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Offshoring in financial services - growing in both strategic and operational significance Back  
Deloitte recently released its Fourth Global Financial Services Offshoring Survey which benchmarks current trend and practices in the sector. Derek Moriarty outlines the highlights of the report and their relevance for Irish financial services sector, which is experiencing a two-way flow in offshoring.
Offshoring has matured at a rapid rate. Over 75 per cent of major financial institutions now have operations offshore, compared to less than 10 per cent in 2001. While the US and UK banking and capital market institutions continue to lead this shift, mainland Europe is showing increasing interest.

Consequently, the offshore headcount has grown dramatically. The Fourth Global Financial Services Offshoring Survey also finds that the average number of staff employed offshore by financial institutions has risen from 150 to 2,700 in just four years – representing an 18-fold increase. Over the last year alone, this has led to the average proportion of group headcount in lower cost countries doubling from 3 per cent to 6 per cent. As a result of increased offshoring, the industry’s savings have risen exponentially from approximately ?250 million globally in 2003 to an estimated ?4.5 billion a year. Deloitte’s research finds that more than half of all financial institutions are now saving more than 40 per cent against their onshore costs for every business process offshored. In 2004, the figure was just 32 per cent.

Scale is crucial
Amid this evolution in offshoring, a widening gulf between the top performing offshoring institutions and the rest can be seen. For example, the report finds that financial institutions who offshore one or two business processes are saving on average 20 per cent less than companies with over five business processes offshore.
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What is clear is that the industry’s star performers have successfully deployed aggressive offshoring strategies, transferring more than 5 per cent of group headcount offshore and achieving bottom line savings of over 40 per cent. In some cases, the savings are equivalent to 3 per cent of the total cost base. The best performing institutions offshore around 12 per cent of group headcount and, on average, save 55 per cent on each business process. For organisations that lack appropriate scale, the operational complexity and overhead costs offset most of the benefits.

IT and beyond…
In the last five years, offshoring has spread across nearly all functions in financial institutions. In contrast, in 2003, two-thirds of activity offshore was IT-related. By 2006, over 80 per cent involved a full range of business processes, with significant growth around transaction processing, finance and HR. Knowledge-process offshoring, such as investment banking analytics and research has also grown. This reflects a transition from a relatively tactical, arbitrage-driven approach to a focus on improving quality and processes.

The offshoring operating model has also transformed. Five years ago, outsourcing dominated the landscape, accounting for over half of all offshoring within the industry. Since then business processes have been moved to newly built, fully owned, captive operations, while third party vendors continue to dominate the area of IT.

China - stealing India’s crown?
While India remains the prime location for offshoring, with around two-thirds of global offshored staff employed in the sub-continent, it is in danger of losing its crown to China. Some 200 million Chinese people are currently learning English, providing a pool of skilled labour that may compete with India over next 10 years. China’s share of offshored labour is already rising, with a third of financial institutions now having back-office (mainly IT) processes based in China. China’s growing competitiveness may dampen salary inflation among Indian offshoring industry workers. Furthermore, there are growing concerns over the supply of skilled workers in India. Only 10-15 per cent of Indian graduates are considered suitable for direct employment in the offshoring industry. This may result in a shortfall of up to half a million professionals by 2010.

Ireland - a two way flow
The impact of the offshoring in the Irish market is being felt as a two way flow.
We are seeing more and more Irish-based institutions across fund administration, banking and insurance relocate activities to lower cost locations such as Poland, Romania, Czech Republic and further afield to India. The activities being relocated tend to be either IT development or transactional processing. Indigenous institutions have tended to use outsource providers (such as Infosys; Wipro; TCS; Accenture) whereas the larger international institutions have established captive operations.

Irish wins
On the other hand we are also seeing a continuing flow of higher skill activities and operations move to Ireland (such as European operations management, R&D, product/sales support) particularly from corporate centres in London and New York. For example, Merrill Lynch recently announced the establishment of a research, development and innovation centre in Dublin.

Offshoring is maturing rapidly. It has unleashed a new competitive dynamic within the financial services industry. Economies of scale and unit costs are increasingly becoming the watchwords for success. Executives need to evaluate how their operational efficiency plans compare to the competition and how offshoring strategies form part of these plans.

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