| Ireland set to both gain and lose as offshoring increases |
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| Financial institutions looking to offshore their operations may not be looking to Ireland as a location of choice any longer, although the value created by existing operations is unlikely to see them leave for a lower cost location, according to a recent survey by Deloitte. In addition, Ireland is being increasingly seen as a location for higher value operations looking for an alternative location, leading to the creation of more skilled jobs. |
If Ireland is to continue to attract offshoring business – and the increased employment associated with it - it needs to set out a viable model for incoming companies to establish their offshoring operations here. Increasingly it is being seen that companies are using Ireland's advantageous tax rate and EU membership as an entry point to doing business in the European single market.
However, as a result of the recent economic success, many firms are now choosing to locate only their high value, client facing operations in Ireland, and are choosing to move other operational practices to a lower cost environment, where employment and operational costs are more manageable. One recent example is the decision of hedge fund administration firm Fulcrum Limited to establish its client facing European and Middle East operations in Dublin, while much of the processing work will be done in its offices in India.
Deloitte recently released its Global Financial Services Offshoring Report 2007, which lists three vital criteria a company must assess when deciding whether offshoring is correct for the firm, and where a company should offshore, if it decides to do so.
The first decision to make is whether, to build an offshoring business from scratch, but an existing operation or even to outsource it to an existing firm. This decision hinges on what a firm wants from the business. Will the operation need to be scaled up in the future? How does the company feel about the risk associated with building up an offshore operation? The key aspect is that a firm needs to have a clear view of its short-term needs, as well as having a longer term vision of where it sees its offshore operation fitting in with an overall business plan.
The key objective at this stage for firms is to obtain maximum economic arbitrage savings and also improving quality. The report points out that, while many financial institutions have already passed this stage of offshoring, it is always important to maintain a perspective on the underlying decisions to offshore in the first place.
Once an offshoring operation has been established, a firm must then look to optimise its savings, This can be done by increasing the scale and scope of the operation, while firms should always be looking at re-engineering their operations in order to gain maximum efficiency.
The third stage for an offshoring operation, according to the report, is releasing value. There are five key options that are beginning to be seen:
• An offshoring company should recycle its savings to re-invest in revenue growth opportunities
• Firms can decide to sell the ownership of the offshoring operation to a third party
• The option of an IPO, in whole or in part, of the offshore operation could be examined
• Firms can sell operational capacity to other financial institutions
• Firms can sell low-end commoditised processes to third parties looking to build scale
However, what does all this mean for Ireland, and job creation? Ireland has added value to many firms that have already established offshoring operations in this jurisdiction, meaning they are unlikely to close their operations here. However, it is becoming increasingly difficult to sell Ireland as a low cost offshoring location. Many firms are now choosing to locate higher value operations that can be offshored in Ireland, such as the recent unveiling of a number of research and development sites. |
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| Article appeared in the October 2007 issue.
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