Jobs exodus to continue despite offshoring fatigue

2005

Hundreds of thousands of UK financial services jobs will be outsourced to low-cost centres aboard by 2010, but 'offshore fatigue' is already leading to sharp decline in the results achieved.

According to a new study by Deloitte, some 20 per cent of the total cost base of the sector will be moved offshore by 2010, a rise from 10 per cent in 2006.

Similar trends are expected in relation to headcount, with10-20 per cent of Britain's two million financial services jobs expected to be offshored by 2010.

But the report argues that financial services companies are capturing less than one-third of the potential cost savings offered by offshoring operations,.

The study found that high performing financial institutions offshore 6.7 per cent of their global headcount, well ahead of the study average of 3.5 per cent.

If all surveyed companies that offshore were to reach this 'best practice' headcount ratio then they could reduce their collective annual cost base by US$16 billion – more than tripling their current reported savings of US$5 billion.

The survey also shows UK financial services firms are achieving higher cost savings through offshoring than their global counterparts, with average cost savings of about 47 per cent, about 10 per cent higher than the global average.

India remains the dominant offshore location with all the firms surveyed having a presence there. Four out of 10 also have a second centre in a location other than India, including China, Canada, South Africa and Singapore.

But the Deloitte reports argues that globally, too many financial services companies are not fully committed to entering into outsourcing arrangements.

"Offshore operations that aggressively expand their scope and scale typically deliver much higher returns," said Chris Gentle, director in financial services at Deloitte and author of the study.

"Financial institutions that make a half-hearted attempt at offshoring are exposed to all of the risk, while enjoying only some of the benefits. The message is clear: don't dabble – stay home if you're not committed".

Gentle added that expanding both the scope and scale of offshoring operations is key to realising these unclaimed savings. Currently, UK organisations offshore an average of three functions and most are rapidly increasing their offshore headcount.

However as the study also highlights, 'offshore fatigue' is becoming a growing issue, with the best offshoring results are often achieved during the first few months of operation, before declining through the first year as companies face a steep learning curve and struggle to increase scale.

This trend reverses through the second and third years, with performance steadily improving as companies gain offshore experience.

However, many companies encounter an alarming drop-off in cost savings and quality after the third year.

Most of the UK firms surveyed have offshored for less than four years, with the average being two years, and it remains to be seen if they can maintain current high cost savings over a longer period of time.

"Relentless margin pressure and intense competition has made offshoring a competitive necessity for most financial services companies. However, offshoring is not a straightforward cost savings tactic" said Russell Collins, head of the financial services practice at Deloitte.

"Many organisations are beginning to experience 'offshore fatigue', as the initial novelty wears off and the original operational managers return from their 'tour of duty'".

"UK companies seem to have a better grip on offshoring issues than some overseas headquartered firms," Collins continued.

"The majority of UK offshorers place a strong emphasis on cost control and quality, and given this focus, their higher than average cost savings and rapid growth is not surprising."