Offshoring: a home away from home

Like it or not, offshoring, already an established trend in retail banking, is becoming the reality in investment management and private banking. The idea of offshoring, or the handing over of certain (usually back office and IT) functions to organisations in countries such as India, conjures up a set of predictable fears. Lower security, lower customer service, the language barrier, to name but a few. But do these predictable phantoms really pose a serious threat, or can offshoring, efficiently handled, bring benefits to provider and customer alike?

One thing is clear: offshoring is here to stay. According to a recent PricewaterhouseCoopers (PwC) survey of the financial services industry, 21 per cent of organisations have been offshoring for more than 10 years, 12 per cent for five years. Only 12 per cent of respondents did not offshore, and 11 per cent expected more than 30 per cent of their headcount to be offshored in three years time.

Nearly two fifths (39 per cent) of those surveyed worked in investment management, real estate, private banking or life insurance, and Indian outsourcing house HCL counts institutions who are “among the largest in Europe in wealth management and investment management” as part of its client base, says Stuart Drew, its head of European financial services.

However, any institutions which think they can hand over certain functions to India, China or Poland and forget all about them, should do some rapid re-thinking. Careful co-operation is the key to successful offshoring.

Hilary McVitty, chief spokeswoman for UK banking at Barclays says: “Our approach is very much hands-on, not the lift, drop and ignore approach which most people have come a cropper on.”

It is also crucial to be carefully selective about which areas to offshore. As figure one shows, IT activities are the most popular candidates for offshoring, with higher value human resources activities such as benefits management, higher value finance activities, such as financial statements and reporting, and knowledge based activities such as financial research, the least likely to be offshored.

HCL’s Mr Drew regards voice-based work as one of the most risky to offshore, certainly straight away. “It does need a fair bit of discussion,” he says. “There is no question that people get concerned when they hear a foreign accent.”

For back office operations, on the other hand, with rules-based processing, he sees “no reason why you can’t go straight to India. If you can get rules written down and do the work offshore, then it may not all be done straight away – for example, loan approval – but you can go through the rules – high, low and medium risk – and do a lot of the work offshore.”

With wealth management and private banking clients, Mr Drew agrees that “generally their worth to the bank would mean that it would be extra careful” but still advocates a degree of offshoring. He explains: “These people tend to have more complex needs – there are fewer rules-based operations – but that doesn’t prevent those being done offshore to quite a degree.”

The advantages

Cost savings, unsurprisingly, are the greatest advantages expected, and gained, by financial services houses offshoring (see table two). However, these may not be as extensive or as rapid as companies imagine. Almost a third of PwC respondents found that costs went up in the first year of offshoring, while 15 per cent had not seen a change in cost base after five years.

Much of this is due to the increase in wages, particularly in India, as the offshoring trend boosts demand, as well as the high turnover rate of workers.

But cost savings are not the only advantage, according to Mr Drew and to Carina Smith, European sales director for business processing outsourcing at Cap Gemini. The idea is that other benefits hit in as and when these become perhaps less extensive.

Mr Drew points to potential increases in productivity, because of the relatively higher level of qualifications of workers in India as opposed to western Europe: “They are all graduates, even for arguably mundane work. They can use their intelligence to improve services.”

One of the key aspects, for Ms Smith is: “Introducing a more commercial rigour to back office functions, so there is more measurement, more standardisation, more control”.

The HCL process, Mr Drew explains, is for clients to record their rule-based processes, pilot them offshore once they are happy that the knowledge transfer has been achieved, and switch them entirely to offshore centres when “they are at the same level”.

As Mr Drew sums up, it sounds an attractive package: “Day one, cost arbitrage. Day two, cost arbitrage plus some productivity improvements. Day n, lots of productivity plus cost arbitrage. As cost arbitrage does get eroded, which will take several years, it will be replaced by productivity improvements.”

But there are dangers – real as well as perceived (see table three). The biggest issue, as reported to PwC by respondents actually involved in offshoring, is finding and attracting employees of the right quality. The next is falling service quality.

Barclays’ solution is training and close monitoring of the Indian operation by a liaison centre in Cheshire, UK, as well as staff movement in both directions, and a policy of viewing Intellenet staff as an extension of the UK work force.

According to Ms Smith, while it is essential to recruit the right quality of personnel, the relationship between the outsourced and retained business is also crucial – “making sure it is streamlined”.

As for ensuring the language skills, she says that picking the right country makes all the difference.” While India might be the right option for firms offering English-only services, European clients can benefit from the diverse language skills of Eastern Europe. “We deliver out of the Poland office in 20 languages,” Ms Smith says. “The ideal client to use Eastern Europe is one with quite a large degree of English language needs but also a large degree of European language needs.” European private banks would fit the bill perfectly.

Another worry, perhaps even greater for wealth management and private banking clients, is security and client confidentiality. But Ms McVitty at Barclays is adamant that such issues can be resolved. “We take steps to make sure security is not reduced,” she says, “in terms of recruitment, training, and the way systems operate.”

A more serious problem, Ms Smith concedes, is “the brand impact of making large numbers of continental European staff redundant. It is considered a big pill to swallow.” Barclays has tried, Ms McVitty says, to minimise the impact on UK staff of its Indian operation, and has worked with unions to this end. The bank has, she says, used “voluntary redundancies in specific geographic areas” to reduce staff numbers.

Where to go

India attracts the lion’s share of attention, and is, currently, the favourite destination of financial services houses offshoring. However, China is the preferred option for offshoring planned for the next three years, PwC found.

For Cap Gemini, Poland, predicted by PwC to make fifth place in the next three years, is a particularly exciting market. “You get a combination of good salary costs, great education, great universities, and very good language capabilities,” Ms Smith explains.

The obvious problem is that, if Eastern Europe takes over as India becomes more expensive, it in turn will become prohibitively so. There are various possible responses. One is to note, as Ms Smith does, that this, while “possibly true” is not “a real danger over the lifetime of most contracts”.

The second is to turn to China, where Cap Gemini is investing heavily. This might lack the European language skills of Poland, but it can be regarded as an Asian hub, and non-voice back office functions can also be offshored there.

A final response is that already given: there is more to offshoring than cutting costs. If the claims of HCL and Cap Gemini are right, then highly qualified individuals in India, Poland, or China, might well prove capable of boosting efficiency and productivity, to the benefit of European and UK wealth managers and their clients.