site unseen? - offshoring

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FINANCIAL 16 MANAGEMENT July/August 2005

‘They say they’re currently processing tax returns,doing accounting work and managing payroll, but they’re readyto work on monthly management accounts and provide man-agement information systems, too.”

This sort of remark is being heard more and more in theCFO’s office or at strategy meetings in UK and US firms today.The term “offshoring” is now in common use and much hasbeen written about the reasons behind it. The types of activitiesbeing outsourced abroad in the financial services industry,for example, range from general ledger accounting, payroll pro-cessing and mortgage loan servicing to treasury management,equity research and even investment management. Thereare also several specialist industry-specific functions that canbe transferred outside the organisation, such as share-transferregistry work, superannuation fund accounting and trustadministration accounting.

The economic case looks compelling. The US banking,financial and insurance services industry is estimated to havesaved close to $6bn (£3.3bn) in the past four years by offshoringto India. Consequently, its costs are seven to ten per cent lower

Does offshoring destroy jobs, ordoes it create cost savings that

will allow a company to maintainhigh-value roles back home?

Sanjeevan Valanju examines thetrend and considers how to

mitigate the risks that come withpacking off key functions abroad.

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FINANCIAL July/August 2005 MANAGEMENT 17

UNSEEN?than those of its European counterparts. And it’s not only themultinationals that have caught on; it can also make sense forsmall and medium-sized enterprises that need to recruit morequalified people but can’t afford western salaries. There arereverse economic benefits as well: in the US, the cost savingscreated by outsourcing helped companies to create jobs andregister quality and productivity gains of up to 20 per cent.

Despite this, offshoring is often perceived as a threat. Themain concerns are that it comes at the expense of control,confidentiality, service quality – and jobs. Some of these fearsare justified, but there are ways to mitigate potential risks. AsPatricia Hewitt, then secretary of state for trade and industry inthe UK, said at a CBI conference in late 2003: “It’s much easierto see the short-term benefits of protectionism than to see itslong-term costs to consumers and business competitiveness.”

Companies are improving their understanding of the issuesof process migration, technology deployment and quality con-trol. They have realised that they can offshore a great deal ofwork and use their existing workforce on more specialist pro-jects with higher charge-out rates, thereby increasing profits

already bolstered by cost savings. The ability to access compe-tent, intelligent people with defined accountabilities, yet nothave them on the payroll, is another key advantage.

India is an extremely popular outsourcing destination andhas proven capabilities at managing a range of processes ofvarying complexity in finance and accounting. The sub-continent offers vibrant capital markets, world-class investmentmanagement and financial services expertise and a talent poolof more than 200,000 qualified accountants, which is beingaugmented by over 50,000 new graduates every year. Indianaccountancy firms are adapting rapidly to provide a wide rangeof outsourced services. These include preparing payroll and taxreturns and using accounting records such as cheque registers,cash receipts, sales journals, bank statements and other items toreconcile bank accounts and create general ledgers and finan-cial statements.

Clients can give these firms journals or unadjusted trialbalances and ask them to make necessary adjustments andprepare financial statements in accordance with their nationalGaaps. Some providers will even offer low-cost modular

Illustration: Steve Rawlings

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computer write-up software for use on their clients’ systems.For example, JP Morgan, Lehman Brothers, Merrill Lynch andCiticorp employ researchers in India who help to identify,design, document, implement and translate financial informa-tion to convert from, say, US Gaap into international financialreporting standards.

Currently, 45 per cent of offshoring activity relates to thefinancial services industry – a proportion that is likely toincrease. Deloitte predicts that two million jobs in financialservices could be relocated over the next five years, savingapproximately $356bn in costs.

Abbey has recently followed competitors such as LloydsTSB, Citigroup and HSBC by moving operations to India in anattempt to streamline processes and reduce overheads. Initiallyit transferred its IT development and back-office processes, butin the past year it has routed customer calls (mainly bankingenquiries) to MsourcE, its partner in Bangalore. This call centreis now Abbey’s biggest, with more than 500 employees. Itresponds to up to half of all of the bank’s customer calls. It’stoo early to put a figure on the savings it has achieved, but thecompany is confident that the move will prove successful.

India is not the only possible location for offshore businessoperations. China has a large, low-cost labour pool, whichis particularly attractive for high-volume business processes.On the downside, Chinese workers still lack in-depth experiencein business process outsourcing and IT, while their general

FINANCE AND ACCOUNTING OFFSHORING ACTIVITY

Estimated costs per transaction in offshore locations

India $0.29

Philippines $0.37

Thailand $0.37

China $0.52

Malaysia $0.54

Singapore $1.15

Hong Kong $2.03

fluency in English is not yet up to standard. More broadly, thereare also concerns about whether the country will be able to sus-tain its economic growth.

The Philippines, which has strong cultural affinities with thewest, is another contender. Some of its business processes are


FINANCIAL July/August 2005 MANAGEMENT 19

comparable to those in the US – it hassimilar accounting qualifications, forexample – which means that the work-force is accustomed to particular busi-ness requirements.

A recent HR study highlighted thebenefits of setting up call centres in thePhilippines. It found that 64 per cent ofFilipino agents spoke more than twolanguages, whereas only 40 per cent ofIndian agents were multilingual. Therewas also a marked difference in employeeturnover. Filipino call-centre workersspent an average of 15 months in a job,compared with Indian call-centre wor-kers, whose average stay was only 11months. The main disadvantages of thePhilippines as an outsourcing destinationare that it has a smaller pool of skilledemployees and is in a less attractive timezone for western businesses.

Offshoring presents special challenges for companies in thehighly regulated financial services industry. They are typicallyresponsible for the conduct of third-party service providers andmust ensure that the outsourced activities also comply with allthe relevant regulations. Many third-party relationships are,

therefore, subject to the same risk man-agement, security, privacy and otherconsumer protection policies that wouldapply if the organisation were perform-ing the activities itself.

Outsourced service providers shouldaddress these issues systematically fromthe initial client discovery meeting to theactual process migration and reporting.The person in charge of each assignmentshould ideally study the client’s existingprocesses and translate its requirementsfor data conversion, reporting, informa-tion security and periodicity into definedstandards. He or she should also getinvolved in writing service-level agree-ments that define clearly the expectationsand obligations of each party so thatthey are properly understood andenforceable. The work should be handledby teams selected, trained and monitored

according to the requirements of each assignment, and a mem-ber of the management team should be nominated as a singlepoint of contact for the client.

Indian businesses have a reputation for being averse tosaying no to any kind of business opportunity and this is true

CASE STUDY:THE WORLD BANK The World Bank moved its back-office operations toIndia from Washington DC in March 2002. It started with80 employees in Chennai and now has a 2,500sq m siteand more than 200 employeesResults� It cut costs by 15 per cent.� It reduced its backlog of accounts receivable and

expense forms from hundreds to a handful.� The bank chose to enlist Indian employees in

process improvement work, such as data mining.� The facility, which was built before the

September 11, 2001 attacks on the World TradeCenter, now provides the unexpected benefit of adisaster preparation and recovery site.



of many offshore vendors. As a result, clients can face problemswith service delivery when their providers’ knowledge and skillsare not up to scratch. Some clients may also experience prob-lems with quality control and/or the security procedures imple-mented by their service providers. Many outsourced providersmay not possess the required operational expertise or resourcesto invest in training and development either, which can meanthat the clients turn out to be the guinea pigs to support theirown learning.

But the most widespread problems associated with off-shoring to India concern cultural differences. These are oftenmanifested in the quality of presentation or in communicatingoperational issues – or even in the business language used insuch communications. Such problems are now being tackled asIndian companies become increasingly aware of their impor-tance in sustaining a happy client relationship. For instance,clients should insist that service providers give a clear picture oftheir capabilities, competencies and constraints at the outset. Itis also vital to research whether the provider is seeking projectsthat complement its existing skills, or those that it can under-take once it has invested in appropriatetraining and resources. Some innovativeproviders have in-house teams of ITexperts and process-migration specialistswho can recommend the necessary tech-nological requirements for each project,taking into account regulatory compli-ance and customer data privacy – oftenpre-empting the client’s requirements fordata integrity, scalability and accessibi-lity. This, however, doesn’t mean thatthey don’t still have difficulties at oper-ational level. If problems do occur, thebest and simplest solution is usually to letthe client know about the bungle, takeresponsibility and have adequate back-up plans for remedial action.

As worldwide interest in offshoringincreases, so does the need for companiesto review their approach to outsourcingabroad. Not every activity can be farmedout and not every activity that can be willgenerate efficiencies and cost savings if itis. It’s vital that, if you are thinking aboutoffshoring, you choose a service providerthat not only understands your organ-isation, its needs and processes, but alsohas the ability to assimilate the essence ofyour business philosophy, service disci-pline and working culture. FM

Sanjeevan Valanju is vice-president,business initiatives, SKP CrossborderConsulting, Mumbai (tel: +9122 5655 0885 or e-mail:[email protected]).

THE FUTURE OFOFFSHORE OUTSOURCING� Only four per cent of administrative processes have so far been offshored

(typically these are data entry, transaction processing and documentcreation). Executives in companies that already use offshoring believe thatmore than half of such processes could be outsourced abroad in future(source: IBM, 2004).

� The popularity of offshoring will continue to increase. Since 1998 Indian ITsoftware and services exports have grown by more than 40 per cent onaverage each year. If this trend continues, the global offshore servicesmarket will be worth more than £130bn by 2008 (source: India’s NationalAssociation of Software and Service Companies).

� Small and medium-sized enterprises are likely to take up offshoring ingreater numbers, spurred on by the cost savings and the advantages ofbeing able to focus on value-adding activities. More offshore serviceproviders will emerge to serve the SME market.

� The political climate for offshoring will become more hospitable as thewider economic benefits become clearer. Although many people object to

the practice of moving jobs offshore,92 per cent of businesses would buy aproduct at a lower cost regardless oftheir principles (source: a Ventoro studyof 5,000 companies in America andEurope, 2004).

� India, with a current market share ofaround 80 per cent, will continue to bethe leader in the offshoring industry forthe foreseeable future. The Indiangovernment is investing heavily inpolitical, legislative and structuralsupport for outsourcing providers, andthe enormous lead the country has inEnglish-speaking, IT-literate talent willmaintain its popularity for years. Thiswill also help more Indian companiesto access the global market.

� The offshore industry currently centreson the cities of Bangalore, Mumbai andPune. Advances in information andcommunications technologies willenable small towns and villages tooffer services to businesses anywherein the world, which should help theindustry to develop a broad supplierbase and to keep price rises in check.

Jim Downey, managing director ofOutspan Consulting, an internationalbusiness consulting company based inBrighton with a service centre in Jaipur,India (visit www.outspanconsulting.comor e-mail: [email protected]).

POINTS TO CONSIDER BEFOREGOING OFFSHORE

� List the processes that could be farmed out toachieve maximum efficiency and then decidewhich of these are suitable for offshoring.

� Draw up a compelling business case foroffshoring and win the commitment andapproval of your stakeholders in advance.

� Decide how to transfer knowledge effectivelyto the offshore centre.

� Select evaluation criteria by which to identifysuitable service providers.

� Decide primary location selection criteria.� List the skills and talents that you require of

offshore staff.� List the risks you need to mitigate while

shifting operations.� Plan how to maintain business continuity

throughout the transition.� Identify all the tax and legal requirements that

will need to be met.� Identify the change management issues that

you will have to address.� Identify and clarify the level of service that you

will require.


site unseen? - offshoring

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