As financial institutions move to offshore more business processes the ‘offshoring’s stars’ are those that don’t just focus on pure labour arbitrage but also seek to re engineer their business processes to make them world best class according to Deloitte’s fourth annual Global Financial Services Offshoring Report 2007.

The institutions enjoying the lion’s share of the estimated US$9 billion savings a year, are taking a long term perspective around offshoring, which the report highlights is spreading across many business functions.

A number of Australian banks are in this lead group Warren Green, Deloitte Financial Services lead partner said.

“Most major Australian banks are employing offshoring strategies today. Those that are reaping the benchmark 40% savings against their onshore costs are the ones that went out early, realised they needed new approaches to legacy businesses, and were prepared to manage the initial reputational risk to deliver better customer service based on operational efficiency.”

He pointed out that there is cumulative cost savings for every business process offshored, and that while the Australian Financial services sector predominantly offshores part of its IT services, back office processing and credit card processing divisions, the industry is also accessing IT skills in India that it cannot access at home due to current skill shortages.

Deloitte Financial Services Consulting partner Fraser Ross also said that the survey showed that the companies getting the most from their offshoring strategies are those that have mapped out how to leverage the best from the business processes they offshore, and re-engineer those business processes to make them world class.

“Offshoring is no longer dominated by call centres,” he said.

“Financial institutions that offshore one or two business processes are saving 20% less, on average, than companies with over five business processes offshore. In 2003, two-thirds of activity offshore was IT-related. By 2006, over 80% involved a full range of business processes.”

The survey showed that offshoring has spread across nearly all business functions, 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.

Green said, “It is however critical that banks and other industry players build a ‘platform for success’ through a stepped enterprise-wide approach that looks at the end user – the customer – first. Then applies a detailed strategic approach across the whole business to ensure they achieve the targeted savings, which in some cases are equivalent to 3% of the total cost base.”

He said, “Institutions that have failed to adopt best practices are experiencing a decline in operational performance. While most major financial institutions now have a sizeable offshore delivery function, the gap between the best and the worst is widening.

“The global statistics show us that the best performing institutions offshore around 12% of group headcount and, on average, save 55% on each business process.

“The poorer performers, whose offshoring programs are suffering, take 25 months to migrate each process. Whereas the most efficient offshorers take just 15 months.”

While India remains the prime location for offshoring globally and in Australia, with around two-thirds of global offshored staff employed in the sub-continent, it is in danger of losing its crown to China.

China’s share of offshored labour is already rising. One third of financial institutions now have back-office processes, mainly IT, in 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. The report suggests that China’s growing competitiveness may dampen salary inflation among Indian offshoring industry workers.

“Australian companies are primarily offshoring to India, but some banks will be looking at leveraging their investments in China,” Green said.

“Carefully considering the value to be accrued and how to achieve it is key,” he said.

“This means determining whether offshore capacity should be built or bought; working together to look for ways to optimise operations; and developing a multiple choice strategy.

“Such a strategy can involve recycling savings to reinvest in growth opportunities; selling ownership in the offshore entity to a third party; exploring an IPO of all or part of the offshoring entity; selling operating capacity to other financial institutions such as trade finance; or selling low end commoditised processes to a third party that is seeking to build scale.”

“Offshoring is a complex strategy, that requires detailed risk analysis,” Green said. “A significant complexity is in the transition and the cost involved in moving operations offshore. This cost can be overlooked and will have a significant impact on savings realised.

“But if done well it can be the difference between saving 20% and 70% per business process. And much more importantly the difference between retaining a satisfied contented end user and a disgruntled one.”

Offshoring survey fast facts

• One third of financial institutions now offshore processes to China
• UK and US lead the way, with mainland Europe following fast
• offshoring is saving the financial services industry an estimated $9 billion p.a. up from estimated $5 billion in 2006 and $500 million in 2003
• 800% increase in headcount over the last four years
• average number of staff employed offshore has increased from 150 to 2700 in just four years
• average proportion of group headcount in lower cost countries doubled to 6% over past year
• more than 75% of major financial institutions have operations offshore, compared to > 10% in 2001
• over half of all financial institutions are now saving more than 40% against their onshore costs for every business process offshored (in 2004, the figure was just 32%)
• range of savings is polarizing, and is now between 20 and 70 per cent per business process.

About GFSI:  Deloitte's Global Financial Services Industry (GFSI) practice offers a wide array of services through our member firms that are specifically designed for financial institutions, in areas such as risk management, financial and corporate governance, regulatory compliance, and technology solutions. These services are tailored to the unique requirements of our clients through dedicated financial services practices in 40 countries.

Please read the Global financial services offshoring report 2007