The Bloor Perspective: Parmalat makes a ham-fist of it, Offshoring and Customs and Excise

In discussions about outsourcing, most of the attention has been paid to the performance of the offshore supplier rather than on managing the outsourcing relationship once the contract is signed. Management of outsourced activities is difficult because they are not under one roof and under single management control. It is an even bigger problem when the other party is many thousands of miles and several time zones away and has a different culture.

When the dust has settled after the conclusion of the large outsourcing contract organisations cannot relax, as there is much work to be done to establish effective cooperation with their outsourcer. Cooperation needs to be based on well-defined management principles with clear accountabilities and have unambiguous processes to deliver the promised benefits.

Principles are crucial for setting the tone of the relationship. They describe the rights and responsibilities of each party to share information and the limits of each party's decision-making authority. Despite the vast improvement in global communications, contact with offshore suppliers is often constrained by time differences. Well-designed principles are doubly important in these circumstances, as they ensure decisions are made that are informed by and align with the principles of the agreement.

An outsourcing project needs a joint management structure to manage operational, tactical and strategic liaison. The management structure will define the roles and responsibilities of each party and the management committees that direct and control the outsourced activity.

New processes will be required to manage the contract and the outsourcer's performance. Existing IT management processes will need to be modified to handle the new arms-length relationship. Additional communications and liaison processes will be needed to resolve issues that will inevitably arise between the partners.

These processes need to be developed and agreed in partnership with the outsourcer - a significant challenge when the outsourcer is on another continent. Even minor differences between business cultures can lead to many more misunderstandings in agreeing business practices and assumptions. A shared information workspace is crucial to ensure that all crucial information is in fact shared so that the playing field stays level.

Outsourcing customers will find it challenging to select the right people to manage these contracts. Managers who have a hands-on approach to solving problems may be perfectly effective when an activity is in-house. They will need a different management style when managing an outsourcing contract where much has to be accomplished with phone calls and written instructions. When offshore contracts encompass geographical and cultural differences, the task becomes very challenging indeed.

Customers of offshore outsourcers need to provide a realistic level of resources to handle this challenging task. Only customers who invest wisely and well in the management of the offshore outsourcing relationship will obtain the promised benefits.

Whatever the final judgement may be on the roles and responsibilities of those, who managed and audited the Italian food company, Parmalat, "the Affair" has yet again focused on auditor reputation. The two accounting firms, Deloittes and Grant Thornton, would appear to be impacted by the affair. Deloittes were the chief auditors and Grant Thornton conducted the audit of the 49 per cent of Parmalat's assets in varying locations and legal jurisdictions.

Whether or not their reputations are destroyed as a result of the Parmalat affair, it highlights the risks the accounting profession runs both in establishing international partnerships to take-on the complex business of auditing companies with many locations in multi-legal jurisdictions. Such audits may enhance prestige and demonstrate their capabilities but anecdotal evidence suggests that the rewards increasingly outweigh risks. Most of the accounting firms already find difficulty in obtaining the requisite level insurance indemnity or cost effective indemnity insurance.

Are these large audits worth the risk? Audit fees will almost inevitably rise to correlate with the increasing risk and potential liability or the firms will vote with their feet and resign. Should the reputations of Deloittes and Grant Thornton be destroyed in consequence of the "Parmalat affair", the consequences may have systemic consequences: three major international accounting firms would remain, creating an unintentional monopoly for conduct of international audits with attendant consequences.

There will be a thorough re-examination of the structure of international accounting partnerships with a possible reversion to national partnerships conducting business on a case by case referral to national partnerships in other countries and legal jurisdictions. This is more costly, probably less efficient and less attractive for pooling skills, resources and opportunities. The doomsday scenario is that the remaining firms increasingly resign from these higher risk international audits leaving industry regulator and governmental agencies with the headache of "how to replace the auditors."

HM Customs and Excise in the UK have permitted organisations to exchange electronic invoices since the early 1980s as long as they were notified and an authorised system was used. Invoices could be transmitted electronically in a variety of electronic formats such as Electronic Data Interchange (EDI) or unstructured (e.g. text) messages.

An EU Directive will come into force on 1 January, 2004 to agree VAT invoicing rules across the EU and ensure electronic invoices are recognised in all member states. The EU regulations require that all electronic invoices be transmitted in a secure environment using industry-accepted encryption such as a digital signature to guarantee the authenticity of origin and integrity of the invoice data. This directive will put electronic invoicing on a sound basis by assuring the authenticity of origin, non-repudiation and integrity of content of electronic invoices.

You can now send electronic invoices electronically without seeking approval from HM Customs and Excise providing notification is given. The rules also cater for invoicing by third party providers that have been recognised by HM Customs and Excise. These specialist electronic invoicing companies can provide all the necessary security technology and expertise that may not be cost-effective for organisations that are only send a few electronic invoices.

One such company, Accountis, a specialist outsourcing company, can deliver the efficiency of electronic invoicing at low cost. It supplies a free, Web-based invoicing account that organisations can use to send up to 25 documents free of charge. Additional blocks of 100 transactions can be purchased for £26 each.

This service is as simple and straightforward to use as a web-based email account. Once you have logged on you can create and send invoices using a simple online form and you can view and manage them online.

This is an example of one of those rare EU regulations that has simplified the UK business rules rather than complicating them. Businesses will need to check that their invoicing format complies with this new law or their customers may be prevented from recovering tax. HM Customs and Excise have indicated that it will provide an additional six months period of grace for organisations to adjust their information systems to comply with the new regulations.

The EU Directive has placed electronic invoices on a firm legal footing while requiring organisations to address he issues of security, authentication and preservation of the electronic record. Those organisations that do not choose to outsource their electronic invoicing will have yet another reason to create their own enterprise content management solution.