Offshoring
Gains Popularity
by Sanjeevan Valanju
Does offshoring destroy jobs, or does it create cost savings
that will allow a company to maintain high value roles back
home? 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 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 save close
to US$ 6 billion in the past four years by offshoring to India.
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%.
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.
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 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
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 comparable to those in the US – it has similar accounting
qualifications, for example – which means that the workforce
is accustomed to particular business requirements.
A recent HR study highlighted the benefits of setting up
call centres in the Philippines. It found that 64% of Filipino
agents spoke more than two languages, whereas only 40% of
Indian agents were multilingual. There was also a marked difference
in employee turnover. Filipino call centre workers spent an
average of 15 months on a job, compared with Indian call centre
workers, whose average stay was only 11 months. The main disadvantages
of the Philippines as an outsourcing destination are that
it has a smaller pool of skilled employees and is in a less
attractive time zone for western businesses.
Offshoring presents special challenges for companies in the
highly regulated financial services industry. They are typically
responsible for the conduct of third-party providers and must
ensure that the outsourced activities also comply with all
relevant regulations. Many third-party relationships are,
therefore, subject to the same risk management, security,
privacy and other consumer protection policies that would
apply if the organisation were performing the activities itself.
Outsourced service providers should address these issues
systematically from the initial client discovery meeting to
the actual process of migration and reporting. The person
in charge of each assignment should ideally study the client’s
existing processes and translate its requirements for data
conversion, reporting, information security and periodicity
into defined standards. He or she should also get involved
in writing service-level agreements that define clearly the
expectations and obligations of each party so that they are
properly understood and enforceable. The work should be handled
by the teams selected, trained and monitored according to
the requirements of each assignment, and a member of the management
team should be nominated as a single point of contact for
the client.
Indian businesses have a reputation for being averse to saying
no to any kind of business opportunity and this is true 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 quality control and/or the security procedures implemented
by their service providers. Many outsourced providers may
not possess the required operational expertise or resources
to invest in training and development either, which can mean
that the clients turn out to be guinea pigs to support their
own learning.
Points to consider before going offshore
- List the processes that could be farmed out to achieve
maximum efficiency and then decide which of these are suitable
for offshoring.
- Draw up a compelling business case for offshoring and
win the commitment and approval of stakeholders in advance.
- Decide how to transfer knowledge effectively to the offshore
centre.
- Select evaluation criteria by which to identify suitable
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.
As worldwide interest in offshoring increases, so does the
need for companies to review their approach to outsourcing
abroad. Not every activity can be farmed out and not every
activity that can be will generate efficiencies and cost savings
if it is. It’s vital that, if you are thinking about
offshoring, you choose a service provider that not only understands
your organisation, its needs and processes, but also has the
ability to assimilate the essence of your business philosophy,
service discipline and working culture.
Sanjeevan Valanju is Vice President, Business Initiatives, SKB Crossborder Consulting, Mumbai. This article is contributed by CIMA (The Chartered Institute of Management Accountants).
