Financial service companies, long in the vanguard for sending work overseas, dramatically expanded the scale, scope
and cost savings of their offshore operations in 2006, according to consulting firm Deloitte & Touche Tohmatsu.
The dichotomy is related partly to scale of operations, with the larger offshore operators reaping the greatest savings, and in part to execution. Institutions that have failed to apply best practices to their offshore operations have, in some instances, experienced a decline in operational performance, putting the "future value from their offshoring operations at risk," the study concludes.
The findings are from the Deloitte 2007 Global Offshore Survey published this week, the fourth in an annual series.
Brian Smith, an analyst at Houston-based sourcing advisory firm TPI, said the Deloitte data offered further evidence that offshoring is maturing and not just the province of large institutions.
"Offshoring for financial services, in particular to India, is now tried and proved across a wide range of processes, so there is increasing familiarity with this approach at all level of firms," including regional banks and smaller institutions, Smith wrote in an email. Early adopters -- money center banks, for instance -- have mature portfolios spanning the globe, he added, including captive and third-party providers.
A survey of financial services companies published by Gartner Inc. in early winter found that 85% of the banking respondents and 75% of insurance respondents said they had an offshore strategy in place. "Offshoring is standard practice in this industry in the sense that it is widespread, particularly among the large financial services companies," agreed analyst Susan Cournoyer, one of the authors of the Gartner report. But that doesn't mean companies feel comfortable they know how to do it.
"The organizational maturity is still in flux as companies appoint executives in charge of global sourcing and develop matrix arrangements around those people, who generally report both to an IT officer and a chief financial officer," Cournoyer said. Companies are also learning "hard lessons about their goals for cost savings versus the realities of the skill sets available on a global basis."
The best and the rest
Offshoring has taken rapid hold in the financial service sector, the Deloitte research shows. In 2001, less than 10% of major financial institutions had moved business processes offshore. By 2006, more than 75% of major financial institutions fielded offshore operations, with U.S. and U.K. companies leading the pack.
The nature of the offshore work has also changed. For example, in 2003, two-thirds of offshore work in the financial industry was IT-related. By 2006, more than 80% of offshore activity involved the full range of business processes, including significant growth in transaction processing, finance and human resource activities. The study found that so-called knowledge processing, such as investment banking analytics and research, is gaining ground, too.
TPI's Smith agreed that there is strong interest and activity in all types of processes, including higher-level work such as equity research and credit analytics. "Some business process areas are maturing faster than others. Mortgage back office, for example, is very mature," Smith said.
Not surprisingly, the industry's approach to offshoring is evolving. Five years ago, most of the offshore work was outsourced to third-party vendors. That remains standard practice for IT services, but business process work has moved to newly built, fully owned, captive centers, according to Deloitte.
As the scale and scope of offshore work mounts, more companies are saving more money. More than half of the financial service institutions surveyed saved more than 40% against their onshore costs in 2006, compared with one-third of companies in 2003. (In 2004, the average cost savings was 32%.)
If the competitive advantage realized by the financial institutions with large-scale operations continues, the dichotomy between the "best and the rest" has the potential to reshape the industry, Deloitte posits.
Let us know what you think about the story; email: Linda Tucci, Senior News Writer