By Andy Jones, 10 February 2009 11:52
COMMENT
Tough times mean banks and financial services firms may have to overcome their fears and embrace new forms of offshoring, says consultant Andy Jones.
Offshoring in the banking and financial services sector, like most industries, is an accepted and widely adopted way of doing business.
Throughout the 1990s financial services (FS) organisations quickly embraced offshoring. Organisations such as HSBC and Morgan Stanley set up captive shared service centres in locations such as Mumbai and Chennai for the provision of predominantly IT and transactional back-office functions including mortgage, credit card and loan processing. This early enthusiasm focused on standard, repetitive transactional processes.
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Today the FS offshore market still strongly reflects its heritage - and take-up of offshoring more complex processes such as finance and accounts (F&A) has been minimal.
Given the current market turmoil, what lies ahead for this industry? Will FS institutions venture into offshoring processes that were previously retained?
To answer these questions, we must first look at why the FS sector lags behind others in offshoring F&A.
The first reason is that over the last few years FS organisations have had other priorities - primarily dealing with changes in accounting practices and regulations such as Basel II, MiFID and Sarbanes-Oxley.
But that's not all. While working on a recent UK bank engagement, three areas of risk were cited as barriers to offshoring: operational, compliance and reputational.
For operational risk, the safety and 'lock-down' functionality of technology, systems and data were cited as reasons for blocking certain types of offshoring. There was concern that remote offices are less secure. This location issue has, however, not stopped other banks from offshoring, so clearly this is not insurmountable. Fraud was also a concern and it was felt the increased remote nature and use of third parties extenuated the risk.
The compliance risk makes sense as the FS industry is fiercely regulated. There is increasing pressure for the sector to be more transparent and able to provide regulators and investors with meaningful investment information. Because top executives are personally responsible for compliance, they want to guard all work closely so they can ensure compliance and control.
Some organisations have taken innovative steps to minimise compliance risk. Credit Suisse, for instance, puts their management 'on the ground' at their offshored location, working alongside their third party provider. This relationship and contract is a success.
The reputational risk is based on the fear among FS organisations that if something fails, it could be detrimental to the brand. That's true - but the risk is not necessarily increased because a third party supplier is involved.
Despite all the reasons the finance sector hasn't widely adopted the offshoring of F&A, the climate is now changing.
You cannot open a newspaper or turn on the TV without hearing about the worsening economy and the government bailing out the banks.
The last decade has been a time of great success and profits for banks, meaning they have not had to focus on their cost base. However this is going to change. Over the next 12 to 24 months FS organisations will have conflicting pressures. There will no doubt be more regulatory changes (as a result of recent events) to implement but at the same time they will have to also address cost pressures too.
CFOs are going to have to make tough decisions. For those organisations which have not already done so, offshoring is an option to overcome both cost and resourcing challenges. Offshoring will be utilised not just to get the competitive edge as the likes of HSBC and Morgan Stanley did years ago, but to ensure these organisations stay in the game.
Recent events will increasingly focus attention to parts of the FS organisation where cost savings and efficiencies can be achieved. F&A offshoring is an established market with a proven track record so is a sensible starting place. The current economic situation will result in boundaries being pushed and changes that were 'nice to have' becoming a necessity.
Andy Jones is a director with offshoring consultancy Alsbridge.
Comments
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1. Ralph
Interesting point, re-looking at cost base. Of course, as HMG is a big shareholder in some large banks, HMG is going to be dead chuffed at the thought of LBG/RBoS et al, shifting jobs out of the UK eh? Especially in all those constituencies belonging to Scottish Labout MPs who will be up against that nasty SNP next year. To say nothing of the lost NI and income tax payments that lost jobs cost the government; added to the social security payments having to go out and the lack of spending, hitting VAT in local businesses where unemployment has just gone up.
We're heading towards a general election and the unions (NuLab's paymasters) are going to lie down and see jobs leave these shores?
What you say makes sense, in a normal, fiscal world but things appear to be turned on heads at the moment.
2. Karen Challinor
nicely put ralph
I agree with 90% of that
only I'd say offshoring to an economy with a much lower cost of living than our own and hence with the ability to undercut any bid made by a UK resident company, regardless of the other relative merits of the respective bids, doesn't make fiscal sense at any time
make the costs of living equal, which the recession might just manage, or take that factor out of the equation by taxation on such deals, and then bids can be judged sensibly on merit as well as cost
and before anyone jumps on the bandwagon this is not protectionism, this is a levelling of the arena, come in with a good quote and you'll still get the contract but now the price won't be the only factor controlling who wins
3. RockHardLoot
In this day and time I would think CFO’s, CEO’s, COO’s, and CMO’s would stop the talk of offshoring. It is amazing to me in the tough economic time that companies are still talking about offshoring. If the people in your country don’t have the jobs, they will not have the money to invest or save in your banks. The short windfall of money that is gained is straight ludicrous when you see what has happened because of offshoring. I would think the so called smart people would see the error in their ways. In order for you country, people or town to survive in any economy, the government and it companies has to provide jobs. Now if the company is planning to move and live in Mumbai and Chennai then more power to you. Just remember the people and economies they left behind. WOW!
4. Bob Baines
By offshoring when there arejobless in the UK - I contend you are already damaging your brand!