Finance and accounting outsourcing: an empirical study of service providers and small business in Australia

Southern Cross University epublications@scu Theses 2009 Finance and accounting outsourcing: an empirical study of service providers and small business in Australia Graham Ray Southern Cross University Publication details Ray, G 2009, 'Finance and accounting outsourcing: an empirical study of service providers and small business in Australia', DBA thesis, Southern Cross University, Lismore, NSW. Copyright G Ray 2009 epublications@scu is an electronic repository administered by Southern Cross University Library. Its goal is to capture and preserve the intellectual output of Southern Cross University authors and researchers, and to increase visibility and impact through open access to researchers around the world. For further information please contact epubs@scu.edu.au.

Finance and accounting outsourcing: An empirical study of service providers and small business in australia A Dissertation by Graham Ray Submitted to the Graduate College of Management, Southern Cross University in partial fulfilment of the requirement of the Degree of Doctor of Business Administration December 2009

Declaration of authorship I certify that the substance of this thesis has not previously been submitted for any degree, nor is currently being submitted for any degree. I also certify that any help received in preparing this thesis and all sources used have been acknowledged. Print Name: Signature: Date: i

Abstract The aim of this research study is to determine whether perception gaps exist between accounting service providers and small business, by identifying variables considered by both groups when considering outsourcing internal accounting activities, and how these perceptions align. Research on small business behaviour is used in many industries to improve the quality of service to the small business consumer. This research proposes a theoretical framework that identifies three dependent variables consisting of decision, benefit and impact factors, and fifteen independent variables influencing each of these factors. Based on a review of extant literature, there is little evidence that research on the subject of outsourcing finance and accounting activities within Australia has been conducted thus far and, as a result, many questions remain unanswered. While the reviewed literature discussed the decision, benefit and impact factors of outsourcing (particularly finance and accounting outsourcing), it failed to identify differences between perspectives of both parties involved in the outsourcing arrangement. Distinguishing between these different perspectives is important, as it identifies likely perception gaps between the service provider and the small business client. Differences of perception are significant, as they impact upon the expectations of small business and how the service provider satisfies the needs and wants of the small business client within the outsourcing arrangement. The study involved data collection from two sub-groups. Service provider participants were sourced from a national organisation whose members provide finance and accounting services to small businesses, with 34 service provider respondents drawn from a sample population of ii

61 participating. Small business participants were randomly sourced from a national database, with 71 respondents drawn from the selected population of 314 taking part. These sub-groups were considered reliable and representative of the population of both groups as a whole. Multiple aspects of available research methodologies were examined in conducting this study. These included research design; construct and item generation; data collection methods; and data analysis. The epistemology employed for this study adopted a positivistic/hypothetico, deductive approach using a web survey research method to provide valid, reliable and practical data to identify the perceptions of accounting service providers and small business owner/managers in relation to finance and accounting outsourcing decision factors. This study not only identifies the decision, benefit and impact factors of finance and accounting outsourcing, but also identifies, compares and contrasts the perceptions of accounting service providers and small business owner/managers. The research study was confined to accounting service providers and small businesses operating within Australia, and was conducted during the period July to October 2007. It should be noted that responses may vary if the survey were replicated in the future. Cross tabulations and frequency analysis were used to compare and contrast responses relating to decision, benefit and impact factors. Questions were assessed by using a sevenpoint Likert scale utilising statistical analysis to compare the mean of responses by each group, and examining these responses in respect of the mean of each total. SPSS Version 14 was used to analyse the data. Findings emanating from this study confirm an alignment of perceptions and a consensus by both respondent groups concerning outsourcing activities, benefits to small business, and impacts on small business. This also gives accounting service providers knowledge of a specific set of factors impacting upon small businesses in relation to outsourcing decision making, benefits and impacts. In particular, this study provides first-hand information to accounting service providers (as frontline practitioners), to the effect that they should actively collaborate and communicate with small business clients about their finance and accounting activities. iii

Lack of prior research, (particularly within Australia) regarding outsourcing decisions by small business demonstrates a need for further in-depth research that should focus on both the developing and changing face of business, and the relationships between small business and accounting service providers. Research on finance and accounting outsourcing identifying and comparing factors impacting upon the decision process is important to and useful for theory building, as well as providing practical implications. Not only will this enhance the literature, it can also provide a useful benchmark for real-world practice, as small businesses need to be competitive in order to survive within a more open international business environment. This research contributes to the body of knowledge by providing a theoretical framework for accounting service providers and small businesses to further explore issues examined in this study. While this research focused on identifying differences between perceptions by two respondent groups, further research linking these factors to the outsourcing activity should provide a wider view of the issues involved. This in turn will assist towards building a better understanding of the cause-effect relationships between different variables within the finance and accounting outsourcing area Key Words: Outsourcing, Business process outsourcing, Finance and accounting outsourcing, Small business, Service provider iv

Journals and presentations Journal: Presenter: Presenter: Presenter: Presenter: Finance and Accounting Outsourcing The Next Logical Step for Small Business. Review of International Comparative Management, ISSN: 1582-3458, No 8 Volume 4/2007. http://www.rmci.ase.ro, December 2007. DBA Symposium Southern Cross University Peer review of research proposal. Tweed Heads, November 2006. Outsourcing in Australia and New Zealand by Small Business. Presented at the Computer Accounting Doctor (CAD) Partners National Conference Christchurch, New Zealand, November 2006 FAO Outsourcing An Exploratory Study of Service Providers and their Clients in Australia and New Zealand. Double blind refereed paper presented at the Small Enterprise Association of Australia New Zealand (SEAANZ) conference. Auckland NZ, September 2007. Outsourcing An Exploratory Study of Accounting Service Providers and Small Business in Australia. Double blind refereed paper presented at the SME Entrepreneurship Global Conference. Melbourne, July 2008. v

Acknowledgements There are a number of people who deserve recognition, and should be acknowledged and thanked for the support, assistance and encouragement they gave me during this journey of academic endeavour. A debt of gratitude goes to my supervisor Dr Philip Neck for everything. It was his unconditional support, motivation, enthusiasm and above all his direct approach to what to me was a daunting task that fostered and maintained the commitment and dedication needed for such a journey of discovery. To you Dr Phil, I simply say thank you for everything and for the inspiration you have given me. In any journey of discovery there are many people who join the adventure. People who for no reason other than to offer help, assistance, guidance, friendship and yes, even criticism are crucial to the eventual end of the road trip. These people have contributed in so many and numerous ways to this research study that it is impossible to adequately express my feelings for them. Their contributions (both large and small) have combined to bring this journey to an end, and I will be eternally grateful to them all. These people comprise academics, colleagues, staff of SCU, friends and DBA candidates and graduates. To all of these people I can only say thank you It is said that behind every great man there is a great woman. Well I may not be a great man, but I certainly do have a great woman behind me. My wife Leonie has been beside me all the way on this journey, and without her by my side this dissertation would not have come to fruition. Her love, drive, motivation, patience and unending confidence in me and my ability to complete this study have at times been the only thing that kept me going. Thank you darling. vi

Table of contents Declaration of authorship... i Abstract... ii Journals and presentations... v Acknowledgements... vi Table of contents...vii List of tables... x List of figures...xiii List of abbreviations... xiv Chapter 1 Introduction... 1 1.1 Introduction... 1 1.1.1 Chapter objectives... 1 1.1.2 Chapter structure... 1 1.2 Background to the research... 3 1.3 Research questions, objectives and proposition... 5 1.3.1 Research questions... 6 1.3.2 Research objectives... 6 1.3.3 Research proposition... 7 1.4 Methodology... 7 1.4.1 Theoretical framework... 7 1.4.2 Research design... 8 1.4.3 Research paradigm... 8 1.4.4 Research method and data collection... 9 1.4.5 Analysis and interpretation of findings...11 1.5 Research limitations...12 1.6 Definitions of terms...13 1.7 Research structure...15 1.8 Conclusions...18 vii

Chapter 2 Literature review...19 2.1 Introduction...19 2.1.1 Chapter objective...20 2.1.2 Chapter structure...20 2.1.3 Background and rationale for the research...21 2.1.4 Theoretical framework...22 2.2 Parent discipline...23 2.2.1 Outsourcing...24 2.3 Immediate discipline...33 2.3.1 Finance and accounting outsourcing...34 2.4 Research issues...39 2.4.1 Research questions and objectives...39 2.4.2 Research proposition...40 2.5 Conclusions...41 Chapter 3 Methodology...42 3.1 Introduction...42 3.1.1 Chapter objective...42 3.1.2 Chapter structure...42 3.2 Overview of theoretical framework...44 3.3 Research design and procedures...45 3.3.1 Research design alternatives...45 3.3.2 Research methodology justification...46 3.3.3 Research technique justification...48 3.4 Research survey design...51 3.4.1 Construct and item generation...51 3.4.2 Survey administration, data screening and data demographics...58 3.4.2.1 Sampling procedure...58 3.4.2.2 Missing data...59 3.5 Data collection and analysis...60 3.5.1 Data collection methods...60 3.5.2 Secondary data...61 3.5.3 Primary data...61 3.5.3.1 Population and sample selection process...61 3.5.3.2 Survey questionnaire design...62 3.5.3.3 Data analysis...64 3.5.3.4 Analysis and interpretation of data...66 3.6 Ethical considerations...67 3.7 Strengths and weaknesses identified in the chosen methodology...68 3.8 Conclusions...68 viii

Chapter 4 Findings and data analysis...69 4.1 Introduction...69 4.1.1 Chapter objective...69 4.1.2 Chapter structure...69 4.2 Data demographics...70 4.3 Participant questionnaire and response analysis...78 4.3.1 Section A Outsourcing information (Questions 1 & 2)...79 4.3.2 Section B Outsourcing decision factors (Questions 3 7)...82 4.3.3 Section C Outsourcing benefit factors (Questions 8 11)...88 4.3.4 Section D Outsourcing impact factors (Questions 12 17)...95 4.4 Conclusions...104 Chapter 5 Conclusions and implications...106 5.1 Introduction...106 5.1.1 Chapter objective...106 5.1.2 Chapter structure...106 5.2 Research outcomes...107 5.2.1 Outcomes Outsourcing decision factors...107 5.2.2 Outcomes Outsourcing benefit factors...109 5.2.3 Outcomes Outsourcing impact factors...110 5.2.4 Revised theoretical framework...112 5.3 Implications for policy and practice...113 5.3.1 Implications for theory...114 5.3.2 Implications for service providers...115 5.3.3 Implications for small business...116 5.4 Limitations of the study...116 5.4.1 Service provider limitations...117 5.4.2 Small business limitations...117 5.4.3 Analytical limitations...117 5.5 Future research opportunities...118 5.6 Conclusions...119 Bibliography...121 Appendix 1 Appendix 2 Appendix 3 Appendix 4 Appendix 5 CAD partner online survey information sheet and consent form...131 CAD partner online survey questionnaire...133 Small business survey letter...147 Small business online survey information sheet and consent form...148 Small business survey questionnaire...150 ix

List of tables Table 3.1 Characteristics of quantitative and qualitative research paradigms...47 Table 3.2 Reasons for selecting quantitative or qualitative research paradigm...47 Table 3.3 provides a comparison of features associated with the different survey methods...50 Table 3.4 Item measures of degree of outsourcing activities...53 Table 3.5 Item measures of outsourcing decision factors...53 Table 3.6 Item measures of benefit factors...55 Table 3.7 Item measures of impact factors...56 Table 4.1 Question 18 Gender This section sought to identify if there were significant differences between the genders of respondents in the sample population...70 Table 4.2 Question 19 Number of years in business This section sought to identify any significant differences in the number of years respondents had been business, as this may impact on the perceptions held about F&AO by the respondents...71 Table 4.3 Question 20 Business location: home or office To identify possible relationships that may be detected during data analysis, respondents were asked to indicate whether they operated their business primarily from home or an external office location, as the business location may impact on the perceptions held about F&AO by the respondents... 72 Table 4.4 & Table 4.5 Question 21 Location of the business This analysis sought to determine the demographic distribution of respondents by state and by area in the sample population to identify any relationships between location and F&AO activities...73 Table 4.5 Location of business by area...74 Table 4.6 Question 22 Business structure Respondents were asked to indicate the type of business structure used in the business to identify any significant relationships between business structure and respondent perceptions...75 Table 4.7 Question 23 Number of employees Information about the number of employees in each business was collected and considered relevant to other demographic data collected and to other data relating to perceptions...76 x

Table 4.8 Question 24 Annual gross turnover of business Respondents were asked to indicate their annual gross turnover from business operations so that relationships with other demographic data and data collected relating to perceptions could be identified...77 Table 4.9 Question 1 Do you think small business outsources more or less of their accounting activities than other small businesses?...80 Table 4.10 Question 2 To what extent do you believe small businesses would consider outsourcing the following activities?...81 Table 4.11 Question 3 To what extent do you agree that the following activities are core activities of small business?...82 Table 4.12 Question 4 To what extent do you agree with the following statement? The timing and co-ordination of the following activities are critical to the overall performance of small business...84 Table 4.13 Question 5 In deciding to outsource their internal accounting activities, what level of importance do you believe small business would place on the following criteria for selecting an outsourcing service provider?...85 Table 4.14 Question 6 To what extent do you agree with the following statement? There are many activities that small business DO outsource or WOULD consider outsourcing because:...86 Table 4.15 Question 7 To what extent do you agree with the following statement? There are many activities that small businesses DO NOT outsource because:...87 Table 4.16 Question 8 To what extent do you agree with the following statement? Outsourcing of the following activities would provide the same degree of control as if the activity were performed in-house...89 Table 4.17 Question 9 Please indicate what you believe is the level of work volume the following activities represent for small business staff...91 Table 4.18 Question 10 How important do you think the following benefits of outsourcing the internal accounting functions are for small business?...92 Table 4.19 Question 11 How successful do you believe small business is likely to be in achieving cost reduction benefits through outsourcing their finance and accounting activities?...94 Table 4.20 Question 12 If the following activities were outsourced by small business, to what extent could the service provider exploit their position through providing these services?...96 Table 4.21 Question 13 If the following activities were outsourced by small business, to what extent would it be difficult to measure whether the activity is performed satisfactorily?...97 xi

Table 4.22 Question 14 If the following activities were outsourced by small business, to what extent would it be difficult to determine whether the service provider had performed according to contractual obligations?...99 Table 4.23 Question 15 If the following activities were outsourced by small business, to what extent would it be difficult for them to arrange for an alternate service provider at short notice?...101 Table 4.24 Question 16 What do you consider the business performance of small business has been in respect of the following activities in the past three years?...102 Table 4.25 Question 17 Which of the following POSITIVE impacts do you believe will be experienced by small business because of outsourcing their finance and accounting activities?...104 Table 5.1 provides a summary of the outcomes and conclusions relating to Section B of this research study...108 Table 5.2 provides a summary of the outcomes and conclusions related to Section C of this research study...110 Table 5.3 provides a summary of the outcomes and conclusions relating to Section D of this research study...112 xii

List of figures Figure 1.1 Outline of Chapter One with section numbers and their relationships... 2 Figure 1.2 Research structure...16 Figure 2.1 Outline of Chapter Two with section numbers and their interrelationships...21 Figure 2.2 Preliminary theoretical framework for this research...23 Figure 3.1 Outline of Chapter Three indicating section numbers and their relationships...43 Figure 3.2 Principles of survey questionnaire design...63 Figure 3.3 Diagram of the quantitative data analysis process...66 Figure 4.1 Outline of Chapter Four with section numbers and their relationships...70 Figure 5.1 Outline of Chapter Five with section numbers and their relationships...107 Figure 5.2 Revised theoretical framework for factors affecting the outsourcing of finance and accounting activities by small business...113 xiii

List of abbreviations ABS ASP BPO BPR CAD CBD CP DBA - Australian Bureau of Statistics - Accounting service provider - Business process outsourcing - Business process reengineering - Computer Accounting Doctor Partners Pty Ltd. - Central business district - CAD Partner - Doctor of Business Administration F&AO - Finance and accounting outsourcing KPI SB SCU SME SP SPSS - Key performance indicator - Small business - Southern Cross University - Small medium enterprise - Service provider - Statistical package for the social sciences xiv

Chapter 1 Introduction 1.1 Introduction This research study aims to explore and identify the variables small business should consider when deciding to outsource their internal accounting functions. Research on small business behaviour is used to improve their quality of service to the small business consumer. This research sets out to develop a theoretical framework to compare and contrast the perceptions of finance and accounting service providers and small business. Additionally, it examines the motives of small business when selecting an accounting service provider to perform the accounting function taking into account the decision factors, benefits and impacts of outsourcing their accounting activities. 1.1.1 Chapter objectives The chapter objectives are to present an overview of the research and to briefly discuss the background of the research, research questions, objectives of the study, and research proposition. The chapter further discusses the methodology to be used in the study and identified limitations. Key term definitions are provided, and the thesis structure is discussed. 1.1.2 Chapter structure Chapter One comprises eight sections and provides the structure for this research. Section 1.1 introduces the research and Figure 1.1 (page 2) provides an outline of the chapter contents. Section 1.2 provides the background to the research and the reasons for studying accounting 1

Chapter 1: Introduction service providers and small businesses, along with their perceptions relating to finance and accounting outsourcing. Section 1.3 considers the research questions, objectives considered central to this study, and the research proposition. Methodology and research processes covering questionnaire development sampling, data collection, analysis and interpretation of findings are outlined in Section 1.4. An outline of limitations of the study as identified in Chapter Five, is covered in Section 1.5, and is followed by Section 1.6, which identifies the key definitions and terms used in this research. Section 1.7 presents the thesis structure and an outline of each chapter, and is followed by Section 1.8, which presents the conclusions from Chapter One. Chapter 1 Introduction 1.1 Introduction 1.2 Background to the research 1.3 Research questions, objectives and proposition 1.3.1 Research questions 1.3.2 Research objectives 1.3.3 Research proposition 1.4 Methodology 1.4.1 Theoretical framework 1.4.2 Research design 1.4.3 Research paradigm 1.4.4 Research method and data collection 1.4.5 Analysis and interpretation of findings 1.5 Research limitations 1.6 Definitions of terms 1.7 Research structure 1.8 Conclusions 1.1.1 Chapter objective 1.1.2 Chapter structure (Source: Developed for this study) Figure 1.1 Outline of Chapter One with section numbers and their relationships 2

1.2 Background to the research Chapter 1: Introduction Based on a review of extant publications, it is evident little research on the subject of outsourcing the finance and accounting function in Australia has been conducted, thus far, and accordingly many questions remain unanswered. Current literature on outsourcing identifies differing viewpoints on what outsourcing covers. Some literature defines outsourcing as hiring an outside company to handle all or part of an organisations data processing activities (Romney & Steinbart 2006, p. 626), while others simply refer to outsourcing as the assignment of an internal function to an outside vendor (Gelinas, Sutton & Hunton 2005, p. 669). For the purpose of this research, finance and accounting outsourcing is defined as the strategic use of an external third party organisation to perform all or part of an organisation s back office functions within the organisations environment. This definition has been determined from the contributions of literature on outsourcing and business process outsourcing and will be applied to the activity referred to as finance and accounting outsourcing (F&AO). It is extensively claimed in the literature that cost reduction is one of the main reasons tempting most small business to outsource their finance and accounting functions (Financial Executive 2004, p. 52). However, it seems a number of other factors like access to accountants with specialised skills and increased service levels (Financial Executive 2004, p. 52) can also be put forward as an explanation of what really influences the decision to outsource the finance and accounting function. Most small business owners want more than someone who simply fills in their tax forms and checks financial reports are accurate. In truth, most small business owners want an advisor to take an active role in managing the business through rough years (Ray 2007a). As the volume of outsourcing undertaken by small business escalates each year, the decision as to which activity to outsource becomes increasingly more difficult (Selim & Yiannakas 2000), and as such, the decision to outsource any small business activity should be considered very carefully due to the long lasting implications (Selim & Yiannakas 2000). 3

Chapter 1: Introduction Outsourcing evolved from activities normally regarded as peripheral (such as cleaning, catering, and security), then expanded to include critical areas such as payroll, accounts receivable, accounts payable (McIvor 2003). This form of outsourcing is known as F&AO, or Finance and Accounting Outsourcing. The incidence of outsourced accounting services is increasing, and many experts predict a rapid growth in the outsourced accounting market (Gildea 2005). A report by Dunn & Bradstreet (https://www.dnb.com/newsview/0200news6.htm) described increased numbers of small business contracting out finance and accounting services, with growth really beginning to accelerate in 2002 and 2003. They found accounts receivable and accounts payable were the most commonly outsourced functions, with a growing number of outsourcing contracts for a full range of accounting services including payroll, management reporting and analysis. Small business managers are learning that outsourcing the finance and accounting function is sound business strategy ( Jennings 2002). Successful outsourcing of the finance and accounting function may provide ways for small business to meet a diverse set of tactical and strategic objectives aimed at improving decision making activity, while saving money and allowing the organisation to focus on its core business activity ( Jennings 2002). While great ideas and entrepreneurial skills are fundamental to a business start-up, good financial management is considered critical to business survival (Gildea 2005). The reason most small business fail is that they are not up to the challenges of effective financial management and decision-making (Gildea 2005). This is where outsourcing the finance and accounting function becomes an alternative for small business to consider in order to remain competitive. All organisations need relevant, timely and accurate financial reports and analysis (Thiss 2005). The needs are similar irrespective of organisational size but unlike larger organisations, small business generally cannot afford to employ an in-house accountant. As such, outsourcing the internal accounting function can make of sense for small business. It is generally regarded that the outsourcing of finance and accounting functions by small business to organisations regarded as experts in the field can alleviate the burden of remaining abreast 4

Chapter 1: Introduction of frequent changes to tax codes and accounting regulations, as well as providing increased levels of information transparency, visibility of controls, and clarity of accountability (Client Operations 2005). Turning to a qualified external outsourcing partner often becomes a logical step for small businesses struggling to find work strengths among their in-house personnel (White 2001). In an age where the small business focus is on core competencies, small businesses are increasingly outsourcing critical financial functions to experts (Prahalad & Hamel 1990). Accounting is the core competency for many finance and accounting outsourcing providers, where they are experts in their field. Outsourcing is gaining popularity as a means of reducing financial and operational risks by making businesses easier to manage. As White (2001) points out, improved risk management has a direct correlation with improvements in financial performance and shareholder value, and as continued pressure for improved financial performance increases, so do the levels of competency and demands for consistency in finance and accounting functions. Outsourcing doesn t work in every situation, but when it does, it is hard to argue with better financial reporting, decision making and professionalism as well as lower costs compared to in-house accounting (Mulherin 2006, p. 22). 1.3 Research questions, objectives and proposition Although the reviewed literature discusses the decision, benefit and impact factors of outsourcing (particularly finance and accounting outsourcing), it fails to identify differences between perspectives of the two parties involved in the outsourcing arrangement. Differences in perceptions are important, as they impact upon the expectations of small business and, consequently, how the service provider satisfies their needs and wants in the outsourcing arrangement. This section now identifies the research questions, specific research objectives related to this study and the research proposition. 5

Chapter 1: Introduction 1.3.1 Research questions Three questions have been identified that will frame the wording of the research proposition: RQ1: What are the perceived decision factors and their levels of importance in the decision to outsource the internal accounting functions as considered by accounting service providers and small business? RQ2: What are the perceived benefits of outsourcing the internal accounting function as considered by accounting service providers and small business? RQ3: What are the perceived impacts of outsourcing the internal accounting function as considered by accounting service providers and small business? 1.3.2 Research objectives The aim of the research is to explore and identify differences in perceptions held by small business and accounting service providers with regard to the decision factors, benefits and impacts of outsourcing, and to determine to what degree such differences may exist. The aim of the research is to: Identify whether a perception gap exists between accounting service providers and small business relating to decision factors and their importance in outsourcing the internal accounting function. Identify whether a perception gap exists between accounting service providers and small business relating to benefits of outsourcing the internal accounting function. Identify whether a perception gap exists between accounting service providers and small business relating to the impacts of outsourcing the internal accounting function. 6

Chapter 1: Introduction 1.3.3 Research proposition It is possible that small business outsourcing the finance and accounting function to organisations regarded as experts in these fields can provide increased levels of performance, control and sustainability; however, the decision, benefit and impact factor perceptions held by the service providers and small business concerning the outsourcing arrangement may be different, and may require an alignment of understanding. 1.4 Methodology Having identified a research topic and carried out the literature review, the next logical step is to identify the various approaches, strategies and data collection methods available across the continuum of research philosophy. 1.4.1 Theoretical framework Theory frames how researchers look at and think about a topic and give meaning to concepts, provide basic assumptions, direct researchers to important questions, and suggest ways of making sense of data (Neuman 2006). As suggested by Neuman (2006), a theory comprises three parts: concepts, relationships and scope. Neuman (2006) further explains that concepts are the building blocks of theory, and are divided into symbols and definitions. Accordingly, theories provide a framework that can guide business strategy by understanding operational insights that are useful for predicting future behavioural patterns. Sekaran (2003) states that literature surveys provide a solid foundation for development of the theoretical framework by identifying variables that may be significant, as determined by previous research findings. 7

Chapter 1: Introduction 1.4.2 Research design Research is defined as the process of systematically obtaining accurate answers to significant and pertinent questions by the use of the scientific method of gathering and interpreting information (Clover & Balsley 1984, p. 1). As the outcome of any study is influenced by the choice of research design, determining the study s characteristics will be a significant factor in the quality of the conclusion (Miller & Salkind 2002, p. 18) As there are a variety of approaches to research, it is helpful to categorise the different types of research. Business research can be classified on the basis of either technique or function (Zikmund 2003, p. 54), and where the research is based on purpose or function, it can be further classified into exploratory, descriptive, or causal research. As indicated by Zikmund (2003), exploratory research does not look for conclusive evidence to determine a course of action, and is initial research conducted to clarify and define the nature of a problem (Zikmund 2003, p. 54). Exploratory studies are a valuable means of finding out what is happening and gaining insights to assess phenomena in a new light (Saunders et al. 2003, p. 96). 1.4.3 Research paradigm A research paradigm is a framework or set of basic beliefs the researcher uses to understand the nature of reality in order to identify the relationship between variables, and to specify appropriate methods for conducting research (Collis & Hussey 2003). Two widely-accepted research paradigms are quantitative (hypothetico, deductive, positivistic) research; and qualitative (constructivist, inductive, phenomenological or interpretivist) research (Collis & Hussey 2003). According to Bryman and Bell (2003), quantitative research is presumed to be exemplified by social survey and exploratory or experimental investigations employing deductive reasoning to test the extent of theory. Qualitative research is associated with in-depth phenomenological interviewing and participant observation drawing on inductive reasoning to develop a model or theory. 8

Chapter 1: Introduction This view is supported by McMurray (2006, p. 69), who suggests quantitative research emphasises the role of measurement and observation and is associated with the collection and use of numerical data, and proceeds from the positivistic assumption that if something exists, it does so in some degree and can therefore be numerically measured ( Jankowicz 1995, p. 174). This study adopts a positivistic/hypothetico, deductive approach to the research objectives stated at 2.4.1 (page 39) and assesses the main factors involved in the outsourcing decision as considered by accounting service providers and small business in Australia. It sets out to identify relationships between the variables in the theoretical model formulated on the findings of the relevant existing literature review. This study will not only identify the decision, benefit and impact factors of finance and accounting outsourcing by small business, but will also seek to identify and understand the perceptions and attitudes of finance and accounting service providers and small business. 1.4.4 Research method and data collection Emory (1991) classified business research based on technique into two types: observation and surveys. However, Zikmund (2003) expands this classification into four basic types: surveys, experiments, observation and secondary data studies. The use of surveys is a research technique in which information is gathered from a sample of people through a questionnaire (Zikmund 2003), and is one of the most popular research techniques used in quantitative business research (McMurray et al. 2006). In using surveys the researcher systematically asks a large number of people the same questions and then records their answers (Neuman 2006, p. 43). Surveys may be classified by the communication medium used: mail and self-administered questionnaires; telephone interviews; face-to-face interviews; and web surveys (Neuman 2006). 9

Chapter 1: Introduction Web surveys use the internet as the communication medium. They are fast and inexpensive, and allow for a flexible design of the survey with visual, audio or video capabilities. The main advantages of this method are the relatively short implementation time and flexibility of design (Manning & Munro 2007). In terms of research technique, this research study utilises the web survey research method. The decision to use this survey method is based on various factors including costs, available budget, time constraints, access to research facilities, expertise of the researcher, research objective, respondent demographics, and survey instrument complexity (Sekaran 2003). The web survey research method is more appropriate where there is a lack of secondary data (Zikmund 2003). In this case, secondary data relative to F&AO in Australia is quite limited. The study will involve data collection from two sub-groups. For the purpose of this study it is considered the primary source of data will come from a questionnaire distributed to each of the sub-groups. The first participant group comprises licensed members of a national accounting services provider operating as independent businesses providing accounting services to the small business sector. Since many tests have shown the percentage of responses to questionnaires can be significantly increased by using an advanced notice, the purpose of the pilot study questionnaire will be explained to this group of accounting service providers before their annual conference, through their organisation s website. A pilot study will be conducted wherein each accounting service provider will be provided with a hard copy questionnaire and an information sheet, and asked to complete the questionnaire manually. The data collected from this pilot questionnaire survey will be used to design a general survey questionnaire which will then be administered to both groups. This questionnaire will be peer reviewed to satisfy construct validity. Any necessary changes will then be made, and 10

Chapter 1: Introduction a final questionnaire prepared and administered to the two participant groups. While each questionnaire will contain the same questions, the way in which those questions are phrased will depend upon the group to be surveyed. In the interest of attaining a high response rate, it is considered desirable to keep the questionnaires to a reasonable size. Both questionnaires will be limited to 24 questions, comprising five sections which will allow classification of collected data. The online survey collection method is considered an appropriate means of data collection due to the demographic distribution of the two survey groups. This survey method will provide an opportunity to design and implement the survey questionnaire in a short period of time, and allow testing the questionnaire before distribution to respondents. Testing the questionnaire will provide the opportunity to evaluate and rectify any design and completion issues. The second participant group to be surveyed will be randomly-selected small businesses from within Australia. The questionnaire will focus on the perceptions of the small business and motives for outsourcing their accounting and finance activities with respect to decision, benefit and impact factors, together with any incentives that would encourage them to further outsource different aspects of their accounting functions. 1.4.5 Analysis and interpretation of findings The data obtained from the surveys would be mostly categorical, and will be presented in terms of frequency and central tendency or dispersion. Each of the questions will contain statements requiring responses. A seven point Likert scale generally regarded as providing interval-type data (McMurray et al. 2006) will be developed for this study and used to record responses. These scales will use anchor words at each end of the scale, and will be summed to provide composite responses. (McMurray et al. 2006) As noted by Neuman (2006), the real strengths of the Likert scale measurement are in its simplicity and ease of use, which allows for more comprehensive multiple indicator measurement where several items are being combined. Davis (2005) confirms that reliability is high when it comes to the ordering of people with regard to a particular attitude. 11

Chapter 1: Introduction Cross tabulations will be used to compare demographic characteristics between the two participant groups, and frequency analysis will be used to compare perceptions relating to decision, benefit and impact factors between them. The data analysis will enable the use of a quantitative research approach focusing on a comparison of small business and services provider perceptions relating to decision, benefit and impact factors. SPSS Ver. 14 statistical computer software will be used to analyse the data collected from the web based questionnaire. 1.5 Research limitations Research limitations likely to affect this study fall into three predominant categories, identified as service provider, small business, and analytical limitations. Service provider participants are sourced from a national organisation whose members provide finance and accounting services to small businesses. The number of service provider respondents who participated in the survey was 34, from a sample population of 61. These were considered reliable and representative of the population as a whole; however, it is recognised that the small number could affect generalisations made in respect to quantitative interpretations of the data. The potential for bias was also considered a limitation, as the primary activity of these respondents is providing accounting services to small business. Small business participants were randomly sourced from a national database. The number of respondents was 71 from the selected population of 314, which was considered representative of small business within Australia. Consideration was given in respect to the generalisability of quantitative interpretations. Analytical limitations resulted from the limited number of respondents surveyed. As such, some trade-offs between the exploratory issues being investigated and the scope of the research was made. The generalisations of findings, measures and populations within this study represent external validity, and are considered another limitation. 12

1.6 Definitions of terms Chapter 1: Introduction Perry (1998) points out that definitions used by researchers are often not universally applied, and that key and controversial terms should be defined to establish positions taken in research. In this section, the following operational terms and definitions are defined, and will be used within this context throughout this dissertation. Business operator(s): There is no standard definition of a small business operator, and no other ABS publications use the term, or provide statistics about small business operators as a group. However, the expression small business operator is often used in research and policy debate, and is generally taken to include the following: a person or persons who own and run the business, and where generally these business operators can be identified as the proprietor of a sole proprietorship, the partners of a partnership, or the working director(s) of an incorporated company (Operational definition). Business process outsourcing: occurs where a supplier takes over responsibility for one or more of an organisation s business processes (Borman 2006, p. 99) Constructs: Qualities used to describe and differentiate between elements or the objects of perception (Collis & Hussey 2003, p. 345) Core activities: Those activities considered central to the organisation successfully serving the needs of their customers (McIvor 2003, p. 108) Cross-tabulations: The process of placing data for two variables in a contingency table to show the percentage or number of cases at the intersection of variable categories (Neuman 2006, p. 356) Dependent variable: Variables whose values are predicted by the independent variable (Collis & Hussey 2003, p. 346) Enterprise: An institutional unit comprising a single legal entity or business entity; or more than one legal entity or business entity within the same enterprise group and within the same institutional sub-sector (Operational definition). 13

Chapter 1: Introduction Exploratory research: Initial research conducted to clarify and define the nature of a problem (Zikmund 2003, p. 54) Finance and accounting outsourcing: For the purpose of this research, finance and accounting outsourcing is defined as the strategic use of an external third party organisation to perform all or part of an organisation s back office functions within the organisations environment (Operational definition). Frequency distribution: A table that shows the distribution of cases into the categories of one variable, that is, the number or percent of cases in each category (Neuman 2006, p. 347). Independent variable: The variable that can be manipulated to predict the values of the dependent variable (Collis & Hussey 2003, p. 349) Likert scale: A scale often used in survey research in which people express attitudes or other responses in terms of ordinal-level categories ranked along a continuum (Neuman 2006, p. 207) Population: A body of people or any collection of items under considerations (Collis & Hussey 2003, p. 353) Operated at home: A home based business where most of the work of the business is carried out at the home(s) of the operator(s) ABS (Cat. No 8127.0, 2004, p. 101) Operated from home: A home-based business where the business has no other premises owned or rented other than the home(s) of the operator(s) ABS (Cat. No 8127.0, 2004, p. 101) Outsourcing: An arrangement in which one organisation provides a service or services for another organisation that chooses not to perform those services in-house (Operational definition) Regional area: A geographic area outside of the Central Business District (CBD) of capital cities, including non capital cities (Operational definition) 14

Chapter 1: Introduction Research: The process of systematically obtaining accurate answers to significant and pertinent questions by the use of the scientific method of gathering and interpreting information (Clover & Balsley 1984, p. 1) Small business: Small businesses (excluding agricultural businesses) are those businesses employing fewer than 20 people ABS (Cat. No 1321.0, 2001, p. 1) Strategic alliance: Viewed broadly as arrangements among firms to work together to attain some strategic objective (Zineldin& Bredenlow 2003, p. 452). Strategic objectives: High-level goals that are aligned with and support the organisation s mission (Romney & Steinbart 2008, p. 796) Strategic outsourcing: an organising arrangement that emerges when firms rely on intermediate markets to provide specialised capabilities that supplement existing capabilities deployed along a firm s value chain (Holcomb & Hitt 2007, p. 466) Tactical objectives: Processes or activities identified as part of the strategic planning process (Operational definition) Turnkey system: A system comprising hardware and software tailored to suit the needs of the customer that is delivered to customers ready to be used (Romney & Steinbart 2006, p. 794) 1.7 Research structure This thesis comprises five chapters as shown in Figure 1.2 (page 16), and is based on the recommended DBA thesis structure defined by Perry (1998). 15

Chapter 1: Introduction Chapter 1 Introduction 1.1 Introduction 1.2 Background to the research 1.3 Research questions, objectives and proposition 1.4 Methodology 1.5 Research limitations 1.6 Definition of terms 1.7 Research structure 1.8 Conclusions Chapter 2 Literature review 2.1 Introduction 2.2 Parent discipline 2.3 Immediate disipline 2.4 Research issues 2.5 Conclusions Chapter 3 Methodology 3.1 Introduction 3.2 Overview of theoretical framework 3.3 Research design and procedures 3.4 Research survey design 3.5 Data collection and analysis 3.6 Ethical considerations 3.7 Strengths and weaknesses identified in the chosen methodology 3.8 Conclusions Chapter 4 Findings and data analysis 4.1 Introduction 4.2 Data demographics 4.3 Participant questionnaire response analysis 4.4 Conclusions Chapter 5 Conclusion 5.1 Introduction 5.2 Research outcomes 5.3 Implications for policy and practice 5.4 Limitations of the study 5.5 Future research opportunities 5.6 Conclusions (Source: Developed for this study) Figure 1.2 Research structure 16

Chapter 1: Introduction Chapter One of this thesis provides a general introduction to finance and accounting outsourcing, and introduces the research. The chapter further discusses the background to the research and considers the research questions, objectives and research proposition. Research methodology employed, data collection, analysis and interpretation of findings are also discussed, and limitations of the study are identified. Chapter Two provides the background and rationale to the research and introduces the preliminary theoretical framework for the study. The chapter identifies the parent and immediate disciplines and reviews the literature relevant to outsourcing and to business process outsourcing as it applies to finance and accounting outsourcing. The chapter then discusses the identified decision, benefit and impact factors influencing finance and accounting outsourcing by small business in order to define the research issues and identifies the research questions, objectives and research proposition. Chapter Three discusses the research methodology employed in this study, and considers the adopted research design and procedures. The chapter considers research survey design and data collection and analysis methods used in the study, as well as the ethical considerations and strengths and weaknesses identified in the chosen methodology. Chapter Four presents the findings of the research study, and interprets their significance based on the data analysis, then presents the results to identify the components and construct a theoretical framework supporting the outsourcing of finance and accounting activities of small business, based on the data analysis. Finally, Chapter Five systematically presents the findings of the research study, and draws quantitative conclusions and implications from the survey data analysed in Chapter Four. It also presents the results of this analysis in order to identify a theoretical framework for outsourcing the finance and accounting activities by small business, and outlines the limitations of the study and possible future research opportunities emanating from this study. 17