Financial Services Firms Embrace Offshore

One group that has clearly embraced offshore outsourcing are financial services companies.
It seems the world's 100 largest financial-services companies said they expect to transfer an estimated $356 billion of their operations and two million jobs offshore over the next five years in efforts to reduce their costs significantly, according to a survey by Deloitte Research. They also expect to reduce costs by nearly $1.4 billion each by 2008 by sending work to low-cost centers like India from developed economies in North America, Europe and Asia.

Deloitte said the $356 billion estimate is based on a $2.34 trillion total cost base for the top 100 institutions globally. This means that the financial-services firms plan to shift, on average, 15 percent of their global cost base offshore over the next five years, according to the survey.

Using that same 15 percent assumption, Deloitte figures that two million positions of the 13 million people employed in the financial services sector of North American; the European Union and Switzerland, and the Asian developed economies of Hong Kong, Japan and Singapore, will shift to low-cost offshore locations.

Thirty percent of the respondents currently have existing offshore operations, and that percentage is expected to climb to 75 percent within two years, according to the survey.

The firms said they achieve 39 percent cost savings from moving operations to low-cost centers where salaries and other costs are much lower.

"Offshoring is gaining momentum at a rapid pace," says Christopher Gentle, a director at Deloitte Research. "And getting offshoring experience as soon as possible translates into greater benefits — from higher cost reductions to more business processes being handled by the low-cost centers."

The study draws four principal conclusions:

However, companies that move operations offshore are not guaranteed success. More than one-third of the historical moves offshore have been unsatisfactory with the institutions planning no further relocations, according to the survey.

What are the most common reasons for these moves failing? Cost reductions significantly below the average; a narrower scope with fewer functions moved offshore; a scale nearly one-fourth smaller than average, and a much shorter timeframe for planning and execution.

What is the most popular place to shift functions offshore? Nearly half are targeting India, which has a huge market of IT professionals who earn much lower wages than elsewhere. Ireland and South Africa are also attractive offshore centers, with China, Malaysia and Australia growing in popularity.

"India stands to be the major offshore hub because of its combination of low cost and high technology expertise," says Gentle. "But there's no guaranteed bonanza for India unless it continues to deliver improved services at globally competitive wage rates. Competition from other countries around the Indian Ocean rim from South Africa to Australia will be fierce."

Deloitte Research estimates more than one million jobs—or about half of the estimated relocations—will move to the Indian Ocean rim over the next five years.

The survey shows that banks and insurance firms are transferring offshore such functions as application development, coding and programming, accounting and finance, operations, processing and administration, contact support and call-center operations.

Since decisions to go offshore are significant ones, the chief executive officer, chief financial officer, chief information officer or chief operating officer makes 90 percent of them. And as the size and complexity of the offshore moves increase, approval by the CEO is set to increase to 45 percent from 20 percent.