of the financial year 5.The accounting software is custom-tailored to our firm
[42, 5]
0.98
Trust in accountant
1.The firm owner/manager has confidence that the (external) professional accountant will treat us fairly, this means to correctly charge for the performed duties 2.The firm owner/manager has confidence that the professional accountant will inform us correctly 3.The firm owner/manager has confidence that the professional accountant will accurately perform the duties 4.The relationship between the firm owner-manager and the professional accountant is based on trust
[5, 21]
0.93
Degree of Competition
1.Product characteristics 2.Promotional strategies among rivals 3.Access to distribution channels 4.Service strategies to customers 5.Product variety
[39]
0.84
Degree of Competition: This study used the measure developed by Rivard et al. [44], asking respondents to record the intensity of their firm competition on a 7-point Likert scale (1- very weak competition and 7- very fierce competition). Details are shown in Table 1.
(S.D) and correlations among the independent variables. The correlation between independent variables was such that multicollinearity is not a concern. Hypotheses Testing Testing for Direct Effects: Table 3 shows regression coefficients and standard error (S.E) for each of the predictor variables. The multiple linear regression analysis in Model 1 of Table 3 shows a significant negative coefficient for asset specificity, suggesting that asset specificity is negatively associated with accounting outsourcing, thereby confirming H1 (p
