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SITE Does offshoring destroy jobs, or does it create cost savings that will allow a company to maintain high-value roles back home? Sanjeevan Valanju examines the trend and considers how to mitigate the risks that come with packing off key functions abroad.
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‘T
hey say they’re currently processing tax returns, doing accounting work and managing payroll, but they’re ready to work on monthly management accounts and provide management information systems, too.” This sort of remark is being heard more and more in the CFO’s office or at strategy meetings in UK and US firms today. The term “offshoring” is now in common use and much has been written about the reasons behind it. The types of activities being outsourced abroad in the financial services industry, for example, range from general ledger accounting, payroll processing and mortgage loan servicing to treasury management, equity research and even investment management. There are also several specialist industry-specific functions that can be transferred outside the organisation, such as share-transfer registry work, superannuation fund accounting and trust administration accounting. The economic case looks compelling. The US banking, financial and insurance services industry is estimated to have saved close to $6bn (£3.3bn) in the past four years by offshoring to India. Consequently, its costs are seven to ten per cent lower
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UNSEEN? than those of its European counterparts. And it’s not only the multinationals that have caught on; it can also make sense for small and medium-sized enterprises that need to recruit more qualified people but can’t afford western salaries. There are reverse economic benefits as well: in the US, the cost savings created by outsourcing helped companies to create jobs and register quality and productivity gains of up to 20 per cent. Despite this, offshoring is often perceived as a threat. The main concerns are that it comes at the expense of control, confidentiality, service quality – and jobs. Some of these fears are justified, but there are ways to mitigate potential risks. As Patricia Hewitt, then secretary of state for trade and industry in the UK, said at a CBI conference in late 2003: “It’s much easier to see the short-term benefits of protectionism than to see its long-term costs to consumers and business competitiveness.” Companies are improving their understanding of the issues of process migration, technology deployment and quality control. They have realised that they can offshore a great deal of work and use their existing workforce on more specialist projects with higher charge-out rates, thereby increasing profits
already bolstered by cost savings. The ability to access competent, intelligent people with defined accountabilities, yet not have them on the payroll, is another key advantage. India is an extremely popular outsourcing destination and has proven capabilities at managing a range of processes of varying complexity in finance and accounting. The subcontinent offers vibrant capital markets, world-class investment management and financial services expertise and a talent pool of more than 200,000 qualified accountants, which is being augmented by over 50,000 new graduates every year. Indian accountancy firms are adapting rapidly to provide a wide range of outsourced services. These include preparing payroll and tax returns and using accounting records such as cheque registers, cash receipts, sales journals, bank statements and other items to reconcile bank accounts and create general ledgers and financial statements. Clients can give these firms journals or unadjusted trial balances and ask them to make necessary adjustments and prepare financial statements in accordance with their national Gaaps. Some providers will even offer low-cost modular FIN A NCIA L
Illustration: Steve Rawlings
July/August 2005 M A N A GEM EN T
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computer write-up software for use on their clients’ systems. For example, JP Morgan, Lehman Brothers, Merrill Lynch and Citicorp employ researchers in India who help to identify, design, document, implement and translate financial information to convert from, say, US Gaap into international financial reporting standards. Currently, 45 per cent of offshoring activity relates to the financial services industry – a proportion that is likely to increase. Deloitte predicts that two million jobs in financial services could be relocated over the next five years, saving approximately $356bn in costs. Abbey has recently followed competitors such as Lloyds TSB, Citigroup and HSBC by moving operations to India in an attempt to streamline processes and reduce overheads. Initially it transferred its IT development and back-office processes, but in the past year it has routed customer calls (mainly banking enquiries) to MsourcE, its partner in Bangalore. This call centre is now Abbey’s biggest, with more than 500 employees. It responds to up to half of all of the bank’s customer calls. It’s too early to put a figure on the savings it has achieved, but the company is confident that the move will prove successful. India is not the only possible location for offshore business operations. China has a large, low-cost labour pool, which is particularly attractive for high-volume business processes. On the downside, Chinese workers still lack in-depth experience in business process outsourcing and IT, while their general
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FINANCE AND ACCOUNTING OFFSHORING ACTIVITY Estimated costs per transaction in offshore locations India Philippines Thailand China Malaysia Singapore Hong Kong
$0.29 $0.37 $0.37 $0.52 $0.54 $1.15 $2.03
fluency in English is not yet up to standard. More broadly, there are also concerns about whether the country will be able to sustain its economic growth. The Philippines, which has strong cultural affinities with the west, is another contender. Some of its business processes are
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therefore, subject to the same risk mancomparable to those in the US – it has agement, security, privacy and other similar accounting qualifications, for consumer protection policies that would example – which means that the workapply if the organisation were performforce is accustomed to particular busiing the activities itself. ness requirements. The World Bank moved its back-office operations to Outsourced service providers should A recent HR study highlighted the India from Washington DC in March 2002. It started with address these issues systematically from benefits of setting up call centres in the 80 employees in Chennai and now has a 2,500sq m site the initial client discovery meeting to the Philippines. It found that 64 per cent of and more than 200 employees actual process migration and reporting. Filipino agents spoke more than two Results The person in charge of each assignment languages, whereas only 40 per cent of ■ It cut costs by 15 per cent. should ideally study the client’s existing Indian agents were multilingual. There ■ It reduced its backlog of accounts receivable and processes and translate its requirements was also a marked difference in employee expense forms from hundreds to a handful. for data conversion, reporting, informaturnover. Filipino call-centre workers ■ The bank chose to enlist Indian employees in tion security and periodicity into defined spent an average of 15 months in a job, process improvement work, such as data mining. standards. He or she should also get compared with Indian call-centre wor■ The facility, which was built before the involved in writing service-level agreekers, whose average stay was only 11 September 11, 2001 attacks on the World Trade ments that define clearly the expectations months. The main disadvantages of the Center, now provides the unexpected benefit of a and obligations of each party so that Philippines as an outsourcing destination disaster preparation and recovery site. they are properly understood and are that it has a smaller pool of skilled enforceable. The work should be handled employees and is in a less attractive time by teams selected, trained and monitored zone for western businesses. according to the requirements of each assignment, and a memOffshoring presents special challenges for companies in the ber of the management team should be nominated as a single highly regulated financial services industry. They are typically point of contact for the client. responsible for the conduct of third-party service providers and Indian businesses have a reputation for being averse to must ensure that the outsourced activities also comply with all saying no to any kind of business opportunity and this is true the relevant regulations. Many third-party relationships are,
CASE STUDY: THE WORLD BANK
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of many offshore vendors. As a result, clients can face problems with service delivery when their providers’ knowledge and skills are not up to scratch. Some clients may also experience problems with quality control and/or the security procedures implemented by their service providers. Many outsourced providers ■ Only four per cent of administrative processes have so far been offshored may not possess the required operational expertise or resources (typically these are data entry, transaction processing and document to invest in training and development either, which can mean creation). Executives in companies that already use offshoring believe that that the clients turn out to be the guinea pigs to support their more than half of such processes could be outsourced abroad in future own learning. (source: IBM, 2004). But the most widespread problems associated with off■ The popularity of offshoring will continue to increase. Since 1998 Indian IT shoring to India concern cultural differences. These are often software and services exports have grown by more than 40 per cent on manifested in the quality of presentation or in communicating average each year. If this trend continues, the global offshore services operational issues – or even in the business language used in market will be worth more than £130bn by 2008 (source: India’s National such communications. Such problems are now being tackled as Association of Software and Service Companies). Indian companies become increasingly aware of their impor■ Small and medium-sized enterprises are likely to take up offshoring in tance in sustaining a happy client relationship. For instance, greater numbers, spurred on by the cost savings and the advantages of clients should insist that service providers give a clear picture of being able to focus on value-adding activities. More offshore service their capabilities, competencies and constraints at the outset. It providers will emerge to serve the SME market. is also vital to research whether the provider is seeking projects ■ The political climate for offshoring will become more hospitable as the that complement its existing skills, or those that it can underwider economic benefits become clearer. Although many people object to take once it has invested in appropriate the practice of moving jobs offshore, training and resources. Some innovative 92 per cent of businesses would buy a providers have in-house teams of IT product at a lower cost regardless of POINTS TO CONSIDER BEFORE GOING OFFSHORE experts and process-migration specialists their principles (source: a Ventoro study who can recommend the necessary techof 5,000 companies in America and nological requirements for each project, ■ List the processes that could be farmed out to Europe, 2004). taking into account regulatory compliachieve maximum efficiency and then decide ■ India, with a current market share of ance and customer data privacy – often which of these are suitable for offshoring. around 80 per cent, will continue to be pre-empting the client’s requirements for ■ Draw up a compelling business case for the leader in the offshoring industry for data integrity, scalability and accessibioffshoring and win the commitment and the foreseeable future. The Indian lity. This, however, doesn’t mean that approval of your stakeholders in advance. government is investing heavily in they don’t still have difficulties at oper■ Decide how to transfer knowledge effectively political, legislative and structural ational level. If problems do occur, the to the offshore centre. support for outsourcing providers, and best and simplest solution is usually to let the enormous lead the country has in ■ Select evaluation criteria by which to identify the client know about the bungle, take English-speaking, IT-literate talent will suitable service providers. responsibility and have adequate backmaintain its popularity for years. This ■ Decide primary location selection criteria. up plans for remedial action. will also help more Indian companies ■ List the skills and talents that you require of As worldwide interest in offshoring to access the global market. offshore staff. increases, so does the need for companies ■ List the risks you need to mitigate while ■ The offshore industry currently centres to review their approach to outsourcing shifting operations. on the cities of Bangalore, Mumbai and abroad. Not every activity can be farmed ■ Plan how to maintain business continuity Pune. Advances in information and out and not every activity that can be will throughout the transition. communications technologies will generate efficiencies and cost savings if it ■ Identify all the tax and legal requirements that enable small towns and villages to is. It’s vital that, if you are thinking about will need to be met. offer services to businesses anywhere offshoring, you choose a service provider ■ Identify the change management issues that in the world, which should help the that not only understands your organyou will have to address. industry to develop a broad supplier isation, its needs and processes, but also ■ Identify and clarify the level of service that you base and to keep price rises in check. has the ability to assimilate the essence of will require. your business philosophy, service disciJim Downey, managing director of pline and working culture. F M Outspan Consulting, an international business consulting company based in Sanjeevan Valanju is vice-president, Brighton with a service centre in Jaipur, business initiatives, SKP Crossborder India (visit www.outspanconsulting.com Consulting, Mumbai (tel: +91 or e-mail: jim.downey@ 22 5655 0885 or e-mail: outspanconsulting.com). sanjeevan.valanju@skpgroup.com).
THE FUTURE OF OFFSHORE OUTSOURCING
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