Any Board of Directors worldwide is well aware that financial control is critical for a company healthy growth, particularly on new ventures in far, unfamiliar regions, or dealing with not so well known people, which happens to be the case in most overseas setups, specifically in a new venture in India.
In such environment there is a certain risk of some events going wrong and unnoticed for a while, thus limiting company’s capacity to take just in time corrective actions.
It is also acknowledged that, no matter the amount of control and prevention systems established, there is no manner to achieve full guaranty that one will get, at all times, the complete and veracious information on the project performance required to take the right decisions.
On the other hand, it is equally accepted that the more effective controls we implement, the better chances of an early alert in case of deviations.
In order to cater to this need, companies with setups in India typically resort to two diverse approaches. In medium to large projects, they will ask their expatriate Director, usually responsible for the industrial organization and know-how transfer, to pay also attention to financial issues. If affordable, they may depute an additional expatriate, with financial background, in the capacity of Financial Controller to handle these matters. The alternate choice, usually in smaller projects, goes to leaving everything in the hands of the local staff, hence wholly depending on the skills and ethical behavior (or lack thereof) of a newly recruited team.
It is evident that, no matter our faith in having the best possible team, leaving this function exclusively in the hands of the branch local staff exposes the company to a certain risk of dangerous deviations, which in case of occurrence could easily go unnoticed till the damage is beyond repairing.
However, contrary to common believe, through our years working in India, we have observed that expatriate financial controllers need not be the only or best approach to handle this requirement and might not produce a significantly better outcome.
Often, cost, lack of the specific local knowledge and experience, required to effectively perform this function, and the “void” where foreigners are sometimes placed, by themselves or kept by the Indian staff, drastically lessen their performance. In fact, it is not exceptional that, in case of misconducts in the company, the expats are the last people to know.
In this context, companies confront a conflict with no clear solution but that of balancing compromises between both approaches.
However, there is a third option which might be considered. Under certain conditions, this controlling function can be also supplied by a third party. A Service Company, with expertise in the Indian environment and awareness of western companies’ concerns, could provide the skills, experience and independence from the subsidiary staff, required to offer a higher reliability at an effective cost.
Moreover, such third party could provide not just an outsourced accountant to depute at the local branch, but make available the support of an entire team of experts in various fields. This approach could transform the traditional financial controlling function into a far wider service of global controlling.
As a matter of fact, a multidiscipline team, with sufficient business processes knowledge, can take controlling beyond just reporting on financial results to providing a highly valuable support in the company’s process of ongoing improvement.
No doubt, being such an innovative model of controlling overseas subsidiaries, its implementation is likely to face constraints and resistance to change from both, parent companies as well as local branches, but the rewards in terms of accurate, trustworthy and cost effective information on the subsidiary progress and valuable support to its growth may well compensate the attempt.
Mario Gil Medrano
Director INDOLINK Consulting